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Insolvency Law - IRAC




Question

 

The law of Bankruptcy is a mirror image of the law of liquidation except that with bankruptcy one examines the individual whereas in liquidation one examines the firm. Other than that, the two branches of law are the same. Do you agree with this proposition? 

 

Answer

 

Issue

Whether the law of Bankruptcy and the law of liquidation are the same branches of law, except Bankruptcy, one examines the individual, whereas, in liquidation, one examines the firm?

 

Rule of law

The law of liquidation is specified under the Corporation Act, 2001. Section 95A of the Corporations Act defines insolvency by defining solvency. This section provides that a person (including a firm) is solvent if, and only if, he can pay other persons' debt when these debts become due and payable. Furthermore, a person who is not solvent shall be regarded as solvent. (LawTeacher, 2013)

 

The case of ASIC v Plymin [2003] VSC 123  lists instances wherein a company can be regarded as insolvent. This case even sets out the general rule that insolvency shall be proven by cash flow and not by the balance sheet test. The cash-flow test determines the ability of the company to meet its debts when they are due. This test looks into the overall health of the company. On the other hand, the balance sheet test only focuses on the value of assets over liabilities.

 

The word "person" here is used in the context of a company. Section 1.5.1 of the Corporations Act, 2001 categorically states that a company is regarded as a distinct legal entity when it has been registered under the Australian Securities and Investment Commission. Henceforth, after registration, the company can own property, perform obligations, exercise rights, and operate distinctly from the people who own the requisite business.

 

Under provisions of the Corporations Act, 2001, the liquidation of an insolvent company allows a registered liquidator to take control and manage the company's affairs so that the company can be subjected to winding up and the remaining debts are fairly paid to the creditors. This includes court liquidation and the creditor's voluntary liquidation.  (LawTeacher, 2013)

 

For individuals, the Bankruptcy Act, 1996 is applicable. A creditor can file bankruptcy proceedings against the individual following the events provided under Section 40 of the Bankruptcy Act, 1996.

 

Application

Many people often use the terms "bankruptcy" and "insolvency" interchangeably". However, it is imperative to acknowledge that both are pretty different from each other.

 

Insolvency is used to determine the firm's position when it cannot pay its debts. Generally, it is interpreted by courts by using the "cash-flow test". In cases wherein the solvent debtor is a company, they will be dealt with following the provisions enshrined under the Corporations Act, 2001. Moreover, any litigation shall happen in the Federal court or a State supreme court following the rules and regulations under the Australian Securities and Investments Commission (ASIC).

 

On the other hand, Bankruptcy is commonly referred to as personal insolvency. It happens when an individual is unable to pay his debt when they become due and payable. This is primarily dealt under the provisions enshrined under Bankruptcy Act, 1996 (Cth). Moreover, any litigation shall happen in the Federal court or a Federal Circuit Court by the rules and regulations mentioned under the Australian Financial Security Authority (AFSA).

 

Although many provisions in the Corporations Act are comparable to those included in the Bankruptcy Act, each has its distinct way of dealing with insolvency. One distinction of particular interest is the availability within each system to third-party debt. It is significantly difficult for firms to acquire access to third-party debt when bankrupt compared to insolvent people. This is a consequence of the distinct and independent evolution of each body of law.

 

There is no specific definition or article of law indicating when a natural person is insolvent, only actions of Bankruptcy. Therefore, there is no legal duty for a natural person to place themselves into Bankruptcy, a point of significant distinction from corporate insolvency. There are criminal statutes that pertain to fraud that apply to persons where there is dishonesty.

 

According to the provisions under Corporation Act, 2001, a director who has become bankrupt shall automatically be disqualified from managing affairs of the company. However, there is no similar restriction placed under the Bankruptcy Act, and only AISC can enforce a ban upon the director. This reflects the inconsistencies prevailing between the two acts.

 

Furthermore, under the law of liquidation, i.e., the Corporation Act, the directors are personally liable for the debts incurred while the company is insolvent. The breach of the aforesaid shall hold the director accountable for five years. On the other hand, the Bankruptcy Act does not impose such criminal sanctions. 

 

Conclusion

As a conclusive analysis, it can be stated that the law of liquidation and law of Bankruptcy are different in their application due to inconsistencies under both acts.

 

 

REFERENCES

 

ASIC v Plymin [2003] VSC 123

 

Bankruptcy Act, 1996 (Cth)

 

Corporation Act, 2001 (Cth)

 

LawTeacher. November 2013. The Multi-Dimensional Concept of Insolvency. [online]. Available from:https://www.lawteacher.net/free-law-essays/company-law/company-law-and-insolvency.php?vref=1 [Accessed 19 November 2021].

 

LawTeacher. November 2013. Bankruptcy is a Legal Process. [online]. Available from: https://www.lawteacher.net/free-law-essays/business-law/bankruptcy-is-a-legal-process-law-essays.php?vref=1 [Accessed 19 November 2021].

 


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