7158AFE Business Structures: Accounting and Legal Issues Summary Answer - Memorandum of Advice Assignment Semester 2, 2016
For a good mark in the law and analysis part of this assessment, your discussion should have considered the following general points.
1. Meaning of Insolvency
To achieve an excellent result, you would need to discuss: Section 95A of the CA and the terms “solvent” and “insolvent”. The meaning of the test- pay all debts as and when due and payable vs assets exceed
liabilities. That cash flow test of insolvency is to be preferred to a balance sheet approach (with
reference to case law). That the courts do take into account the broader picture of the debtor’s position, including
access to further finance and the “commercial realities” of the business. The mere fact that a debt is not enforced by a creditor is not likely to mean it will not be
taken into account unless there is a clear statement by the creditor that it is not to be
paid. The factors that have been suggested by ASIC and have some recognition in ASIC v Plymin
eg
Specifically, some of factors you could discuss include (but not limited to) are: There is a security interest held by the bank and the relationship between the
company and the bank. The state of the company’s financial records. That the company is currently making losses and has used up its reserves. The trade creditors are being paid selectively including the ATO – meaning that the
ATO has been paid (along with others) ahead of other unsecured creditors.
You can also consider the company’s insolvency in terms of the balance sheet test as this is
relevant to the overall position of the company. However, you would not do this prior to
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discussing the above. Your focus should be on the ‘as and when due’ test for payment of
liabilities. Note also that case law suggests the court will consider factors such as possible
asset sales. However, consider how the sale here might affect future operations of the
company.
2. Further information required
The key issue here is that the financial information provided here is inadequate to make a
detailed evaluation of the company’s position as to solvency and its possible alternatives.
Discuss what information you should expect. For example, it is clear that the company is a
segmented operation (separate businesses being carried out) so information is needed to
analyse each segment in terms of overall viability. Other information includes whether there
have been any demands for payment (particularly statutory demands), any further financial
information on the company’s new markets (remember to be specific), etc.
3. External Administration Options
The relevant types of external administration are: Some form of turnaround / corporate rescue / restructure. Voluntary administration. Liquidation (winding up). Receivership.
You should discuss each briefly and in context of the question. They key factor in determining
the best option for the company is whether it is considered that there is a temporary liquidity
issue, or whether the company is insolvent.
Can the company be rescued / restructured?
Consider Financial analysis / ratios, such as the current ratio etc. Financing opportunities – including debt and equity.
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That the overdraft is approaching its limit as well. Possible sale opportunities (non-performing segments)
Voluntary Administration
Consider Whether directors of likely to be liable for insolvent trading per s 588G. That receivers can still be appointed during the voluntary administration (and mostly
likely will be appointed.
Liquidation
Consider: Winding the company up is a last resort mechanism. The decision should only be made
by the company if it is hopelessly insolvent. Whether the creditors are likely to apply to the court to have it wound up. Remember
that the creditors must prove insolvency, or show that insolvency is presumed (for eg
non-compliance with a statutory demand notice).
Receivership
Consider The likelihood of this occurring. Note that the bank can only appoint a receiver if the company defaults – for eg, it does
not pay loan repayments.