AYB230 · Corporations Law
External Administration & Insolvency
This Topic 11 chapter covers how a company in financial distress is dealt with, and who gets paid when it is wound up. It defines insolvency and its tests (ASIC v Plymin; the statutory presumption s459C/E), the three types of external administration (receivership, voluntary administration → DOCA, winding up), small-business restructuring, and — the unit's other must-know waterfall — the order of distribution of claims (s555/s556). It is examined as short-answer and ILAC, with the order-of-distribution question rewarding a clean, ranked answer.
What this chapter covers
- 01Insolvency: the inability to pay debts as and when they fall due
- 02Insolvency tests: the ASIC v Plymin indicators
- 03The statutory presumption and statutory demand (s459C/s459E): the 21-day letter
- 04Secured vs unsecured creditors
- 05Receivership: a secured creditor realising assets to recover its loan
- 06Voluntary administration and the DOCA (deed of company arrangement)
- 07Winding up / liquidation (members' voluntary, creditors' voluntary, court) and small-business restructuring
- 08Order of distribution of claims in liquidation (s555/s556)
External administration & the order of distribution (short-answer, s556)
- +1Issue: In what order are Cascade's claims paid out on its winding up under s555/s556?
- +2Law: The liquidation distribution order is: secured creditors with a non-circulating (PPSA) security interest realise their collateral first; then the costs and fees of the liquidation (s556(1)(a)–(df)); then employee entitlements (s556(1)(e)–(h), with a statutory cap for director-employees); then secured creditors with a circulating interest; then unsecured creditors; and finally members, who rank equally (s555).
- +1Application: The bank realises the machinery first ($300k, outside the pool to that value, being perfected and non-circulating). Then the liquidator's fees ($40k), then employees ($90k), then trade creditors share what remains pari passu; ordinary members take any surplus.
- +1Conclusion: Order = bank (non-circulating secured) → liquidator's fees → employees → trade (unsecured) creditors → ordinary members.
Key terms
- Insolvency
- The inability of a company to pay its debts as and when they fall due — a cash-flow test, not merely a balance-sheet shortfall. It is the trigger for the insolvent-trading duty (s588G) and for several forms of external administration.
- Insolvency tests (ASIC v Plymin) & statutory presumption
- ASIC v Plymin lists practical indicators of insolvency — dishonoured cheques, COD demands, post-dated cheques, no timely audited accounts, unpaid PAYG and superannuation, bank demands, and an unsatisfied statutory demand. A failure to satisfy a statutory demand (s459E) within 21 days triggers a statutory presumption of insolvency under s459C.
- Receivership
- A form of external administration where a secured creditor (or the court) appoints a receiver to take control of and sell the secured assets to recover the secured loan. It is essentially a private enforcement of security, focused on the secured creditor's interest rather than the company as a whole.
- Voluntary administration & DOCA
- Voluntary administration places an independent administrator in control to investigate and recommend the best outcome for creditors (s435A). Creditors then decide between three outcomes: the company returns to its directors, a deed of company arrangement (DOCA — a binding compromise to pay creditors), or winding up.
- Winding up / liquidation
- The process of ending a company: a liquidator realises the assets, distributes the proceeds to creditors in the statutory order, returns any surplus to members, and then ASIC deregisters the company so it ceases to exist. It can be a members' voluntary winding up (solvent), a creditors' voluntary winding up, or a court-ordered winding up.
- Order of distribution (s555/s556)
- The ranking of claims in a liquidation: secured creditors with a non-circulating interest realise their collateral first; then liquidation costs and fees (s556(1)(a)–(df)); then employee entitlements (s556(1)(e)–(h), with a cap on director-employees); then circulating secured creditors; then unsecured creditors; and finally members, who rank equally among themselves (s555).
External Administration & Insolvency FAQ
How is insolvency tested?
Insolvency is the inability to pay debts as and when they fall due (a cash-flow test). The courts use the practical indicators from ASIC v Plymin — dishonoured cheques, suppliers demanding cash-on-delivery, unpaid PAYG and superannuation, no timely audited accounts, bank demands, and an unsatisfied statutory demand. Failing to satisfy a statutory demand under s459E within 21 days triggers a statutory presumption of insolvency (s459C), which is a common way creditors establish it.
What are the three types of external administration?
Receivership — a secured creditor appoints a receiver to sell the secured assets and recover its loan. Voluntary administration — an independent administrator investigates and creditors then choose to return the company to its directors, enter a deed of company arrangement (DOCA), or wind it up. Winding up (liquidation) — a liquidator realises the assets and distributes them, which can be a members' voluntary, creditors' voluntary, or court winding up. There is also a small-business restructuring process for smaller companies.
In what order are claims paid when a company is liquidated?
Secured creditors with a perfected non-circulating security interest are paid from their collateral first. Then come the liquidator's costs and fees (s556(1)(a)–(df)), then employee entitlements (s556(1)(e)–(h), with a statutory cap for director-employees), then secured creditors with a circulating interest, then unsecured creditors sharing pari passu, and finally the members, who rank equally among themselves (s555). Knowing this waterfall cold is one of the highest-yield exam skills in the unit.
What is the difference between a DOCA and winding up?
A deed of company arrangement (DOCA) is a binding compromise agreed by creditors during voluntary administration that lets the company keep operating while paying creditors an agreed amount — the aim is to deliver a better return than immediate liquidation and, where possible, save the business. Winding up ends the company entirely: the liquidator sells everything, distributes the proceeds in the s556 order, and ASIC deregisters the company so it ceases to exist.
Exam move
Two things win marks here. First, be able to establish insolvency: memorise the ASIC v Plymin indicators and the statutory-demand route (s459E 21-day letter → s459C presumption). Second — and most important — write the s556 order of distribution as a fixed waterfall you can reproduce instantly: secured non-circulating → liquidation costs → employees (director cap) → circulating secured → unsecured → members equally (s555). For the structural side, learn the three types of external administration (receivership / voluntary administration → DOCA / winding up) and the voluntary-administration decision (s435A), plus small-business restructuring. Note Topic 12 (the future company) is flagged not examinable. Cite the section, and on a distribution question give a clean ranked list rather than prose.
