Same objectives, yet different outcomes?
One of the masterclasses held at our October Queensland State Conference was on the inconsistencies between the two major pieces of insolvency legislation.
Why this topic?
The Bankruptcy Act 1966 and the Corporations Act 2001 were formed at different times, have different histories, and different purposes. Each has evolved over the decades and these inconsistencies have evolved between them and even within each of them.
While insolvency practitioners are used to these inconsistencies, people outside the industry can be confused as to why we do certain things in certain ways.
Obviously this is a huge topic, so I can only offer some bullet points on the main differences.
Just to indicate how far we have come over the centuries, this is from a judgment in Dive v Maningham (1551) ER 96:
“he ought to live off his own goods … and if he has no goods he shall live off the charity of others, and if others will give him nothing, let him die in the name of God, if he will, and impute the cause of it to his own fault, for his presumption and ill behaviour brought him to that imprisonment”
- The Corporations Act provides that directors are personally liable for debts incurred while a company was insolvent. It also has sections that can make it an offence punishable for up to five years imprisonment.
- While the personal liability question is not an issue, the Bankruptcy Act has no criminal sanction for incurring debts while insolvent. The best it has is an offence for ‘Rash and Hazardous Gambling’.
Restrictions on being a director
- Under the Corporations Act a person under an insolvency administration (e.g. bankruptcy or Part X) automatically cannot be a company director, without exception and no appeal process exists. The ban applies for the administration’s duration and is automatically lifted.
- There is no automatic restriction from being a company director if you are a director of another company in liquidation. There is a process to ban a director under various circumstances, but the Australian Securities and Investments Commission (ASIC) takes this action.
- So, the paradox is a person who loses $5,000 of creditors’ money under their own name cannot be director, but a person who loses $5,000,000 of creditors’ money through a company can be director, at least until banned.
- Should a bankrupt be able to be a director? If there is more than one director and the other directors and the shareholders agree—why shouldn’t a bankrupt or Part X debtor be allowed to remain a director? We could create a legal mechanism to remove the bankrupt if other directors or shareholders wish. Does being a bankrupt make someone ‘evil’ enough to warrant this exclusion?
- Should a director be automatically banned? For example, if a person is a director of three liquidated companies in five years, should that person be automatically banned from being a director for five years? ASIC should be able to automatically issue a banning notice, which could be appealed in court within 30 days. Does losing creditor’s money inside a corporate veil make you any less ‘evil’ than a bankrupt?
Reports to and Meetings of Creditors
- Under the Corporations Act, voluntary liquidations have an initial meeting, annual meetings or reports, and a final meeting at the end of the liquidation. Whereas, a court liquidation only has meetings when the liquidator wishes them or creditors demand them.
- A few of the inconsistencies between the Acts are:
- Number of creditors required for a quorum—one under the Bankruptcy Act and two under the Corporations Act.
- Virtual meeting vs. meetings by proxy—meeting held purely by voting slips under the Bankruptcy Act and (effectively the same thing) meetings held where creditors attend by a proxy to the chairperson at the meeting.
- Majority on value (Bankruptcy Act) vs. majority on number (Corporations Act).
- Special resolutions apply in some cases, but under a strict pass or fail regime (Bankruptcy Act) vs. Polls and chairperson casting votes (Corporations Act).
Dealing with related parties
- The Corporations Act limits dividends paid to ‘excluded’ company employees (i.e. people related to a director), and has recovery provisions that streamline the process of recovering assets from ‘close associates’ of the director (e.g. unreasonable director-related transactions).
- The Bankruptcy has neither of these provisions for parties related to the bankrupt.
Outside parties may never notice many of these inconsistencies, but some do cause confusion and unequal outcomes.