Chapter 12
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BANKRUPTCY AND CORPORATE INSOLVENCY
Test Your Knowledge (page 192)
1. Outline the aims of bankruptcy law.
Sample answer
Bankruptcy law is designed to meet the case of an individual who has no reasonable prospect of being able to pay his or her debts. The aims of bankruptcy law are therefore :
2. Explain the function of a bankruptcy notice.
Sample answer
A bankruptcy notice is a notice which is served on a debtor requiring the payment of a judgment debt. A debtor who fails to comply with a bankruptcy notice commits an act of bankruptcy and can be made a bankrupt.
3. State the requirements that must be satisfied before a creditor can issue a creditor's petition against a debtor.
Sample answer
A creditor's petition may only be presented against a debtor if the amount owing is a minimum of $2000. This may be the sum of two or more debts owed to two or more creditors: s 44.
4. Once issued, what does a creditor's petition require a debtor to do? Give an example of an act of bankruptcy.
Sample answer
Once a creditor's petition has been issued, the court makes a sequestration order and the debtor becomes bankrupt. The debtor is then required to allow his or her assets to be vested in the Official Receiver or the Trustee in Bankruptcy with some minor exceptions. Sections 73–76 of the Bankruptcy Act provide that after a sequestration order has been made or a bankruptcy has occurred as the result of a debtor's petition, a bankrupt may make a proposal to the creditors for a composition in satisfaction of their debts or a scheme of arrangement of their affairs.
It is an act of bankruptcy for debtors to change their place of residence, move from the usual place of business, and refuse to see callers with the intention of defeating or delaying their creditors.
5. Explain what insolvency means? Is there any difference between bankruptcy and insolvency?
Sample answer
Insolvency is the inability of a company to pay debts as they become due and payable. A company is insolvent if it is experiencing an acute shortage of working capital. Bankruptcy proceedings are only brought against individuals, whereas insolvency proceedings are brought against companies.
6. What is the effect of voluntary administration on creditors?
Sample answer
Voluntary administration provides the company with breathing space while its future is being resolved. When the company is in voluntary administration, unsecured creditors cannot enforce their claims against the company without the consent of the administrator or the court's permission. Secured creditors cannot, except in limited circumstances, enforce their charge (security) over company property.
7. Discuss briefly the features of deeds of company arrangement.
Sample answer
Deeds of company arrangement are agreed upon by the creditors in a voluntary administration. Such a deed may have one of the following features:
(a) a moratorium under which the company is given extra time to pay its debts accrued before the commencement of voluntary administration
(b) a compromise whereby the creditors agree to accept payment of a lesser amount in the settlement of the company's debts
(c) a combination of a moratorium and compromise with creditors
(d) an orderly sale of all the company's property over a period of time that was mutually agreed.
8. Explain what is meant by saying that receivership is a form of external administration.
Sample answer
Receivership is a form of external administration in that it involves the appointment of an independent insolvency practitioner. Where a receiver is appointed by secured creditors of a company, for example, the receiver's duty is to take possession of the secured property, sell it, and out of the proceeds repay the secured debts owed: Corporations Act ss 416–434.
9. What are the aims of liquidation?
Sample answer
Liquidation (also known as winding up) is an orderly process under which a company's affairs are wound up, its property is sold, debts owed to creditors are repaid, and any surplus is distributed among its shareholders in accordance with the company's constitution. In a winding up process which brings a company's existence to an end, a liquidator is appointed by the creditors and control of the company passes to the liquidator.
10. What are the effects of winding up a company?
Sample answer
The company continues to exist as a legal entity after winding up commences. However, it is prevented from carrying on business after the winding up order except for the purpose of winding it up. The company's property continues to belong to it, but its powers to deal with its property are severely restricted: s 468. The directors lose their powers to manage the company's affairs which are controlled by its liquidators who will discharge the company's liabilities in preparation for its dissolution.
11. Discuss the powers and duties of:
An administrator is a person who is appointed in a voluntary administration to decide whether a company should come under administration in accordance with a deed of company arrangement, be wound up, or revert to normal operation. The administrator must give an opinion on each option and recommend which option is in the best interests of the creditors. In doing so, the administrator attempts to work out the optimum solution to the company's problems.
A liquidator is a person who is appointed in the winding up of a company, to assume control of the company's affairs and to discharge its liabilities in preparation for its dissolution. When a liquidator is appointed, all the assets are gathered together, valued, and then put to auction or sold by private agreement. The liquidator ascertains the liabilities of the company, determines its contracts, disposes of its business, distributes the assets to creditors and any surplus to the proprietors, and brings about the dissolution of the company as a legal entity.
Back to chapter selection
BANKRUPTCY AND CORPORATE INSOLVENCY
Test Your Knowledge (page 192)
1. Outline the aims of bankruptcy law.
Sample answer
Bankruptcy law is designed to meet the case of an individual who has no reasonable prospect of being able to pay his or her debts. The aims of bankruptcy law are therefore :
to distribute the debtor's property among his or her creditors in the most expeditious and economical manner in accordance with the provisions of the Bankruptcy Act 1966 (Cth)
to investigate the conduct and affairs of the debtor
to give the debtor a new and fresh start in life freed from the demands of creditors.
to investigate the conduct and affairs of the debtor
to give the debtor a new and fresh start in life freed from the demands of creditors.
2. Explain the function of a bankruptcy notice.
Sample answer
A bankruptcy notice is a notice which is served on a debtor requiring the payment of a judgment debt. A debtor who fails to comply with a bankruptcy notice commits an act of bankruptcy and can be made a bankrupt.
3. State the requirements that must be satisfied before a creditor can issue a creditor's petition against a debtor.
Sample answer
A creditor's petition may only be presented against a debtor if the amount owing is a minimum of $2000. This may be the sum of two or more debts owed to two or more creditors: s 44.
4. Once issued, what does a creditor's petition require a debtor to do? Give an example of an act of bankruptcy.
Sample answer
Once a creditor's petition has been issued, the court makes a sequestration order and the debtor becomes bankrupt. The debtor is then required to allow his or her assets to be vested in the Official Receiver or the Trustee in Bankruptcy with some minor exceptions. Sections 73–76 of the Bankruptcy Act provide that after a sequestration order has been made or a bankruptcy has occurred as the result of a debtor's petition, a bankrupt may make a proposal to the creditors for a composition in satisfaction of their debts or a scheme of arrangement of their affairs.
It is an act of bankruptcy for debtors to change their place of residence, move from the usual place of business, and refuse to see callers with the intention of defeating or delaying their creditors.
5. Explain what insolvency means? Is there any difference between bankruptcy and insolvency?
Sample answer
Insolvency is the inability of a company to pay debts as they become due and payable. A company is insolvent if it is experiencing an acute shortage of working capital. Bankruptcy proceedings are only brought against individuals, whereas insolvency proceedings are brought against companies.
6. What is the effect of voluntary administration on creditors?
Sample answer
Voluntary administration provides the company with breathing space while its future is being resolved. When the company is in voluntary administration, unsecured creditors cannot enforce their claims against the company without the consent of the administrator or the court's permission. Secured creditors cannot, except in limited circumstances, enforce their charge (security) over company property.
7. Discuss briefly the features of deeds of company arrangement.
Sample answer
Deeds of company arrangement are agreed upon by the creditors in a voluntary administration. Such a deed may have one of the following features:
(a) a moratorium under which the company is given extra time to pay its debts accrued before the commencement of voluntary administration
(b) a compromise whereby the creditors agree to accept payment of a lesser amount in the settlement of the company's debts
(c) a combination of a moratorium and compromise with creditors
(d) an orderly sale of all the company's property over a period of time that was mutually agreed.
8. Explain what is meant by saying that receivership is a form of external administration.
Sample answer
Receivership is a form of external administration in that it involves the appointment of an independent insolvency practitioner. Where a receiver is appointed by secured creditors of a company, for example, the receiver's duty is to take possession of the secured property, sell it, and out of the proceeds repay the secured debts owed: Corporations Act ss 416–434.
9. What are the aims of liquidation?
Sample answer
Liquidation (also known as winding up) is an orderly process under which a company's affairs are wound up, its property is sold, debts owed to creditors are repaid, and any surplus is distributed among its shareholders in accordance with the company's constitution. In a winding up process which brings a company's existence to an end, a liquidator is appointed by the creditors and control of the company passes to the liquidator.
10. What are the effects of winding up a company?
Sample answer
The company continues to exist as a legal entity after winding up commences. However, it is prevented from carrying on business after the winding up order except for the purpose of winding it up. The company's property continues to belong to it, but its powers to deal with its property are severely restricted: s 468. The directors lose their powers to manage the company's affairs which are controlled by its liquidators who will discharge the company's liabilities in preparation for its dissolution.
11. Discuss the powers and duties of:
- a receiver
- an administrator
- a liquidator.
An administrator is a person who is appointed in a voluntary administration to decide whether a company should come under administration in accordance with a deed of company arrangement, be wound up, or revert to normal operation. The administrator must give an opinion on each option and recommend which option is in the best interests of the creditors. In doing so, the administrator attempts to work out the optimum solution to the company's problems.
A liquidator is a person who is appointed in the winding up of a company, to assume control of the company's affairs and to discharge its liabilities in preparation for its dissolution. When a liquidator is appointed, all the assets are gathered together, valued, and then put to auction or sold by private agreement. The liquidator ascertains the liabilities of the company, determines its contracts, disposes of its business, distributes the assets to creditors and any surplus to the proprietors, and brings about the dissolution of the company as a legal entity.
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