Indri runs a soil-testing business. He decides to form a company to take over the business. He is the sole shareholder and sole director. Indri sells his business to the company at an inflated price and lends the company $90,000 to help meet the cost of purchase. As security for the loan, Indri arranges a mortgage over a vacant block of land, which he transferred to the company as part of the business sale. In the first year of operation, the business makes a small profit (after paying both Indri and his 20 daughter's wages), but by the end of 2012 it is clear that the building industry is going through a major slump. Indri becomes desperate and works even harder. While working late into the night, Indri badly lacerates his hand and needs micro-surgery. His efforts to keep the business afloat are in vain and the company is forced into liquidation. On realisation of the assets, it is found that the company has approximately $95,000 to go towards meeting creditors' claims of $210,000:
(a) If Indri is the only secured creditor, will he get back his $90,000?
(b) Can Indri claim workers' compensation, assuming that he is otherwise entitled to it?
With regards to the case scenario, it can be apparently noted that Indri is associated with operating a soil-testing business, suggesting that he is running a soleproprietorship form of business. However, it must further be noted that Indri has decided to form a company that is capable of taking over the business. Although a company cannot be formed without less than 2 members, it must be noted that Indri is the sole director and the sole shareholder of the company. Indri, as the only secured creditor, has lent the company $90,000 for ensuring that it is able to meet its cost of purchase. As per Sect 51E of the Corporations Act 2001, secured creditors can be considered as the creditors of the company, in case the debt that is owed to the company is secured with the help of a security interest. However, it must be noted that since the company is forced into liquidation, Indri, as the only secured creditor is entitled to receive the lent money. This can be attributed to the fact that as a secured creditor, Indri would hold priority over the unsecured creditors. Chapter 7 underlying the Title 11 of the United States Code considers that secured creditors are general at a lower chance of risk since their credit is supported by the collateral encompassing mortgage on assets. They further carry a legally enforceable right that enables them to collateral securing the loans with that of mortgage carrying an equivalent value. In case the debtor is associated with defaulting on the obligations made with respect to secured creditor, the secured creditor has the right to seize and sold the collateral to satisfy the debt. Only, in case of an automatic stay, the secured creditor might not be able to regain control over the value of collateral. However, the bankruptcy law ensures that the secured creditors are able to obtain priority in the collateral, which is able to seize, sell as well as keep the proceeds that are obtained from the sale near to the owed amount. Secured creditor is further in a condition to collect the deficiency from the remedies that are left available for the unsecured creditors. Hence, as the only secured creditor, Indri is entitled to receive the owed amount from seizing, selling or arranging proceeds from sale of mortgage over a vacant block of land.
Based on the assumption that Indri is entitled to receive workers’ compensation, it can be apparently stated that Indri is entitled to receive compensation once the company goes into liquidation. Herein, due consideration needs to be placed on the fact that in scenarios wherein company goes into liquidation, the employees are entitled to obtain payment as per the Fair Entitlements Guarantee (FEG). In the past, FEG was known as General Employee Entitlements and Redundancy Scheme (GEERS) that is provided to the eligible employees towards ensuring that they are able to obtain their unpaid entitlements. Indri is further entitled to receive compensation for the personal injury as per the Sect 31 of the Workers Compensation Act 1951. Such entitlements can encompass annual leaves, service leave, payments with regards to the notice of termination, redundancy pay and wages for up to 13 weeks. As part of workers’ compensation, Indri is further eligible to receive compensation in the form of insurance payment towards covering their wages as they are unfit to perform their work. It further includes payments that are made to the workers for covering medical expenses and rehabilitation.
ASIC, Constitution and replaceable rules (2016)
AustLII, Bankruptcy Act 1966 - Sect 44 (2016)
AustLII, Corporations Act 2001 - Sect 135 (2016)
AustLII, Corporations Act 2001 - Sect 141 (2016)
AustLII, Corporations Act 2001 –Sect 1072B (2016)
AustLII, Corporations Act 2001 –Sect 201G (2016)
AustLII, Corporations Act 2001 –Sect 201H (2016)
AustLII, Corporations Act 2001 –Sect 201J (2016)
AustLII, Corporations Act 2001 –Sect 51E (2016)
Ayotte, Kenneth and David A. Skeel, ‘Bankruptcy Law as a Liquidity Provider’ (2013) 80(2) The University of Chicago Law Review 1557- 1624
Bebchuk, Lucian Arye and Jesse M. Fried, ‘A new approach to valuing secured claims in bankruptcy (No. w8276)’ (2001) 114(2386) National Bureau of Economic Research. 2386-2436.