Bills Digest 57 1996-97 Corporations Law Amendment Bill 1996


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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

Passage History

Corporations Law Amendment Bill 1996

Date Introduced: 6 November 1996
House: Representatives
Portfolio: Treasury
Commencement: Royal Assent

Purpose

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.

Background

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.

Main Provisions

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.

Endnotes

  1. General Insolvency Inquiry - Report No. 45, Australian Law Reform Commission, Australian Government Publishing Service, Canberra, 1988.
  2. Ibid (Volume 1) at p.26.
  3. (1995) 13 ACLC 874
  4. (1995) 13 ACLC 874 per Cohen J. at p. 879.

Contact Officer and Copyright Details

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.

PRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.

ISSN 1323-9031
© Commonwealth of Australia 1996

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Published by the Department of the Parliamentary Library, 1996.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 14 November 1996

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