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Creditors’ Ranking upon Liquidation

Discuss about the Meaningful Standards in Financial Planning.

The Corporations Act determines which group of creditors is paid first when the company is facing insolvent liquidation. The secured creditors are rank higher than the unsecured in priority of payment; for example, banks. It is because the unsecured creditors have no security over the company assets. If there are enough funds left in the company after paying the liquidators fees and the priority creditors such as employees and the secured creditors, the remaining money will be distributed to unsecured creditors inform of dividend.

Therefore, upon the liquidation, Fruitopia will have to pay her creditors according to the priorities for dividends in liquidation set under Section 556 of the Corporations Act 2001 (Quo 2007, p.124). Section 556 lists the priorities for dividends in a liquidation, which also comprises of the entitlement of the employee’s priorities. Rent arrears are categorized under liquidator fees and expenses because they are part of the administration costs and expenses. Liquidator fees and expenses are rank first according Section 556 listing, which makes the Landlord (Pennyless Ltd Company) to be paid first. The second ranked creditors are the employees’ unpaid wages. The employees have a statutory priority to be paid with respect outstanding entitlements after the payments of liquidation costs and expenses and liquidation fees. Therefore, the last creditor to be paid will be the unsecured loan from the bank.

An Unfair preference is the payment or transfer of assets that give a creditor an upper hand over other creditors. Such payments can be recovered by the appointed liquidators. The recovered funds can then be distributed equally among the creditors. Some of the elements of an unfair preferences claim include:

  • The debt, which is the subject of the transaction must be unsecured.
  • The company was insolvent when the transaction took place or became insolvent as a result of entering into the transaction.
  • The creditor got a better return that it would have not received if the transaction could have not taken place.

Referring to the above claims, it is evident that the company was insolvent at the tme of transaction. Corporation insolvency is the inability to be able to pay its debts when they are due. Fruitopia Pty Ltd was facing difficulties in paying its employees wages and the debts of its suppliers, and was uncertain of paying its employees their holiday pay entitles due to insufficient funds (Varzaly 2015, p.292). Therefore, it means that the transaction took place during insolvency. Considering such situation, it is right to say that the $100,000 that was deposited by Fruitopia Pty Ltd into the company’s bank account to reduce the debt owed to the bank was unfair preference payment.

Unfair Preferences

Any director who operates an insolvent company has breached the directors, duties as described under the Corporations Act 2001 (s 588G) (Varzaly 2015, p.303). Some of the corporation common insolvency includes receivership, liquidation, and administration. A director could be personally liable to insolvency if he or she led the company into bankruptcy and personal insolvency agreements (Quo 2007, p.130). Other than that, a director may become responsible for breaching his or her duties if:

  • He or she was the director when the company incurred a debt.
  • The company became insolvent, or became insolvent by incurring that debt, or by incurring debts that includes that debt.
  • At that period, there were reasonable grounds for suspecting that the company would become insolvent or was insolvent.

According to this case, it is clear that the director of Fruitopia Pty Ltd was operating under insolvency. It is because he or she was not able to pay the employee’s wages on time, had outstanding rent arrears, bank loan, and suspected that the company would be able to pay employees’ holiday entitlements 2001 (Quo 2007, p.123).

Any company legally required to be aware of their legal duties and obligation under the Corporations Act 2001 (Act), the Constitution and Shareholders Agreement of the company, and the general Law. Any director who fails to comply with his or her obligations may have grave consequences, which may include 5 years jail time, disqualification from company management, compelled to pay compensation funds, or face criminal and civil penalties of up to $200,000.

To avoid legal liability of corporation insolvency, the director needs to ensure their company does not trade in a manner that result to insolvency or do business when it is insolvent. The director is also required to check cash flow and other financial records, payments of creditors and repayment of long-term loans that the company has entered into, and invoices (Dobson 2014, p. 6). The director should take steps to address such matters before they get out of hand because early action can save the company. Moreover, a director should conduct due diligence to establish the superannuation liability state before acepting to become the director of any company. On the other hand, the director must make sure that the Australia Security and Investment Commission (ASIC) details are updated and provides an address for service that is scrutinized by professionals.

A director must comply with his or her legal duties under the Corporations Act 2001. The two responsibilities among others that are imposed on directors include:

  • The duty to act in good faith in the best interest of the company and for a better purpose
  • The duty to exercise care and diligence

The above outlined obligations are among the list of the legal requirements of the corporation directors that they must comply with. Being that the directors may become personally liable for the decisions that are made in their capacity as directors, it is vital that they understand all the responsibilities imposed on them.


The laws that govern the duty to avoid conflict of interest are found under the General law, s 182 and 183 of the Corporation Act 2001, and s 191 of the Act (Adams 2015, p.32). It is a requisite that directors must disclose all material of their personal interests that they have in connection to the affairs of the company. The law requires that all the directors to notify the bord of directors about such conflict of interest as soon as they become aware of such interest (Willis, O'Rourke & Fass, 2015). However, the directors of proprietary companies are not needed to provide notice of the conflict of interest so long as other directors are fully aware of the type and extent of conflict of interest of such directors. It is evident in the case McGellin v Mount King Mining NL (1998). Directors may breach duty to avoid conflict of interes if:

  • they are personal gaining profit from the proposed deal,
  • they propose to contact personally with the company
  • they sit on the Board while they are the direct competitor of the company, and
  • they use information or their position to advantage themselves or to cause detriment to the company

Section 180 (1) of the Corporation Act 2001states that a director must exercise the powers and discharge their responsibilities with due diligent and care that any other person would have done if were in the same position (Adams 2015, p.31). Directors may breach Section 180 (1) of the Act if they should have been reasonably aware that the company was likely to breach the Corporations Act, with grave consequences for the company. For example in the case Australian Securities and Investment Commission v Cassimatics (No. 8) [2016] where the court considered the nature of the duties of care and diligence the directors owed under s 180 (1) of the Act.

  • Offering financial products without an Australian Financial Services License (AFSL).
  • Legal Consequences of providing financial services without AFS license.

Offering financial products without a licensed financial services

Australian Financial Services License (AFSL) is a legal document required for one to provide legal financial services. The law prohibits an organization or a person from providing financial advice unless it holds an AFSL. AFSL is provided by the Australian Securities and Investment Commission (ASIC) to allow organizations or people to provide legal financial services business, which includes dealing in financial products. The definition stated in Division 3 of the Corporations Act and in s 12BAA of the ASIC Act. Under section 763 of the Corporations Act defines financial products as a facility through which a person makes a financial investment, making non-cash payment or manages financial risk.

On the other hand, financial service happens where a person deals in a financial product, gets a market for financial product, provides crow-funding, and provides a custodial services among others (Bruce & Ahmed, 2014). Financial products include things such as bonds, shares, interest under management schemes, superannuation, life insurance, general insurance, life insurance, margin lending facilities and derivatives.  The law requires that any person who performs the business of providing financial services should always hold an AFS license as stated under s 911A of the Corporations Act. However, in some circumstances, a person can be exempted from the requirement to have AFS license or may be allowed to provide financial services under a limited AFS license (Taylor 2017, p.12). The only exceptions where an individual can be allowed to provide financial products are stated under s 911A (2) of the Corporations Act 2001. Regulation 7.6.01(1)(a) allows one who is dealing in financial product not to hold AFS license only if he or she is acting in the capacity of trustee of a non-public offering superannuation entity.

Directors’ Duties

Australian Financial Service License is the Australian Securities and Investment Commission (ASIC) considers the different between the general advice, personal advice, and information to be vital. It says that a person is not required to have a license to be able to provide information about financial products. But, if a person is providing a general or personal financial advice, it must be properly licensed. However, there are discrete categories of licensing that are associated with competencies and resources the licensee must possess as stated under section 949A of the Corporations Act 2001 (Taylor, 2016, p.12). ASIC explains that an advice may be regarded as personal if it is presented in a manner that a reasonable person might have considered the objectives of the client’s financial needs.

Any person who would be found to have committed offence of providing financial services without AFS license would get a maximum penalty of two years imprisonment or a fine of $22,000 (Bruce & Ahmed, 2014).  Most of the people who are found to have committed such crimes is when one gradually has expanded from the matters that do not need AFSL, like accounting to matters such as insurance broking of finance advice that require licensed personnel. Additionally, one can also breach AFS licensing regulation if he or she has been working for someone else under their AFSL, and then began to work individually (Taylor 2017, p.12).

Moreover, for the court to determine the elements of the offence, it must determine that the person carried on the business of providing financial advice or did not hold the relevant license as required under s 913B of the Corporations Act, which covers the provision of financial advice. The law under the Corporations Act requires one not to carry the financial services business without AFSL, and any person who is involved in such businesses is said to have committed offence (Bruce & Ahmed, 2014). Therefore, for one to be allowed to get involved in financial services business must be a holder of Australian Financial Services License (AFSL).

To conclude with, it is vital for any organization or a person who wants to do financial service and products business to ensure that they are legally recognized legally by becoming AFSL holders. However, if one intends to do such businesses, then the laws requires that such persons work should operate under a person who holds Australian Finance Services License.


Adams, MA 2015, 'The unavoidable norm: Conflicts of interest by officers', Governance Directions, vol. 67, no. 1, pp. 30-32.

Bruce, K, & Ahmed, AD 2014, Conceptions of Professionalism : Meaningful Standards in Financial Planning, Routledge, Farnham, Surrey, UK.

Dobson, R 2014, 'Liquidation - Winding Up A Company', BusiDate, vol. 22, no. 4, pp. 5-6.

Quo, S 2007, 'Insolvency law: a comparative analysis of the preference tests in the Hong Kong Special Administrative Region (HKSAR) and Australia', International Insolvency Review, vol. 16, no. 2, pp. 123-143.

TAYLOR, M 2016, 'Are all planners competent to be self-licensed?', Money Management, vol. 30, no. 12, p. 12.

Taylor, M 2017, 'OBJECTIVELY WINDING BACK THE 'SIGNIFICANCE TEST'', Money Management, vol. 31, no. 6, p. 12.

Varzaly, J 2015, 'The Enforcement of Directors' Duties in Australia: An Empirical Analysis', European Business Organization Law Review, vol. 16, no. 2, pp. 281-319.

Willis, M, O'Rourke, T, & Fass, M 2015, The Resilient Director, Brown Dog, Bath.

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