PART B: CORPORATIONS LAW
Week 11: Company finance and External Administration of
Topics for week 11
Weekly textbook reading: Business and Corporations Law (BCL) chapters 11 and
The topics to be covered in this class are:
● What is equity financing?
● What is debt financing?
● What is legal required for each type of finance?
● Issuing shares and debentures
● Corporate Insolvency
Finance for a company involves providing capital to fund the business activities of
the company. When a company needs to seek capital beyond what it is currently
producing it can raise money in two ways:
(1) Selling shares in the company to investors
(2) Borrowing money from an external lender
Selling shares is called equity financing. Borrowing money from a lender is called
The difference between debt and equity finance
Two of the main types of finance available are:
● Debt finance – money provided by an external lender, such as a bank, building
society or credit union.
● Equity finance – money sourced from within your business.
Sources of debt finance
Banks, building societies and credit unions offer a range of finance products – both short and
long-term. These include:
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● business loans
● lines of credit
● overdraft services
● invoice financing
● equipment leases
● asset financing
If you need finance to buy goods like furniture, technology or equipment, many stores offer
store credit through a finance company. Generally, this is a higher interest option. It suits
businesses that can pay the loan off quickly within the interest-free period.
Most suppliers offer trade credit. This allows your business to delay payment for goods.
Trade credit terms vary. You may only get it if your business has a good reputation with the
Most finance companies offer finance products through retailers. Finance companies must
be registered. So before you get finance, check the Australian Securities & Investments
Commission (ASIC) registers
Factor companies provide finance by buying a business’s outstanding invoices at a discount.
The factor company then chases up the debtors. This is a quick way to get cash, but can be
expensive compared to traditional financing options.
Family or friends
If a friend or relative offers you a loan, it’s called a debt finance arrangement. Before you
decide on this option, think carefully about how this arrangement could affect your
Sources of equity finance
Often called ‘bootstrapping’, self-funding is often the first step in seeking finance. It involves
funding from personal finances and your business revenue. Investors and lenders will expect
some self-funding before they agree to offer you finance.
Family or friends
Offering a partnership or share in your business to family or friends in return for equity is
often an easy way to get finance. However, consider this option carefully to make sure it
doesn’t affect your relationship.
Investors can contribute funds to your business in return for a share in your profits and
equity. Investors (such as business angels) can also work in your business to provide
expertise and advice.
These are often big corporations that invest large amounts in start-up businesses. The
businesses usually need to have potential for high growth and profits. Venture capitalists:
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● typically require a large controlling share of your business
● often provide management or industry expertise
Also known as an Initial Public Offering (IPO), floating on the stock market involves publicly
offering shares to raise capital. This can be a more expensive and complex option. There is
also a risk of not raising the funds you need due to poor market conditions.
In general, the government doesn’t provide finance for starting up or buying your business.
However, you may be suitable for a grant. For example for:
● research and development
● business expansion
Crowdfunding is way to raise money by asking a large number of people each to invest in or
donate to your product idea or project. It usually done through online.
Some websites offer a crowdfunding platform for your product idea or project.
There are four main types of crowdfunding you can use to get finance for your business.
Each uses a different way to attract funding and may have different tax responsibilities for
the parties involved.
In donation-based crowdfunding, a contributor makes a payment to your business without
receiving anything in return. This is generally used to raise money for one-off projects.
In reward-based crowdfunding, you give the contributor a reward, (such as goods or services
or a discount), in return for their payment.
These could be:
● discounts on future purchase of the product you are developing
For example, you could say that for every donation of $10, you’ll acknowledge the donor on
your product website. For every donation of $20, you’ll discount 5% off the purchase of your
Equity-based crowdfunding (also called crowd-sourced funding) is a way for small to
medium-sized companies to raise money for their business. Typically from a large number of
investors that invest small amounts of money. Each investor can invest up to $10,000 a year
in a company and in exchange they’ll receive shares in the company.
Learn more about crowd-sourced funding on the Australian Securities & Investments
Commission (ASIC) website.
This is where a contributor lends money to your business and you agree to pay interest and
repay principal on the loan.
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Once you’re ready, learn the steps to take to crowdfund your business.
HOW TO CROWDFUND YOUR BUSINESS
Before you start a crowdfunding campaign you should understand your tax
AUSTRALIAN TAXATION OFFICE
Guide to business funding
Learn more about sources of funding in the Australian Small Business and Family Enterprise
Ombudsman’s (ASBFEO’s) FitsME – Essential Guide to Business Funding.
This guide for small business owners provides:
● an overview of the funding products available to help you make the best choice for
● steps to increase your chance of securing funding.
Types and Classes of shares
|Ordinary shares||Ordinary shares are the most common type
of shares and the full name is fully paid
ordinary share or FPO.
Generally, when investors talk about shares,
you can assume that they mean ordinary
With some companies there can be two
classes of share and usually they are called
A and B. Generally, the different classes
come with different voting rights.
|Preference shares||Preference shares are generally superior to
an ordinary share in some way, usually
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|because they have first preference or right to
Preference shares generally don’t have
Some preference shares are convertible, that
is, they can be converted to ordinary shares
at some stage in the future. These type of
shares are also know as hybrids.
|Contributing shares||Contributing shares are also known as partly
paid shares. These shares are usually issued,
such that part of the price that is payable
immediately and a balance is then due by an
instalment, or instalments payment at a
future date. If the company is a no liability
company the shares can be forfeited instead.
Contributing shares can be bought and sold
on the ASX like any other share, with the
future amount owing being carried over to
the new owner.
Recently, a number of investors and traders
were caught out when they bought shares in
a company that had dramatically fallen in
value to less than a cent, hoping to make a
quick profit. Unfortunately the shares they
bought had a $1 instalment due within a
short time frame. A lot of people faced
financial ruin because of the large numbers
of shares they had bought..
|Company issued options are options issued
by the company that give the holder the right
to acquire a certain number of fully paid
ordinary shares at a stipulated price at any
time in the future up to the expiry date.
While a company issued option can be listed
on the exchange, it does differ slightly from
other options you may see. If you exercise
the company option, new shares are issued
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|and the company collects the full agreed
price of the share from the option holder.
More on preference shares
Preference Shares – PRF
As the name indicates, preference shares are ranked above ordinary shares. In the case of
a liquidation of assets, preference shareholders receive priority to repayments. Other rights
● Fixed and accrued dividends (increased security and certainty for shareholders)
● Priority repayment of capital in cases of insolvency
Cumulative Preference Shares – CUMP
Dividends will accumulate under an arrears even when the company does not have the profit
to pay out until the balance is paid off to the shareholders. As a preference share, payouts
will be in priority to ordinary shares.
Non-Cumulative Preference Shares – NCP
Unlike cumulative preference shares, owners of non-cumulative shares aren’t eligible to any
of the dividends they missed. As a preference share, payouts will be in priority to ordinary
Redeemable Preference Shares – REDP
These shares can be redeemed for cash anytime at the company’s discretion. There is
usually a vesting period before such rights can be accrued. REDP allows for greater
flexibility and liquidity of assets. Payouts will be in priority to ordinary shares.
Non-Redeemable Preference Shares – NRP
NRP shares cannot be redeemed for cash during the lifetime of the company. These shares
can only be redeemed once the company goes into liquidation. As a preference share,
payouts will be in priority to ordinary shares.
There is a greater demand by shareholders for preference shares in start-up companies as
they can receive assurance of recompense in cases of liquidation.
Disclosure on issuing shares
As a general rule, if you are a public company offering securities for sale (for example,
shares or debentures) then you must provide a disclosure document to potential investors.
A disclosure document is the broad term used to describe all regulated fundraising
documents for the issue of securities.
There are four types of disclosure document:
● a prospectus
● an offer information statement
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● a profile statement, and
● a two-part simple corporate bonds prospectus.
All companies entitled to fundraise can use a prospectus. You may also be able to use an
offer information statement or a profile statement depending on the type of fundraising you
intend to do and whether you satisfy the restrictions imposed on using those documents. You
must use a two-part simple corporate bonds prospectus for offers of simple corporate bonds.
The type of information you’ll be required to provide in each of these disclosure documents is
different in certain respects.
A prospectus is the most common type of disclosure document and has the broadest
information requirements. If your prospectus offers securities listed on a prescribed financial
market, it may not need to contain as much information as otherwise needed because much
of the information will already been released to the market as part of your continuous
disclosure obligations. For more information see Regulatory Guide 254 Offering securities
under a disclosure document (RG254)
Offer information statements
An offer information statement has lower disclosure requirements but can only be used for
fundraising up to $10 million in aggregate – that is, including any earlier fundraising under an
offer information statement. If you want to use an offer information statement you must be
able to include with it a copy of an audited financial report with a balance date within the last
six months. For more information, see RG 254.
A profile statement is a document setting out limited key information about the company and
the offer. Companies can only use profile statements where ASIC has approved their use.
There are currently no approved uses for profile statements.
Two-part simple corporate bonds prospectuses
Following amendments introduced by the Corporations Amendment (Simple Corporate
Bonds and Other Measures) Act 2014, a specific disclosure regime applies to offers of
‘simple corporate bonds’, which must be offered under a two-part simple corporate bonds
A two-part simple corporate bonds prospectus consists of:
● a base prospectus with a life of three years, which must include general information
about the issuer that is unlikely to change over the three-year life of the document
(and that may be released in advance of an actual offer of simple corporate bonds);
● an offer-specific prospectus for each offer, which must include details of the offer and
may update information contained in the base prospectus.
A debenture is a medium-term investment issued by a company where investors lend them
money in exchange for a regular and fixed interest amount for the term of the investment.
The invested funds (principal) are repaid at the end of the term (maturity) and are usually
secured by tangible property. They may be offered at call or for a set period. Lenders can
protect themselves in the event that the company borrowing money fails to repay the loan by
registering under the Personal Property Securities Act 2009 (Cth).
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Corporations Act s 9 defines a debenture as:
debenture of a body means a chose in action that includes an undertaking by the body to
repay as a debt money deposited with or lent to the body. The chose in action may (but
need not) include a security interest over property of the body to secure repayment of the
money. However, a debenture does not include:
(a) an undertaking to repay money deposited with or lent to the body by a person if:
(i) the person deposits or lends the money in the ordinary course of a business
carried on by the person; and
(ii) the body receives the money in the ordinary course of carrying on a business
that neither comprises nor forms part of a business of borrowing money and
providing finance; or
(b) an undertaking by an Australian ADI to repay money deposited with it, or lent to it,
in the ordinary course of its banking business; or
|Note:||This paragraph has an extended meaning in relation to Chapter 8 (see
(c) an undertaking to pay money under:
(i) a cheque; or
(ii) an order for the payment of money; or
(iii) a bill of exchange; or
(e) an undertaking by a body corporate to pay money to a related body corporate; or
(f) an undertaking to repay money that is prescribed by the regulations.
For the purposes of this definition, if a chose in action that includes an undertaking by a
body to pay money as a debt is offered as consideration for the acquisition of securities
under an off-market takeover bid, or is issued under a compromise or arrangement under
Part 5.1, the undertaking is taken to be an undertaking to repay as a debt money
deposited with or lent to the body.
Personal Property Securities Act 2009 (Cth)
What is the Personal Property Securities Register (PPSR)?
The PPSR is the official government register of security interests in personal property –
these are debts or other obligations that are secured by personal property. It is an online
noticeboard accessible by the general public 24/7. The PPSR started on 30 January 2012
and replaced many state-based registers, such as REVS and other vehicle registers and
the ASIC Register of Company Charges, to form one national register.
When someone registers a security interest on the PPSR, they are letting the world at
large know that they claim to have a security interest over certain personal
property. Personal property includes things like cars, company assets, boats,
used goods and intellectual property; it doesn’t include land or fixtures.
Millions of searches and registrations take place on the PPSR every year.
Who looks after the PPSR?
The operation of the PPSR is overseen and managed by the Registrar of Personal Property
Securities. The Registrar is appointed by the Attorney General’s Department; the current
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Registrar is Hamish McCormick. The Registrar’s office sits in a Commonwealth government
department called the Australian Financial Security Authority (AFSA).
The Registrar’s job is to make sure that the PPSR is managed responsibly, made available
to use and contains information that is reliable. They can do many things to make sure this
happens including making decisions about what can be registered on the PPSR, when the
PPSR needs to be made unavailable and investigating misuse of the PPSR. The Registrar
can also delegate these powers to others as necessary.
How does the PPSR work?
The PPSR was created as a result of law that came into operation on 30 January 2012. This
law is called the Personal Property Securities Act 2009 (PPS Act).
The PPS Act, (and any other rules, regulations[ or laws made under it), contains rules about
how the PPSR works; essentially to allow registrationand search of security interests. It
includes things like how registrations are made on the PPSR, what powers the Registrar has
to make decisions about the PPSR and how to search the PPSR.
Difference between shares and debentures
A share is an interest in a company which gives the shareholder legal rights
A debenture is a document which is evidence of a loan to a company at a fixed
rate of interest and which is repayable on a specific date.
On the advantages and disadvantages of debt financing, see BCL page 579.
The main aim of corporate insolvency law is to provide a fair and orderly process for dealing
with the financial affairs of insolvent companies. Insolvency law is important because not all
companies will succeed in their business objectives; some will fail and leave their debts
unpaid. Corporate insolvency is regulated by the external administration provisions of
chapter 5 of the Corporations Act 2001 (Cth).
The Corporations Act 2001 (Cth) provides for four main types of external administration for
● voluntary administration,
● deeds of company arrangement,
● liquidations (or winding up) and provisional liquidation, and
● Scheme of arrangement.
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Receivership is not an external administration. A scheme of arrangement may be utilised to
implement a merger or restructure of a solvent company.
Receivership is a form of administration in relation to property of a company that involves the
appointment of an independent, registered insolvency practitioner called a “receiver”. The
role of a received appointed by a secured creditor is to take possession of the secured
property, sell it, and, out of the proceeds, repay the secured debt owed by the company.
Receiverships are not within the statutory definition of “external administration” but they
usually occur in the context of an insolvent debtor company and have close similarities to
voluntary administration and liquidation.
A receiver may be appointed by a secured creditor such as a debenture-holder or by a court.
The loan agreement or debenture will provide the right for a secured creditor to appoint a
receiver. If the receiver is also managing the company’s business, he/she will be the
“receiver and manager”.
A court may appoint a receiver: see s 1323(1)(h).
A privately appointed receiver owes duties to the secured creditor, but also owes the
company common law and statutory duties to exercise powers in good faith and for proper
purposes and a duty of care not to sacrifice the company’s interests recklessly. Receivers
must exercise reasonable care in selling the secured property at market value.
The company continues to exist after the appointment of a receiver; it is still a separate legal
entity. The receiver does not replace the board of directors. If a receiver and manager is
appointed, then the board will not continue to exercise management powers. Under
receivership, unsecured creditors can still bring legal proceedings. This is different from the
position of unsecured creditors in relation to liquidation and voluntary administration.
Receivership ends when the receiver completes the sale of secured property and the debt to
the secured creditor has been discharged and the receiver’s costs and fees are paid. If the
company is not in liquidation, directors retake control of the company’s affairs at the end of
Voluntary administration involves the appointment of a registered, independent insolvency
practitioner (“administrator”) who take control of an insolvent company, often for a short time
(around 4 weeks). The aim of the voluntary administration rules in Pt 5.3A of the
Corporations Act are to maximise the changes of the company continuing to exist and if that
is not possible, to provide a better return to creditors than would result from an immediate
winding up (S 435A).
Voluntary administration is a flexible form of external administration and consists of two
phases. The first is the appointment of the voluntary administrator. The second part begins
after a creditors’ meeting when the creditors meet to determine whether to proceed to
liquidation or a deed of company arrangement. Usually, voluntary administration is the result
of a decision by the directors that the company is insolvent or likely to become insolvent in
the future (s 436A). Directors may put the company into voluntary administration to avoid
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liability associated with insolvent trading (s 588M). There are also reasons associated with
the operation of Commonwealth income tax legislation. Once an administrator has been
appointed, directors lose the right to manage the company unless they have written approval
from the administrator (s 437C). Within 8 business days of appointment, the administrator
must call a first meeting of the company’s creditors (S 436E).
The job of the administrator is to investigate the financial position of the company (s 438A)
and report on whether a compromise or arrangement could be made. During the time of
administration there is a stay on all claims against the company (ss440A-440J). The
administrator also has the responsibility of calling a second meeting of all creditors of the
company to determine its future. The creditors determine what will happen to the company.
The requirements for the meeting are found in ss 439A and B Section 439C of the
Corporations Act 2001 (Cth) provides that a company’s creditors may choose:
● That the company enters into a deed of company arrangement
● That the company is wound up or
● That the administration is ended.
Deeds of company arrangement often have these features:
-they provide for a moratorium which allows the company more time to pay debts incurred
before voluntary administration began.
-they provide for a compromise where creditors agree to accept payment of a smaller
amount as a final settlement of their debts.
-they provide for a combination of a moratorium and compromise
-they provide for an orderly sale of the company’s property over time.
A deed of arrangement binds all unsecured creditors, but only binds secured creditors if they
have voted in favour of the deed s 444D(2).
Liquidation is a form of external administration that results in the company being
deregistered and ceasing to exist as a legal entity. It involves the appointment of an
independent, registered liquidator who takes control of the company from its directors and
shareholders. Liquidation is the process under which the company’s affairs are wound up,
its property sold, debts are repaid to creditors and any surplus is distributed to shareholders.
The Corporations Act 2001 (Cth) regulates two types of liquidation; compulsory liquidation
and voluntary liquidation. Voluntary liquidation includes both members’ voluntary winding
up and creditors’ voluntary winding up. The objectives of the liquidation provisions in
Corporations Act 2001 (Cth) include ensuring that creditors, especially unsecured creditors,
share equally in the distribution of an insolvent company’s assets, ensuring that insolvent
companies stop trading for the good of the business community as a whole, and there is an
investigation into the insolvent company before winding up to determine the reasons for the
Compulsory liquidation “winding up in insolvency” Part 5.4, ss459A-459T
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Section 459P provides that creditors, the company, a contributory, a director and ASIC may
apply to the court for a winding-up in insolvency. An applicant must file an application to
wind up a company and the court will set a date for the application to be heard within 6
months of the application: s 459R. At the hearing of the application, the court must be
satisfied that the company is insolvent before it can make an order to wind up the company.
Section 459C provides a list of situations in which a court may presume that a company is
459C Presumptions to be made in certain proceedings
(1) This section has effect for the purposes of:
(a) an application under section 234, 459P, 462 or 464; or
(b) an application for leave to make an application under section 459P.
(2) The Court must presume that the company is insolvent if, during or after the 3 months ending on
the day when the application was made:
(a) the company failed (as defined by section 459F) to comply with a statutory demand1; or
(b) execution or other process issued on a judgment, decree or order of an Australian court in favour
of a creditor of the company was returned wholly or partly unsatisfied; or
(c) a receiver, or receiver and manager, of property of the company was appointed under a power
contained in an instrument relating to a circulating security interest in such
(d) an order was made for the appointment of such a receiver, or receiver and manager, for the
purpose of enforcing such a security interest; or
(e) a person entered into possession, or assumed control, of such property for such a purpose; or
(f) a person was appointed so to enter into possession or assume control (whether as agent for the
secured party or for the company).
(3) A presumption for which this section provides operates except so far as the contrary is proved for
the purposes of the application.
Putting a company into a creditors’ voluntary winding up does not involve a court order
and can come about in a number of ways, including as a transition from voluntary
administration (s 439C). A company that is subject to a deed of company arrangement can
convert to a creditors’ voluntary winding up if creditors pass a resolution terminating the
deed and resolving that the company be wound up (s 446A). A creditors’ voluntary
winding-up can proceed from a members’ voluntary winding-up (s 494, 497)
Powers of the Liquidator
When appointed, a liquidator takes control of the company and the liquidator’s powers are
exclusive (ss 477 and 506). This means that liquidators can carry on the company’s
business if that is necessary, sell all or any of the company’s property and bring or defend
legal proceedings on behalf of the company. Liquidators often begin examinations of the
company’s books and seek information from officers to bring about the recovery of property
belonging to the company, determine whether the actions of directors or officers has led to
the company’s insolvency and investigate possibilities for litigation against third parties.
1 A statutory demand is a formal document signed by a creditor which specifies the amount of the debt owed by
the company. This must be at least $2000.
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Effects of Winding-up
The right of creditors to bring their own legal action to enforce debts is lost when liquidation
begins and the process of repaying debts is controlled by the liquidator. One of the major
tasks of the liquidator is to sell the company’s property and divide the proceeds. In this
process creditors are paid before shareholders. The Corporations Act provides that all
unsecured creditors with provable debts will participate equally in the distribution of a
company’s assets on winding-up. If there is not enough money to meet all the debts in full,
unsecured creditors are paid proportionately; this is known as the “pari passu rule”.
The outcome of a liquidation is that a company is registered from the register of companies.
Schemes of arrangement
Schemes of arrangement permit the court to supervise the reorganisation of the rights and
liabilities of shareholders and creditors. This is a complex, expensive and time-consuming
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