Bankruptcy – changes to advertising

Under section 73 of the Bankruptcy Act, creditors may meet in order to decide whether to agree to annul a bankruptcy. Similarly, section 188 provides for creditors to meet to consider a Part X Personal Insolvency Agreement proposal.

Such meetings are required to be advertised in a manner approved by the Inspector-General. Traditionally, newspaper advertising was the prescribed method. However, from 1 September 2010, section 73 and section 188 meetings are required to be advertised on ITSA’s website on a dedicated creditors meetings page, in lieu of newspaper publication.

ITSA charges a flat fee of $275.00 to advertise each creditors meeting. Requests to advertise a creditors meeting are to be made at least 10 days prior to the proposed meeting using an ITSA form.

This is a significant development in insolvency law, although of only a small compass at this stage. It will be interesting to monitor whether any attempt is made to apply the same principle to corporate insolvency, where the website would presumably be managed by ASIC.

Corporations Act – insolvent dividends

The Corporations Amendment (Corporations Reporting Reform) Act 2010 (Cth.) received Royal Assent on 28 June 2010. Among other things, the Act clarifies the circumstances in which payment of a dividend amounts to insolvent trading.

Section 254T of the Corporations Act originally provided that a dividend may only be paid “out of profits of the company”. The Explanatory Memorandum to the 2010 Bill notes that concerns had been raised as to the lack of guidance about, or a definition of, the term “profits”, including that “the legal precedents on this issue are outdated and complex and not in line with current accounting principles”.

The new section 254T addresses this issue by providing for a three-tiered test. Under the new provision, a company must not pay a dividend unless: –

1. the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
2. the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
3. the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Note 1 to the new provision gives an example: the payment of a dividend would materially prejudice the company’s ability to pay its creditors “if the company would become insolvent as a result of the payment”. Note 2 highlights the duty to prevent insolvent trading on payment of dividends.

Existing liabilities of directors under section 588G as to payment of dividends or reducing capital are otherwise unchanged.