Case Of Ravi Owns Soil And Water Testing Pty Essay

Question:

Discuss about the Case of Darwin Soil and Water Testing Pty Ltd.

Answer:

Issue

Ravi owns a soil and water testing company known as Darwin Soil and Water Testing Pty Ltd and is the sole shareholder and director of the company. The company reported a good profit at the end of the first year and was seen as a safe venture. However in its second year its largest contractor started to employ internal entities for their soil and water testing and this caused a huge fall in the revenue of the company. Ravi felt that the company would soon become insolvent and thus employed an administrator to manage the affairs of the company. The administrator declared that the company owed a total of $210,000 (this included a debt a $90,000 to Ravi as the sole secured creditor) and had assets worth a total of $95,000. The issue here is to determine the options available to the appointed administrator and the amount to be paid to the unsecured creditors in case Ravi can recover his debt to the company.

Rule

Companies that undertake business activities within the jurisdiction of the Australia are regulated by the provisions of the Companies Act, 2001. Part 5.3A of the Corporations Act, 2001 defines the administration process undertaken with the appointment of an administrator.

When a company is or will evidently become insolvent the company itself can appoint an administrator for the affairs of the company. This is defined in Section 436A of the act[1]. Section 436C of the act states that a person who can legally claim a securities interest in the company can appoint an administrator if the person feels that the company will evidently become insolvent[2]. It is further provided in Section 436DA (2) of the act that an administrator appointed through such a process would have to make a declaration regarding the liabilities and indemnities of the company at the time of commencement of such a process[3]. The administrator so appointed assumes complete control over the affairs of the company and acts on behalf of the company as defined in Section 437A of the act[4]. Section 436E of the act provides for the time and purpose of the first creditors meeting which the administrator is tasked with holding[5]. The section states that the person so appointed would have to hold the first meeting of the creditors where it would be determined if a committee inspection needs to be appointed for the company and decides on the composition of such a committee. The section also necessitates that such a meeting must be held within 8 days from the appointment of such an administrator and the creditors must be given 5 days notice before the meeting is held.

When the administrator assumes complete control over the affairs of the company he may sell properties related to the business or sell parts of the business or the company as a whole[6]. Additionally, the administrator can enter into contracts on behalf of the company. After commencement of the administration process the administrator so appointed is the individual tasked with transacting on behalf of the company following the provisions of Section 437D of the act[7].

When an administrator is appointed for such a process the options available to him are enumerated below[8]:

  • The administrator may return the business of the company back into the hand of their board of directors.
  • The administrator can give an approval for the formulation of a Deed of Company Arrangement (DOCA) and this would effectively discharge the liabilities of the company.
  • The administrator also has the option to commence liquidation proceedings on behalf of the company by virtue of the appointment of a liquidator.

The execution of a Deed of Company Arrangement (DOCA) extinguishes all claims against a company. However such an agreement does not extinguish all rights, the rights of a secured creditor remain even after the execution of a DOCA if the secured creditor refrains from voting for the approval of the DOCA this has been defined in Section 444D (1) of the act[9].

The court also held In the matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed)[10] that when a secured creditor refrains from voting for a deed of company arrangement his securities interest in the company survives even after the execution of the Deed of Company Arrangement. This thus means that the company is still liable to repay the secured creditor the full amount owed to him in such a case. This is by virtue of Section 444D (1) of the Corporations Act, 2001.

Application

In the given set of facts and circumstances it can be inferred Ravi being the sole shareholder and director of the company invoked the administration process by virtue of Section 436A of the act on behalf of the company. It can also be inferred that Ravi invoked the administration process through Section 436C of the act as the only secured creditor of the company. The administrator so appointed made a declaration that the companies total liabilities were to the tune of $210,000 and that the total assets of the company amounted to $95,000 following his obligations as per Section 436DA (2) of the act. By virtue of 437A of the Corporations Act, 2001 the company the administrator now had complete control over the affairs of the company due to the commencement of the administration process[11].

Thus for the administration process of Darwin Soil and Water Testing Pty Ltd the administrator now has three options available to him which he may employ:

  • The first is delivering the company to Ravi as the sole shareholder and director. Ravi has however failed in effective administration of the company and this had almost lead to the demise of the company. Thus, handing over the company to Ravi would not be a viable option and thus it would not be prudent to employ this method.
  • Darwin Soil and Water Testing Pty Ltd need to extinguish its debts as their first and foremost priority and commencing winding up proceedings would not be ideal for the interests of the company. Thus, approving a Deed of Company Arrangement (DOCA) and thus discharging the debts of the company through the execution of such a deed would be a viable option for the future of the company. This would eliminate all its debts and yet keep the company in existence.
  • The administrator also has the option to appoint a liquidator on behalf of the company and thus commence winding up proceedings for the company. In such a case the winding up proceedings would lead to the end of the company’s existence and yet would not discharge all claims against the company sufficiently or satisfactorily. Thus employing such a procedure for the future of the company would be a futile pursuit as at the end of the liquidation process the company would not exist.

Thus from a preliminary analysis of the facts and circumstances and the practical options available to the administrator we see that the second option, which is the execution of a deed of company arrangement is the most viable option available to the administrator[12]. Thus, the administrator by virtue of the powers conferred to him under the provisions of Section 437A of the act will act on behalf of the company and approve a Deed of Company Arrangement (DOCA) which will strategize how the company will discharge the liabilities it owes[13].

When such a DOCA is executed it would be prudent for Ravi to refrain from voting for the approval of such a deed. As a result following the provisions of Section 444D (1) of the Corporations Act, 2001 Ravi’s entitlement to the $90,000 which Darwin Soil and Water Testing Pty Ltd owes him would also survive. This thus means that the company would have to reimburse Ravi for the total amount lent to the company. This legal stand is also supported by the judgment in Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed)[14] and would dictate that Ravi would be able to recover the entire amount. Thus Ravi being the sole secured creditor would be paid $90,000 out of the total assets of the company. In such a case the amount to be distributed among the unsecured creditors would be the remaining $5000 which would be paid on pro-rata basis.

Conclusion

In this case the administrator appointed by Ravi would have the three options discussed above available to him. However, the problem with the other options is that they would not lead to an amicable solution for the company’s problem. Thus, approval and execution of a Deed of Company Arrangement (DOCA) is only viable option available to the administrator.

When executing such a deed Ravi would refrain from voting for its approval and thus his entitlement to the dues would survive as per statutory provisions and case laws. This would thus mean that the company would have to pay Ravi a total of $90,000 out of its total assets of $95,000 as the only secured creditor. This would mean that the remaining $5000 would have to be distributed on pro-rata basis amongst the unsecured creditors. The calculation for the same is set out below.

Calculation

Payment to Unsecured Creditors:

Particulars

Amount ($)

Unsecured Debts

1,20,000

Secured Debts

90,000

Total Debt

2,10,000

Total Assets

95,000

Less: Secured debts

90,000

Unsecured creditors pay

5,000


Bibliography

Corporations Act, 2001.

In the matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977.

Bevan, Christopher J. Corporations law. Thomson Reuters (Professional) Australia Limited, 2014.

Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. "Commercial applications of company law." (2013).

Harris, Jason, Anil Hargovan, and Michael Andrew Adams. Australian corporate law. Vol. 2. LexisNexis Butterworths, 2013.

McKendrick, Ewan. Contract law: text, cases, and materials. Oxford University Press (UK), 2014.

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