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Insolvency

Insolvency

General Overview and Trends

Insolvency in Fiji under the Companies Act 2015 refers to the financial state of a company when it is unable to meet its debt obligations and faces potential liquidation or other forms of restructuring. Insolvency cases involving companies are common in Fiji and can have significant economic implications. The overall trends in insolvency may vary based on economic conditions, business environment, and government policies.

Legal Framework

Insolvency is primarily governed by the Companies Act 2015 which provides the guidelines and procedures for dealing with insolvency cases involving companies. The Companies Act 2015 regulates the process of voluntary administration, receivership, liquidation, and other related insolvency proceedings.

Under Section 514 of the Companies Act 2015, a company or foreign company is solvent if and only if it is able to pay all its debts as and when they become due and payable. A company or foreign company which is not solvent is insolvent.

The Companies Act 2015:

• outlines the provisions related to insolvency and restructuring of companies in Fiji. It governs the conduct of directors, creditors, and insolvency practitioners during the insolvency process. The Act also provides rules for the orderly winding up of companies to protect the interests of creditors and stakeholders.
• allows financially distressed companies to opt for voluntary administration. In this process, an independent administrator is appointed to assess the company’s financial affairs and propose a restructuring plan to creditors.
• Under the Companies Act 2015, a receiver may be appointed by a secured creditor to take control of the company’s assets and manage them to recover the debt owed.
• The Act prescribes the process of liquidation, which involves winding up a company’s affairs to distribute its assets among creditors and shareholders.

Solvency

Under the Companies Act 2015, solvency is the ability to pay all debts when due, while insolvency refers to the inability to do so. A company is deemed unable to pay its debts if a creditor, owed a sum exceeding $10,000FJD, issues a statutory demand and the company fails to pay, secure, or compound for it within three (3) weeks.

Additionally, insolvency can be established if certain conditions are met within a three-month period before the winding-up application is made, such as unsatisfied execution processes, appointment of a receiver or manager due to a floating charge, or the court’s satisfaction that the company cannot pay its debts, considering both current and potential liabilities.

Modes of Insolvency

Under the Companies Act 2015 in Fiji, the winding up of a company may be either by the court, voluntary or subject to the supervision of the court.

Winding Up by the Court

Part 39 of the Companies Act 2015 provides for Winding Up by the Court.

The court has the authority to wind up both local companies and foreign companies that are registered in Fiji. In other words, the court has the power to initiate the process of liquidating or dissolving these companies if necessary.

A company, including a foreign company, may be wound up by the court if:

• the company passes a special resolution to be wound up by the court
• if the company fails to commence its business within a year of incorporation or suspends its operations for a whole year
• the company is insolvent
• the court deems it just and equitable for the company to be wound up
• in the case of a foreign company conducting business in Fiji, if winding-up proceedings have been initiated in the country of its incorporation or in any other country where it has established a place of business.

Application for Winding Up by the Court

An application for the winding up of a company can be made by the company itself or by creditors, contributories (shareholders), or both. However, there are specific conditions that need to be met for certain parties to make such an application. For example, a creditor may apply if the company owes them a debt exceeding a prescribed amount.

If the application is to wind up a foreign company, the court must be satisfied that the liquidator or provisional liquidator of the foreign company has requested in writing for such an application to be made. The court has powers to dismiss or adjourn the winding-up application, make interim orders, or grant a winding-up order.

The court cannot refuse to make a winding-up order solely based on the company’s lack of assets or that its assets have been mortgaged to the same value as or more than the assets themselves. If the application is based on the “just and equitable” ground, the court must make a winding-up order if the applicants are entitled to relief, and there is no other remedy available, provided they are not acting unreasonably.

Statutory Demand

To initiate a winding up process, a statutory demand (S515 Notice) is served on the debtor to pay the prescribed debt within 21 days of services of the demand notice.

If the debtor fails to comply with the notice within the prescribed time limit, the company or its creditors are entitled to file the necessary application for winding up in Court.

Setting aside Statutory Demand Notice

A company who has been served with a statutory demand notice has the right to apply to the court to have it set aside. This application must be made within 21 days from the date of service of the demand.

To make the application valid, the company must file an affidavit supporting the application with the court and serve a copy of the application and supporting affidavit on the person who served the demand. The application is then called before the Court.

If there is a genuine dispute between the company and the party making the demand or when the company has an offsetting claim, the court calculates the substantiated amount of the demand.

Circumstances for Setting Aside a Statutory Demand

If the substantiated amount is less than the statutory minimum, the court must set aside the demand. If it is equal to or greater than the statutory minimum, the court may vary the demand and declare it effective from the date of service.

The court may also set aside a demand if there is a defect that would cause substantial injustice or for any other valid reason. While an order setting aside a statutory demand is in force, the demand has no effect. If the court does not set aside the demand, the application is dismissed.

The court also has the discretion to impose conditions on an order setting aside a demand. If the court sets aside the demand in favor of the company, it may order the party who served the demand to pay the company’s costs related to the application.

A company is prohibited from opposing a winding-up application on certain grounds related to its failure to comply with a statutory demand, except with the court’s permission, and the court may grant leave only if it finds the ground to be material to proving the company’s solvency.

Winding Up Petition in Court

A company or its creditors may file a petition and an affidavit in support to wind up a company.

Winding-up application must be determined within a six-month period with the possibility of extension under certain conditions.

Staying or Restraining Legal Proceedings

When an application for winding up in made, the company or the creditors may apply to the Court for any actions brought by the company or any legal proceedings against the company to be stayed pending determination of the winding up application.

Consequences of Winding Up

Upon the issuance of a winding-up order, the company is required to submit a copy of the order to the Registrar of Companies in the prescribed format for registration. Once a winding-up order is in effect, no legal action or proceeding can be pursued or initiated against the company without the court’s permission and subject to any conditions imposed by the court.

A winding-up order benefits all creditors and contributories of the company as if it were granted based on the joint application of a creditor and a contributory. This means that the order provides protection and remedies for both those owed money by the company (creditors) and the company’s shareholders (contributories).

Official Receiver in Winding Up

During the winding up of a company, the Court may appoint an officer other than the Official Receiver if it deems it beneficial for a more convenient and cost-effective winding-up process. The appointed officer will be considered the Official Receiver for the specific winding-up proceedings.

When a winding-up order is made or a provisional liquidator is appointed, the company must provide a statement of its affairs in the prescribed format, verified by affidavit, to the Official Receiver. This statement should include details of the company’s assets, debts, liabilities, creditor information, securities held, and other relevant information as required. The statement must be submitted within 14 days from the date of the provisional liquidator’s appointment or within a court-approved extended time.

The Official Receiver may also request reports related to the company’s formation, failure, and business conduct, and may bring attention to any potential fraud in connection with the company’s promotion or formation. Such reports may grant the court further powers if fraud is indicated. Additionally, any person claiming to be a creditor or contributory is entitled to inspect the statement and obtain a copy upon payment of a prescribed fee.

Appointment of Liquidators by the Court

The court may appoint one or more liquidators for the purpose of conducting the winding-up proceedings of a company and carrying out any duties imposed by the court. Upon a winding-up order or appointment of a provisional liquidator, the liquidator takes custody and control of all the company’s property and assets.

Official Receiver

The court can appoint the Official Receiver as the provisional liquidator between the time a winding-up application is presented and the winding-up order is made. The court has the authority to limit and restrict the powers of the appointed liquidator.

Upon the making of a winding-up order, the Official Receiver automatically becomes the provisional liquidator and will continue acting as such until another person is appointed as the liquidator. The Official Receiver is required to convene separate meetings of the company’s creditors and contributories to determine whether an application should be made to appoint a liquidator other than the Official Receiver.

Liquidator other than the Official Receiver

If a person other than the Official Receiver is appointed as the liquidator in the court’s winding-up proceedings, they must notify their appointment to the Registrar and provide the required security. The appointed liquidator must also cooperate with the Official Receiver and provide necessary information and access to company documents.

The court-appointed liquidator may resign or be removed by the court for cause.  

Voluntary Winding Up

A company may be voluntarily wound up if it passes a special resolution to that effect or if it resolves, by special resolution, that it is unable to continue its business due to its liabilities and that winding up is advisable.

Once the resolution for voluntary winding up is passed, the company must give notice of the resolution within 14 days through advertisement in the Gazette, a local newspaper, and by lodging a prescribed form with the Registrar of Companies.

The voluntary winding up process is considered to commence at the time the resolution for voluntary winding up is passed.

Statutory Declaration of Solvency

The directors of the company, or a majority of them if there are more than two directors, can convene a meeting and make a declaration in the prescribed format. This declaration affirms that the directors have conducted a thorough investigation into the company’s financial affairs and are of the opinion that the company will be able to settle all its debts within a specified period, not exceeding 12 months from the commencement of the winding up.

To be effective, the declaration must meet two conditions:

• it must be made within 30 days before the resolution for winding up is passed and must be lodged with the Registrar of Companies for registration before that date.
• The declaration should include a statement of the company’s assets and liabilities as of the latest feasible date before making the declaration.

If the requirements are met, the winding up is termed a “members’ voluntary winding up.” However, if the declaration is not made and lodged with the Registrar of Comapnies, the winding up is referred to as a “creditors’ voluntary winding up.” This process allows for a clear distinction between voluntary winding up procedures where the company is deemed solvent and capable of settling its debts and those cases where the company’s solvency is uncertain, and creditors’ interests need to be protected in the winding-up process.

Appointment of Liquidators

The company is entitled to appoint one or more liquidators for winding up the company’s affairs and assets while specifying their remuneration in a general meeting. Once a liquidator is appointed, the powers of the directors cease, except with the approval of the company in general meeting or the liquidator.

The liquidator may, with a special resolution from the company, accept shares or other interests in a transferee company as compensation or additional benefits when transferring the transferor company’s business or property.

The liquidator must call a meeting of creditors if they believe the company may not be able to pay its debts fully within the specified period. The liquidator must convene a general meeting of the company at the end of each year during the winding up process to provide an account of their actions and the winding up’s conduct during the preceding year.

Final Meeting and Deregistration

Winding Up Account: Once the company’s affairs are fully wound up, the liquidator must prepare an account of the winding-up process. This account should show how the winding up was conducted and how the company’s property was disposed of.

General Meeting: The liquidator must call a general meeting of the company to present the winding-up account and provide any necessary explanations regarding the account.

Meeting Notice: The meeting must be announced through advertisements in the Gazette and a newspaper circulated in Fiji. Additionally, a notice specifying the time, place, and purpose of the meeting must be lodged with the Registrar at least 30 days before the meeting.

Lodging Documents: Within 14 days after the meeting, the liquidator must lodge a copy of the winding-up account and a notice confirming that the meeting was held, along with its date.

Quorum Requirement: If a quorum is not present at the meeting, the liquidator must lodge a notice confirming that the meeting was duly called but no quorum was achieved.

Registrar of Company’s Actions: The Registrar will receive the account and the necessary returns, then register these documents. After two months from the registration, the Registrar will proceed with deregistering the company.

Deferring Deregistration: The court has the authority to defer the date of company deregistration if an application is made by the liquidator or any other interested person.

Duty to Deliver Court Order: If the court orders a deferral of deregistration, the applicant must deliver a certified copy of the court order to the Registrar of Companies within 7 days for registration.

Consequences of Voluntary Winding Up

Once the voluntary winding up commences, the company is required to cease its regular business operations, except to the extent necessary for the proper and beneficial winding up process. In other words, the company must primarily focus on the orderly liquidation of its assets and settling its obligations.

Moreover, any transfers of shares, except those approved by the liquidator, and any changes to the status of the company’s members, made after the commencement of the voluntary winding up, will be considered void.

Winding Up under Supervision of the Court

The court has the authority to order that a voluntary winding up of a company continues but under the supervision of the court.

The court may impose necessary conditions and allow creditors, contributories, or others to seek court intervention if needed. This supervision ensures proper oversight of the winding up process.

Such an application for winding up subject to court supervision is treated as an application for winding up by the court, giving the court jurisdiction over relevant actions. The court can appoint an additional liquidator through an order. The liquidator appointed by the court holds the same powers and obligations as if appointed through the standard procedures for voluntary winding up. The court also has the power to remove any liquidator it appoints or continues under the supervision order and can fill any resulting vacancies. These provisions ensure proper oversight and management in a voluntary winding up under court supervision.

Supervision Order

When an order for winding up subject to supervision is made, the liquidator has the authority, subject to any court-imposed restrictions, to exercise all their powers without the court’s sanction or intervention, as if it were a voluntary winding up. However, certain specific powers mentioned in Section 543(1)(c), (d), or (e) cannot be exercised by the liquidator without the court’s approval or, in the case of a creditors’ voluntary winding up before the supervision order, without the sanction of the court, the committee of inspection, or a meeting of the creditors if no such committee exists.

It’s important to note that despite the supervision, a winding up subject to court supervision is not considered a winding up by the court for the purposes of the provisions in the Companies Act. However, the order for winding up subject to supervision is deemed to be an order for winding up by the court for all other purposes.

Bankruptcy

Bankruptcy is governed by the Bankruptcy Act 1944.

The following acts committed by a debtor make them eligible for bankruptcy proceedings:

• making a conveyance or assignment of property for the benefit of creditors
• engaging in fraudulent conveyances, gifts, or transfers of property
• creating a charge on property to avoid fraudulent preference
• attempting to evade creditors by leaving the country or removing property
• having goods seized in civil proceedings and not satisfying the judgment within 21 days
• filing a declaration of inability to pay debts or presenting a bankruptcy petition against oneself
• failing to comply with a bankruptcy notice served by a creditor
• giving notice of suspending payment of debts

“Debtor” encompasses any individual or entity, whether domiciled in Fiji or not, who was present in Fiji, had a residence, conducted business, or was a member of a partnership conducting business in Fiji at the time of the act of bankruptcy.

Bankruptcy Notice

The bankruptcy notice must be in the prescribed form. The notice basically requires the debtor to either pay the judgment debt or amount ordered to be paid, as per the terms of the judgment or order, or to secure or compound for it to the satisfaction of the creditor or the court. The notice must state the consequences of non-compliance.

The notice can specify an agent to act on behalf of the creditor for any required payment or action. It will not be invalidated if the specified amount exceeds the actual amount due, except if the debtor disputes it within the allowed time. If no dispute is raised, the debtor will be considered compliant if they take the necessary steps to satisfy the notice based on the correct amount due.

Petition in Court

Should the debtor fail to comply with the bankruptcy notice within 7 days of service, the second step is to file a Petition and an Affidavit in Support in court.

The Petition and Affidavit in Support is prepared by a creditor or their solicitors against a debtor. The creditor will pay $100 plus VAT for petition fees to the Revenue Collector at the Office of the Official Receiver. The Revenue Collector will issue a receipt for the payment. The creditor or its solicitors will file all petition documents at the Magistrates’ Court. The Petition is then heard before the Magistrates’ Court before orders for bankruptcy against the debtor can be granted.

Under the Bankruptcy Act, if a debtor commits an act of bankruptcy, the court has the jurisdiction to make a receiving order for the protection of the debtor’s estate. The receiving order can be made upon the presentation of a bankruptcy petition either by a creditor or by the debtor themselves, subject to certain conditions specified in the Act. The purpose of the receiving order is to safeguard and manage the debtor’s estate during the bankruptcy proceedings.

Conditions on which Creditor may Petition

Under the Bankruptcy Act, a creditor is eligible to present a bankruptcy petition against a debtor only if certain conditions are met. These conditions are as follows:

• The debt owed by the debtor to the petitioning creditor, or the aggregate amount owed to multiple petitioning creditors jointly, must amount to $100 or more.
• The debt must be a specific and quantifiable sum, payable either immediately or at a certain future time.
• The act of bankruptcy on which the petition is based must have occurred within 3 months before the petition’s presentation.
• The debtor must be domiciled in Fiji or must have resided, had a dwelling-house, place of business, or conducted business in Fiji personally or through an agent or manager within the year before the petition’s presentation. Alternatively, the debtor should have been a member of a firm or partnership that conducted business in Fiji within the said period.
• Additionally, if the petitioning creditor is a secured creditor, they must either declare their willingness to surrender their security for the benefit of all creditors in case the debtor is adjudged bankrupt or provide an estimate of the security’s value. If the latter option is chosen, the creditor may be considered a petitioning creditor to the extent of the remaining debt after deducting the estimated value of the security, similar to an unsecured creditor. It’s worth noting that a creditor is restricted from presenting a bankruptcy petition based on the execution of a deed of arrangement if prohibited by any applicable law relating to deeds of arrangement.

Proceedings and Order on Creditor’s Petition

• Filing and Verification: A creditor’s petition must be supported by an affidavit from the creditor or someone with knowledge of the relevant facts. It should also be served according to prescribed procedures.

• Hearing and Proof: At the hearing, the court will require evidence of the creditor’s debt, proper service of the petition, and the alleged act of bankruptcy. If satisfied, the court may issue a “receiving order” based on the petition.

• Dismissal of Petition: The court may dismiss the petition if it is not satisfied with the evidence of the debt, act of bankruptcy, or service. It may also do so if the debtor can prove an ability to pay debts or if there are sufficient reasons against making the order.

• Bankruptcy Notice: If the act of bankruptcy is related to non-compliance with a bankruptcy notice to pay or secure a judgment debt, the court may stay or dismiss the petition if an appeal is pending.

• Debtor’s Denial: If the debtor denies owing the alleged debt or disputes its amount, the court may stay the proceedings and require security to be provided. This is to cover the debt and costs in case the debt is established in a future trial.

• Proceedings Stayed: If the proceedings are stayed and delayed for a justifiable reason, the court may entertain another creditor’s petition and dismiss the original petition on fair terms.

• No Withdrawal Without Court’s Leave: Once a creditor’s petition is presented, it cannot be withdrawn without the court’s permission.

Liquidation

Registration of Liquidators

A natural person who ordinarily resides in Fiji may apply for registration as a liquidator or as a liquidator of a specified company or managed investment scheme that is to be wound up under this Act.

Key points about the application process with respect to liquidators are:

• The application must be submitted to the Ministry of Justice.
• The application should include the information prescribed in the regulations made under the Companies Act 2015.
• The application must be in the prescribed form, indicating that there is a specific format provided for making such applications.

Qualifications

In order to qualify to be registered as a liquidator, the applicant must:

• ordinarily reside in Fiji.
• hold a degree, diploma, or certificate from a recognised university or institution acceptable to the Ministry of Justice.
• be a chartered accountant with a current certificate of public practice issued by the Fiji Institute of Chartered Accountants, following the Fiji Institute of Accountants Act 1971.
• demonstrate experience in connection with companies to which a receiver or manager has been appointed or that are being wound up. They must also prove their capability to perform liquidator duties and their suitability as a fit and proper person for registration.

A person disqualified from acting as an officer of a company cannot be registered as a liquidator.

Upon the Ministry of Justice’s approval of a liquidator registration application, the Ministry of Justice will issue a certificate to the applicant indicating their registration, the registration start date, and, if applicable, the name of the specified company or managed investment scheme they are registered to. Registration as a liquidator (except for specified companies or managed investment schemes) remains in force until it is canceled by the Ministry of Justice or until the person dies.

The Ministry of Justice cannot refuse to register a person as an auditor or liquidator without giving them an opportunity to make submissions and provide evidence regarding the matter. If the Ministry of Justice refuses an auditor or liquidator registration application, they must provide written notice of the decision and the reasons for it to the applicant within 14 days.

Cancellation of Registration

The Ministry of Justice may cancel the registration of a person as a liquidator, or as a liquidator of a specified company or managed investment scheme on the following grounds:

• The person becomes bankrupt or insolvent.
• The person is disqualified from acting as an officer of a company under Part 12 of the Companies Act.
• The person contravenes section 412 of the Companies Act.

Upon making such a decision, the Ministry must provide the person with written notice within 14 days, stating the decision and the reasons for it. The cancellation comes into effect at the end of the day the notice is given. However, any failure by the Ministry to comply with the notice requirement does not affect the validity of the decision to cancel the registration.

Register of Liquidators

The Ministry of Justice is responsible for keeping this register for the purposes of the Companies Act. The register includes essential details about registered liquidators, such as their name, the date of registration, the address of their primary place of practice, and any other places they practice as a liquidator. Additionally, if a liquidator practices as a member of a firm, an employee of a company, or under a different name, the details of that firm, company, or name must be recorded.

The register also contains information about any suspension of a liquidator’s registration, including suspensions relating to specified companies or managed investment schemes. The Ministry of Justice may include other relevant particulars in the register. When a person ceases to be a registered liquidator, their name and related particulars must be removed from the register. The register is open for inspection, and individuals have the right to access and obtain copies or extracts from it.

Professional Indemnity Insurance

The Companies Act 2015 requires that registered auditors, liquidators, or those registered for specified companies or managed investment schemes must maintain appropriate professional indemnity insurance and fidelity insurance to cover claims related to their roles. However, if the person’s registration occurred before the Act’s commencement, these insurance requirements do not apply until the commencement date.

Trading in Financial difficulties

In Fiji, trading in financial difficulties refers to the situation where a company continues to operate and conduct its business while experiencing financial distress. It involves managing the company’s affairs with the aim of turning around its financial situation and avoiding insolvency.

Fiji does not have specific legislation or provisions that govern trading in financial difficulties. However, there are general legal principles and considerations that companies in financial distress should keep in mind:

Directors’ Duties: Directors of a company have fiduciary duties to act in the best interests of the company. This includes exercising reasonable care, skill, and diligence in managing the company’s affairs, even when facing financial difficulties. Directors must consider the impact of their decisions on creditors’ interests and take steps to mitigate potential losses.

Solvency Assessment: Directors have a legal obligation to regularly assess the solvency of the company. If they believe or have reasonable grounds to believe that the company is or may become insolvent, they must consider the interests of creditors and take appropriate actions.

Reporting and Disclosure: Directors must ensure accurate and timely reporting of the company’s financial position. Financial statements, reports, and disclosures must adhere to accounting and reporting standards and provide a true and fair view of the company’s financial affairs.

Obtaining Professional Advice: In situations of financial difficulty, it is advisable for directors to seek professional advice from accountants, insolvency practitioners, or legal experts. These professionals can provide guidance on available options, potential restructuring measures, and compliance with relevant laws and regulations.

Creditors’ Interests: Directors should consider the interests of creditors and act diligently to avoid preferential treatment or unfair prejudice. Payments to creditors should be made in the ordinary course of business and not favoring specific creditors over others.

Restructuring and Negotiations: Companies facing financial difficulties may explore options such as debt restructuring, refinancing, negotiation with creditors for extended payment terms, or seeking additional capital injections. These measures aim to improve the company’s financial position and restore its viability.

While Fiji does not have specific legal provisions for trading in financial difficulties, it is important for directors to navigate these situations with transparency, good governance, and compliance with their legal obligations. Seeking professional advice and acting in the best interests of the company and its stakeholders are crucial during periods of financial distress.

Business Restructuring/Business Rescue

In Fiji, the concept of business rescue or restructuring is primarily addressed through the voluntary administration process under voluntary winding up which can either be subject to supervision of the court or by the creditors voluntary winding up (Part 40 of the Companies Act). These concepts are discussed above in detail. The voluntary winding up procedure allows financially distressed companies to undergo a restructuring process aimed at rehabilitating the business and maximizing returns for creditors.

The practical aspects of insolvency law in Fiji may vary depending on the specific circumstances, the type of insolvency procedure, and any relevant agreements or court orders. Seeking professional advice from a qualified insolvency practitioner or legal expert is recommended to navigate the practical complexities of insolvency proceedings in Fiji effectively.

Voluntary liquidation is a significant decision for a company, and proper compliance with legal requirements is crucial to ensure a smooth and lawful process.

To understand the specific criteria and procedures applicable to your unique situation in Fiji, contact Lex Connect Legal https://www.lexconnectfiji.com/lexconnect-legal/