Australian Corporate Insolvency Laws - Assignment Example

Australian Corporate Insolvency Laws Introduction Corporate Insolvency provisions are certainly one of the most important components of Australia’s Corporation’s act and are certainly one of the most important frameworks that govern the country’s corporate sector. In this context, the effectiveness of the insolvency regulations and the processes involved in the framework are indispensable for ensuring the well function of Australia’s business sector and economy. Further, they are a primary means of ensuring discipline and proper resource allocation within the corporate sector. Insolvency laws have also helped enhance the level of corporate governance and are a reference point for corporate ethics. They facilitate creditors of private companies to take steps towards replacing management in the case of troubled firms thereby helping creating the required prudence in corporate behavior. Corporate insolvency laws further allow for the examination into circumstances that give rise to insolvency and help evaluate the conduct of the management in a company in the event of a failure, thereby helping investigate for any culpable behavior. insolvency laws are further used to assess the role of people involved in the transfer of funds, assets or property that may be potentially recoverable. Given these considerations, insolvency laws play a central role in the functioning of capital markets, which underlines the prominence of these laws for Australia (Roman Tomasic, 2006, pg. 15). Statutory insolvency laws in Australia are governed through two different streams of proceeding namely the Corporations Act and the Bankruptcy Laws. While the former applies to companies, the latter can be brought to use in the case of individuals. In many cases, the insolvency of a company can lead to implications on the bankruptcy act. For instance, cases such as negligence on the part of directors towards creditors, personal commitments provided to the company or in situations when a civil liability arises towards insolvent trading are all cases where the insolvency laws can be brought to use. Conceptual Framework The insolvency laws have been the subject of review and analysis since a long time and this can be attributed to the broad range of issues that they deal with within the framework of corporate insolvency. In this context, each of the provisions under insolvency laws can be considered to provide a guideline to a particular aspect under insolvency procedures. One of the primary areas that any evaluation into insolvency deals with is within the appointment, constitution, removal and responsibilities of administrators or the liquidators. Review committees that have taken part since the Harmer Report of 1992 have expressed whether there is a need to provide more independence to administrator and the additional measures that need to be provided in order to facilitate such a feature (Ole Kramp, 2009, pg. 56). This independence is necessary to ensure that the decision making process is devoid of any influence or stress that could help in qualitative decisions. Insolvency laws must also be analyzed over the concerns regarding the mode of appointment or dismissal of administrators as well as liquidators and whether the procedures involved in such appointments can be improved. Reviewers of the laws have long pondered over the openness of the different forms of administration and the frequencies with which parties seek a particular form of external administration (ranging from liquidation to voluntary administration) (Royston Goode, 2005, pg. 34) by analyzing the managements of both small and large scale corporations in Australia and the pattern of changes affected in them over a period of few years. One of the other areas that voice the need for improvement and where certain discrepancies have been detected concerns the duties of directors. There is a general agreement towards the possibility of improving the provisions towards insolvent trading. It is necessary to determine if the law is in a position to determine the responsibilities of directors within the current context of insolvency or even in cases where such as a case is pending. Further, reviews of insolvency laws have maintained that the current voidable transaction provisions need an improvement and if so, what measures can be initiated towards better compliance of the director towards reports and information to the company’s administrators about internal affairs. This is necessary to avoid any potential consequences of the insolvency laws such as penalties, compensation proceedings or even the liability of facing criminal charges. This is usually achieved by efficient book keeping as well as the requirement on the part of the directors to refrain from active trading under any state of insolvency. It has also been found that the current procedures of voluntary administration have not been able to achieve many of their intended objectives and that many features are open to improvement. This is primarily because of the rules that govern the votes of creditors have been found to not be fully appropriate. Besides, doubts have been cast over the methods involved in resolving deadlocks through fair means and call for laying greater weight on the value instead of the number of creditors in certain circumstances (Roman Tomasic, 2006, pg. 113). There have also been suggestions to provide better guidance to the manner involved in exercising a casting vote on the part of an administrator. It also needs to be examined whether the statutory demands under the Corporations Act are appropriate and whether there are any better alternatives to this. Legislators are also pursuing the case for a unified administrative framework that caters to the needs of both corporate as well as personal insolvency ((Vanessa Finch, 2002, pg. 86). The Evidence The discussion initially focuses on the consequences of the actions of directors in large companies, whose decisions have influenced the restructuring of such companies. Consider the case of ‘Sons of Gwalia’, which raised questions on the obligations as part of the disclosure, whereby a certain tension was found to exist between such obligations and ensuring sufficient confidence in the company that was experiencing financial trouble, where efforts towards restructuring were underway outside the purview of a formal insolvency process. The case of ‘Sons of Gwalia’ has brought to light the importance of the amount of information available publicly, which effectively highlights the relationship between a firm and its investors, employees and suppliers. Lack of proper framework to oversee the adherence to a formal insolvency and restructuring proceeding resulted in a straining of the critical relationship between these entities, which is necessary to ensure continued operation (Peter Maunder, 2006, pg. 68). Some of the inconsistencies will be discussed through certain cases that have gained significance in the context of the Corporations Act. Most recently, there was a very public case that argued over the issue of whether a proxy appointed through a shareholder could be allowed to vote on behalf of the shareholder. The case in question was between the Corporate regulator of Australia, the Securities and Investments Commission and Nicholas Whitlam, the Chairman of NRMA Ltd., a prominent insurance compay. The issue assumes significance as such provisions had earlier allowed directors of companies for unfair gains. For instance, during the Annual General meeting of the Coles Meyer company in 2002, the director Solomon Lew used an astounding 117 million proxy votes to reappoint himself as director (Ole Kramp, 2009, pg. 48). The case involved the accusation on the part of the ASIC to vote in favor of a resolution to increase the remuneration despite instruction from the members of the company who had appointed the defendant as the proxy. Given the personal interest of the defendant in having the resolution passed, refrained from signing the resolution thereby resulting them in not being counted leading to a special passing of the resolution in favor of the proposed raise (Ole Kramp, 2009, pg. 54). This deliberate intention to not sign the poll paper thereby was perceived as a breach of his duties as a director as a result of this improper use of the defendant’s position. This discrepancy has resulted in a fresh call for better regulation of proxies thereby preventing any unnecessary complexity. In the case of the Coles Meyer AGM in 2002, regulators had been unsure whether Solomon Lew was obligated to vote or otherwise (Ole Kramp, 2009, pg. 51). These ambiguities shed light on the lack of any clear insight into the consequences of the appointment of a director as a proxy. This is further unacceptable given that there is no rationale behind differentiating between the responsibilities of a board of directors and others including proxies. As such, there is a necessity to make amendments to rein in the much needed consistency. Additionally, the obligation to disclose information such as performance, sales, profit margins etc. is influenced by the certainty of information with one of the exceptions being in cases wherein it is supposed to remain confidential. However, instances such as Randall vs. Aristocrat Leisure (2004) and ASIC vs. Southcorp have highlighted the situations where information comprises issues of supposition and is insufficient to warrant any disclosure (William Duncan, 2005, pg. 156). Discrepancies occur when huge differences are encountered between the information available in the markets and the information released by the company. In the case of Randall vs. Aristocrat, leaking crucial information had an influence on the stock price thereby leading to trade on false information. In most of these cases, lack of adequate time did not allow an investigation of the factual circumstances of these cases thereby illustrating circumstances involving a sufficient amount of doubt on the ‘certainty’ of such information. In 2007, some significant amendments were made to the insolvency provisions under the Corporations Act, by which liquidators could group their administrations as part of a liquidation procedure. However, a similar move was not approved in the case of the voluntary administration regime as it was believed that such a provision would not provide the necessary alternatives to restructure the financial assets of the company under such circumstances. Further, such an application is found to trespass the rights of creditors at least to the point where they could be entitled to sizeable dividends from the restructuring process. This situation first came to light in the case ‘Australasian Memory Ltd., vs. Brian’ in 2000 where the provisions under section 447A restricted the extent to which creditors could play a part in the process that could have led to any maximization of the value of the assets. These limitations also led to unreasonable delays impacting the amount of returns to them (Michael Adams, 2007, pg. 127). Conclusions & Reflections The discussions in the preceding sections provide certain insights into some of the present consequences of the Australian Corporate Insolvency Laws. These laws, enacted predominantly through the Corporations Act and the Bankruptcy Act have worked towards providing a legalized framework for guiding the various stakeholders involved in any potential process of insolvency. Although the present provisions under these have been exhaustive, they lead to certain unintended consequences, which have been brought forward through intense debate within legal circles. In this context, there have been a number of studies in several aspects of Insolvency and a number of recommendations have been made to improve the laws over the years. The discussions provided as part of this paper provide only a basic insight into the depths of analysis that has gone into this work and there is an ongoing request from the concerned authorities for more submissions and reviews, whose suggestions may make these laws more plausible and easier to implement, follow and regulate. As such, it is only a matter of time and resolve before the present unintended consequences in these laws are resolved in effective time and the process of insolvency made a rather smoother and lucid process. References 1. Roman Tomasic (2006), Insolvency law in East Asia. New York: Ashgate. 2. Royston Goode (2005), Principles of corporate insolvency law. London: Sweet & Maxwell. 3. Christopher Symes (2007), Statutory Priorities in Corporate Insolvency Law: An Analysis of Preferred Creditor Status. New York: Ashgate. 4. Vanessa Finch (2002), Corporate insolvency law: perspectives and principles. Cambridge University Press. 5. Paul Omar (2008), International insolvency law: themes and perspectives. London: Routledge. 6. Ole Kramp (2009), The Role of the Administrator in the Corporate Rescue Process in Australia and Germany: A Comparison. Berlin: GRIN Verlag. 7. Peter Maunder (2006), Government intervention in the developed economy. New York: Taylor & Francis. 8. Kevin Lindgren (2008), Business law of Australia. University of California. 9. William Duncan (2005), Joint ventures law in Australia. Sydney: Federation Press. 10. Michael Adams (2007), Australian Essential Corporate Law 2/e. London: Routledge. Read More