LAW205 Commercial and Corporate Law for Accountants

Provisions on relation to the options available to the administrator are provided through the provisions of section 438A of the Corporation Act 2001 (Cth).  It has been provided through the section that the as soon as the company goes into administration the administrator has to investigate the business, financial situation and property of the company. He has to formulate an opinion in relation to whether a deed of company arrangements would be required to be executed in the best interest of the creditors, whether bringing the administration period to an end would be in the interest of the creditor and whether the being wound up would be in the best interest of the company.

It has been provided through the provisions of section 435 of the CA that the administration of the affairs, business and property of a company has to be done in a way which enhances the chances of the organization to continue its existence, and if such situation is not possible then to wound up the company.

It has been identified by going through the situation in which Small Pty Ltd is that the company has a debt of total $210000 and the total assets of the company is of $95000. Thus through the application of the provisions of section 95A it can be stated that the company is insolvent as it is not able to pay the bets which have become payable and due.

Under the provisions of section 436C of the CA, Ravi who is also a secured creditor of the company has the power to appoint an administrator by written application and the appointment of a administrator is therefore valid.

Further under the provisions of section 439A of the CA it is the duty of the appointed administrator to inform the creditors about the appointment and convene meetings within the convening period.

The primary options which will be available to the administrator are those which are available in section 438A of the CA. as per the section the administrator will have the option of deciding whether a deed of company arrangements would be required to be executed in the best interest of the creditors, whether bringing the administration period to an end would be in the interest of the creditor and whether the being wound up would be in the best interest of the company.  Overall his primary focus in relation to Small Pty Ltd would be to ensure the best interest of the creditors.

In addition under the provisions of section 435 of the CA it is the duty of the administrator to carry out the administration in a way which enhances the chances of the organization to continue its existence, and if such situation is not possible then to wound up the company. in this situation there is no way that the company can continue existence as it has become insolvent and insolvent trading is prohibited under section 588G of the CA. Thus in the given situation the primary option which the administrator has to avail is that of winding up the company in the best interest of the creditors.

The company has become insolvent as per section 95A of the CA. The most suitable option which would be available to the administrator in the situation would be to wound up the company.

Issue 2

Whether Ravi is entitled to make a claim in relation to the company worth $90000

Rule

The company once registered is converted to a separate legal person as stated in the most popular case is the history of company law Salomon v A Salomon & Co Ltd [1896] UKHL 1. The facts of this historical case are similar to the present issue and thus may be helpful in relation to resolving the issue in hand.  In the case the defendant had sold his business to the company which was formed by him. He had also been issued with debentures worth 10000 which is a form of a secured loan. There was no dispute over the fact that the debentures have been obtained in a legal manner. A liquidator had been appointed as the company became insolvent. The liquidator attempted to deny the defendant the debenture amount. The court in this case made a ruling that the defendant is entitled to the debentures as the company is a separate legal entity and the debentures had been provided in a legal manner.

Another case which dealt with the situation is the case of Macaura v Northern Assurance Co Ltd [1925] AC 619. The court in this case had a discussion in relation to the principles of lifting the corporate veil. The unique situation in this case was that the company owner themselves made a claim to lift the corporate veil. In this case it had been ruled by the House of Lords that the corporate veil cannot be lifted unless there has been a fraud done when the company was being incorporated.

The principles of corporate veil found between the owners and the company was also analyzed through the provisions of the case of Lee v Lee's Air Farming Ltd [1960] UKPC 33. In this case the court held that a person can be regarded as an employee of a company which is solely owned by him under the principles of separate legal entity of a company. The principles of the cases of Salomon v A Salomon & Co Ltd and Macaura v Northern Assurance Co Ltd had been affirmed in this case.

In Gilford Motor Co Ltd v Horne [1933] Ch 935 the court stated that where the company has been established to avoid a legal obligation it would be appropriate for the courts to pierce the corporate veil of the company.

Application

It has been provided through the facts that Ravi has formed a company where there were significant issues with respect to soil and water contamination with toxic chemical PFAS.  However the company had been formed legally and there is no concrete evidence to show that Ravi created the company to valid legal liability as it was done in Gilford Motor Co Ltd v Horne. Ravi as provided a secured loan to the company worth $90000 which is also assumed to have been provided legally. In the given situation by the application of the case of Salomon v A Salomon & Co Ltd it can be stated that Ravi would be entitled to get the secured loan. This is because the company in context which has been formed legally is a separate legal entity and the loan had been provided in a legal manner. Thus the court will not lift the corporate veil in the situation. This position of Ravi can be further confirmed by applying the principles of Macaura v Northern Assurance Co Ltd and Lee v Lee's Air Farming Ltd where it was stated that the corporate veil cannot be lifted unless there has been a fraud done when the company was being incorporated.

Conclusion

Thus from the above discussion it can be concluded that as there is not  enough proof to show that Ravi has done any fraud and as per the principles of corporate veil and separate legal person Ravi will be entitled to the $90000.

Issue 3

What amount may be received by the unsecured creditors in the given situation?

Rule

In the case of Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 it had been stated by the court that when the company has got into liquidation the secured creditors needs to paid initially and only the remaining amount has to be provided to the unsecured creditors. The provisions have also been discussed in section 471C of the CA.

Application

In the given situation it has been stated that the company has a debt of total $210000 and the total assets of the company is of $95000. Ravi being the secured creditor will be entitled to get 90000 from the $90000 which would leave $5000 for the creditor.

The following are the entitlement of the creditors

References

Corporation Act 2001 (Cth)

Gilford Motor Co Ltd v Horne [1933] Ch 935

Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559

Lee v Lee's Air Farming Ltd [1960] UKPC 33

Macaura v Northern Assurance Co Ltd [1925] AC 619

Salomon v A Salomon & Co Ltd [1896] UKHL 1