Debt Recovery, Bankruptcy, Company Insolvency and Director's Duties

Date: Nov 29, 2007
Document Type: Article
  • Many years debt recovery experience.
  • 1,000's of Statutory Demands/Bankruptcy Notices/Statements of Claims/Writs issued.
  • We have trained professional and paralegal staff with thorough knowledge of:
    • debt recovery procedures in all Courts including Bankruptcy, company liquidation, enforcement of judgment etc. post-Bankruptcy and post-Liquidation procedures including liquidation and recovery of assets
  • We have procedures which ensure The timely resolution of disputes Negotiation instead of litigation.
  • We have extensive commercial law experience including expert drafting of agreements and documents to secure payment (eg guarantees, mortgages etc).
  • We telephone debtors and negotiate payment options. We don't just issue documents.

HOW CAN A CREDITOR COLLECT A DEBT?

If you are owed money you can take legal action to recover it.

Debts of up to $40,000.00 are recovered in the Local Court.

Debts of up to $750,000.00 can be recovered in the District Court. The Court can deal with cases where larger amounts are involved if the parties to the case agree. (The Court has unlimited jurisdiction in claims for damages for personal injuries arising out of a motor vehicle accident).

Debts exceeding $750,000.00 are usually dealt with in the Supreme Court.

To commence Court proceedings the party who is owed money (the creditor) files a Statement of Claim. This document sets out basic details of the debt and tells the debtor to pay the debt or to defend the matter within 28 days after service of the Statement of Claim. If the debtor does not file a defence and does not pay within that twenty-eight day period then Judgment will be entered against the debtor.

Once Judgment is entered it can be enforced. A number of procedures are available including-

  • Writs: A Court officer, the Sheriff, attends the debtor's premises, seizes goods and sells them. The proceeds of the sale go to the creditor.
  • Examination Summons: The debtor is required to attend the Court to answer questions about how he, she or it can satisfy the Judgment. The information is then used to assist other debt recovery processes.
  • Garnishee Orders: A Court can issue an Order addressed to an unrelated party who owes money to the debtor. The Order requires the money to be paid to the creditor instead of the debtor.

All of the above procedures are subject to various technical rules.

If ordinary debt recovery procedures don't work, or if the debtor is a company and owes more than $2,000.00, then the creditor can commence:-

  • Bankruptcy proceedings against an individual; or
  • Winding up proceedings against a company

WHAT ARE BANKRUPTCY PROCEEDINGS?

Bankruptcy is a process where an independent Trustee takes control of the estate of an insolvent person, turns the assets into cash (with some exceptions) and distributes the proceeds equally among the unsecured creditors. "Unsecured creditors" are ordinary creditors who do not hold security, such as a mortgage, for payment of the debt due by the creditor. Secured creditors will usually look to the asset over which they have security such as a house, to obtain payment.

Because of the stigma associated with bankruptcy, and because of the adverse effect on a persons credit rating, many debtors do not wish to be declared bankrupt. Therefore commencing the bankruptcy process can be an effective way of obtaining payment if you are a creditor.

Bankruptcy proceedings are commenced in the Federal Court or the Federal Magistrates Court. The Court holds an enquiry into whether a person can pay their debts as they fall due. If they cannot, then the Court can declare them bankrupt and appoint a Trustee to take control of their estate.

Before a person who is declared bankrupt, the Court must be satisfied that the person has committed an "act of bankruptcy" no more than six months before the commencement of the bankruptcy proceedings. The most common Hact of bankruptcy` is the failure to comply with a Bankruptcy Notice. This process works as follows:

the creditor obtains a Judgment in the Local, District, Supreme or Federal Court;

  • the creditor obtains a "Bankruptcy Notice" from the Insolvency and Trustee Service of Australia. This is a document which requires the debtor to pay the debt within twenty-one days of service of the document. If within that period the debtor does not dispute the validity of the Bankruptcy Notice or pay the Judgment Debt, then the debtor will have committed an "act of bankruptcy" and the law will presume them to be insolvent. This is what gives the Court the power to make them bankrupt.
  • Once an Act of Bankruptcy has been committed then the creditor commences bankruptcy proceedings by obtaining the issue of a Creditor's Petition by the Court.
  • Some weeks after the Creditor's Petition has been issued and served on the debtor, the Court then considers the evidence relating to the insolvency of the debtor (usually a failure to comply with the Bankruptcy Notice) and if the Court is satisfied that the debtor is insolvent, the Court will appoint a Trustee to take control of the debtor's estate.

It is the Trustee's job to turn the debtor's assets into cash and distribute the cash to unsecured creditors (after payment of the Trustee's fees and the legal costs of the creditor who made the debtor bankrupt).

WHAT ARE COMPANY WINDING UP PROCEEDINGS?

If a company is unable to pay its debts then the Court has the power to wind it up and appoint a Liquidator whose duty is to turn the assets into cash and distribute the cash in the order set out in the Corporations Act. The creditor who obtains the appointment of the Liquidator, and the Liquidator, take priority in relation to their costs as do certain employee entitlements. The balance is distributed equally between unsecured creditors.

The process of winding up a company is similar to the process of having a person declared bankrupt. The process usually occurs as follows:-

  • If a creditor is owed a debt or more than $2,000.00 (it does not have to be a Judgment Debt) it can serve a Creditor's Statutory Demand on the company requiring the company to pay the debt within twenty-one days. If the company fails to dispute the debt or pay the amount claimed within that period, then the law will presume the company to be insolvent.
  • The creditor then commences winding up proceedings before the Supreme or Federal Court by filing an Originating Process. If the Court is satisfied the debtor company is insolvent then a Liquidator will be appointed.

The service of a Creditor's Statutory Demand is not the only way in which a creditor obtains the right to commence winding up proceedings. However it is the process which is used most often.

A WORD OF WARNING

The above is only a basic summary of winding up and bankruptcy proceedings. The process can be very technical, particularly in relation to the validity of Bankruptcy Notices, Creditors Petitions, Creditors Statutory Demands and Originating Processes. If a creditor is unsuccessful in bankruptcy proceedings costs will usually be awarded against the creditor. It is wise to seek the assistance of a lawyer with a detailed knowledge of the procedures. At Craddock Murray Neumann we have the expertise to help you.

WHAT IS COMPANY ADMINISTRATION?

If the Directors of a Company believe that a Company is insolvent, but that it has a solid "core" business which will allow it to trade viably in the future, the Company can appoint an Administrator.

The Directors will put up a proposal that existing debts be extinguished by paying creditors a percentage of their claims in full discharge of all liabilities of the Company.

When a Company goes into administration the Company appoints an official Administrator who is an insolvency practitioner who is independent of the Company.

The Administrator calls a meeting of creditors.

At the meeting of creditors the Administrator informs the creditors whether they would be better off:

  • putting the Company into liquidation immediately;
  • or accepting the offer of the Directors.

If the creditors want to accept the offer of the Directors then the Company and the Directors will execute a Deed of Company Arrangement which will provide that the creditors take the payments (often made by the Directors) in full satisfaction of their claims against the Company.

Until the Deed of Company Arrangement is executed, the Administrator controls the Company.

Once the Deed of Company Arrangement has been executed the management of the Company returns to the Directors.

Craddock Murray Neumann can help you with issues which arise in relation to Company Administration. We can also put you in touch with expert Company Administrators who might be able to help you if your company is in difficulty.

WHAT IS A MAREVA INJUNCTION?

If: a creditor has a right to commence proceedings; and has evidence that the debtor is disposing of assets so as to prevent recovery of the Judgment Debt once it is obtained then the creditor can apply to the Court for a "Mareva" injunction to restrain the debtor from dealing with their assets.

Craddock Murray Neumann has had extensive experience in obtaining "Mareva" injunctions.

WHAT DUTIES TO COMPANY DIRECTORS HAVE?

Generally (with some exceptions) Directors owe their duties to the Company and not to the shareholders of a Company.

Directors have a duty of care and diligence to manage and conduct the business of the Company in the best interests of the Company. This means that Directors must::

  • set goals for the Corporation;
  • oversee the acquisition and organisation of financial and human resources towards the attainment of the goals of the Corporation; and
  • review at reasonable intervals the progress of the Corporation towards achieving its goals.

Directors can rely on the "Business Judgment Rule" to show that they have acted with proper care and diligence. In order to obtain the benefit of this Rule, a Director;

  • must make a judgment in good faith for a proper purpose;
  • must not have a material personal interest in the subject matter of the judgment;
  • must inform himself or herself about the subject matter of the judgment; and
  • must rationally believe that the judgment is in the best interest of the Corporation.

(Section 180(3) of the Corporations Act)

The Directors of a Company also have a duty of good faith. This requires the Directors;

  • to exercise their powers only for proper Corporate purposes:
  • to avoid actual or potential conflicts between their duties to the Company and their personal interests or duty to others;
  • to account to the Company for business opportunities which come to them by reason of or in the course of holding office as a Director.

This duty is sometimes referred to as a "fiduciary duty". This duty is now contained in Section 181 of the Corporations Act which requires a Director to discharge his or her duties In good faith and in the best interests of the Corporation and for a proper purpose".

The duty can be breached where:

  • a Director has an interest in a competing business;
  • the Director pockets the profit which should be the profit of the Company;
  • assets are transferred from the Company into the Director's own name;
  • the Director uses information gained in the course of acting as a Director for personal advantage or to cause detriment to the Corporation.

It is a criminal offence for a Director to use his or her position dishonestly with the intention of directly or indirectly gaining an advantage for himself or herself or causing detriment to the Corporation (Section 184 of the Corporations Act).

The Court can make Orders regulating how a Company is to conduct itself, or altering interests or the shareholders or winding the Company up, if a Company is being conducted so as to prejudice the interests of shareholders as a whole or is oppressive to or discriminatory against minority shareholders. (Section 232 and 233 of the Corporations Act).

If the Court makes a "Civil Penalty Order" in relation to a breach by a Director or his or her duties, the Court can make an Order disqualifying the Director from holding Directorships and can impose penalties of up to $200,000.00 with respect to the contravention. (Section 1317G of the Corporations Act).

If there has been a contravention the Court may also order a person to compensate the Corporation for damage suffered by the Corporation (Section 1317H).

ASIC can apply for a penalty to be imposed or a Compensation Order to be made. The Corporation can apply for a Compensation Order.

Section 588G imposes a duty on Directors to prevent a Company incurring a debt while it is insolvent.

There is a defence if at the time the debt is incurred the Director does not take part in management of the Company because of illness or for some other good reason, or because the Director believes on reasonable grounds that a competent and reliable person is monitoring the Company's solvency, or if the Director takes all reasonable steps to prevent the Company from incurring the debt.

Under Section 588M, if an unsecured creditor suffers loss because the debt was incurred, the Company's Liquidator can recover from the Director an amount equal to the loss. If the Liquidator does nothing to recover the loss, or the Liquidator agrees, then a creditor can sue the Director to recover the loss (Section 588R).

At Craddock Murray Neumann we can help you with issues relating to Directors' duties.

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