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Insolvency
Table of contents
Introduction
A company is solvent if, and only if, the company is able to pay all of the company's debts, as and when they become due and payable. A company that is not solvent is insolvent.[1]
A company becomes insolvent if it commences to be wound up, ceases to carry on business, or when a receiver is appointed.[2]
The 3 most common types of corporate insolvency are voluntary administration, liquidation and receivership.[3]
Voluntary administration
Voluntary administration is a process where an administrator is appointed to a company in financial difficulties (but which could possibly be saved). During this time the administrator investigates the company’s affairs to be able to make a recommendation to creditors as to whether the company should come under administration, be wound up or revert to normal operation.[4]
A creditor is a person to whom a debt must be paid.[5]
Where a company is in voluntary administration s.440D of the Corporations Act 2001 (Cth) (Corporations Act) applies.
The Corporations Act, s.440D provides:
Stay of proceedings
- During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:
- Subsection (1) does not apply to:
- a criminal proceeding; or
- a prescribed proceeding.
The Commission is not a ‘Court’ and is therefore the stay prescribed in s.440D of the Corporations Act does not stop an employee from making or proceeding with an application for unfair dismissal.[6] The Member hearing a matter has a discretion as to whether that application will proceed for determination or be adjourned.[7]
Receivership
Receivership is the process by which a receiver is appointed to a company to collect or protect property for the benefit of either the person who appointed the receiver, or the persons who are ultimately found to be entitled to that property. Receivership is typically instituted where a company is at or near insolvency.[8]
Liquidation
The orderly winding up of a company’s affairs. It involves realising the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders.[9]
To realise means to convert assets into cash, often by selling them.[10]
A company liquidation is the corporate equivalent of bankruptcy proceedings against an individual who becomes insolvent.[11]
The three types of liquidation are:
- court
- creditors’ voluntary, and
- members’ voluntary.
An unfair dismissal application lodged against an employer who is declared insolvent by a Court or a provisional liquidator can proceed in the Commission.[12]
Exception
Section 500(2) of the Corporations Act applies to a creditors’ voluntary winding up where the company is insolvent. The Corporations Act provides:
Execution and civil proceedings
...
(2) After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.[13]
The Commission has found that an unfair dismissal application falls within the meaning of ‘civil proceedings’ in s.500(2) of the Corporations Act.[14]
The Commission is not a ‘Court’ and is therefore unable to grant leave as prescribed in s.500(2) of the Corporations Act.[15]
However, s.500(2) of the Corporations Act does not apply a members’ voluntary winding up where the company is solvent (at the time of making a special resolution under s.491 of the Corporations Act) and the decision to wind up is made by a majority of the directors.[16]
Unpaid entitlements
The Australian Government provides financial assistance to cover certain unpaid employment entitlements to eligible employees. This help is available to an employee after losing their job because their employer went bankrupt or into liquidation through the Fair Entitlements Guarantee (FEG).
For more information visit the the Fair Entitlements Guarantee (FEG) page on the Department of Employment's website, or call the FEG Hotline on 1300 135 040.
References
[1] Corporations Act 2001 (Cth) s.95A.
[2] Butterworths Australian Legal Dictionary, 1997, at p. 604.
[3] Australian Securities & Investments Commission, Types of Insolvency.
[4] Butterworths Australian Legal Dictionary, 1997, at p. 1250.
[5] Butterworths Australian Legal Dictionary, 1997, at p. 302.
[6] Smith v Trollope Silverwood & Beck Pty Ltd PR940508 (AIRCFB, Giudice J, Ross VP, Whelan C, 17 November 2003), [(2003) 142 IR 137].
[7] See for eg Krebs v Pika Wiya Health Service Aboriginal Corporation (Administrators Appointed and under Special Administration) [2015] FWC 1232 (Hampton C, 6 March 2015).
[8] Butterworths Australian Legal Dictionary, 1997, at p. 987.
[9] Insolvency: a glossary of terms, Australian Securities & Investments Commission, December 2008, at p. 4.
[10] Insolvency: a glossary of terms, Australian Securities & Investments Commission, December 2008, at p. 5.
[11] Butterworths Australian Legal Dictionary, 1997, at p. 697.
[12] Smith v Trollope Silverwood & Beck Pty Ltd PR940508 (AIRCFB, Giudice J, Ross VP, Whelan C, 17 November 2003), [(2003) 142 IR 137].
[13] Corporations Act 2001 (Cth), s.500(2).
[14] Grujevski v Queens Wharf Brewery [2014] FWC 3725 (Gooley DP, 5 June 2014) at para. 11; citing Silalahi v CMI Industrial (Forge) [2012] FWA 7275 (Jones C, 31 August 2012) at paras 11–16.
[15] Grujevski v Queens Wharf Brewery [2014] FWC 3725 (Gooley DP, 5 June 2014) at para. 10; citing Smith v Trollope Silverwood & Beck Pty Ltd, PR940508 (AIRCFB, Giudice J, Ross VP, Whelan C, 17 November 2003), [(2003) 142 IR 137]
[16] Woolley v Glenjac Pty Ltd t/a Aussie Farmers Direct [2014] FWC 7833 (Hatcher VP, 4 November 2014) at para. 16; citing Catto & Ors v Hampton Aust Ltd (In Liq) & Anor [1998] SASC 6594 (16 October 1998), [(1998) 29 ACSR 225]; Awada v Linknarf [2002] NSWSC 873 (26 September 2002), [(2002) 55 NSWLR 745].
Updated time
Last updated
16 March 2021
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