We have found that there is some confusion amongst debtors and directors on whether voluntary appointments may be made to insolvent people or companies when there is a winding up or bankruptcy application on foot, and the differences between how the two Acts handle this situation.
The Bankruptcy Act is a little more liberal in its rights for debtors to commence a voluntary appointment when an application is before the court for an ‘involuntary’ appointment (a Sequestration Order). When a creditor’s petition is lodged against a debtor but has yet to be heard, the debtor can still either lodge a debtor’s petition making themselves bankrupt, or execute an authority under Part X proposing a Personal Insolvency Agreement.
Section 55 of the Bankruptcy Act deals with the presentation of debtor’s petitions. The only restriction placed on these presentations (after a creditor’s petition has been filed) is when the creditor’s petitions relates to a group of people, and the debtor’s petition relates to only one of these people. In that case, directions from the Court must be sought before the debtor’s petition is accepted or rejected.
55(3B) The Official Receiver must refer a debtor’s petition to the Court for a direction to accept or reject it if there is a creditor’s petition pending against a group of debtors (whether they are joint debtors or members of a partnership) that includes the debtor against whom the debtor’s petition is presented.
The ability to file a debtor’s petition whilst a creditor’s petition is pending is confirmed in section 115. This section deals with ‘when’ a bankruptcy commences. This section sets a date for the commencement of a bankruptcy when:
115(2) Petition presented when at least one creditor’s petition was pending against the petitioning debtor (whether alone, as a member of a partnership or as a joint debtor), and accepted by the Official Receiver without a direction from the Court.
If directions from the Court are necessary, the Court will set the commencement date of the bankruptcy.
This ability to make voluntary appointments carries over to Part X of the Bankruptcy Act. If a section 188 authority appointing a controlling trustee over one’s affairs becomes effective (signed by all parties) before an order is made under a creditor’s petition, that petition is immediately stayed and remains so at least until the meeting of creditors is held or adjourned. This is set out in section 189AAA.
BANKRUPTCY ACT 1966 – SECT 189AAA
Stay of proceedings relating to creditor’s petition until meeting of debtor’s creditors
(a) an authority signed by a debtor under section 188 has become effective; and
(i) a creditor’s petition was presented against the debtor before the authority became effective; or
(ii) a creditor’s petition is presented against the debtor after the authority became effective but before the first or only meeting of the debtor’s creditors called under the authority;
proceedings relating to that petition are, by force of this subsection, stayed until:
(c) the conclusion of the meeting; or
(d) the adjournment of the meeting;
whichever is the earlier.
The Corporations Act is more restrictive when an application for the winding up of a company in insolvency has been filed. Once a creditor’s application has been filed, the company (its directors and members) cannot resolve to wind itself up voluntarily, but the directors can appoint a voluntary administrator that may result in a voluntary liquidation.
If a winding up application has been filed with the Court, the directors and members cannot automatically commence a voluntary winding up through the normal Part 5.5 provisions – they must seek leave of the court.
CORPORATIONS ACT 2001 – SECT 490
When company cannot wind up voluntarily
(1) Except with the leave of the Court, a company cannot resolve that it be wound up voluntarily if:
(a) an application for the company to be wound up in insolvency has been filed; or
(b) the Court has ordered that the company be wound up in insolvency, whether or not the order was made on such an application; or ..
And whilst directors can appointment voluntary administrators to a company after a creditor’s petition is filed, the Court has the discretion on whether to dismiss the application or adjourn the application to wait the outcome of the voluntary administration process, or proceed with the application and wind up the company on the application hearing date. We have seen all three occur.
Interestingly, under the Corporations Act the courts can still make a winding up order, under certain circumstances, even after a voluntary liquidation has commenced.
CORPORATIONS ACT 2001 – SECT 467B
Court may order winding up of company that is being wound up voluntarily The Court may make an order under section 233, 459A, 459B or 461 even if the company is already being wound up voluntarily.
Debtors, directors and their advisers should be aware of the possible restrictions placed upon certain types of appointments under certain circumstances.