WARNING:
This Digest is prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments.
This Digest was available from 28 November 1996
CONTENTS
Corporations Law Amendment Bill 1996
Date Introduced: 6 November 1996
House: Representatives
Portfolio: Treasury
Commencement: Royal Assent
The Bill amends the Corporations Law to remove an
unintended anomaly which can adversely affect creditors who deal
with a company while it is under a deed of company arrangement,
arising from financial difficulties encountered by the company.
A scheme for the voluntary administration of a company in
financial difficulties was an initiative inserted in the
Corporations Law by the Corporate Law Reform Act
1992. The system allows the directors to appoint an
independent administrator who is given a specified period of time
to assess the financial situation of the company and to propose a
plan for consideration by the company and its creditors.
Essentially, it is a mechanism which allows an attempt to resolve
the financial difficulties of the company without moving
immediately to a liquidation of the company.
The scheme allows the company to operate under what is known as
a deed of company arrangement. The deed is essentially an agreement
which binds the creditors to a course of action, and amongst other
things, prevents one or more of them moving prematurely to apply to
wind-up the company by their own application as an individual
creditor.
Where the creditors decide that there is no merit in allowing
the company to continue to trade and that the company should be
wound up, the administrator is then deemed to be the liquidator.
Such a system allows, when necessary, a smooth and efficient
transition to a winding up process.
This scheme has its origins in the recommendations of the
Australian Law Reform Commission's report General Insolvency
Inquiry of 1988 (known as the 'Harmer Report')(1).
The adoption of the Harmer Report recommendation on voluntary
administration saw the abandonment of the old form of Official
Management for a company in financial difficulties. Official
Management had it limitations in that it required a management
scheme which would repay all creditors in full,
otherwise the company had to go into liquidation (2)
It is noted in the Second Reading speech for this Bill, on 6
November 1996, that these minor legislative amendments in the Bill
are necessary as a result of the decision of the Supreme Court of
New South Wales in June 1995 in Re Crawford House Press Pty
Ltd (3).
It is helpful to have a brief outline of the case. On 13
December 1993, Mr Dean-Willcocks was appointed Administrator of
Crawford Press Pty Limited. At that time the company had creditors
whose debts amounted to $1,344,293. By 23 December 1993, a
creditors' meeting had resolved that the Administrator should cease
to be involved in the actual carrying of business of the company
but that the Administrator would have certain powers should the
company default on the arrangement. It was therefore assumed that
the company should continue in business and that the company and
not the Administrator would incur such debts as were necessary for
carrying on the business. This was subsequently shown to be a
fateful resolution because the scheme of voluntary administration
under the Corporations Law will accord priority for
payment of debts incurred by an Administrator during
administration. If the debts are incurred by the company in lieu of
the Administrator then that protection is unavailable.
The company continued to trade but it was not successful and in
June 1994, creditors had met again and decided that the arrangement
should be terminated and that the company should be wound up. The
Administrator, Mr Dean-Willcocks, was appointed liquidator.
In the period December 1993 to June 1994 the company incurred
additional debts of $38,113.
One of the key issues in the Crawford House case
revolved around the rule that when a company is under
administration of an Administrator and it then goes into
liquidation, the 'protection period' for the priority payment of
certain debts incurred by the Administrator relates back to the
date of the commencement of the administration (December 1993), and
not the subsequent date of liquidation (June 1994). This is an
important rule because it offers some assurance to creditors when
they deal with an Administrator who is trying to resolve the
financial difficulties of the company. In the Crawford
House case there is a variation in that the Administrator was
effectively directed to step to one side while the company
continued in business under a deed of company arrangement during
the period December 1993 to June 1994. It was therefore the company
which was incurring the debts in this period and not the
Administrator. The Court held:
This results in the regrettable
situation that there appears to be no right in those who become
creditors of the company or whose debts were increased during the
period of the operation of the deed, to prove for those debts or
increased debts. This would not seem to be a result intended by the
legislature.
...
It is not satisfactory that the position should be left as it is
and it requires urgent legislative amendment (4). </ ul>
Even though it can be argued that Crawford House was really
under administration in the period December 1993 to June 1994, the
Corporations Law is expressed in such a way that the debts
incurred which attract the protection of priority payment are those
incurred by a 'relevant authority' - which is
defined to include the Administrator but not the company.
The primary aim of this Bill is to allow debts incurred while a
company is operating under a deed of company arrangement to be
recognised, where appropriate, by the liquidator as debts or claims
that are provable in a winding up of the company.
The Crawford House case is not an uncommon arrangement
and similar circumstances will have applied in other liquidations.
For this reason, the Bill contains a provision to retrospectively
protect liquidators who have interpreted the Corporations
Law in such a way as was originally intended by the
Parliament.
In the Second Reading speech, on 6 November 1996, the Government
noted that a large number of insolvency practitioners have been
acting on the assumption that the anomaly in the Corporations
Law would be corrected in a way which is consistent with the
provisions of an identical Bill, the Corporations Law Amendment
Bill 1995, which was introduced on 18 October 1995 but lapsed when
Parliament was prorogued for the 1996 General Election. The
Government notes that it had some reservations in relation to the
1995 Bill when it was in Opposition. However, given the assumption
of insolvency practitioners mentioned above, the current Bill will
follow the same form as the 1995 Bill but that the reservations
will be referred to the Legal Committee of the Companies and
Securities Advisory Committee for consideration.
The amendments to the Corporations Law are set out in
the Schedule to the Bill. Clause 3 implements that
Schedule.
[Readers should be aware of the
distinction between the
Corporations Act 1989 and the
Corporations Law. The
Corporations Act 1989 has
82 sections and it enacts the
Corporations Law at section
82. The
Corporations Law is an extensive piece of
legislation in its own right and it currently contains over 1400
sections. For convenience, these laws are referred to separately.]
</ ul>
Item 1 in the Schedule to the Bill adds a note
the definition of "relevant date" in the main definitions section
(section 9) of the Corporations Law. This note simply
alerts users to the amendment in proposed new section 553(1B) which
relates to certain debts incurred when a company is under a deed of
company arrangement.
Item 2 in the Schedule to the Bill is the key
provision in the Bill and it provides statutory protection for
certain debts or claims which arise when a company is under a deed
of company arrangement. (Under the Corporations Law, debts
such as penalties or fines are, however, excluded). Item
2 inserts proposed new subsection 553(1A) and 553(1B) into
the Corporations Law.
Item 3 inserts a proposed new section 1411
which has a retrospective effect. The retrospectivity effectively
validates the actions of any liquidator who has recognised debts
which, if challenged, on the basis of the Crawford House
decision should have been rejected by the liquidator. It is
suggested that the retrospectivity dates back to the commencement
of the voluntary administration scheme introduced by the
Corporate Law Reform Act 1992.
- General Insolvency Inquiry - Report No. 45, Australian
Law Reform Commission, Australian Government Publishing Service,
Canberra, 1988.
- Ibid (Volume 1) at p.26.
- (1995) 13 ACLC 874
- (1995) 13 ACLC 874 per Cohen J. at p. 879.
Brendan Bailey (06 2772434)
14 November 1996
Bills Digest Service
Parliamentary Research Service
This Digest does not have any official legal status. Other
sources should be consulted to determine whether the Bill has been
enacted and, if so, whether the subsequent Act reflects further
amendments.
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the public.
ISSN 1323-9031
© Commonwealth of Australia 1996
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Published by the Department of the Parliamentary Library,
1996.
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Last updated: 14 November 1996
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