The Corporations Act – Abuse of the Voluntary Administration Regime

Part 5.3A of the Corporations Act provides the most popular corporate reorganisation regime in Australia, governing processes of external administration. 

The object of the regime, as stated under section 435A, is to administer the business, property and affairs of an insolvent company in a way that maximises the chances of it continuing in existence. Alternatively, the regime aims to result in better returns for the creditors and members where an insolvent company is unable to continue in existence. 

Reorganisation typically involves a restructuring of business operations, undertakings and corporate, financial or capital structures. Corporations ultimately rely on reorganisation to resolve financial distress. Though, there is undeniable abuse transpiring which raises a critical question: is the current threshold adequate to prevent opportunism, commercial immorality, strategic behaviour, and other abuse? 

This very question requires comprehensive evaluation of policy considerations – and importantly, this article does not intend to take away from those intricacies. Though, on its face, the prevalence of phoenix companies, for example, prove that a preventative mechanism is lacking. When phoenix companies are mentioned, think illegal phoenix activity characterised by one company continuing the business of another to avoid debt. Scholars suggest that it is this type of conduct which raises concern for the sufficiency of the current legislative regime.  

The legislative criterion requires that a company be, in the opinion of its directors, insolvent or likely to become insolvent. Arguably, this offers large flexibility and virtually unconstrained discretion to company directors, and on this basis, many agree that it provides an insufficient threshold requirement. While the company board must turn its mind to the question and form a “genuine opinion as to the solvency (or likely solvency) of the company”, there is no clear standard. For this reason, it is unsurprising that abuse occurs.      

As discussed, capturing an abuse of the regime can be challenging. This difficulty is magnified because ‘abuse’ is relatively undefined. Blacktown suggests that the meaning of abuse can be likened to the abuse of process doctrine under common law. Though, New Bounty cautions against merely importing the common law doctrine for use in this context. Instead, an abuse is typically considered to be for an ‘improper purpose’, that is, a purpose outside section 435A. 

Catch more on this issue in Ep 75 with Paulina Fishman available only on Hearsay: The Legal Podcast.

By: Hearsay: The Legal Podcast with research by Keira Hoyland.