Background of a Case Study

Discuss about the Case of Darwin Soil and Water Testing Pty Ltd.

Darwin Soil and Water Testing Pty Ltd is a company owned by Ravi who is the sole shareholder and director. The company was incorporated in 2016 and reported a good profit at the end of the year. This was mainly due to the growing global environmental concerns which made companies carrying on these business activities increasingly popular. When incorporating the company Ravi sold the sole-trader business (the previous business structure of the company) to the company at an inflated price and loaned the company $90,000 in the same process. This loan was secured against a plot of land that was owned by the company. The company’s primary contractor was the Department of Defense who since 2017 decided to employ internal personnel for soil and water testing. Due to this the company suffered a rapid fall in revenues earned by the company. Ravi was aware of the company’s financial stand and predicted that the company would soon become insolvent. This lead to the appointment of an administrator for the affairs of the company. The administrator assessed that the total assets of the company were $95,000 and the total debts of the company amounted to $210,000. This included Ravi’s debt as the sole secured creditor. The issue here is to determine the options available to the administrator and the amount that will be paid to the unsecured creditors at the end of the administration process.

Corporations functioning within the jurisdiction of the Australian commonwealth are governed by the provisions of the Corporations Act, 2001 (Coffee, Sale and Henderson 2015). The act defines and regulates the functioning of companies and provides for its debts and liabilities in case the company needs to be wound up. Part 5.3A of the Corporations Act, 2001 deals with Administration of a corporation’s affairs with the view of executing a deed of company arrangement (Bottomley 2016). This is the part that provides for the appointment of an administrator for the affairs of the company and the options available to the administrator so appointed.

Section 436A of the Corporations Act, 2001 deals with the concept of the appointment of an administrator and provides that in case a company is or will evidently become insolvent an administrator maybe appointed to take care of the affairs of the company (Hiller 2013). In such a case a company does not go into liquidation and has a chance of revival through the acts of the administrator. In this case the company itself appoints an administrator. As per Section 436C of the Corporations Act, 2001 a person who can claim an enforceable secured securities interest in the company can appoint an administrator for the company in case the company is or will evidently become insolvent (Hanrahan, Ramsay and Stapledon 2013). Section 436DA (2) of the Corporations Act, 2001 provides that when such an administrator is appointed by virtue of the provisions of this part of the act, the administrator must issue a formal declaration of the indemnities and relationships that the company owes or are owed to the company (Sealy and Worthington 2013). Refraining from making such a declaration would place the administrator in breach of the provisions of the Corporations Act, 2001.

Provisions of Corporations Act, 2001 for Administration of an Insolvent Company

An administrator so appointed under the provisions of Part 5.3A of the act is also tasked with the responsibility of holding the first creditors meeting (Hannigan 2015). This meeting is when the indemnities and the liabilities of the company are discussed and the strategies to be employed to discharge these liabilities are formulated. The time and purpose of such a meeting is defined in the provisions of Section 436E of the Corporations Act, 2001 (McQueen 2016). This section mandates that the meeting so defined must be held within 8 days from the date of appointment of the administrator and the administrator must give the creditors 5 days notice before holding such a meeting. This meeting also decided whether in the circumstances it would be appropriate to appoint a committee of inspection to enquire into the reasons behind the detrimental financial position of the company (McLaughlin and McLaughlin 2013). In case such a committee needs to be appointed the composition of the member of the committee is also decided upon at this meeting. This meeting also gives the creditors the right to remove such an appointed administrator and replace him with an adequate administrator in case they feel the appointer arbitrator cannot competently discharge the duties he is entrusted with.

Section 437A of the Corporations Act, 2001 defines the actual role of the appointed administrator and states that once appointed the administrator assumes complete control over the affairs of the company (Capaldi, Zu and Gupta 2013). This means that he can exercise any of the powers the company could exercise while it was not under such an administration process. By virtue of the powers conferred under this section the administrator may continue to transact on behalf of the company and in doing so can sell part or the entirety of the corporation based on the needs of the circumstances. In exercising this power the administrator can sell all properties related to the company and its business operations. Section 437D of the Corporations Act, 2001 states that after the commencement of the administration process the only individual who can transact on behalf of the company is the administrator (Ferran and Ho 2014). Transactions that are undertaken by other individuals would be deemed void transactions and thus would have no legal validity. By virtue of the powers conferred under this section the administrator can also enter into and execute contracts on behalf of the company.

Role and Powers of an Administrator

After commencement of the administration process and the determination of the indemnities and liabilities of the company the administrator has three statutory mechanisms which he may employ for the company’s administration. These mechanisms are (McKendrick 2014):

1. The administrator may end the administration procedure and deliver the company back to the original administration of the company which is its Board of Directors.
2. To discharge the debt and liabilities of the company the administrator may approve a Deed of Company Arrangements which will provide for the way in which the company will release its debts and liabilities to the extent practically possible.
3. The administrator may appoint a liquidator and thus initiate winding up proceedings on behalf of the corporation. This would bring an end the existence of the company.

When an administrator approves the execution of a Deed of Company Arrangement (DOCA) the deed provides for the process of discharge of the debts and liabilities of the company then the company’s debts are eliminated after the execution of the deed. However as provided in Section 444D (1) of the Corporations Act, 2001 the rights of secured creditors is not extinguished by the execution of a Deed of Company Arrangement unless the creditor voted in favour of approval of the deed (Gullifer and Payne 2015). This means that in a case where a secured creditor refrained from voting for the approval of a DOCA his right survives past the execution of the deed.

In the matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977 it was held by the court that when a secured creditor does not vote for the approval of a Deed of Company arrangement, his secured securities interest in the company is not extinguished by the execution of a DOCA and he is entitled to recover the secured debt from the company (Chen, Ramsay and Welsh 2016). This is also based on the provisions of Section 444D (1) of the Corporations Act, 2001.

The facts of the given scenario state that Ravi eventually became aware that Darwin Soil and Water Testing Pty Ltd would become insolvent and thus appointed an administrator for the company. This appointment was thus by virtue of the provisions of Section 436C of the Corporations Act, 2001 taking Ravi as the only secured creditor for the company (Sajeevi and Mahanamahewa 2015). Being the sole shareholder and director this appointment can also be construed to be by virtue of Section 436A of the Corporations Act, 2001 as this is ideally an appointment by the company itself (O’Donovan 2014). In this case the appointed administrator made his declaration as per the statutory requirement under 436DA (2) of the act and stated that the company’s total assets were worth $95,000 and including the debt owed to Ravi ($90,000) the company’s debts amounted to a total of $210,000. Thus if the company was compelled to repay Ravi for his debt the remaining assets to be distributed among the unsecured creditors would amount to $5000.

Statutory Mechanisms for Company’s Administration

Under the circumstance the appointed administrator has the following option of which one maybe employed to ensure that the company has the best possible outcome in such a predicament. The first option to be considered is the administrator delivering the company back into the hands of the administration (Hannan 2018). In this case Ravi is the sole shareholder and director of the company and is thus the only one individual the company can be delivered to. However, Ravi has been unsuccessful in maintaining and managing the company and hence this option is not feasible for the future of the company. The second option is the approval and execution of a Deed of Company Arrangement which will discharge all debts and liabilities of the company. This option would not extinguish the existence of the company but would relieve the company of all its debts. This is thus the only viable option which may be employed by the administrator which provides for a solution to the company’s predicament. The third option available to the administrator is the appointment of a liquidator and the commencement of the liquidation process. Such a process would ensure that the company ceases to exist and thus it would not be a viable future for the company (Australia 2016). The winding up procedure would also employ court procedures and thus would be an expensive and tedious process.

Judging from the given set of facts it can be inferred that the company needs to ensure that the procedure would not bring about an end to company and in the process needs to extinguish its debts and liabilities. Thus in such a scenario the approval and execution of a Deed of Company Arrangement is the best possible solution for Darwin Soil and Water Testing Pty Ltd.

Following the judgment in Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977 it can be seen that when the appointed administrator executes a Deed of Company Arrangement for Darwin Soil and Water Testing Pty Ltd, the company’s debt to Ravi would not be extinguished as per the provisions of Section 444D (1) of the Corporations Act, 2001 if he does not vote for the approval of the DOCA (Bruner 2013). Thus, Ravi’s debt would be secured and he would be entitled to get back the entire amount owed to him by the company. As the company’s only secured creditor the debt owed to him would get first priority and his debt would have to be paid before the unsecured debts are discharged by the company. Thus, from the total assets of the company which amount to $95,000, $90,000 would have to be paid to Ravi as the sole secured creditor of the company and thus the remaining amount would be distributed among the other unsecured creditors.

Conclusion

To conclude, in case of Darwin Soil and Water Testing Pty Ltd the options available to the administrator would be:

• To deliver the company back in to hands of the Board of directors.
• To approve and execute a Deed of Company arrangement.
• To appoint a liquidator and begin the liquidation process.

Thus, as per the need of the company the best option available to the administrator would be to execute a Deed of Company arrangement. In order the ensure that Ravi recovers his money as a secured creditor of the company he must not vote for the approval of a deed of company arrangement and in doing so the company’s debt would not be extinguished. Thus Ravi would be able to recover the $90,000 owed to him and $5000 would be split among the unsecured creditors.

Payment to Unsecured Creditors:
Particulars	Amount ($)
Unsecured Debts	1,20,000
Secured Debts	90,000
Total Debt		2,10,000
Total Assets	95,000
Less: Secured debts	90,000
Unsecured creditors pay	5,000

 

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