ACC204 | Law | Administration Procedures Under the Corporations Act
Eric, Mary and Mei Ling are the only shareholders and directors of AcmePty Ltd, a trading company that supplies food products to cafés aroundBrisbane. In recent times, Acme’s cash flows have been pressured becauseseveral large customers, including CafeNow (a large franchise coffee shopwith hundreds of outlets), have been late in paying their invoices. This hasmeant that on several occasions Acme has not had sufficient funds to payits bills, particularly rent. The owner of its warehouse (Leaseco Ltd) haswritten several letters warning that if Acme is late in paying its rent, it willbe evicted from the premises.
At the same time as the company’s cash flow troubles, the employees takeindustrial action in an attempt to receive a pay increase. This strike stopsdeliveries from the warehouse for two days, with several customerscancelling their supply contracts with Acme. The cash flow problems areincreased, when the company’s bank, Eastbank Ltd, threatens to appoint areceiver over the company, if it does not pay its monthly interest within twoweeks.Eric, Mary and Mei Ling convene a board meeting to consider their options.
Eric and Mei Ling would like to negotiate with their creditors to restructurethe company’s debts. Mary, however, would like to sell out and changeindustries.
Advise Eric, Mary and Mei Ling as to their options under the externaladministration procedures under the Corporations Act, including theadvantages and disadvantages of such procedures.
Answer:
Businesses may at one point or the other face financial difficulties which may make them find it hard paying their liabilities including rent and debts to creditors. However, under the Corporations Act, there are quite some procedures which the business stakeholders may employ in such situations. For instance, Eric, Mary, and Ling should opt for specific types of external administrators under the Corporations Act to come up with a solution to their problem.
They should consider appointing a registered and independent practitioner in charge of insolvency to take complete control of their business just for a short time. Apparently, the Corporations Act presents the role of this administrator as maximizing the chances of the firm to remain in existence (Semple, Nagarajah & Hsu, 2015). The administrator can simply do this by allowing Acme Pty Ltd to ‘trade out of trouble.’ It is of an advantage as the company gets the opportunity to be run by a different individual who may take a different strategy and get the business out of trouble. Nonetheless, it is also risky as the administrator may be new to the firm and may fail to know what the business entails.
Therefore, if the option of a voluntary administrator fails, they may opt for receivership, whereby they choose an independent and registered insolvency receiver, who takes possession of the company sell it out, and further repay the debts to creditors. Despite the disadvantage of losing the company’s assets, this option would be advantageous since it will help the business repay off its liabilities and stay free of debt (Hargovan, 2015). If this fails, as well, then the stakeholders may have no option but to go for liquidation. However, this would be a disadvantage as it would force the company to stop existing as a legal entity. Nonetheless, the only advantage is that the shareholders will have the equal distributions of what remains after what is owed is repaid in full.
References
Hargovan, A. (2015). Tax debts and directors liability for insolvent trading. Governance Directions, 67(5), 302-305.
Semple, C., Nagarajah, N., & Hsu, W. (2015). Institutional shareholder activism: New draft guidance from ASIC provides a refresher on association. Governance Directions, 67(3), 170-172.
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