Essay: Analysis Of Corps Act & Doctrine Of Separate Legal Entity.

What options are available to the administrator? Is Ravi entitled to get the $90,000 back and, if so, on what basis? If Ravi is successful, how much will unsecured creditors get back?

The first issue and relevant provisions of the Corporations Act

The first issue that exist in the given scenario are:

• To determine what actions can be taken by the administrators appointed by Ravi

Rule:

For the purpose of analyzing the first issue that has been identified in this given scenario, it is important todiscuss the relevant provisions of the Corporations Act that are relevant in this scenario. It has been provided in section 436DA(2) of the Corporations Act 2001 (Cth) that an administrator who is duly appointed by the provisions as provided in section 436A, 436B or 436 C is required to make declarations about the indemnities and the relationships owed to or by the company. The administrator is required to give a notice to the creditors of the company five days prior to holding the meeting (Yogaratna and Xynas 2017). For the purpose of assessing whether the company is insolvent the administrator must refer to section 95a of the Corporations Act. It has been specifically provided in the section that a person can be considered to be insolent, if such person fails to pay all the debts acquired by such person at the time when they become due. It can be stated in accordance with section 435 A of the CA that an administrator of a business can manage the property and affairs of a company:

• In a way which give maximum chances to the company for continuing its existence
• In a way which will eventually result in the immediate winding up of the company, if it is found that such winding up of the company  would create better return for the credtors of the company.

It has been provided in section 436E that administrators of companies are required to hold meetings of creditors and the purpose and time of conducting such meetings have been clearly illustrated in the aforementioned section. In accordance with this section it can be stated that the purpose of holding a meeting of the creditors is determine whether a committee needs to be appointed for the inspection of the debts owed by the company to the creditors. The time period of holding the meeting has been specified to be eight days since the appointment of such director. Further in relation to section 439 A it can be stated that a company administrator must convene a meeting with the creditors of a company during the time period when the company is in administration within the convening period as provided in subsection 5 of the aforementioned act. It can be stated that the meeting with the creditors must be held within 5 days after the end of the convening period.

Finally it has been provided in section 438A(a) that once a company enters into administration, the administrator of the business is required to investigate the operations of the company, the property of the company and its financial position. It has been further provided in subsection 438A(b) of the aforementioned actthat an administrator is required to make a decision in regards to governance of the business by assessing the following options:

• to execute a deed of arrangement(DOCA) by assessing whether it would be in the best interest of the creditors of the company
• to end the process of administration if it is found to be in the best interest of the creditors
• To liquidate and wind up the company if it is found in the best interest of the creditors.

The second issue and the Doctrine of Separate Legal Entity

Application

Thus by analyzing the facts of the case, it can be stated that in this case the administrator appointed by Ravi must declare the debts and the indemnities and which are owed by the company to the creditors as provided in section 436 DA(2). The administrator must make assessments about the assets and the and the debts owed y the company to its creditors as provided in section 438A(a). The administrator must assess whether the company in consideration is insolvent by applying the section 95(a) of the Corporations Act. It is evident in this scenario that the company has does not have the assets to pay the creditors. The company has assets worth 95, 000 dollars where as it owes 210,000 dollars to the creditors. The administrator must subsequently hold meetings with the creditors in accordance with sections 436E and 439A(6) to decide its future course of actions. Finally it can be stated in accordance with section 438A(b)that an administrator in this given scenario that the administrator can either:

• Either execute a deed of company arrangement
• End the process of administration
• Wind up the company

Conclusion

Thus in this given scenario the administrator can thus execute DOCA, liquidate the company or end the process of administration.

Issue two

The second issue that exists in this scenario is whether Ravi is entitled to recover the 90,000 dollars that he invested in the company.

Rule:

In this given scenario the doctrine of separate legal entity of a corporation is relevant. The doctrine of separate legal entity had been established in the case of Salomon v Salomon &Co [1897] AC22. In this case Salomon had been operating as a sole trader. However he formed a company to provide his sons with a share to five of the sons in the company. He had established the company with his wife and his five adult children. The company after being incorporated allotted 20,000 shares to Salomon for transfer of the assets of his business to the company. It can be stated that the remainder of the purchase price was owed to Salomon by the company. The remaining purchasing price that was owed to the company as a loan made Salomon a secured creditor of the company. Thus in this Salomon had acted as a secured creditor as well as the holder of majority of the shares. However, shortly after the business was sold off it suffered a loss and went into liquidation. The liquidator claimed that Salomon could not recover the debts from the company as he was in charge of the operations of the company. It had been held by the House of Lords in this case that Salomon was entitled to recover the debts owed to the company as he was a secured creditor of the company and the company had a separate legal entity. Thus in this case the principle of the Corporate Veil had been established.

The third issue and the entitlement of unsecured creditors

The case Macaura v Northern Assurance Co Ltd [1925] AC 619 was a land mark and Unique case in which the owners of the company requested to lift the corporate veil. The House of Lords in this case held that the insurers were not liable to pay by the contract as the timber was burnt in the fire did not belong to Mr. Macaura who had held the insurance policy. The Salomon v Salmon case had also been applied in this case to determine the separate legal entity of the company.

Another case which dealt with the same issue is the case of Lee v Lee’s Air Farming Ltd [1960] UKPC 33. In this case it had been held by the Privy council that the company formed by Lee was a separate legal entity which was distinct from its founder by the application of the Salomon case. Therefore in regards to the facts of the case, it had been held by the Privy Council that it was perfectly reasonable for Lee to claim compensation as he had a contract of employment with the company he owned.

The doctrine of separate legal entity has also been illustrated in section 119 of the Corporations Act 2001. In this section of the CA it has been clearly specified that a company starts to exist as a body corporate at the beginning of the day it gets registered (Yogaratnam and Xynas 2017). The company’s name is the name specified in the certificate of registration.However, as held in the Gilford Motor Company Ltd v. Horne, the courts have the right to pierce the corporate veil if the court feels fraud or misconduct is being perpetrated behind the veil. In this case Horne had setup a company in the name of his wife for the purpose of soliciting customers from the Gilford Company, which he was restricted to do by the employment contract between him and the Gilford company.

Application

Thus by analyzing the facts of the case, it becomes evident that the case is similar to the case of Salomon’s. In this given scenario, Ravi had established the company by transferring the assets of his business to the company. Therefore by the application of the principle of the Salomon’s case, it can be stated that Ravi in this given scenario acted as the secured creditor of the company. He had lent the company a sum of 90,000 dollars which was required for the registration, purchase and the set-up costs of the company. In this given scenario, it has been provided thatRavi had sold his business to the company at an inflated price.However as opposed to the case of Gilford Motor v Horne, in this case the company was not used as a mask for the purpose of carrying on the business which otherwise would not have been permitted. Therefore, the corporate veil of the company cannot be lifted in this case. Thus, Ravi would be entitled to recover the money.

Conclusion

Thus, to conclude it can be stated that Ravi will be entitled to recover the entire amount which he owed to the business.

Issue 3:

The third issue which has been highlighted in the scenario is how much will the unsecured creditors is entitled to get.

Rule:

It can be stated that in relation to section 471 C that the rights of the secured creditor does not get affected even in case of winding up of the company.

Application

As established before Ravi is a secured creditor of the company he is entitled to receive the entire amount of 90,000 that he lent to the business. The company has assets worth 95,000 whereas it owed its creditors 210,000. Thus in this case, it evident that the unsecured creditors will get the remaining amount after deducting the secure loan lent by Ravi to the company from the total assets of the company. They are entitled to get.

Reference List:

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

Salomon v Salomon &Co [1897] AC22

Macaura v Northern Assurance Co Ltd [1925] AC 619

Corporations Act 2001 (Cth)

 Yogaratnam, J and Xynas, L. (2017).Corporations Law: In Principle, 10th Edition