10898 insolvency 1 front section - allens · ©allens arthur robinson 2008 written and published by...

ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW

2007

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ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW 2007

Also available online at:

http://www.aar.com.au/pubs/arir/index.htm

10898 Insolvency 1 front section1 110898 Insolvency 1 front section1 1 27/02/2008 10:58:42 AM27/02/2008 10:58:42 AM

© Allens Arthur Robinson 2008Written and published by Allens Arthur Robinson Deutsche Bank Place, Corner of Hunter and Phillip Streets, Sydney NSW 2000 www.aar.com.au

The summaries in this review do not seek to express a view on the correctness or otherwise of any court judgment. This publication should not be treated as providing any defi nitive advice on the law. It is rec om mend ed that readers seek specifi c advice in relation to any legal matter they are handling.


PREFACEIt gives us great pleasure to introduce our Annual Review of Insolvency & Restructuring Law 2007.

The Review is now in its ninth year. The feedback that we receive from our clients (bankers, insolvency practitioners, corporate counsel, credit managers and others conducting business throughout the region) suggests that the Review remains a popular feature on the insolvency and restructuring calendar.

During 2007, our Corporate Insolvency and Restructuring Group has been kept busy performing a wide range of work, including issues arising out of the HIH, ION, Westpoint, Sons of Gwalia and Henry Walker Eltin external administrations. On the disputes front, we have also been involved in various court proceedings, including the Highstoke, Chandra and Leveraged Equities decisions, summaries of which appear in this year's review.

Other key insolvency and restructuring decisions that were delivered during 2007 included:

• Stork ICM Australia Pty Ltd – on whether future possible personal injury claims can be transferred from one company to another along with insurance cover, via a scheme of arrangement;

• Ausino International; DCT v Wellnora – on the use of the administrator's casting vote;

• the disciplinary proceedings in ASIC v Edge;

• the Kalls Enterprises decision of the NSW Court of Appeal on the meaning of a 'transaction' of a company; and

• the High Court's decision in Southern Cross Mining on the provability of costs orders.

Key legislative developments have included:

• the implementation of the Corporations Amendment (Insolvency) Act 2007 and the Corporations Amendment Regulations 2007 (No 13), including extending the time for the holding of creditors' meetings;

• the decision of the United States Bankruptcy Court in Bear Stearns relating to the interpretation of the concept of centre of main interests in the US, central to the UNCITRAL Model Law on Cross-Border Insolvency;

• the release by the Corporations and Markets Advisory Committee of its discussion papers on long-tail liabilities and the Sons of Gwalia 'shareholders as creditors' issue; and

• the release by the IPA of its Code of Professional Practice for insolvency professionals.

Australia continues to experience something of an economic divide between the resource-rich states of Western Australia and Queensland, and the south-eastern states. It remains to be seen what impact the recent and likely further interest rate rises will have on this 'dual economy'.

The past year was notable for the sub-prime loan market 'meltdown' in the US from July 2007 and a consequent increase in credit prices. The sub-prime problem has resulted in a reduction in availability of credit (the 'credit crunch') and the collapse of some 'hedge fund' corporations, including in Australia. In addition, economic data coming out of the US continues to suggest there is a real prospect of a recession occurring in that country. The short- and medium-term effect of these developments, if any, on the Australian and Asian regional economies continues to be debated, but we are already seeing growth in our Group's workload across our Australian offi ces.

We thank all of the partners, senior associates, lawyers, research assistants and summer clerks at Allens Arthur Robinson who have contributed to this year's outstanding publication. We give particular thanks to Angela Martin, who has overseen the selection of the cases for the Review and edited the developments section. Also thanks to Anne Ferguson in Melbourne, Michael Ilott in Brisbane and Christa Walker in Perth for coordinating the preparation of the case notes.

Other signifi cant contributors of note to whom we are grateful are Joseph Garas, Michael Popkin, Christopher Prestwich, Gabi Crafti, Stephanie Wee and Hilary Birks. Thanks also to the publications team led by Melinda Woledge and the design team led by Kelly Royle.

Once again, we hope that you fi nd the Review an informative and useful reference tool. As always, we welcome your feedback and look forward to working with you as clients of our insolvency and restructuring practice in 2008.

John Warde, Partner and co-editor Kim Reid, Partner and co-editor

March 2008


CONTRIBUTORS

John Warde

EDITORS

Pouyan Afshar

Nadine Bairle

Cameron Ball

Cain Beckett

Hilary Birks

Carla Bongiorno

Claire Bourke

Anna Brown

Laura Brown

Sarah Burgemeister

Sam Cadman

Jessica Choong

Karin Clark

Gabi Crafti

Liana Crowne

Clementine Davidson

Hollis Dufour

Andrew Finch

Adrian Fisher

Joe Garas

Kylie Giblett

Kelly Griffi ths

Clint Hinchen

Stuart Hohnen

Katherine Horne

James Hughes

Melanie Jasper

Lucy Jurd

Jenny Kaldor

Gina Kawalsky

Rowan Kelly

Ada Lam

Anthony Lepere

Dana Levi

Thomas Levi

Angela Martin

Eibhlin McBride

Matthew McCarthy

Bryony McCormack

Alexandra McCosker

Elissa Morton

Paul Nicols

Rebecca O'Brien

Jonathan Pagan

Catherine Parr

Michael Popkin

Christopher Prestwich

Georgia Price

Michael Quinlan

Gavin Rakoczy

Sean Redden

Kim Reid

Katya Rozenblit

Mark Ryan

Adam Santamaria

Mark Schneider

Matthew Skinner

Angela Stavrianou

Lisa Tibbits

Megan Trethowan

Christa Walker

John Warde

Stephanie Wee

Jocelyn Williams

Kim Reid


ALLENS ARTHUR ROBINSON INSOLVENCY & RESTRUCTURING

Allens Arthur Robinson (AAR) has been servicing clients in Australia for 180 years and in the Asia region for the past three decades. AAR is one of the largest law fi rms in the Asia region, with 190 partners and more than 600 other legal staff. We provide a full range of commercial legal services to many of the region’s leading corporations and government organisations, including more than half of Australia’s, and a dozen of the world’s, top 100 companies.

Banks, corporations, directors, receivers, administrators, creditors and liquidators know our reputation for rapid response and quality work in insolvency and restructuring.

If you are dealing with troubled corporations in Australia, Asia or internationally, our experienced team can work with you to provide the fast, effective solutions you require.

Our commitment is to provide a team, on the ground, to manage the critical stages of a matter. Experienced insolvency and restructuring lawyers are backed by the fi rm’s specialists in relevant industries and areas of law.

Our expertise extends to every corporate insolvency situation; we have handled some of Australia’s and South East Asia’s most signifi cant insolvencies and restructures in recent years.

We have acted in numerous corporate restructurings: our detailed knowledge of corporate and tax law helping our clients to achieve results with certainty and speed. Our dealings with international corporate groups have kept us at the leading edge of global trends in corporate restructuring.

Partner, MelbournePh: +61 3 9613 [email protected]

Partner, SydneyPh: +61 2 9230 [email protected]

Partner, Hong KongPh: +85 2 2840 [email protected]



Partner, BrisbanePh: +61 7 3334 [email protected]

Partner, PerthPh: +61 8 9488 [email protected]

Clint HinchenNational Practice Leader

Andrew Boxall

Anne Ferguson

Tania Cini

John Gallimore

Jim Dunstan

Tim Lester


Michael QuinlanDeputy Practice Leader


Geoffrey RankinNational Practice Leader







Partner, SingaporePh: +65 6535 [email protected]




Partner, Hong KongPh: +85 2 2840 [email protected]

Diccon Loxton

Simon McConnell

Steve Pemberton

John Warde

Simon Lynch

Paul Nicols

Kim Reid

David Martino

Alf Pappalardo

Ian Wallace


Adam Thatcher


TABLE OF CONTENTS

Deeds of company arrangement and voluntary administrationThe voluntary administrator's equitable lien v fi xed charges: which has priority? 19

Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd

Challenge to administrator's rejection of proof of debt and associated costs orders 21

Silvia & Anor v Brodyn Pty Limited

Chairperson's failure to exercise casting vote manifestly unreasonable 23

Ausino International Pty Ltd v Apex Sports Pty Ltd

Seeking more time to convene a second creditors' meeting? Extension may be granted 25only under extenuating circumstances

Fincorp Group Holdings Pty Limited

Challenging judgment debts: what the court will not allow 27

General Homes v Jonathon B & Leanne A Caelli trading as JC Electrical

Court can replace liquidators and direct new liquidators to investigate conduct 29of administrators during administration

Malhotra v Tiwari & Ors

How should a trustee determine employee entitlements under a company trust fund? 31

Leonard Thomas Hinde

Extension of time to hold second creditors' meeting to effect sale of business 33

In the matter of Global Food Equipment Pty Ltd (under administration); Carter v Global Food Equipment Pty Ltd

Extension of the decision period for enforcement of charges 35

Australian Capital Reserve Limited (administrators appointed) v High Tower Investments Pty Limited (administrators appointed); in the matter of High Tower Investments Pty Limited (administrators appointed)

Grounds to terminate a DOCA 37

Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) & Ors

Power to appoint a receiver or make a freezing order when a company is in administration 39

ASIC v Krecichwost & Ors

Chairman's exercise of casting vote 40

Deputy Commissioner of Taxation v Wellnora Pty Limited

Powers of administrator under deed of arrangement 42

Jamieson Louttit v Kolln

Grounds for extending time to convene creditors' meeting 43

Re Evans & Tate Ltd (administrators appointed) (receivers and managers appointed); Ex Parte Jones


Should a court award indemnity costs against an unsuccessful applicant on an 45 application to set aside a DOCA?

Deputy Commissioner of Taxation v Wellnora Pty Ltd (No. 2)

Grounds for court intervention in the voluntary administration process 47

Sutherland v Johnson Property Holdings

Deregistered companiesDoes a plaintiff have standing as a creditor to seek a winding-up order if the defendant 49company was deregistered when the debt fell due?

GIO General Ltd v Sabko Pty Ltd

Company reinstated to participate in an appeal 51

ACCC v ASIC

Corporate Lazarus: undoing court-ordered reinstatement of deregistered companies 52

Westbury Holdings Kiama Pty Ltd v ASIC

Reinstatement to enable claim against a deregistered company's insurer 54

La Trobe Capital & Mortgage Corporation Ltd v REA Australasia Pty Ltd

Reinstatement of a company for purpose of dealing with refund of monies 56

Farnsworth v ASIC

Application for reinstatement of a deregistered company following mismanagement 58

Vukasin v ASIC

Directors and corporate governanceAppointing liquidators: does the court have power to set aside directors' resolutions and 60in what circumstances can indemnity costs be ordered?

The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No. 4)

Director's duty to prevent insolvent trading 62

Mark Damian Charles Roufeil & 1 Or v Noel Linder & 1 Or

Company's loss must be directly caused by directors' breach 64

Ad'Tel Digital Systems Group Pty Ltd (in liquidation) v Future Corporation Australia Ltd (formerly Telco Australia Ltd) & Ors

Honestly forgot to remit your employees' PAYG income tax deductions? 65

Deputy Commissioner of Taxation v Dick

Whether a cross-claim for equitable contribution is a debt provable under the Bankruptcy Act 67

Buzzle v Apple Computer

Directors held personally liable for insolvent company's debts 69

Williams v Scholz & Anor


Lending and securitiesCourt may award judicial sale of mortgaged land at suit of mortgagor in special circumstances 71

New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd & 12 Ors

Conditional sale as a 'security interest' under the Chattel Securities Act 73

General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd

'All monies' mortgages that secure nothing 75

Chandra & Anor v Perpetual Trustees Victoria Ltd & Ors

Mortgagee's duty to take reasonable steps to obtain market value of property: 'in one line' sales 78

Glodale Pty Ltd v Investec Bank (Australia) Ltd

LiquidationMeaning of 'interest' under section 253E CA 79

Southern Wine Corporation Pty Ltd (in liquidation) v Perera

Oppression of minority shareholder leads to winding up on a just and equitable basis 81

The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No. 3)

The ATO and the joinder of former directors to recovery proceedings 83

Noxequin Pty Ltd v Deputy Commissioner of Taxation

Proving solvency: will a suitcase full of cash do? 85

Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd

Proving and waiving the presumption of insolvency 87

Dwyer & Anor v R-Jay Pty Ltd

Winding up of a company already subject to voluntary winding up 89

Ausino International Pty Ltd v Apex Sports Pty Ltd

Can a court grant leave to bring proceedings on behalf of a company in liquidation? 91

Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd

Winding up of solvent company 93

Nilant (as trustee of the property of Osborne, a bankrupt) v R L & K W Nominees Pty Ltd & Anor

Court order to overcome insurance restrictions 95

Re Harris Scarfe (in liquidation) & Harris Scarfe Wholesale Pty Ltd (in liquidation) (No. 3)

Entitlement to set off on exercise of an option 97

JLF Bakeries Pty Ltd (in liquidation) v Baker's Delight Holdings Ltd

Winding-up application not an abuse of process even though brought for ulterior motives 99

Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd

Importance of understanding the consequences of liquidation 101

Milicevic v Capital Scaffolding Pty Ltd (in liquidation)


When can a creditor bring a claim under the voidable transaction provisions? 103

Edenden v Bignell

Can contractual set-off operate as a defence in winding-up proceedings? 104

National Australia Bank Ltd v Idoport Pty Ltd

LiquidatorsReplacing a resigning liquidator with a liquidator from the same fi rm of accountants 106

Dean-Willcocks, re Militto's Transport Pty Ltd (in liquidation)

Appointment of provisional liquidator in family oppression suit 108

David Alexander Grace v Deborah Sharon Grace and 5 Ors

Joint and several liquidators acting unilaterally 110

In the matter of Bernsteen Pty Ltd & Anor (No. 2)

Appointing a receiver as liquidator and assistance to liquidators in realising and protecting assets 111

Elderslie Finance Corporation Limited v Newpage Pty Limited

Who pays the costs of a successful application to set aside examination summonses? 113

In the matter of Mendarma Pty Ltd (in liquidation) (No. 2)

Court refuses application to set aside examination summonses 115

Murray Roderick Godfrey as liquidator of Pobjie Agencies Pty Ltd (in liquidation) ACN 000 859 405

Benefi t of court orders vest in the offi ce of liquidator, not particular liquidators themselves 117

Gazal Apparel Pty Ltd v Davies & Ors

Grounds to discharge examination summonses 118

Onefone Australia Pty Ltd v One.Tel Ltd

Appropriateness of making orders under section 477(6) CA 120

ASIC v Read

Principles to be applied on appeal of a liquidator’s decision to reject proof of debt 121

Tirrabella Pty Ltd v Struthers

The identity of the liquidator: it's the offi ce, not the individual 123

Re Harris Scarfe (in liquidation) & Harris Scarfe Wholesale Pty Ltd (in liquidation) (No. 2)

When should the court grant leave to appoint a liquidator as administrator of a company? 125

ASIC v Green Pacifi c Energy Limited ACN 004 119 304

Over the edge: breach of liquidator's duties 127

ASIC v Robert John Edge

Liquidator generally not personally obliged to pay costs 129

Jenkins v Jonkay Pty Ltd


Substantive rights and fi nal relief in applications under section 511 CA 130

Meadow Springs Fairway Resort Ltd (in liquidation) (ACN 084 358 592) v Balanced Securities Ltd (ACN 083 514 685)

Liquidator’s power to carry on a business and sell wine on behalf of former investors 132

Crouch re Heritage Fine Wines Pty Ltd

When should a provisional liquidator be appointed? 134

Emmacourt Pty Limited v Jewels of Australia Pty Limited

Does a liquidator or trustee in bankruptcy owe duty of care to third parties? 136

Mills & Ors v Sheahan

Application by special purpose liquidator for production of documents by third party 138

Onefone Australia Pty Ltd v One.Tel Ltd

ProcedurePublic examination power confi ned to the examinable affairs of corporations under 140external administration

Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd & Anor (No. 2)

The limitation period under section 588FF(3) CA 142

Davies v Chicago Boot Company Pty Ltd (No. 2)

ASIC's liability for costs where it intervenes in proceedings 143

Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd (No. 2)

Broad power for ASIC to decide who is an 'eligible applicant' under sections 596A and 596B CA 145

Ryan v ASIC; in the matter of Allstate Explorations NL (subject to deed of company arrangement)

Calculation of periods of time 'beginning on' a specifi c day 147

Morgan, in the matter of the Yourhealth Companies

Variation of preservation orders to release funds to meet legal costs 148

ASIC in the matter of Richstar Enterprises Pty Ltd ACN 099 071 968 v Carey (No. 15)

Approval sought by ASIC to release records to liquidator 149

ASIC; In the matter of Westpoint Corporation Pty Ltd ACN 009 395 751 (receivers and managers appointed) (in liquidation v Read)

Procedural irregularities in resolution to wind up: if at fi rst you don't succeed ... 151

Hill v Hicom International Pty Ltd (in liquidation) ACN 070 061 344

Proceedings in open court or in camera 152

Re JN Taylor Holdings Ltd (in liquidation)

Can time limit for application for compensation be extended? 154

Newtronics Pty Ltd v Gjergja & Anor

Replacement of liquidators, deed administrators and trustees 155

Rocke (as liquidator of ACN 080 794 636 Pty Ltd), in the matter of ss502 and 506(4) of the Corporations Act


Is a costs order a provable debt? 157

Foots v Southern Cross Mine Management Pty Ltd

ReceivershipAppointing receivers: have you done everything you needed to do? 159

Gladstone & District Leagues Club Ltd v Hutson & Ors

Freezing orders as an alternative to appointment of receiver 160

ASIC in the matter of Richstar Enterprises Pty Limited (ACN 099 071 968) and Carey (No. 18)

Schemes of arrangementCan future liabilities and the right to insurance indemnities be transferred by a scheme 162of arrangement?

In the matter of Stork ICM Australia Pty Ltd; Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd

Is a meeting of special classes of members required? 164

In the application of United Medical Protection Limited, The Medical Defence Association of Victoria and Seventy-Fifth Jonestown

Statutory demandsDon't delay in applying to set aside a statutory demand 166

SV Steel Supplies Pty Ltd v Palwizat

Statutory demand served by new custodian claiming to be creditor set aside 168

Hansmar Investments Pty Ltd v Perpetual Trustee Company Ltd

Setting aside statutory demands: mistaken belief as to indebtedness may not suffi ce 170

Errichetti Nominees Pty Limited v Paterson Group Architects Pty Limited

Does a declaration of an entitlement to an indemnity create a judgment debt against 172the indemnifi er?

LawCover Pty Ltd v Swart

Proving service of a statutory demand: presumption of insolvency rebutted? 174

Deputy Commissioner of Taxation v Trio Site Services Pty Ltd

Setting aside statutory demands: is there a back door for when you are out of time? 176

Global Cement (North Queensland) Pty Ltd v Benchmark Debtor Finance Pty Ltd; ARMC Concrete Products Pty Ltd v Benchmark Debtor Finance Pty Ltd

Whether power to extend time may be exercised after expiry of time for compliance 178

Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd

Application to set aside a statutory demand 180

Finance & Equity v Leveraged Equities; Aussie Products v Leveraged Equities

Whether statutory demand should be set aside 182

Hilldale v Leveraged Equities


Whether company may oppose a winding-up application where it did not apply to set 184 aside a statutory demand

Radiancy (Sales) Pty Ltd v Bimat Pty Ltd

Failure to challenge Commissioner's assessment may not preclude the setting aside 186 of a statutory demand

Zolsan Pty Ltd v Deputy Commissioner of Taxation

Uncommercial transactions, preference payments and disclaimer of onerous property

Family-related transactions will be closely scrutinised 188

Welcome Homes Real Estate Pty Limited & Ors v Ziade Investments Pty Limited & Anor

Payment made by a director to a third party with company funds 190

Kalls Enterprises Pty Ltd (in liquidation) & Ors v Baloglow & Anor

Running account defence not dependent on the same credit terms applying throughout 193the relation-back period

Sutherland & Anor v Lofthouse & Anor

Steady repayment of debts as unfair preference 194

Tolcher & Ors v John Danks & Son Pty Ltd

What constitutes a 'transaction' and is it uncommercial? 196

Capital Finance Australia Limited v Tolcher

Developments in AustraliaCorporations Amendment (Insolvency) Act 2007 and Corporations Amendment 198Regulations 2007 (No 13)

IPA Code of Professional Practice 200

UNCITRAL Model Law in Australia 201

Reform of personal property security law in Australia 202

CAMAC considers implications of Sons of Gwalia decision 204

The end of share splitting in schemes of arrangement? 208

ALRC proposes overhaul of credit reporting rules 215

Signifi cant issues with Consumer Credit Code amendments 218

Long-tail liabilities: CAMAC's discussion paper and the impact on insolvency practitioners 222

Developments in AsiaIntroduction of insolvency laws in Nepal 227

Developments in EuropeReforms to Greek Bankruptcy Code 228

Changes to Hungarian bankruptcy law favour secured creditors 229


Developments in Great BritainCan a fl oating charge be recharacterised? 230

Duty of disclosure of a bank in a co-workout arrangement 232

Discussion paper on banking reform: protecting depositors 234

Developments in the United StatesCross-border insolvency: COMI and the Bear Stearns decision 235


GLOSSARY

ACCC Australian Competition and Consumer Commission

ASIC Australian Securities & Investments Commission

ATO Australian Taxation Offi ce

CA Corporations Act 2001 (Cth)

DOCA Deed of Company Arrangement


ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW 2007

Also available online at:

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19

The Supreme Court of New South Wales examined the limits of, and priority accorded to, a voluntary administrator's equitable lien over the property of a company in administration. The court was asked to decide whether an administrator's equitable lien over the company's property ranked higher in priority than the interest of a secured creditor holding both fi xed and fl oating charges.

In March 2006, voluntary administrators were appointed to Perfection Developments Pty Ltd. Perfection had, in 2003, granted a mortgage to Donovan Oates Hannaford Mortgage Corporation Ltd over land that Perfection had developed. Donovan also had an equitable mortgage and fl oating charge over Perfection's assets, which mainly comprised the land and a residential development on that land.

The administrators sought a declaration that they had an equitable lien over Perfection's property which:

• secured their remuneration and expenses incurred during the administration; and

• ranked higher in priority than Donovan's fi xed charge (ie its registered mortgage).

The court found that, under section 443F CA, the administrators had a statutory lien over Perfection's property that secured a right of indemnity in relation to their remuneration and expenses. Under s443E(1) CA, this lien had priority over Perfection's unsecured debts and its debts secured by a fl oating charge.

The court also found that, in line with previous authority, the administrators had an equitable lien over Perfection's property. As the administrators' statutory and equitable liens secured exactly the same rights and monies, the court held that the equitable lien must have the same priority ranking as the statutory lien. The court therefore held that Donovan's fi xed charge had priority over the administrators' equitable lien.

The court did not grant the declaratory relief sought by the administrators.

The court outlined the following two situations, neither of which applied in this case, in which an equitable lien may have priority over a fi xed charge:

• Where the administrator's actions have resulted in a benefi t to a secured creditor holding the fi xed charge justifying the administrator being compensated for his or her costs (the 'salvage' principle).

• Where the secured creditor holding the fi xed charge has in some way ceded priority to an administrator.

DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

The voluntary administrator's equitable lien v fi xed charges: which has priority?

Case Name:Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd

Citation:[2007] NSWSC 10, Supreme Court of New South Wales per Barrett J

Date of Judgment:29 January 2007

Issues:• Voluntary administrator's

equitable lien over a company's property

• Priority ranking of an equitable lien against a fi xed charge

• Sections 443D, 443E, 443F CA

10898 Insolvency 2 casenotes.ind19 1910898 Insolvency 2 casenotes.ind19 19 27/02/2008 10:57:40 AM27/02/2008 10:57:40 AM

20

This decision illustrates the limits of a voluntary administrator's right to recover his or her costs and expenses from the assets of a company under administration. Although administrators will have a statutory and equitable lien over the company's property entitling them to recover their costs and expenses, that lien will only have priority over the rights of unsecured creditors or creditors with fl oating charges. The equitable lien may have priority over a fi xed charge if the administrator's actions have resulted in some benefi t to the creditor holding that charge, or if that creditor has ceded priority to the administrator.


21


Challenge to administrator's rejection of proof of debt and associated costs orders

Case Name:

Silvia & Anor v Brodyn Pty Limited

Citation:[2007] NSWCA 55, Court of Appeal of New South Wales per Hodgson, Ipp and Basten JJA

Date of Judgment:27 March 2007

Issues:• Whether the administrator

wrongly and unreasonably rejected a proof of debt

• The costs implications of a fi nding that the administrator wrongly and unreasonably rejected a proof of debt

The appellants, Dasein Constructions Pty Limited and Mr Brian Silvia (Dasein's administrator), appealed against a fi rst instance decision by Chief Justice Young that the administrator had wrongly rejected a proof of debt submitted by Brodyn Pty Limited seeking damages for Dasein's alleged repudiation of a construction contract with Brodyn. The appellants were also appealing against Chief Justice Young's orders that the administrator and Dasein pay Brodyn's costs of the proceedings.

The NSW Court of Appeal dismissed the fi rst part of the appeal and upheld Chief Justice Young's fi nding that Brodyn's proof of debt should have been admitted to prove, and that the administrator had acted unreasonably in his handling of the proof of debt. In this respect, the court made several important comments.

• The administrator had acted unreasonably in failing to provide Brodyn with a copy of, and the opportunity to comment on, a report that the administrator then relied upon to reject Brodyn's proof of debt – the administrator had failed to act 'according to standards no less than those of a court or judge: see Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 339'.

• While the contrary expert report that Brodyn relied upon at fi rst instance covered matters outside of those raised in Brodyn's proof of debt, the report was still admissible and clearly established Brodyn's claim against Dasein, and hence Brodyn's proof of debt.

• The administrator could rely on additional material from a creditor after it had lodged a proof of debt, even if that material varied in some respect from the nature and amount of the claim. Therefore, the administrator could have allowed Brodyn's claim to the extent of $461,882 on the basis of other evidence fi led or could have allowed an amended proof of debt to be submitted claiming a larger sum;

• The judge at fi rst instance was wrong to say that the administrator should have admitted the proof of debt for $486,371, when the claim before the administrator was for the lesser sum of $461,882. Once the primary judge had decided to allow the appeal, the question was the order which was to be made under section 1321 CA.


22

With respect to the second aspect of the appeal in relation to costs, the Court of Appeal dismissed Dasein's appeal (on the basis of the above fi nding that Brodyn's claim against Dasein was made out), but partly upheld the administrator's appeal. The Court of Appeal disagreed with Chief Justice Young's comment that 'an unsuccessful liquidator or administrator ordinarily pays costs to the successful party'. Instead, Justice Hodgson made the following observations on when a liquidator/administrator will be liable for legal costs:

• If proceedings are brought by a company in liquidation, with the liquidator not being a party, and if those proceedings are unsuccessful, an order for costs would generally be made against the company but not against the liquidator, unless the liquidator has acted unreasonably (at [49]).

• If proceedings are brought by a liquidator in relation to a company's affairs, generally an order for security for costs will not be made; but if those proceedings are unsuccessful, then an order for costs will generally be made against the liquidator personally (at [50]).

However, the liquidator would generally be entitled to an indemnity from the assets of the company, although that may be denied if the liquidator has acted unreasonably (at [51]).

• If proceedings brought against the liquidator are successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability (at [52]). This may be achieved by ordering that the company in liquidation pay the costs (if the company is also a defendant), or by ordering that the liquidator's liability for costs be limited to the amount of assets of the company available for that purpose (at [53]).

• If the liquidator has acted unreasonably in defending the litigation, the liquidator may be made personally liable (at [54]).

• Generally, the same principles apply to administrators as to liquidators (at [55]).

While disagreeing with Chief Justice Young's statement of the applicable law, the Court of Appeal upheld his fi nding that the administrator was liable for Brodyn's costs because he had acted unreasonably in failing to provide Brodyn with a copy of, and the opportunity to comment on, a report that the administrator then relied upon to reject Brodyn's proof of debt. However, the Court of Appeal limited the period of time to which the costs order applied, ruling that it only commenced from the date when the administrator could fi rst be said to have acted unreasonably.

Finally, the court found that it was appropriate that the administrator be a party to proceedings in which his decision has been challenged, as a result of which he may be the subject of orders (see at [60] per Justice Hodgson).

An administrator must act according to standards no less than those of a court or judge and must provide a claimant with the opportunity to review and respond to material that the administrator proposes to rely upon in dealing with that claimant's proof of debt. A failure to do so can result in the administrator being found to have acted unreasonably and costs being awarded against them.


23


Chairperson's failure to exercise casting vote manifestly unreasonable

Case Name:Ausino International Pty Ltd v Apex Sports Pty Ltd

Citation:[2007] NSWSC 289, Supreme Court of New South Wales, Equity Division, per Barrett J


Issues:• Were the chairperson's

reasons for not exercising the casting vote at a creditors' meeting relevant?

• Were considerations taken into account by chairperson in forming view on resolution proper?

• Was failure to exercise a casting vote manifestly unreasonable?

This case relates to considerations that should/should not be taken into account by a chairperson in deciding whether to use their casting vote at a creditors' meeting. The case also outlines the reasons as to how, when and why a casting vote should be exercised.

Ausino was a major creditor of Apex. Ausino applied to the court for orders overturning a DOCA that Apex executed. Apex's creditors had been given materially misleading information when they considered the proposal to execute the DOCA. The application was adjourned and the adjournment was granted on terms requiring that correct and updated material be given to creditors; and a creditors' meeting be called to determine whether the DOCA should continue or be terminated.

Neither resolution was passed at the meeting: the votes were deadlocked and the chairperson did not exercise his casting vote. The chairperson stated he did not act on his inclination to overturn the DOCA because of:

• pending court proceedings; and• 'signifi cant objections' to voting entitlements and the values for which some

creditors should be admitted for voting purposes.

When the application returned to the court, Ausino submitted that the chairperson had abdicated his legal responsibility to exercise the casting vote.

Justice Barrett stated that:

• a decision to exercise or not to exercise a casting vote must be consistent with the interests of creditors as a whole;

• use of a casting vote is discretionary but should be exercised unless there is good reason not to; and

• failure to exercise a casting vote for an irrational or irrelevant reason is inconsistent with a chairperson's duties.

Justice Barrett held that:

• The pending court proceedings were irrelevant to the making of a proper decision by the chairperson because the court's objective in granting the adjournment was to allow the future of the DOCA to be decided at the creditors' meeting.

• Objections to voting entitlements and voting values are irrelevant to a decision regarding the exercise of a casting vote.


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For those reasons, Justice Barrett determined the court had to review the result at the creditors' meeting according to its powers under section 600C of the CA. Justice Barrett considered the chairperson's comments regarding the likelihood that:

• distributions under the DOCA would be delayed;• recovery possibilities available in the case of winding up would be denied if the

DOCA remained in place; and• the vote was not an objective refl ection of the best interests of unrelated

creditors with appreciable claims.

The court determined these considerations were properly taken into account by the chairperson who demonstrated a well-based preference, in the interests of creditors, to overturn the DOCA. It was therefore manifestly unreasonable for the chairperson to fail to exercise the casting vote according to his expressed inclination.

The court ordered that the resolution terminating the DOCA and winding up the company be taken to have been passed at the meeting.

Although use of a casting vote is discretionary, it should be exercised unless there is good reason not to, or if it is inconsistent with the interests of creditors as a whole. Pending court proceedings and objections to voting entitlements or voting values should not be taken into account by a chairperson when deciding not to exercise their casting vote at a creditors' meeting.


25


Seeking more time to convene a second creditors' meeting? Extension may be granted only under extenuating circumstances

Case Name:Fincorp Group Holdings Pty Limited


Date of Judgment:17 April 2007

Issues:• Section 439A CA • Circumstances justifying

extension of time for second meeting of creditors

• Test for the court in granting an extension

Administrators: need more time to prepare the reports and recommendations required by section 439A CA? This case suggests that the court will be reluctant to grant a request for an extension unless there are extenuating circumstances, especially if the extension of time is signifi cant.

Unless the court orders otherwise, s439A CA requires administrators to hold a meeting of creditors within 21 to 28 days (depending on when the administration began) of the beginning of an administration. At that meeting, administrators are required to provide creditors with:

• a report about the company's business, property, affairs, fi nancial circumstances and any proposed DOCAs; and

• a statement and reasons as to whether it would be in the creditors' interests for the administration to end and/or the company to be wound up.

In this case, the administrators applied for an extension of time of the convening period by three months to enable them to fulfi l the requirements of s439A CA.

The court noted that the stated objectives of Part 5.3A CA led to an expectation that a voluntary administration would proceed promptly, because of the fact that secured creditors and various other people were barred from pursuing their claims while the company was in voluntary administration. The CA does, however, confer on the court jurisdiction to extend that period. The court found a number of reasons for granting the extension, including:

• that there was a high degree of complexity in the group companies' corporate structure;

• the ongoing (and valuable) development projects of the company were complex and had potential;

• the company books were in a poor state;• the directors were recently appointed and not fully conversant with the

company's affairs; and • to date, no creditors had objected to a proposed extension of time.

The court held that, where the prospects of a better outcome for creditors in extending the convening time outweighed the general expectation of a prompt resolution of an administration, it should grant such an extension, but only after balancing the various factors present on a case-by-case basis against the inconvenience to those who would be barred from making a claim during that time. In this case, an order for extension was justifi ed. The court also noted that, with more than 8000 investors involved, the administrators had to contend with media interest.


26

The court also ordered that, should the administrators decide they were able to convene a useful meeting before the expiration of the three-month extension, they should be free to do so.

A court will require good reasons to extend the convening period for a creditors' meeting under s439A CA. It may be prepared to extend that period if the administrators can show prospects of a better outcome for creditors through a potentially longer period of administration.


27


Challenging judgment debts: what the court will not allow

Case Name:General Homes v Jonathon B & Leanne A Caelli trading as JC Electrical

Citation:[2007] NSWSC 463, Supreme Court of New South Wales per Bergin J

Date of Judgment:11 May 2007

Issues:• Whether 'strike out'

order 'determined' the proceedings

• Whether order made after specifi ed date in DOCA precludes creditor from obtaining leave to enforce order against company in administration

Companies and administrators should not purposefully delay or manipulate proceedings to avoid paying judgment debts. A discharge of debts clause in a DOCA may not be effective against a later order to pay money into court as security for a judgment debt if proceedings concerning the debt are still on foot.

JC Electrical received a determination in its favour from an adjudicator and obtained judgment against General Homes (GH) in the local court, including garnishee orders. GH obtained a stay of that judgment and subsequent vagaries in the Local Court resulted in the matter not being reached. GH also commenced Supreme Court proceedings challenging the determination. When GH did not comply with dates set by the court, JC Electrical sought orders that:

• the proceedings be struck out; • the stay on the Local Court proceedings be lifted; and • GH pay the adjudication amount of $49,434 plus interest into court, pending

the determination of the proceedings (the order for security).

Two days before the hearing, GH went into voluntary administration. At the hearing, the court made the orders sought by JC Electrical.

The administrators, JC Electrical and certain excluded creditors then entered into a DOCA. The DOCA provided that creditors must accept their entitlement under the DOCA in full satisfaction and complete discharge of all debts or claims as at a specifi ed date, being the date of administration.

The administrators subsequently refused to comply with the order for security, claiming that the strike-out order determined the proceedings so there was no longer any obligation. The administrators also claimed that the judgment debt was the underlying debt warranting the order for security and, as the order was made after the specifi ed date, the DOCA precluded JC Electrical from enforcing it.

The court held that 'determination' means when proceedings are brought to an end. Strike out and dismissal for want of prosecution are both interlocutory in nature, so the strike-out order did not determine the proceedings and the order for security still stood.


28

GH's challenge, stay and entering voluntary administration two days before the hearing caused delays and diffi culties for JC Electrical. The administrators had not opposed the orders made, but had said there was no money to pay into court when it was obvious from the DOCA that a fund of money had become available. The order for security post-dated the date specifi ed in the DOCA; however, at that time the judgment debt had been stayed and GH's proceedings challenging the determinations were on foot. The court held that JC Electrical should have the opportunity to enforce the order for security, and to apply for payment out of that money.

This case confi rms that a strike-out order does not fi nally 'determine' proceedings. Although this case is limited to its specifi c facts, it is a warning to companies and administrators against using delays, stays of proceedings, or the timing of appointing administrators in attempting to challenge judgment debts in court.


29


Court can replace liquidators and direct new liquidators to investigate conduct of administrators during administration

Case Name:Malhotra v Tiwari & Ors

Citation:[2007] VSCA 101, Court of Appeal of Victoria per Chernov, Nettle and Redlich JJA


Issues:• Exercise of supervisory

controls by the administrators over those managing a company in voluntary administration

The appellant in this case was a benefi ciary of a trust of which S & D International Pty Ltd (in liquidation) (the company) was trustee. The appellant sought orders that the liquidators of the company had conducted themselves in such a manner that they should be removed and replaced. The court ordered that the current liquidators be removed and directed the replacement liquidators to investigate the handling of the voluntary administration and liquidation of the company by the previous administrators and liquidators.

On 22 April 2005, the second respondents (Peter Robert Vince and Stirling Lindley Horne) were appointed the company's administrators under Part 5.3A CA and, on 29 June 2005, the company went into voluntary liquidation, with the second respondents being appointed as liquidators. The court was required to consider whether the second respondents had acted appropriately in their capacity as administrators and liquidators of the company, specifi cally in respect of:

• the appointment by the second respondents of the fi rst respondents (Sheela Tiwari and Pradeep Tiwari – long-standing directors of the company) to manage the company's business during its administration. The appellant asserted that the liquidators were concerned that the fi rst respondents were diverting the company's business to their own interests and, in the process, were misappropriating cash and other company assets;

• that the second respondents had shown bias in favour of the fi rst respondents by allowing them to manage the company during the administration period: • at a fee substantially in excess of that for which the appellant offered to

manage the company during the administration period; and • in circumstances where the fi rst respondents were not forthcoming

with information to allow the second respondents to identify the company's assets;

• that the second respondents did not impose effective supervisory controls over the fi rst respondents in their management of the company during administration, particularly having regard to:• the 'cash nature' of the company's business;• unexplained cash withdrawals from the company's accounts; and• information that ought to have given rise to reasonable suspicions on the

part of the second respondents that the fi rst respondents had diverted parts of the company business to their own interests; and

• whether the second respondents were entitled to all of the fees that they claimed.


30

The court ordered that the second respondents be removed and replaced as liquidators of the company and that the replacement liquidators investigate whether:

• the fi rst respondents diverted any part of the company's business and misappropriated any cash or other company assets;

• anything that the second respondents did or failed to do during the company's administration caused loss or damage to the company; and

• the second respondents were entitled to all of the fees that they claimed.

Administrators of a company in voluntary administration must take care to exercise effective supervisory controls over the persons charged with managing all or part of the company under administration during the administration period. This is particularly so where there is prima facie evidence that those persons charged with the company's management during administration may be acting otherwise than in the best interests of the company as a whole.


31


How should a trustee determine employee entitlements under a company trust fund?

Case Name:Leonard Thomas Hinde

Citation:[2007] NSWSC 640, Supreme Court of New South Wales, Equity Division, per Rein AJ

Date of Judgment:22 June 2007

Issues:• Whether court should give

advice to trustee under section 63 of the Trustee Act 1925 (NSW)

• Whether trustee should take into account payments made under a Commonwealth scheme to administrator for payment of employees' entitlements

• Appropriate remuneration for trustee

It may be appropriate for the court to provide advice on a section 63 application by a trustee for resolution of a dispute between parties to a trust. In calculating employee entitlements, a trustee may take into account public scheme payments made to the administrator for employees without having to reimburse the Commonwealth.

Australian Phototonics Pty Ltd (APPL) established a trust in October 2004 to provide benefi ts to various employees. An administrator of APPL was appointed one month later and APPL entered into a DOCA in March 2005.

The Department of Employment and Workplace Relations (the Department) provided payments totalling $150,246 to the administrator on behalf of the APPL employees. This was under a Commonwealth scheme (the scheme) that enabled entitlements to be paid to employees where a company in administration or liquidation had not done so, and recovery of funds to be then sought from the realised assets. If payments were made directly to employees, the scheme contemplated that funds would be recovered from employees who had entitlements paid in due course by the administrator.

The trustee sought to distribute the trust funds to the eligible employees, and all but one employee (K), approved the proposed distribution and amounts.

The trustee sought judicial advice under s63 of the Trustee Act 1925 (NSW) and orders in relation to construction of the trust deed and the proposed distribution of funds.

After reviewing the divergent judicial opinion on whether s63 proceedings were appropriate for the resolution of disputes between parties to a trust, Justice Rein held that this was an appropriate case for the court to give advice.

K submitted that, under the DOCA, she was entitled to a sum substantially in excess of the sum determined by the administrator. Justice Rein held that the trustee was entitled to rely on the administrator's calculations as to employees' entitlements.

His Honour then considered the payments made under the scheme to the administrator. K asserted that, in making payments, the trustee should disregard the scheme payments. The only interested party who appeared at the hearing was the Department. It supported the trustee taking the scheme payments into account, which would result in suffi cient trust funds to meet all outstanding claims. Justice Rein found that the trustee was justifi ed in taking into account any scheme payment in assessing and paying employees' entitlements.


32

In appropriate cases, the court will provide advice on a s63 application by a trustee for resolution of a factual dispute between parties to the trust. Whether a trustee may take into account public scheme payments will depend on construction of the trust deed.


33


Extension of time to hold second creditors' meeting to effect sale of business

Case Name:In the matter of Global Food Equipment Pty Ltd (under administration); Carter v Global Food Equipment Pty Ltd

Citation:[2007] NSWSC 901, Supreme Court of New South Wales per White J


Issues:• Section 439A(6) CA• Whether extension of time

would be granted for second meeting of creditors to enable sale of business

• Policy of Part 5.3A CA

The administrators applied to the court for an extension of time to hold the second meeting of creditors. The purpose of the extension was to enable the sale of the business to take place before the second meeting. This case confi rms that the courts may allow an extension for this purpose, taking into account the relevant circumstances and the policy behind Part 5.3A CA.

Following their appointment, the administrators aimed to sell the business of the companies as a group and devised a timetable for offers. They applied to the court for an extension to hold the second meeting of creditors so that the meeting could be held outside the convening period under section 439A(5) CA, after the companies had been sold. Under the CA, the purpose of the second meeting of creditors is to decide whether the administration should end, whether the company should be wound up, or whether any proposed DOCA should be entered into.

The court stated that, in exercising its discretion under s439A(6) CA, it will balance the need for an administration to be quick and effi cient against the need for administrators to present meaningful choices to creditors. The court considered the elements of the policy behind Part 5.3A CA:

• to maximise the chance that the company continues in existence and, if this is not possible, to maximise returns to creditors;

• for administrators to make decisions regarding the sale of assets but for creditors to make the decisions outlined above; and

• for creditors to be given a swift opportunity to make these decisions, unless the court grants an extension of time for the meeting.

The court acknowledged that, in principle, it would be preferable to hold the second meeting of creditors before any sale of the business was fi nalised. In particular, this is because a sale could preclude any advantageous DOCA that may be proposed.

In this case, no DOCA had been proposed and the administrators were of the opinion that a quick sale would maximise returns to creditors. No creditors had objected to the administrators' strategy. It was determined that, theoretically, the only persons who could be affected by the court granting an extension would be any person who may propose a DOCA.

The court balanced these considerations by making orders:

• to extend the time for holding the second meeting of creditors for the period sought by the administrators but with liberty to any person to apply to vary the orders by giving notice to the administrators; and


34

• to enable the meeting to be held before the end of the convening period, if the administrators thought it desirable.

When an application is made to the court under s439A(6) CA to extend the convening period for the second meeting of creditors, the court will examine the circumstances of the case against the policy behind Part 5.3A CA. The court has the discretion to make orders that are appropriate to the circumstances, including orders that reserve liberty to apply to interested persons to change them.


35


Extension of the decision period for enforcement of charges

Case Name:Australian Capital Reserve Limited (administrators appointed) v High Tower Investments Pty Limited (administrators appointed); in the matter of High Tower Investments Pty Limited (administrators appointed)

Citation:[2007] FCA 1028, Federal Court of Australia, New South Wales District Registry, per Gyles J

Date of Judgment:6 July 2007

Issues:• Sections 435A, 439A,

441A and 447A CA • Whether the ‘decision

period' under s441A CA should be extended to coincide with 'convening period' under s439A CA

An order was granted under section 447A(1) CA to extend the 'decision period' under s441A(1)(b) CA in relation to various companies under administration to the last day of the 'convening period' under s439A(5) or (6) CA for each of the companies.

Under s440B CA, a person generally cannot enforce a charge on the company's property during a company's administration. However, s441A CA provides that a chargee can enforce a charge if:

• a chargee has a charge(s) over the whole, or substantially the whole, of the company's property; and

• the chargee enforces the charge(s) in relation to all of the company's property subject to the charge(s) before or during the decision period. Section 9 CA defi nes the ‘decision period’ as being 10 business days from the beginning of the administration.

Section 439A CA provides that the administrator must convene a second meeting of the company’s creditors within the 'convening period', which is generally 21 days from the beginning of the administration.

In relation to most of the respondent companies, the administrators of Australian Capital Reserve Limited (ACR) determined that it would be open to ACR to enforce its charges under s441A CA. However, because of their late appointment, ACR's administrators had a shorter 'decision period' in which to act. ACR's administrators decided that if the 'decision period' was not extended, they would take steps to enforce the charges before the 'decision period' expired, in order to protect ACR's rights under s441A CA. This action may have prompted other prior-ranking chargees to take enforcement action that they otherwise might not have taken, which may have been detrimental to the ultimate best interests of ACR's creditors.

ACR's administrators applied to link the decision period with the convening period for each of the respondent companies. Section 447A CA provides that the court may make such orders as it thinks appropriate about the operation of Part 5.3A CA in relation to a particular company.

Justice Gyles did not doubt that an extension of the decision period was required in the circumstances and that s447A CA granted the court the power to make the order. His Honour recognised that administrations vary greatly and considered that, in this case, it would be sensible to link the decision period with the convening periods in order to recognise the inter-relationship between the administrations of the respondent companies.


36

The case demonstrates that the court will consider the circumstances of an administration in exercising its general power under s447A CA. The court confi rmed that s447A CA has a broad operation and provides the fl exibility required to realise the object of Part 5.3A CA.


37


Grounds to terminate a DOCA

Case Name:Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) & Ors

Citation:[2007] SASC 296, Supreme Court of South Australia per Layton J

Date of Judgment:10 August 2007

Issues:• Section 445D CA – more

than one ground alleged• Court's discretion to

terminate a DOCA

This case concerned an application by a creditor to terminate a DOCA under section 445D CA and the court's exercise of its discretion in such circumstances.

Annatom Pty Limited became insolvent and the sole director, Mr Tigani, appointed an administrator and provided him with details of Annatom's creditors. The administrator's s439A report recommended that the creditors enter into a DOCA. This resolution was passed by the requisite majority in value and number, although two creditors voted against it.

Mondello Farms Pty Limited had been involved in litigation against Annatom, resulting in costs orders in favour of Mondello. Mondello claimed that it was a creditor of Annatom. Information about the Mondello litigation had not been provided to the administrator until before the second creditors' meeting. Mondello only found out about the administration after the DOCA had been executed. Mondello was not included on the list of creditors, nor was any information about the Mondello litigation outlined in relevant documents. After the DOCA had been executed, Mr Tigani was declared bankrupt.

Mondello sought to have the DOCA terminated on a number of grounds under s445D, including the following:

• that the information about Annatom's business, property, affairs or fi nancial circumstances given to the administrators or creditors was false or misleading and was material to the creditors' decision to vote in favour of the DOCA;

• there were material omissions from the information provided to creditors;• there was a material contravention of the deed by Mr Tigani, who was also

bound by the DOCA;• the DOCA would be oppressive and unfairly prejudicial or discriminatory against

certain creditors; and• the DOCA should be terminated for some other reason.

The court found that there should have been further investigation and disclosure of matters regarding the Mondello litigation, the status of various creditors and allegations of insolvent trading. The court considered case law outlining the relevant tests and policy considerations in order to establish breaches of s445D(1) CA. It was held that:

• the failure to disclose the Mondello litigation and the impending bankruptcy of Mr Tigani was a breach of s445D(1)(a) and (b);

• the failure to disclose information about the creditor status of Mr Tigani and two related entities of Annatom was a breach of s445D(1)(c);

• there was no contravention of s445D(1)(d);


38

• there was a breach of s445D(1)(e), as Mondello was not represented as a creditor and there were no proper investigations into the creditor status of Mr Tigani and the two related entities;

• there was a breach of s445D(1)(f) because implementing the DOCA would be unfairly prejudicial and discriminatory to Mondello and, if it had voted on the DOCA, a majority of creditors would have been against the DOCA; and

• in light of all of the circumstances, it would be appropriate to terminate the DOCA under s445D(1)(g).

The court also considered factors regarding its discretion to terminate the DOCA and held that:

• the need for proper investigation into a company's fi nancial position and the status of creditors is in the public interest;

• the interests of the other creditors would not be adversely affected;• there was no undue delay in bringing proceedings; and• it would have been inappropriate for Mondello to lodge a proof of debt because

this would indicate that it was in favour of the administration process.

In addition, the court also commented that a company that continues to engage in litigation and incur adverse costs orders when there are reasonable grounds to suspect that it is insolvent is incurring 'debts' for the purposes of s588G(1) CA.

The court will exercise its discretion to terminate a DOCA in circumstances where one or more of the grounds in s448D are made out. In particular, the court will do so where there has not been an adequate investigation into a company's fi nancial position, the creditors as a whole will not be adversely affected, and where there is no undue delay in commencing the proceedings.


39


Power to appoint a receiver or make a freezing order when a company is in administration

Case Name:ASIC v Krecichwost & Ors

Citation:[2007] NSWSC 948, Supreme Court of New South Wales, Equity Division, per McDougall J


Issues:• Section 1323 CA • Court's power to make

freezing orders

The question in this case was whether the court had the power, under section 1323 CA, to appoint a receiver and/or make freezing orders while investigations were underway by the administrators into the possibility of insolvent trading. The court found that this discretion was available under s1323(1) CA.

The Fincorp group of companies collapsed in March 2007, with administrators appointed on 23 March 2007. The administrators had begun conducting an investigation into a number of matters, including possible insolvent trading. ASIC was also investigating the Fincorp group of companies, and sought to freeze the assets of those involved in the investigations until they were complete, or, alternatively, the appointment of a receiver to the company. The court considered whether s1323 CA provided the authority to make an asset-freezing order, or whether such an order would need to be made under the court's inherent jurisdiction.

After consideration of previous authority, and an examination of the legislation, Justice McDougall found that s1323(1) did envisage an ability to appoint a receiver, or, in the alternative, make a freezing order, with the relevant test being an assessment of whether it was 'necessary or desirable for the protection of aggrieved persons' (at 26), which then enlivened the discretion to make the orders.

In considering the exercise of this discretion, Justice McDougall considered it more important to look at the needs of the people considered 'aggrieved', rather than the drastic nature of the remedy itself, when deciding whether to appoint a receiver or apply a freezing order, and thus dismissed claims of potential damage to the reputation of the directors. While his Honour considered it would be in the interests of 'aggrieved persons' that a receiver be appointed to protect the assets involved, he instead chose to make a freezing order for two months based on consideration of the demonstrably low risk of dissipation of assets in this case and the drastic nature of receivership.

This case confi rms that the court has the power under the CA to make orders that have the effect of preserving the assets of those being investigated by ASIC. However, it will tailor the order to suit the circumstances of the particular company and investigation. Here, the court found that the interests of 'aggrieved persons' could be adequately protected by the making of a freezing order.


40


Chairman's exercise of casting vote

Case Name:Deputy Commissioner of Taxation v Wellnora Pty Limited

Citation:[2007] FCA 1234, Federal Court of Australia per Lindgren J


Issues:• Sections 600B and

447A CA• Administrator's duty when

exercising a casting vote

In this case, the Deputy Commission of Taxation (the DCT) sought to set aside a DOCA on the basis that the administrator who cast the deciding vote did not take into account certain creditor interests. This case highlights that the court has a wide discretion to consider not only the creditors' interests, but also commercial morality and the public interest under sections 600B and 447A CA.

Wellnora Pty Limited was proposed to be wound up on 25 November 2005. On 24 January 2006, Ms Soong, the sole director, proposed instead that Wellnora enter into a DOCA. On 14 February 2006, Wellnora's creditors met, with the majority of creditors in number voting for executing the DOCA, and the majority in value voting against it. As there was not the requisite majority of creditors in number and value to pass the resolution, it was passed on the casting vote of the chairman, Mr Hamilton, who was also the administrator.

After investigating the fi nances and affairs of Wellnora, in accordance with s435A(b) of the CA, Mr Hamilton decided that a DOCA would result in a better return for Wellnora's creditors than would result from an immediate winding-up of the company. Accordingly, he cast his vote in accordance with that recommendation.

The DCT made an application to the court on various grounds for the termination of the DOCA, including:

• the DOCA being contrary to public interest and commercial morality, as it contained low dividends;

• that the administrator had not taken into account the needs of the major unsecured creditors, namely the DCT, in deciding to exercise his casting vote; and

• that certain information about Wellnora's business had not been in the administrator's report, including compliance history and the related interests of the other creditors.

The court found that nothing the administrator might have said in his s439A report would change Wellnora's compliance history, or the low level of dividend offered by the proposed DOCA. The implication of this was that the fi ve related creditors would not have been infl uenced to vote differently by a s439A report from the administrator containing this additional information.

The court also found that the administrator had carried out a thorough investigation, and that the DOCA would provide better value for the creditors.


41

The power conferred by s600B was seen to be an ample one that could be exercised by the court considering not only the interests of creditors, but also the public interest and commercial morality. On consideration of all these issues, Justice Lindgren found that winding up would serve no useful purpose in general, and therefore the DOCA should not be set aside.

An administrator is required to take into account a number of factors in deciding whether to exercise his casting vote, including whether it is in the best interests of the creditors. Although the court has a wider discretion to consider commercial morality and the public interest, a DOCA will not be set aside merely because the administrator acted only in the creditors' interests.


42


Powers of administrator under deed of arrangement

Case Name:Jamieson Louttit v Kolln



Issues:• Section 447D(2) CA• Administrator's power to

declare dividend under deed of arrangement

The administrator of two DOCAs sought directions for, among other things, an order that he was entitled to declare a dividend under a DOCA. The court found that the administrator did not have the power to declare a dividend, as there was no such power expressly granted by the DOCA.

The plaintiff (the administrator) sought directions under section 447D(2) CA as to how to distribute surplus assets of Trician Pty Ltd and Nollk Pty Ltd under the deed of arrangement (the deed) entered into between the administrator, Trician, Nollk, Ian Kolln, Patricia Kolln and Margaret Robinson. The deed was a schedule to two DOCAs, under which the plaintiff was appointed deed administrator.

The deed provided that Ian and Patricia Kolln would divide the real estate assets and proceeds of sale of assets of Trician and Nollk equally between them, and refer all accounting and non-property issues to the arbitrator for fi nal determination. The plaintiff was the arbitrator and administrator of the deed.

The administrator proposed to pay a dividend to Ian and Patricia Kolln in their capacity as shareholders of Trician, on the basis that the deed:

• permitted the administrator to make adjustments in accordance with the deed to calculate share price; and

• allowed the administrator to ‘do all things necessary for selling, calling in or converting into money any of the property of the company’.

In respect of the fi rst point, the court found that the declaration of a dividend does not fall within the administrator's power to make adjustments to calculate the share price. The court noted that, at the time the parties entered into the deed, the board held the power to declare dividends, and it would not have delegated this power to the administrator.

In respect of the second power, the court found that the declaration of a dividend is not a sale, calling in, or conversion of money.

The court stated that the power to declare a dividend would only arise if it were 'necessary' for the administrator to carry out its duties. The court found that it was not necessary for the administrator to declare a dividend in order to perform its functions. For these reasons, the court held that the administrator did not have the power to declare a dividend.

An administrator under a deed of arrangement does not have the power to declare dividends unless the deed expressly provides the administrator with that power.


43


Grounds for extending time to convene creditors' meeting

Case Name:Re Evans & Tate Ltd (administrators appointed) (receivers and managers appointed); Ex Parte Jones

Citation:[2007] WASC 235, Supreme Court of Western Australia per EM Heenan J

Date of Judgment:

7 September 2007

Issues:• Application for extension

of time to convene second creditors' meeting

• Order for access to pooled assets of a corporate group to secure administrators' fees

In this case, the administrators sought a three-month extension of time to convene a second creditors' meeting so as to be able to make appropriate recommendations.

The fi rst defendant, Evans & Tate Ltd, is the parent company of a group of wholly owned companies under external administration (the group). Joint and several receivers and managers were appointed by the principal secured creditor and controlled almost all of the companies in the group. The receivers and managers expected that it would take between two to three months to fi nalise any sale of the group's assets.

The applicants were the joint and several administrators (the administrators) of the group and were appointed before the receivers and managers. The administrators were required to consider the group's future prospects and whether it would be in the interests of the group's creditors to execute a DOCA, for the administration to end, or for the group to be wound up. As the receivers and managers were in control of the group's assets, the administrators were limited in their ability to perform their tasks, because any resolution would depend both on the approach of the receivers and managers in realising the group assets (to satisfy secured debts) and on the prices received.

The administrators made an application to the court for the following relief:

• an order for a three-month extension to convene a second creditors' meeting required by section 439A CA, so the administrators would be in a better position to make recommendations to creditors once more was known of the proposals of the secured creditors to deal with the group's secured assets and the intentions and progress of the receivers and managers; and

• an order under s447A CA for permission to access the pooled assets of the companies in the group, so as to facilitate a lien as security for payment of the administrators' remuneration and expenses incurred in the course of the administration.

After hearing arguments from the parties, the court ordered:

• a 30-day extension and liberty to apply for a further period, so the administrators would have the opportunity to put before creditors, members, or the court, more fi nancial information than was available at that time. A three-month extension was not justifi ed on the basis that there were no suffi cient prospects for an improved outcome for unsecured creditors, members, or other persons affected. Decisions about the proposed sale or realisation of assets lay with the receivers and managers and a longer extension would not allow the administrators to report on whether a scheme of arrangement could be devised and whether it would be in the interests of creditors or members;


44

• that notice of the orders be given to creditors and that they, or any other interested persons, may apply to vary the orders; and

• an adjournment of the application for the specifi cation of the administrators' rates of charging for work done in the course of the administration and for securing their expenses against the group's assets, until further notice could be given to all creditors, members and persons affected.

Courts have discretion to extend the time period for convening creditors' meetings. However, a court is unlikely to grant a substantial extension if there are no suffi cient prospects of an improved outcome for creditors and others affected by the company to justify such an extension.


45


Should a court award indemnity costs against an unsuccessful applicant on an application to set aside a DOCA?

Case Name:Deputy Commissioner of Taxation v Wellnora Pty Ltd (No. 2)


Date of Judgment:8 October 2007

Issues: • Whether indemnity costs

should be awarded against a party who seeks to have a DOCA set aside

In this case, the court had to consider whether a creditor who failed in its application to set aside a DOCA should be ordered to pay the administrators' costs on an indemnity basis.

Administrators were appointed to Wellnora Pty Limited in January 2006. Later that month, Wellnora's sole director proposed that the company enter into a DOCA. At a creditors' meeting in February 2006, a resolution was passed approving the DOCA on the casting vote of the chairman, who was one of several appointed administrators.

Of the six creditors who attended the creditors' meeting, fi ve related creditors voted in favour of the DOCA and one unrelated creditor, the Deputy Commissioner of Taxation (the DCT) voted against it. The DCT accounted for almost 56 per cent of the company's debt, so that no majority was carried in both number of creditors and the value of their debts. The chairman cast his vote in favour of the DOCA, and the resolution was passed.

The DCT commenced proceedings to set aside the DOCA. Justice Lindgren of the Federal Court noted that he had the power to set aside the DOCA under section 600B CA. However, he accepted that the chairman exercised his casting vote in good faith and in the best interests of the creditors. Justice Lindgren also noted that, despite his decision not to set aside the DOCA, there were some factors that were in favour of setting aside the DOCA, namely:

• the minimal dividend to creditors that could be expected from the DOCA; and• the history of the company's controllers setting up companies for a particular

project, accruing debts, and then closing down by way of external administration with tax outstanding.

However, Justice Lindgren held that the DOCA should not be set aside as:

• liquidation of the company, as an alternative to the DOCA, would achieve nothing in the absence of any indication from the DCT (the one unrelated creditor) that it would fund investigations and recovery by the liquidator; and

• the DCT failed, in a timely manner, to inform the chairman of the grounds of the DCT's opposition to the DOCA and that it would seek to have it set aside.


46

Following the decision of Justice Lindgren not to set aside the DOCA, Wellnora brought proceedings against the DCT seeking to recover the costs of the proceedings that were brought by the DCT to have the DOCA set aside. The administrators submitted that it was unreasonable for the DCT to have subjected them to the cost of a fi ve-day hearing to have the DOCA set aside, and alleged that the grounds upon which the DCT sought to have the DOCA set aside were unreasonable.

However, the court held that indemnity costs should not be awarded against the DCT, as indemnity costs should only be awarded if a case is 'special' or 'out of the ordinary'. That is, indemnity costs should only be awarded where it was unreasonable for the party against whom the order was made to have subjected the innocent party to the exposure of costs. The court noted that, in the circumstances, it was not unreasonable for the DCT to seek to have the DOCA set aside, because there were clearly factors in this case that justifi ed it and the evidence was not such that it could be said that the proceedings to set aside the DOCA were 'futile'.

This case emphasises that a court will only award indemnity costs against a party who seeks to have a DOCA set aside where it was unreasonable for that party to have brought the proceedings in the fi rst place. Where there is evidence to suggest that a DOCA ought to be set aside, then it cannot be said that the proceedings were brought unreasonably, even if the court ultimately decides not to set aside the DOCA.


47


Grounds for court intervention in the voluntary administration process

Case Name:Sutherland v Johnson Property Holdings

Citation:[2007] NSWSC 1331, Supreme Court of New South Wales per Austin J

Date of Judgment:21 November 2007

Issue: • End of voluntary

administration on the grounds that the company is solvent, or there is an abuse of process

The plaintiff in this case sought an order under the so-called 'magic provision' of section 447A CA to bring voluntary administration to an end on the grounds that the company was solvent or that the provisions of Part 5.3A CA were being abused. The case does not mark any change in the law, but rather emphasises that relief under s447A is to be granted only when the factual circumstances support such an order.

Johnson Property Holdings Pty Ltd (the company) was registered in 1997 and, from that time until June 2007, Mr Johnson acted as the sole director and held 99 out of the 100 issued shares in the company. His wife, Mrs Johnson, held the remaining share. On 22 May 2007, a judgment was obtained against Mr Johnson for a substantial sum of money and a bankruptcy notice was served upon him for the judgment debt. As a result of his imminent bankruptcy, Mr Johnson appointed Mrs Johnson as sole director of the company on 18 June 2007 so as to avoid the problems that would arise for the company as a result of his automatic disqualifi cation from managing a corporation. Mr Johnson was subsequently declared bankrupt on 6 July 2007 and Mr Sutherland (the plaintiff) was appointed trustee in bankruptcy.

On 29 October 2007, Mrs Johnson, acting as sole director, resolved to appoint Mr Moodie as administrator of the company under the belief that the company was insolvent or likely to become insolvent under s436A CA. Mr Moodie, in his capacity as administrator, held a creditors' meeting and recommended to the creditors on 15 November 2007 that the company should be wound up. The plaintiff's application was based on the argument that Mrs Johnson could not have passed a proper resolution since there was no satisfactory evidence of insolvency at the time. However, Justice Austin did not agree with the plaintiff's submissions that Mrs Johnson had not had proper regard to the fi nancial position of the company. His Honour at [20] found 'that the company is, at best, of doubtful solvency', based on the creditors' claims and the company's minimal assets.

On the second ground of objection, relating to the abuse of the administration procedure, the plaintiff alleged that Mr Johnson was somehow 'pulling the strings' since June 2007 by appointing his wife as director in order to prevent his trustee in bankruptcy from taking control of the company's affairs. However, his Honour held that, upon appointment of the plaintiff as trustee in bankruptcy, he became entitled to register as the controlling shareholder of the company. Thus, the plaintiff could replace Mrs Johnson and take practical control of the company, regardless of Mr Johnson's acts or any alleged abuses of the administration provisions in Part 5.3A CA. The plaintiff's failure to object to Mrs Johnson's directorship and replace her between 6 July 2007 and 29 October 2007 was his own omission and insuffi cient grounds to end the administration.


48

For the purposes of obtaining relief under s447A CA, the plaintiff must convince the court that there are factual grounds for intervening in the administration process voluntarily entered into by the company.


49

DEREGISTERED COMPANIES

Does a plaintiff have standing as a creditor to seek a winding-up order if the defendant company was deregistered when the debt fell due?

Case Name:GIO General Ltd v Sabko Pty Ltd



Issues:• Whether the plaintiff is a

creditor for a debt incurred during a company’s deregistration

• Application of sections 459A, 461(1)(k) and 601AH CA

• Whether company should be wound up in insolvency or on just and equitable grounds

In this case, the court considered whether a debt that became due while a company was deregistered could be validated under section 601AH(3) CA.

Sabko Pty Ltd (the company) was deregistered on 25 December 2005. At the time it was deregistered, it still held an insurance policy from GIO General Ltd. The policy was initially for one year from 8 April 2005 to 8 April 2006, but was automatically renewed for a further year. The premium for the renewed policy fell due on 31 July 2006, after the company ceased to exist. GIO applied for orders:

• reinstating the company under s601AH(2) CA; and• winding up the company, either in insolvency under s459A CA, or on just and

equitable grounds under s461(1)(k) CA.

GIO submitted that, upon reinstatement, s601AH(5) renders the debt one that was incurred by an existing company. However, s601AH(5) does not permit anything purported to be done between deregistration and reinstatement to be regarded as valid. The deemed continuity created by s601AH(5) has been held in three cases not to apply where, between deregistration and reinstatement, a company:

• was served, and failed to comply, with a statutory demand;• had the opportunity to make submissions at a taxation-of-costs hearing; and• conferred authority on a subsidiary to give notices.

Justice Austin held that these cases were different from the current case because, in those cases, validation would have required the court to authorise a positive act that was done during deregistration. In this case:

• the company’s liability arose out of an insurance contract made before the company was deregistered;

• nothing subsequently happened after deregistration to terminate or vary the contract; and

• the liability arose through the absence of anything being done.

As a result, Justice Austin held that the debt which did not exist while the company was deregistered springs into life when a reinstatement order is made. As a result, the amount due under the insurance policy was entitled to be treated as a debt due and owing by the company, and GIO was deemed to be a creditor and had standing to seek a winding-up order in insolvency or on just and equitable grounds.


50

On the evidence, Justice Austin was not satisfi ed that the company was insolvent, but ordered winding up on just and equitable grounds, based on the following:

• the company was deregistered nearly 15 months ago;• there was no evidence that those formerly interested in the company had taken

any steps to resurrect it;• the director of the company was served with the present application and did

not appear;• the company did not respond to GIO’s request for payment; and• there was evidence that the company was continuing to trade at its former

premises, notwithstanding that the company no longer existed at law.

A debt incurred during a time that a company was deregistered may spring into life upon reinstatement where the obligation was incurred before the company was deregistered. In such circumstances, the person to whom the debt is owing has standing as a creditor to seek a winding-up order.


51


Company reinstated to participate in an appeal

Case Name:ACCC v ASIC

Citation:[2007] FCA 696, Federal Court of Australia, Queensland District Registry, per Greenwood J


Issues:• Standing of the ACCC in an

application under section 601AH(2) CA

• Whether reinstatement of company for purposes of an appeal is 'just in the circumstances'

The applicant sought an order to reinstate the registration of a company and a number of consequential orders. Reinstatement was sought for the purposes of a pending appeal in a proceeding to which the deregistered entity was a party.

The ACCC sought administrative reinstatement by ASIC of the registration of Dataline.Net.Au Pty Ltd (the company). ACCC contended that the company was a necessary party to an appeal to be heard by the Full Court, which concerned the pecuniary penalty that may be awarded against the company for breaching the Trade Practices Act 1974 (Cth).

Section 601AH(2) CA empowers the court to reinstate the registration of a company on the application of 'a person aggrieved' by the deregistration, in circumstances where the court considers 'it is just to do so'.

The court found that, because of its statutory role (to give effect to the Trade Practices Act by promoting competition, fair trading and providing consumer protection), the ACCC was a person aggrieved with standing to apply for reinstatement.

The court found that reinstatement was just, as the ACCC had sought to secure the consent of the company's former liquidator to administrative reinstatement of the company by ASIC, but the company's former liquidator refused to do so.

The ACCC may apply for a company's registration to be reinstated in circumstances where the relevant company is a necessary party to appeal proceedings concerning a pecuniary penalty against that company.


52

Can a resurrected corporation have its rebirth undone? In this decision, Justice Barrett considered the operation of an order made under s601AH CA to reinstate the registration of a deregistered company and the effect of an order setting aside the order for reinstatement.

On 5 March 2007, Justice Barrett made an order directing ASIC to reinstate the registration of Churnwood Holdings Pty Ltd, a company deregistered on 29 January 2005 after its voluntary winding-up was complete (the reinstatement order). ASIC did not oppose the application for reinstatement. On 14 March 2007, under the order made by Justice Barrett, ASIC reinstated the company's registration.

Following the reinstatement, an application to set aside that reinstatement order was brought by three related but separate parties who, in 2004, had granted an option to purchase certain property to Churnwood or its nominee. The applicants contended that Churnwood had nominated Westbury Holdings Kiama Pty Ltd to exercise those options. Westbury purported to exercise the options in October 2006, more than 20 months after Churnwood had been deregistered. The applicants had a real interest in the reinstatement of the registration of Churnwood but were given no notice of the original application and therefore had no opportunity to put their case at the hearing.

The applicants relied on various arguments in support of the setting aside of the reinstatement order, including:

• that they were parties likely to be affected by the reinstatement order and should have an opportunity to be heard; and

• material facts had not been disclosed.

Justice Barrett agreed that the applicants were likely to be affected by the reinstatement order but concluded that, although the respondents had not provided them with notice of the hearing, the fact that the applicants' lawyers were aware of and attended the hearing was suffi cient opportunity for the applicants to be heard.


Corporate Lazarus: undoing court-ordered reinstatement of deregistered companies

Case Name:Westbury Holdings Kiama Pty Ltd v ASIC



Issues:• Can an order to reinstate a

deregistered company be set aside and discharged after the deregistered company has been reinstated?

• The effect of setting aside an order to reinstate a deregistered company after reinstatement


53

Justice Barrett also found that the respondents had failed to disclose material facts. As a result, His Honour stated at [25]-[26] that, 'there could be a need for the orders made on 5 March 2007 to be set aside… but… there is an issue of overriding importance relevant to the question whether the court would actually do so.'

According to s601AH CA, if reinstatement is effected, the company is taken to have continued in existence as if it had not been deregistered. Justice Barrett at [32] stated that once the reinstatement of the registration of a company had been effected, the reinstatement order was fulfi lled and therefore, 'termination of the direction of the court that provided the statutory warrant for ASIC's act would obliterate neither the act nor its statutory consequences' (at [33]).

In other words, Justice Barrett held that once an order to reinstate a company had been fulfi lled, merely setting aside that order will not change the status of the reinstated company.

Once an entity is reinstated, the court cannot retrospectively deprive a company of its corporate existence by setting aside its original order. This decision confi rms, irrespective of any irregularity or invalidity, that an effected order to reinstate the registration of a previously deregistered company cannot be undone by merely setting aside the original order.

As Justice Barrett at [51] states, any order setting aside an order for the reinstatement of the registration of a company 'would be an empty order having no meaningful effect and of no utility. For that reason, the court will not make such an order.'


54


Reinstatement to enable claim against a deregistered company's insurer

Case Name:La Trobe Capital & Mortgage Corporation Ltd v REA Australasia Pty Ltd

Citation:[2007] NSWSC 652, Supreme Court of New South Wales, Equity Division, per White J


Issues:• Whether plaintiff entitled

to claim against company's insurer under section 601AG CA

• Reinstatement of deregistered company under s601AH(2) CA

• Removal of liquidator under s503 CA

Where a plaintiff is not able to bring a claim against a deregistered company's insurer under section 601AG CA, the court may permit reinstatement of the deregistered company under s601AH(2) CA in order to allow the plaintiff to bring a claim.

A company was placed in voluntary liquidation in March 2003 and deregistered in November 2003.

The plaintiff applied under s601AH(2) CA for an order that ASIC reinstate the company. The plaintiff claimed that it suffered loss by lending money upon security of a property in reliance on a negligent valuation by the company in June 2002.

The company was 'replaced as a trading entity' by United Valuers Pty Limited (UV) in October 2002. The company and UV were both insured under a professional indemnity policy for the period from December 2002 to December 2003. In October 2003, the plaintiff wrote to UV advising of its intention to bring a claim if there was a shortfall in realising the secured property against the mortgage debt. The letter was forwarded to the insurer shortly after. The plaintiff sold the secured property in 2004 at a loss.

In February 2005, the plaintiff advised the insurer of the company's deregistration and its intention to claim under its letter of October 2003. The insurer took the position that notice had not been given to the company during the period of insurance because disclosure had been made to UV and not the company.

Section 601AG CA permits recovery from the insurer of a deregistered company if the company had a liability that was covered by the policy immediately before deregistration. The plaintiff sought reinstatement in the event that its letter of October 2003 did not amount to a claim covered by the policy. A former director of the company opposed the application for reinstatement on the basis that the directors could be exposed to unnecessary costs and actions by the liquidator.

Justice White said that, while it was arguable that the letter did not amount to the making of a claim, forwarding it to the insurer was a report by the company of an incident that might give rise to a claim. Reinstatement could give rise to a liability of the insurer to the company, which could entitle the plaintiff to a charge over the insurance monies payable under s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). Even if that were not so, if the plaintiff obtained leave and successfully claimed against the company in liquidation, and the company successfully cross-claimed against the insurer, the liquidator would hold those proceeds for the plaintiff.


55

Justice White noted that the court needs to be satisfi ed both that the plaintiff is a person aggrieved by the deregistration and that reinstatement is just. His Honour found that the plaintiff was aggrieved and that reinstatement was just because the benefi t to the plaintiff outweighed the potential detriment to the directors.

The plaintiff also sought that, upon reinstatement, the company be immediately wound up and a new liquidator appointed. Justice White held that, for the court to remove a voluntary liquidator under s503 CA, it was not necessary for the liquidator's conduct to be impugned. As he had shown no interest in resuming offi ce and had not responded to the notice, this was suffi cient cause for a new liquidator to be appointed in his place.

This case demonstrates that the court may be willing to order reinstatement where a plaintiff is unable to bring a claim against a deregistered company's insurer under s601AG CA. Further, where appointment of a new liquidator is sought, it is not necessary for the liquidator to have acted improperly: lack of interest or failure to respond is suffi cient cause to appoint a new liquidator under s503.


56


Reinstatement of a company for purpose of dealing with refund of monies

Case Name:Farnsworth v ASIC

Citation:[2007] NSWSC 866, Supreme Court of New South Wales per Hammerschlag J


Issues:• Whether company should

be reinstated and a DOCA resuscitated to allow liquidator to deal with refund monies

• Sections 447A and 601AD(2) CA

Money was incorrectly distributed under a DOCA after which the company was deregistered and the DOCA terminated. The plaintiff sought to have the company reinstated and the DOCA resuscitated so he could distribute the monies correctly.

The plaintiff was appointed voluntary administrator of Aust Even Resources Pty Ltd (the company). The company entered into a DOCA, with the plaintiff appointed as administrator.

The plaintiff advertised for proofs of debt to be lodged. Proofs of debt were received from the ATO and the New South Wales Offi ce of State Revenue (the OSR). The plaintiff declared a dividend in favour of the ATO and the OSR. The company was then deregistered and the DOCA terminated.

Subsequently, the plaintiff received a letter from the ATO advising that the proof of debt was mistakenly lodged, and requesting its withdrawal. Attached to the letter was a refund of the dividend, which the plaintiff placed in an account.

The plaintiff sought orders that:

• the company be reinstated;• the DOCA's termination be revoked; and• the refund monies be dealt with under the DOCA as if they had been part of the

DOCA funds in the fi rst place.

Alternatively, the plaintiff sought directions from the court as to how to distribute the monies under section 63 of the Trustee Act 1925 (NSW).

Section 601AH(2) CA provides that the court may make an order that ASIC reinstate the registration of a company if a person is aggrieved by the deregistration and the court is satisfi ed that it is just that the company’s registration be reinstated. Justice Hammerschlag considered that the plaintiff was a person aggrieved by the deregistration and had standing to bring the application. Justice Hammerschlag further held that the company’s registration should be reinstated, as no one was likely to be prejudiced by the reinstatement and public interest warranted the reinstatement.

Section 447A CA gives the court a general power to make orders regarding DOCAs. The court held that this was an appropriate case to use s447A CA to revoke the DOCA's termination.


57

The court ordered that ASIC reinstate the company and made additional orders under Part 5.3A CA regarding the DOCA and the distribution of the refund monies.

In considering whether to reinstate a company, the court will consider whether the applicant is an aggrieved person, whether it is in the public interest to do so and whether anyone will be prejudiced by the reinstatement. In certain circumstances, the court may use Part 5.3 CA to make orders revoking the termination of and resuscitating a DOCA.


58


Application for reinstatement of a deregistered company following mismanagement

Case Name:Vukasin v ASIC



Issues: • Section 601AH(2) CA• Standing to seek

reinstatement: s601AH(2)(a)(i) CA

• Reinstatement after mismanagement leads to deregistration

• The role of liquidators

When a company is deregistered, provisions in the CA allow the court to make an order requiring ASIC to reinstate the company's registration if the reinstatement application is made by a person aggrieved by the deregistration and the court is satisfi ed that it is just. A recent Supreme Court of New South Wales decision held that a company may be reinstated where the reinstatement application was combined with an application for winding-up and for the immediate appointment of a provisional liquidator.

Hy-Lift Pty Ltd (the company), a forklift company, was incorporated in 1983 and dissolved under section 601AB CA in November 2001. This followed maladministration that included unpaid GST and employee group tax deductions, amounting to liabilities in excess of $120,000. While the company was still deregistered, a new lease, which later proved valuable, was entered into, purportedly in favour of the deregistered company as lessee. The plaintiff, Mr Vukasin, and his co-director wished to have the company wound up and the business sold off, but that was prevented by the deregistration. The plaintiff therefore sought orders for the company's reinstatement and other relief.

The Supreme Court considered whether the plaintiff had standing to seek reinstatement under s601AH(2)(a)(i) CA. Justice Austin noted the question of whether a shareholder/director of a company has standing by himself or herself remains unsettled in the authorities, but expressed the view that it was unnecessary to reach a concluded view on that point. Instead, he held that the plaintiff had a suffi cient factual interest to justify the conclusion that he was 'a person aggrieved by the deregistration', given that the continued deregistration was an obstacle to the plaintiff's plans to wind up and sell the business, as well as a hindrance to his ability to sell off the valuable lease.

The Supreme Court considered whether it was just that the company's registration be reinstated. His Honour decided that, while the company was subjected to maladministration, the application for reinstatement being coupled with an application for winding-up and for the immediate appointment of a provisional liquidator derailed the likely resumption of maladministration [at 15]. Moreover, his Honour noted that the maladministration was the result of a division of functions, that the plaintiff placed his trust in his co-director to attend to the company's fi nancial and administrative affairs and that this side of the business was neglected as a result of the co-director's illness [at 15]. Reinstatement was just provided the company was immediately placed under the control of a provisional liquidator [at 14].


59

His Honour held that any prejudice that might fl ow on to the lessor of the premises as a result of not being able to disregard the lease and not being able to offer the demised premises at a higher rent, could not be described as 'unfair' prejudice: a lessor should not be permitted to take advantage of the deregistration [at 16].

The Supreme Court granted the plaintiff leave under s459P(2) CA to seek an order that the company be wound up in insolvency as a contributory under s459P(1)(c) CA, by reason that the company's tax liability upon reinstatement established a prima facie case of insolvency [at 20].

The lease was validated under the court's discretion contained in s601AH(3)(a) CA. Justice Austin held that this was a case where a transaction had been purportedly undertaken by the company during a period of non-existence by means of things actually done by or for it [at 25]. His Honour found that no prejudice would arise by curing the defi ciency here of deregistration through validating the lease.

In circumstances where the deregistered company seeking reinstatement is coupled with an application for winding up and for the immediate appointment of a provisional liquidator, the court may, as in this case, fi nd that reinstatement is just.


60

DIRECTORS AND CORPORATE GOVERNANCE

Appointing liquidators: does the court have power to set aside directors' resolutions and in what circumstances can indemnity costs be ordered?

Case Name:The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No. 4)

Citation:[2007] FCA 220, Federal Court of Australia per Rares J

Date of Judgment:28 February 2007

Issues:• Whether liquidator could

be appointed in the circumstances

• Whether court has power to set aside resolution of board of directors

• Costs on an indemnity basis

This judgment examines two matters that were not dealt with in the original set of proceedings.1

Consequent to Justice Rares' decision in the underlying proceedings, BGR Corporation Pty Ltd (BGR) accepted that a liquidator should be appointed for it and each of its subsidiaries. However, BGR argued that placing BARM (one of the BGR subsidiaries and the 8th defendant in the underlying proceedings) into liquidation would encourage the ATO to seek security for costs against the company. Justice Rares saw no reason why this should preclude the appointment of a liquidator and made an order appointing a liquidator to BARM.

Justice Rares also considered a resolution made by the directors in relation to the declaration and payment of an interim dividend. His Honour set aside the directors' resolution on the grounds that the resolution was oppressive and noted that the court has power 'in equity and under [section 233 of the Corporations Act] to set aside a resolution made in circumstances where there has been a fraud on a power by the members'. Justice Rares noted that the court's power extends to 'ordering the company to do directly what could have been done by it through the proper exercise by its members or directors of their powers sourced in its constitution or in the Act ' .

Food Improvers Pty Ltd applied for its costs in the underlying proceedings on an indemnity basis. It accepted that there was no offer along the lines of Calderbank v Calderbank 2 or in accordance with Order 23 rule 11. However, Food Improvers argued that the settlement discussions were at an advanced stage and that it was unreasonable for shareholders not to have resolved the proceedings on the terms discussed during the settlement negotiations and as contemplated in the draft settlement deed.

His Honour found that this was not an unreasonable response to the terms of the proposed deed because the deal that was on offer was not a 'fi nal' deal and left open the question of future litigation. His Honour referred to the decision of Justice Hely in Port Kembla Coal Terminal v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 at 287 and noted that conduct of a defendant in failing to accept a Calderbank offer had to be shown to be unreasonable in all of the circumstances so as to justify a departure from the normal rule as to costs. The application for indemnity costs was dismissed.

1. The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No. 3) [2007] FCA 97.

2. [1976] FAM 93.


61

The court has the power to set aside and substitute a resolution passed by the board of directors under s233 of the CA. An application for indemnity costs in circumstances where a defendant failed to accept a settlement offer would be made only if there is clear evidence of 'unreasonableness'.


62


Director's duty to prevent insolvent trading

Case Name: Mark Damian Charles Roufeil & 1 Or v Noel Linder & 1 Or



Issues:• Section 588G CA • Director's duty to prevent

insolvent trading

Directors will be liable for insolvent trading where there are reasonable grounds for suspecting that the company is, or will, become insolvent, at the time a debt is incurred. The director in this case was found to be in breach of this duty.

Section 588G CA sets out a director's duty to prevent insolvent trading by a company. Under s588G(1) and (2), if a company is insolvent at the time a debt is incurred, or becomes insolvent by incurring that debt, a director may breach his or her duty by failing to prevent the company from incurring it. This will occur where the director, or a reasonable person in similar position to that director, suspects that the company may be insolvent, or would become insolvent, by incurring the debt.

In this case, Mr Linder was a director of Easter Logistics Pty Limited (the company). In November 2000, the company acquired the business of Macksville Haulage Pty Limited. In exchange for Macksville's business assets, the company agreed to pay Macksville's debts to key creditors. The value of the debts assumed by the company exceeded the value of the assets it acquired by more than $370,000.

The company quickly fell into fi nancial diffi culty.

In October 2001, the company's business was transferred to Easter Group Pty Ltd. Again, the transfer of the company's business was made on the basis that the Easter Group would assume liability for its trade debts.

Justice White concluded that the requirements of s588G(1) had been met. He also concluded that Mr Linder was aware that the company was insolvent because:

• there was correspondence with Mr Linder relating to outstanding rental obligations;

• Mr Linder knew the company did not have funds to make lease payments;• Mr Linder knew the company had not lodged business activity statements; and• Mr Linder knew the company had not paid its tax liabilities.

Justice White also expressed concern about the acquisition of Macksville by the company and then of the company by the Easter Group. He noted that there seemed to be a pattern of conduct by the offi cers of ignoring taxation liabilities and then transferring assets and business to a new shell. This new shell would pay key trade creditors and leave behind a company without assets to meet its other liabilities.


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This case provides an example of the liability that can fl ow to a director where that director fails to prevent the company from acting while insolvent. Directors should be aware that liability is not limited to situations where that particular director suspects that the company is, or will, become insolvent. The duty to prevent insolvent trading may also be breached where a reasonable person in a similar position to that director would form that suspicion.


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Company's loss must be directly caused by directors' breach

Case Name:Ad'Tel Digital Systems Group Pty Ltd (in liquidation) v Future Corporation Australia Ltd (formerly Telco Australia Ltd) & Ors

Citation:[2007] NSWSC 566, Supreme Court of New South Wales, Equity Division, per Bryson AJ


Issues:• Breach of directors' duties • Loss of subsidiary's assets

as a result of any breach of directors' duties

When suing the directors of a company for loss caused by a breach of the directors' statutory duties, proof is required that the loss that is the subject of the claim was directly caused by the breach.

In this case, the directors of a parent company (Telco) and its subsidiary, Adlink Group Pty Ltd, (the directors) entered into an agreement, without legal advice, to sell Adlink's assets to a third party. On 15 June 2000, the directors entered into the agreement without considering the interests of Adlink (the fi rst agreement). The fi rst agreement's effect was to leave Adlink with no assets and no commercial gain since the sale monies for the assets were to be paid directly to Telco rather than Adlink. On 29 June 2000, the directors entered into a fresh agreement by which the third party purchased Adlink's shares (the second agreement). As such, Adlink's assets were not ultimately transferred to the third party; Adlink merely became a subsidiary of the third party by way of a share sale.

Adlink changed its name to Ad'Tel Digital Systems Group Pty Ltd (Ad'Tel) on 3 October 2000 and went into liquidation on 15 June 2001. Ad'Tel's liquidator could fi nd no signifi cant assets to realise for the benefi t of its creditors and it was unclear on the evidence as to what had happened to Ad'Tel's assets. Following an investigation, the liquidator of Ad'Tel sued the directors for breach of their statutory duties under the CA, alleging that they failed to consider the interests of Ad'Tel when entering into the agreements and that, as a result of entering into those agreements, Ad'Tel lost its assets.

Justice Bryson found that it was not necessary to determine whether the directors had breached their statutory duties, as it had not been proved that Ad'Tel's assets were lost as a result of the directors entering into the agreements (as opposed to Ad'Tel merely losing its assets in the normal course of trading unsuccessfully). Had the second agreement not been entered into, and Ad'Tel's assets merely transferred to the third party, then it could be inferred that Ad'Tel lost its assets as a direct result of the directors entering into the agreements.

A liquidator should exercise care when alleging that a company suffered loss as a result of a breach by the company's directors of their statutory duties to ensure that proof is available to demonstrate that the loss was directly caused by the breach.


65


Honestly forgot to remit your employees' PAYG income tax deductions?

Case Name:Deputy Commissioner of Taxation v Dick

Citation:[2007] NSWCA 190, New South Wales Court of Appeal per Spigelman CJ and Santow and Basten JJA


Issues:• Application of section 1318

CA to income tax payments

After failing to make income tax payments, a company director sought relief under section 1318 CA for acting honestly. The Deputy Commissioner of Taxation was unsuccessful at fi rst instance and appealed to the Court of Appeal. The court held that relief under the CA could not be used to avoid an obligation under the Income Tax Assessment Act 1936 (Cth) (the ITAA) and allowed the appeal.

When a company fails to remit income tax deducted from its employees' wages, the Commissioner of Taxation has the power to pursue the debt against the director personally (under s222AOB ITAA). The Commissioner can only do this if the director has failed to:

• ensure the company complies with its obligations;• make an agreement with the Commissioner;• appoint an administrator; or• take steps to wind up the company.

Northern Spirit Football Club 2000 Pty Ltd failed to remit more than $140,000 in income tax from 1 June 2002 to 31 March 2003. The Deputy Commissioner commenced proceedings against the club's director to recover this sum. The director submitted that he had acted honestly and sought relief from the court under a discretion conveyed by s1318 CA.

There were two issues that the Court of Appeal needed to resolve before it could consider the application for relief.

The fi rst issue was whether the discretion in the CA could be used to grant relief for a breach of a different statute. The majority held that, because s222AOB could result in a company appointing an administrator or being wound up, it went to a 'core area' of corporations law. It followed that the discretion could be used. Chief Justice Spigelman dissented on this point in fi nding that the purpose of s222AOB was not for regulating corporations, but rather for controlling revenue.

The second issue was whether the two provisions were compatible with each other. The court found that the general presumption that there is no contradiction between two enactments of one legislature was rebutted in this case. Special provisions intended to exhaustively cover a particular subject matter will override any general provisions to the extent that they encroach on that subject matter; that is, the general discretions of the CA could not encroach on the specifi c powers granted by the ITAA.


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The court held that s1318 CA could not be used to grant relief following a breach of s222AOB. The appeal was therefore allowed.

This case illustrates that directors of companies that have failed to remit their employees' income tax deductions cannot rely on the CA discretions to avoid civil penalties.


67


Whether a cross-claim for equitable contribution is a debt provable under the Bankruptcy Act

Case Name:Buzzle v Apple Computer



Issues:• Insolvent trading• Sections 588G and

588M CA• Whether cross-claim for

equitable compensation is a debt provable under s82(1) Bankruptcy Act 1966 (Cth)

The fi rst defendant brought a cross-claim against a director of the plaintiff company, seeking equitable compensation. The issue for the court was whether the cross-claim was a debt provable under the Bankruptcy Act 1966 (Cth) (the Act).

Buzzle brought proceedings against Apple on the basis that Apple was a director of Buzzle, and was liable to compensate Buzzle under sections 588G and 588M CA for insolvent trading.

Apple cross-claimed against another director of Buzzle for equitable compensation. The director (the bankrupt) was an undischarged bankrupt.

The bankrupt alleged that the cross-claim was a debt provable in his bankruptcy under s82(1) of the Act, and that Apple was required to obtain the court's leave to proceed. As Apple had not obtained the court's leave, the bankrupt argued that the cross-claim should be stayed.

At issue was whether a cross-claim for equitable contribution is a debt provable under s82(1) of the Act. The court noted that, for this to occur, the debt must have occurred at the date of bankruptcy, or it must be a debt resulting from an obligation incurred before the date of bankruptcy. The court observed that the acts and omissions of Apple and the bankrupt occurred before the bankruptcy.

The court noted that equitable compensation ‘is usually expressed in terms requiring contribution between parties who share coordinate liabilities or a common obligation to make good the one loss’. The court found that the cross-claim for equitable compensation was dependant on such a coordinate liability between the directors.

The court further held that:

• there is nothing in s82(1) of the Act that restricts the term ‘debts and liabilities’ to debts due only in law and not in equity;

• the broad policy of the Act is that ‘[e]very possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy…’; and

• it would be contrary to that proposition to fi nd that a direct claim against the bankrupt would be a provable debt, but a cross-claim arising out of the same circumstances would not.


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The court held that the cross-claim fell within the defi nition of s82(1) of the Act and, because Apple had not obtained leave for the action to proceed, ordered that the cross-claim be stayed.

A cross-claim for equitable compensation under s588G and s588M CA is a debt provable under s82(1) of the Act.


69


Directors held personally liable for insolvent company's debts

Case Name:Williams v Scholz & Anor

Citation:[2007] QSC 266, Supreme Court of Queensland per Chesterman J

Date of Judgment:21 September 2007

Issues:• Sections 588G, 588M,

588H and 1318 CA• Directors made personally

liable for debts incurred by an insolvent company

The liquidator in this case issued proceedings against the directors of a company to recover debts incurred by the company while insolvent. The directors unsuccessfully argued that they had limited involvement in the company's management and had relied upon another director to inform them about the company's solvency.

The directors of Scholz Motor Group Pty Ltd (the company) were Mr and Mrs Scholz (the defendants), Leslie Scholz (the defendants' son) and Brett Seymour.

The directors appointed the plaintiff as an administrator of the company. The company's creditors later resolved to wind up the company and appointed the plaintiff as a liquidator.

The plaintiff alleged that a reasonable person in the defendants' position would have been aware of grounds for suspecting that the company was insolvent when it incurred debts. The plaintiff sought to recover the amount of the company's outstanding debts from the defendants personally under section 588M CA.

The defendants relied upon the defences contained in s588H CA and claimed that they should not be held personally liable because they had not been involved in the company's trading activities during the relevant period and had reasonably relied upon information provided to them by Mr Seymour.

Justice Chesterman held that there had been reasonable grounds for the defendants to suspect that the company was insolvent because:

• the defendants were involved in negotiating increases to the company's overdraft limit;

• the company's bank sent monthly statements to the defendants, indicating that the company had exceeded its overdraft limit;

• a bank offi cer regularly telephoned the defendants and informed them that the company had exceeded its overdraft limit;

• the bank informed the defendants when cheques were dishonoured; and• once the overdraft limit had been increased to $1 million, the bank told the

defendants that it would not approve a further increase.

Justice Chesterman also found that, since the defendants claimed that they did not trust Mr Seymour, they could not reasonably have relied upon the information he gave them. He also noted that the defendants did not attempt to remove Mr Seymour as a director, did not question Leslie Scholz about the company's affairs or resign from their positions as directors.


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The court also denied the defendants’ claim that they should be entitled to have their liability for the company’s debts reduced by 50 per cent under s1318 CA. This section allows the court to relieve a person either wholly or partly from liability where a person has acted honestly and it would be fair in the circumstances. In this case, the court held that it would not be fair to the company’s creditors to excuse the defendants from liability, especially when the defendants allowed the company to continue to incur debts that they knew the company could not repay.

Courts will closely examine a director's actual involvement in a company's fi nancial affairs to determine whether a reasonable person in the director's position would have suspected that the company was insolvent. Where there were reasonable grounds for suspecting insolvency, directors may be held personally liable for debts incurred by the company.


71

LENDING AND SECURITIES

Court may award judicial sale of mortgaged land at suit of mortgagor in special circumstances

Case Name:New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd & 12 Ors



Issues:• Is the court authorised

to award judicial sale at the suit of the mortgagor, despite objections by a second mortgagee?

This case involved an application by a mortgagor for a judicial sale of land under the Real Property Act 1900 (NSW) over opposition by the second mortgagees. It was held that, in special or exceptional circumstances, the court has inherent jurisdiction to direct a sale against the wishes of the second mortgagees and, as a necessary incident of that power, to direct the discharge of their mortgages.

The plaintiff mortgagor was the registered proprietor of a development site that had approval for the construction of three apartments. The plaintiff mortgagor ran out of money when the apartments were partially built and applied for a judicial sale of land. The plaintiff mortgagor had received an offer from a third party to buy the mortgaged land. Expert evidence indicated that the proposed purchase price represented the market value for the mortgaged land. The fi rst mortgagee consented to the sale by the mortgagor. The second mortgagees objected to the sale, not being satisfi ed that the best available price for the mortgaged property had been obtained, despite unchallenged expert evidence that the price obtained represented current market value.

Justice White found that, in special or exceptional circumstances, a mortgagee can be compelled to discharge its security even though its debt had not been fully repaid. In deciding to exercise the court's inherent jurisdiction to award judicial sale at the suit of the mortgagor, Justice White cited the following factors:

• the fi rst mortgagee had indicated that it would exercise its power of sale should the mortgagor's proposed sale not proceed (and this was likely to result in a substantially lower price for the mortgaged property, and create delay);

• if the sale by the mortgagor did not proceed because of the objections of the second mortgagees, the second mortgagees would still not be able to exercise their powers of sale;

• there was no income to be derived from the mortgaged land and interest on the mortgagees' loans would continue to run should the mortgaged land not be sold; and

• the prospects of obtaining a higher purchase price for the mortgaged land was speculative and therefore the potential gain for the second mortgagees was disproportionate to the risk of loss to the mortgagor and guarantor.

The second mortgagees were, however, given the opportunity to purchase the mortgaged property at the proposed purchase price and back their judgment that a higher price could be achieved.


72

A lender will not be deprived of its security lightly; however, in special or exceptional circumstances, a court may override the mortgage securities and award judicial sale at the suit of the mortgagor. Further, where a mortgagee asserts that a higher price can be obtained for land, it should adduce evidence in support of that assertion.


73


Conditional sale as a 'security interest' under the Chattel Securities Act

Case Name:General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd

Citation:[2007] HCA 19, High Court of Australia per Gleeson CJ and Gummow, Kirby, Hayne and Heydon JJ


Issues:• Whether a vendor of goods

sold by way of conditional sale has a security interest under the Chattel Securities Act 1987 (Vic)

• Sections 3 and 7 of the Chattel Securities Act

This case considers whether a vendor of goods sold by way of conditional sale holds a 'security interest' in goods under the Chattel Securities Act 1987 (Vic) (the Act).

The respondent, Southbank Traders Pty Ltd, sold motor vehicles to a retailer, Kingstrate Pty Ltd. The sale agreement contained a Romalpa clause providing that Southbank retained title to the goods until the purchase price had been paid.

While the purchase price was still unpaid, Kingstrate attempted to sell the vehicles to General Motors Acceptance Corporation (GMAC). Southbank sued GMAC for conversion of the cars, or alternatively, for detinue. The Victorian County Court dismissed Southbank's claim on the ground that it had an unregistered security interest in the vehicles that had been extinguished upon the purchase of the vehicles by GMAC by virtue of section 7(1) of the Act.

Section 7(1) provides that where the holder of an unregistered security interest in goods is not in possession of the goods, the interest is extinguished if the goods are sold to a purchaser who purchases the goods for value, in good faith, and without notice of the security interest.

The Court of Appeal reversed this decision and held that Southbank did not have a security interest under the Act.

The main question on appeal to the High Court was whether Southbank had a security interest in the goods under the Act.

The Court of Appeal took a restricted view of the defi nition of security interest, fi nding that it only applied to 'created interests', such as a charge, and did not apply to 'reserved interests' such as the interest in this case.

The High Court rejected this interpretation and held that:

• the defi nition of ‘security interest’ in s3(1) clearly extends beyond mortgages and charges as it deems that security interests arise under chattel leases and hire-purchase contracts;

• to be a security interest, ‘the interest must secure payment of a debt or other pecuniary obligation’;

• the Act clearly contemplates that a security interest may be reserved; and• the words ‘other supplier of goods’ under s3(3) are wide enough to include the

interest a vendor has under a conditional sale where title has not yet passed.


74

The High Court held that this interpretation is consistent with the purpose of the legislation, the statutory context, and the text itself. The question of whether GMAC purchased the goods in good faith and without notice (s7 of the Act) was referred back to the Court of Appeal.

The term 'security interest' in the Act includes a conditional sale which provides that the vendor retains title to the relevant goods until the purchase price is paid. This is an important decision for vendors selling goods under conditional sales contracts, as it indicates that vendors must register their security interests in the goods or risk losing them in circumstances where the goods are sold to a third-party purchaser in good faith and without notice.


75


'All monies' mortgages that secure nothing

Case Name:Chandra & Anor v Perpetual Trustees Victoria Ltd & Ors

Citation:[2007] NSWSC 694, Supreme Court of New South Wales per Bryson AJ


Issues:• 'All monies' mortgages that

are tainted by fraud may not provide full security for advanced monies

• Lenders need to consider the form of wording used in mortgage documentation

The New South Wales Supreme Court's decision in Chandra & Anor v Perpetual Trustees Victoria Ltd & Ors casts further doubt on the value of the security afforded by all monies mortgages that are tainted by fraud.

The decision of Justice Bryson in Chandra & Anor v Perpetual Trustees Victoria Ltd & Ors [2007] NSWSC 694 is the latest in a number of recent cases1 that have held that where a mortgage registered on the Torrens register does not record the amount it purports to secure, but instead refers to another agreement that details the loan, it will not provide the mortgagee with the full protection of indefeasibility of title if that collateral loan agreement is void. In considering argument that had not been raised in previous decisions, his Honour held that the mortgagee's loss was compensable under the Torrens Assurance Fund.

This decision casts further doubt on the value of the security afforded by all monies mortgages that are tainted by fraud.

Background On 7 April 2005, Perpetual made a loan advance of $500,000, secured, it thought, by a mortgage over the residential property owned by the plaintiffs (the owners). The details of the loan, including the amount owing and the repayment terms, were set out in a collateral loan agreement (the loan agreement) and not in the form of mortgage registered on title, or the memorandum attached to that mortgage form itself, which was also purportedly registered on the title (together, the mortgage). On 2 May 2005, a further advance of $250,000, also secured by the mortgage, was made. The mortgage and loan agreement had been forged by people impersonating the owners. These impersonators had also fraudulently obtained a duplicate Certifi cate of Title.

The owners commenced proceedings, seeking relief against (in the alternative):

• Perpetual, as the mortgagee, for a declaration that no money was secured by the mortgage;

• the NSW Registrar General of Lands for loss arising from the registration of the mortgage; or

• the solicitor who assisted the fraudsters to obtain the duplicate Certifi cate of Title for the subject property, which was then used to register the mortgage.

1. For example, Perpetual Trustees Victoria Ltd v Tsai (2004) 12 BPR 22,281; Printy v Provident Capital [2007] NSWSC 287.


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Perpetual fi led cross-claims against:

• the Registrar General and the State of New South Wales, seeking, alternatively, compensation from the Torrens Assurance Fund (for damages arising from the issue of the duplicate Certifi cate of Title) or damages for negligence; and

• the solicitor, claiming damages for negligence.

The solicitor fi led a cross-claim against the Justice of the Peace before whom the mortgage and the loan agreement had been signed by the fraudsters.

The owners' claim against Perpetual The plaintiffs sought a declaration against Perpetual that no monies were in fact secured by the mortgage.

The language used in the mortgage indicated that the mortgage was security for 'the Secured Money', which was defi ned as being all monies owing or payable under 'a Secured Agreement'. In turn, 'Secured Agreement' was defi ned in the mortgage as being 'any present or future agreement between Us [as mortgagee] and You [as mortgagor]'.

Justice Bryson, referring to the NSW Supreme Court's decision in Perpetual Trustees Victoria Ltd v Tsai (2004) 12 BPR 22,281, held that the only agreement that could have been a 'Secured Agreement' for the purposes of the mortgage was the loan agreement. As the loan agreement was a forgery and, as Justice Bryson stated, 'the [P]laintiffs had nothing to do with it', his Honour was satisfi ed that there was no agreement entered into between Perpetual and the owners that could have been characterised as a 'Secured Agreement'. Accordingly, the mortgage was held to secure no monies.

The owners' claim and Perpetual's cross-claim against the Registrar General Through the combined operation of sections 120 and 129 of the Real Property Act 1900 (NSW), the owners and Perpetual were entitled to recover damages from the Torrens Assurance Fund if they could prove that they had suffered loss or damage as a result of the operation of the Act (and providing that the Registrar General could not establish a defence). Under s129 of the Act, a defence is available to the Registrar General where the loss or damage suffered is a consequence of:

• 'any act or omission by that person', being the person who suffered the loss or damage; or

• 'any fraudulent, wilful or negligent act or omission by any solicitor, licensed conveyancer or real estate agent', where the loss or damage suffered is compensable under that person's professional indemnity insurance.

Justice Bryson held that, as the mortgage did not secure any monies, the owners had not suffered any loss or damage and were therefore unable to recover from the Torrens Assurance Fund. However, even if the owners had suffered loss or damage, they would not have been entitled to recover from the Torrens Assurance Fund, as the loss or damage would have been caused by the negligence of the solicitor, who was found to have been in breach of the duty of care he owed to the owners.


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Justice Bryson found that Perpetual was able to recover from the Torrens Assurance Fund. The Registrar General was not successful in establishing either of the defences under s129(2) of the Act, as the loss or damage sustained by Perpetual had not been caused by 'any act or omission' by Perpetual and the solicitor also had not owed Perpetual any duty of care.

The solicitor's cross-claim against the JP The solicitor claimed that the JP was negligent in witnessing, or purporting to witness, the signing of the mortgage and the loan agreement by persons who were not in fact the proprietors of the property that was the subject of the mortgage. Justice Bryson found no negligence on the part of the JP, who had accepted and trusted the word of the fraudster, whom she had known for a number of years as her employer, in satisfying herself of the identity of the signatories.

This case confi rms the principle from Tsai that 'all monies' mortgages, which purport to secure monies identifi ed in a collateral loan document that is void for fraud, do not in fact secure anything, despite indefeasibility principles that may have protected amounts expressly referred to in the mortgage. The case also illustrates the usefulness of the Torrens Assurance Fund in providing compensation to mortgagees who fi nd themselves in situations where the loan documents, collateral to 'all monies' mortgages, are void for fraud. For situations where the Torrens Assurance Fund is not available to provide compensation, lenders may wish to consider obtaining private title insurance in order to protect their position.


78


Mortgagee's duty to take reasonable steps to obtain market value of property: 'in one line' sales

Case Name:Glodale Pty Ltd v Investec Bank (Australia) Ltd

Citation:[2007] VSC 276, Supreme Court of Victoria, Common Law Division, per Pagone J


Issues:• Section 85(1) Property Law

Act 1992 (Qld) and s420A CA

• Whether properties were adequately marketed to obtain reasonable price

The plaintiffs in this case alleged that the defendant bank had breached its duties as mortgagee in selling apartments as a whole block rather than individual units and, as a result, the properties were sold below market value. The court found that the bank was entitled to sell the properties 'in one line'; however, had not taken reasonable steps to obtain market value.

The second and third plaintiff provided a mortgage over two properties in favour of Investec Bank (Australia) Ltd as security for a loan granted to the fi rst plaintiff. The two properties were apartment blocks in Port Douglas. The fi rst plaintiff defaulted on the loan repayments and failed to remedy the default. Investec sought to enforce their security by way of the sale of the properties. Investec appointed receivers and managers, who in turn appointed real estate agents in Cairns and Melbourne to undertake the sale. The properties were eventually sold by Investec as mortgagee in possession as 'in one line' sales, which involved the sale of the entire property, rather than individual apartments.

The claim by the plaintiffs was that Investec had breached its obligations under s85(1) of the Property Law Act 1992 (Qld) (the PLA) and s420A (1) CA to take all reasonable care to sell at market value. The court found that Investec was entitled to sell the properties 'in one line', particularly as the debt was increasing rapidly and previous attempts to sell individual apartments had failed. Therefore, Investec had not breached its duties by choosing this method of sale. However, the court found that, in conducting the sales, Investec did not take reasonable steps to obtain market value on the sale. For example, the marketing strategies adopted were limited, some less favourable descriptions of the properties had been used and there was evidence that the failure to involve a local real estate agent may also have affected the outcome. Valuations of the properties from the time indicated that Investec had in fact sold the properties below market value and, on the evidence presented, had failed to comply with their duties under both the PLA and the CA.

The court awarded damages to the plaintiffs in the amount of the difference between the market value and the actual selling price of the properties, subject to a reduction based on the amount still outstanding on the original loan.

Although a mortgagee may sell apartment properties 'in one line', the market value must be accurately assessed, and the properties must be adequately promoted and marketed in order to discharge a mortgagee's duties under the PLA and CA.


79

LIQUIDATION

Meaning of 'interest' under section 253E CA

Case Name:Southern Wine Corporation Pty Ltd (in liquidation) v Perera

Citation:[2006] WASCA 275, Court of Appeal of Western Australia per Steytler P and McLure and Pullin JJA

Date of Judgment:19 December 2006

Issues:• Section 253E CA• Whether responsible entity

had an interest in resolution other than as a member due to its liquidation

• Meaning of 'interest' in this context

This decision considers the question of whether a responsible entity had 'an interest other than as a member' in a resolution voted on at a meeting of members of a registered scheme because of the fact that it was in liquidation.

The appellant company, Southern Wine Corporation Pty Ltd (SWC), was the responsible entity in a registered scheme (the scheme). While in liquidation, SWC purported to vote in a resolution to amend the scheme's constitution, which would allow it to sell its 56 per cent stake to a third party. The respondent contended that SWC had 'an interest in the resolution or matter other than as a member' such that, under section 253E CA, it was not entitled to vote on the resolution. The term 'interest' is not defi ned in the CA or its Regulations.

The respondent argued that, because SWC was in liquidation, its interest lay in the orderly winding up of the company and the rateable meeting of its creditors' claims, as well as in the fact that the resolution's passing would affect its position as the responsible entity. It contended that these were interests 'other than as a member' of the scheme.

In determining the meaning of 'interest' here, the court had regard to:

• the legislative history of the provision;• the use of the word 'interest' elsewhere in the CA, for instance under s191(1),

interpreted as 'a relationship of some real substance to the subject matter under consideration'; and

• its ordinary meaning, being any direct or indirect benefi t or advantage; arising out of the subject matter, without being so wide as to encompass 'concern'.

As a result, the court found that the purpose of s253E is 'to ensure that the responsible entity, in voting on a resolution, would not put its own interest, arising independently [emphasis added] of its membership of the scheme, ahead of that of other members, to their potential detriment'. Justice Steytler nevertheless noted that Australian law is not yet at the point of imposing a fi duciary duty on controllers which would prevent them from exercising their shareholder voting rights in a self-interested way.


80

The court concluded that SWC voted on the resolution in circumstances in which its only interest arose out of its capacity as a member and it was not relevant that the company was in liquidation. The desire to maximise a unit holder's return on the sale of its units was seen to be an advantage or benefi t (and hence an 'interest'), arising as a member regardless of whether the sale is for the benefi t of a company's creditors or its shareholders. Moreover, the resolution was to operate equally on all members of the scheme so, while the liquidator's actions in voting were clearly self-interested, there was no breach of s253E CA.

This case makes clear that a company retains its 'interest' as a member of a scheme even when in liquidation. A self-interested vote in scheme resolutions is unproblematic, so long as it does not operate to the detriment of other members.


81

LIQUIDATION

Oppression of minority shareholder leads to winding up on a just and equitable basis

Case Name:The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No. 3)

Citation:[2007] FCA 97, Federal Court of Australia per Rares J


Issues:• Equitable winding up under

the CA• Section 232 CA• Section 461 CA

The Federal Court considered that circumstances in which there is conduct deemed oppressive to minority shareholders will found an application to wind up a company on a just and equitable basis.

The plaintiff company, The Food Improvers Pty Limited (TFI) was a 22.9 per cent shareholder in the BGR Corporation Pty Ltd (BGR). TFI was controlled by Mr Bax, who, until June 2005, acted as BGR's managing director. The majority shareholding in BGR was held by The Triad Health Products Group of Companies Pty Ltd, controlled by Mr Gulson. Other minority shareholders included Karcor Holdings Pty Ltd, controlled by Mr Reese, and Cordato Partners (Services) Pty Ltd, controlled by Mr Cordato. Mr Bax, Mr Gulson and Mr Reece carried out the functions of the senior management of BGR and their companies each had lucrative consultancy contracts with BGR for their services. Mr Cordato provided BGR with legal services but did not play a role as a director or executive. Despite the difference in shareholdings, the business was run as a quasi-partnership, with each member contributing equally to the business’s direction and planning.

The plaintiff sought the winding up of BGR on the bases provided under sections 232 or 461(1)(k) CA. Section 232 allows the court to wind up a company if the conduct of its affairs is either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member. Section 461 allows the court to wind up a company if it is of the opinion that it is just and equitable to do so.

The plaintiff's application followed the development of serious personal confl icts between Mr Bax and Mr Gulson, who used his power as majority shareholder to effectively exclude Mr Bax from his previous role as an equal partner in the business's direction and planning and his removal as its managing director.

Justice Rares found that there had been a loss of mutual trust and confi dence among BGR's principals such that, had the company been a partnership, the partnership would have been brought to an end and that this was a suffi cient basis to fi nd that it was just and equitable to order the winding up of BGR. His Honour agreed with previous legal comment that 'the existence of irreconcilable differences among persons involved in what is, in effect, a partnership, conducted through a company, applies to both applications for winding up on the just and equitable ground and also to oppression suits'. It will only be available to plaintiffs, however, if they are not the party responsible for the breakdown of the relationship.


82

Justice Rares further found that it was unjustifi able that BGR's money had been spent in the defence of these proceedings for the primary purpose of Mr Gulson and Mr Cordato's companies avoiding orders being made that would affect them in their personal capacity as shareholders. For this and other reasons, his Honour concluded that the conduct of BGR's affairs was contrary to the interests of its members as a whole and was oppressive to, unfairly prejudicial to or unfairly discriminatory against the defendant.

Because the wide variety of ways in which the breakdown of personal relationships may cause the breakdown of a corporation, Justice Rares stated that the court should not be too keen to set down hard and fast rules governing the ways in which its broad range of discretionary remedies are to be applied.

Factors pointing to oppression in this particular case justifying the making of a winding-up order included:

• the majority shareholder being responsible for both the 'loss of the mutual trust and confi dence' and the exclusion of the minority shareholder from his previous role in company management;

• Mr Bax having been excluded from the running of BGR on knowingly false grounds; and

• company funds being directed to purposes other than the company's – ie towards a dispute between shareholders.

Where a business is operated as, in effect, a partnership conducted through a company, the breakdown of personal relationships and the deterioration of members’ ability to conduct the business together may lead to conduct judged as unfairly oppressive to minority shareholders. The court has a broad range of discretionary remedies available to it under the CA in such situations, including ordering that the affected company be wound up.


83

LIQUIDATION

The ATO and the joinder of former directors to recovery proceedings

Case Name:Noxequin Pty Ltd v Deputy Commissioner of Taxation


Date of Judgment: 16 February 2007

Issues:• Recovering 'voidable'

payments made by insolvent companies to the ATO

• Liabilities of former directors to indemnify

the ATO • Costs implications • Sections 588FA, 588FC,

588FE, 588FF, 588FGA CA

Liquidators: when bringing claims against the ATO for any transactions that may be voidable under the CA, remember that the matter may not be concluded by virtue of the ATO agreeing that the company in liquidation is entitled to be repaid. The ATO may be entitled to join former directors to the proceedings, in order to seek a full or partial indemnity of any repayment that it makes.

This case involved a liquidator and a company in liquidation seeking orders for the ATO to repay the amount of four payments that the company had made to the ATO. The ATO had agreed that each of these payments represented 'unfair preferences', and did not deny that they each represented an 'insolvent transaction' that was therefore 'voidable'.

The four payments came to a total of $127,462 and, of this amount, $46,928 related to liabilities that the company owed to the ATO under the Taxation Administration Act 1953 (Cth). The ATO was thereby entitled to join Mr Soong, the company's former sole director, to the proceedings, and to seek orders under s588FF(2) CA for him to indemnify the ATO against all 'loss and damage' that it would incur as a result of being ordered to repay the $46,928. Mr Soong was joined mid-way through the proceedings, and he elected to participate, and to contest the assertion that the company had been insolvent when each of the payments were made to the ATO.

Justice Barrett had no diffi culty in fi nding that the company had been insolvent when the relevant payments were made to the ATO, and that the company in liquidation was entitled to restitution of the full $127,462, plus interest. By operation of s588FF(2), Mr Soong was automatically required to indemnify the ATO against any 'loss or damage' that it suffered as a result of being ordered to repay the $46,926. The court further considered that this indemnity would encompass any interest component that the ATO was required to repay on the $46,926, and that this interest should be calculated to the date of the order.

The court was not impressed by Mr Soong's election to contest the solvency issue, particularly in circumstances where he had refused to admit, pre-trial, that the company had been insolvent at the time of the relevant payments and then did not produce any evidence, and said that this represented a 'prolongation of the case by groundless contentions'. It ordered him to pay the costs of the insolvency issue in favour of the plaintiffs on an indemnity basis.


84

The joinder, by the ATO, of a company’s former directors mid-proceedings may have the effect of prolonging matters that would otherwise have been resolved more quickly. However, liquidators can take some comfort in the knowledge that where former directors cannot show good grounds for disputing the relevant facts, they may be ordered to bear the full costs consequences of a party joined in the ordinary course.


85

LIQUIDATION

Proving solvency: will a suitcase full of cash do?

Case Name:Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd

Citation:[2007] FCA 548, Federal Court of Australia, Victorian District Registry, per Finkelstein J


Issues:• Section 459C CA • Proof of solvency• Liability for costs where

winding-up application withdrawn

The Deputy Commissioner of Taxation (the DCT) sought his costs of a winding-up application that had been withdrawn. The DCT argued that affi davit material, which had been fi led on behalf of the company, did not establish the company’s solvency. In fi nding that the affi davit material did establish a prima facie case of solvency, the court noted that there is no requirement that companies seeking to prove solvency produce audited accounts.

The DCT fi led an application to wind up De Simone Consulting Pty Ltd for its failure to satisfy a statutory demand for unpaid tax. De Simone denied liability, but did not apply to set the demand aside. At the fi rst hearing of the DCT's application, the sole director of De Simone produced a suitcase containing several hundred thousand dollars in cash, more than enough cash to meet the debt claimed by the DCT. The application was stood over to enable De Simone to fi le proper evidence of its solvency.

De Simone's director fi led a lengthy affi davit setting out in detail the nature of De Simone's assets and liabilities, deposing that its assets exceeded its liabilities by more than $1.4 million. The following week, De Simone paid a substantial amount of money to the DCT.

The DCT was subsequently granted leave to withdraw its winding-up application. The court ordered that De Simone pay the DCT's costs of the application. De Simone appealed that costs order.

On appeal, the DCT argued that it should be entitled to its costs because the affi davit did not prove that De Simone was solvent and a winding-up order would have been made had the application proceeded. The DCT argued that, because audited accounts had not been produced with the affi davit material, De Simone had not proven that it was solvent.

Justice Finkelstein rejected the proposition that audited accounts are required to prove solvency. His Honour held that the standard of evidence required to prove the solvency of a company will depend on the particular facts of the case. In some instances, those facts will justify a requirement for the provision of audited accounts. However, His Honour noted that there will be many instances where the facts of the case do not justify the expense and trouble of preparing audited accounts.


86

His Honour held that the affi davit material fi led on behalf of De Simone did, if the evidence were unchallenged, establish a prima facie case of solvency. While that evidence was not the 'fullest and best evidence' of the company's fi nancial position and would have been tested carefully had the application proceeded, his Honour held that this demonstrated that neither party could say with any certainty whether a winding-up order would have been made had the application not been withdrawn. His Honour awarded the DCT costs up to the date on which the affi davit was fi led, and ordered that the parties bear their own costs after that date.

The case demonstrates that in establishing solvency, each case is different. The evidence required to establish solvency will depend on the particular facts of the case at hand. Audited accounts may or may not be required. However, companies should ordinarily provide the 'fullest and best evidence' of their fi nancial position.


87

LIQUIDATION

Proving and waiving the presumption of insolvency

Case Name:Dwyer & Anor v R-Jay Pty Ltd

Citation:[2007] SASC 115, Supreme Court of South Australia, Civil Division, per Debelle J


Issues:• Whether the insolvency

presumptions in section 588E(8) CA are triggered if insolvency is not proved in other proceedings

• Whether presumptions about insolvency can be waived

A presumption of insolvency can be a liquidator's best friend. However, this case confi rms that a presumption of insolvency does not arise unless the elements of section 588E CA are proved. Furthermore, the court has stated that the presumption can be waived by the party who has the benefi t of the presumption.

Section 588E CA establishes a regime for making a presumption about insolvency when certain circumstances are satisfi ed. In particular, s588E(8) provides that a presumption of insolvency will arise based upon a determination made in another proceeding about the insolvency of a company or the validity of any defences raised in such proceedings. Section 588E(9) confi rms that the presumptions operate in all other proceedings, unless the contrary is expressly proven in those proceedings.

In this case, the Supreme Court of South Australia considered whether a decision about the insolvency of a company was made in other proceedings brought before the District Court. In the District Court, the parties did not present any evidence proving insolvency. Rather, the parties agreed to not dispute the fact that the company became insolvent on 31 July 2000. In this case, Justice Debelle held that mere agreement to not dispute facts is not suffi cient to indicate that there was proof of insolvency. To that end, without proof, no presumption about insolvency can operate. The circumstances to be proved in s588E(8) had not been proved in the proceedings before the District Court.

Justice Debelle also considered the rare situation in which a party who has the benefi t of a presumption may seek to waive the benefi t of that presumption. His Honour concluded that statutory presumptions regarding evidentiary matters (for example, a presumption about insolvency as contained in s588E) can be waived by the party who holds the benefi t of the presumption. Justice Debelle stated that there is no prohibition contained in s588E that prevents the waiver of the benefi t of a presumption. It is open to the party who benefi ts from the presumption to elect to rely on the presumption or not.


88

This case is signifi cant for two reasons. First, it confi rms that for a presumption of insolvency to arise under s588E CA, the elements enumerated in the legislation must be proved. Merely agreeing not to dispute the facts is not proof of the elements required to give rise to a presumption of insolvency. It must be formally pleaded and proved. Secondly, this case confi rms that parties who benefi t from the presumption of insolvency can waive that benefi t. The operation of s588E(8) CA applies equally to presumptions about insolvency, as well as any associated defences, and as such both liquidators and defendant creditors may benefi t from a presumption.


89

LIQUIDATION

Winding up of a company already subject to voluntary winding up

Case Name:Ausino International Pty Ltd v Apex Sports Pty Ltd



Issues:• Section 600C CA• Winding up of a company

already subject to voluntary winding up

• Replacement of liquidator

The issue in this case was whether it is appropriate for a court to order the winding up of a company already in voluntary liquidation and then replace the liquidator. The case dealt with two different sets of proceedings in relation to Apex Sports Pty Limited.

An order was sought to terminate a DOCA in relation to the defendant, Apex Sports, which would have the effect of placing Apex Sports into voluntary liquidation. However, a further order was sought by the plaintiff, Ausino International Pty Ltd, for a court-ordered winding-up order in part to appoint a new liquidator.

The First Apex Proceeding (3883/2005)As a consequence of a judgment made in the First Apex Proceeding, Ausino required the court to make an order already foreshadowed in the judgment; that is, an order under section 600C CA be made:

• to terminate the Apex Sports' DOCA; and• that, at the 21 November 2006 creditors' meeting, a resolution be passed to

wind up Apex Sports.

However, the making of this order would impact on the other proceeding involving these parties, being the Second Apex Proceeding.

The Second Apex Proceeding (2683/2005)In the Second Apex Proceeding, Ausino sought the winding up of Apex Sports in insolvency on the basis of an unsatisfi ed statutory demand. However, as a consequence of the s600C order, Apex Sports would make the transition to a creditors' voluntary winding-up, with the deed administrator of the DOCA continuing as liquidator. Ausino contended that the application for the winding up of Apex Sports should supersede the voluntary winding up that would occur under a s600C order, and that another liquidator should be appointed instead of the deed administrator.

The court acknowledged that a replacement regime of winding up (which would not require an order terminating the voluntary winding up) may be installed where there is a good reason to do so. In this case, the court was satisfi ed that there were three reasons why the court should make a winding-up order and appoint a liquidator other than the deed administrator:


90

• There were unresolved allegations of apprehended lack of independence and impartiality against the deed administrator/proposed liquidator. While these allegations remained unresolved, it would be counterproductive to leave in place the potential for that dispute by allowing the deed administrator to remain as the liquidator, given the possibility of these allegations being revived at a later stage.

• Dismissing the winding-up application would put an end to an undertaking given by the fourth defendant in relation to the preservation of a monetary fund of $379,299, which was the subject of a judgment on 2 March 2007.

• Ausino had offered an undertaking to the court to fund the court-appointed liquidator's investigations. This funding would not be available if the voluntary winding up occurred.

The court found that these grounds were suffi cient to warrant a winding-up order, even though voluntary winding up would have eventuated under the s600C order.

Ausino proposed that an alternative liquidator be appointed to Apex Sports. The court held that, in winding-up applications, the qualifi ed person nominated by the plaintiff is to be appointed, unless some unsuitability of that person is established. No such unsuitability was present in this case.

The court can order the winding up of a company already subject to voluntary winding up. Such an order operates as a replacement regime and the voluntary winding up will continue in existence. However, the court will only make this order if there is some good reason to do so, as demonstrated here.


91

LIQUIDATION

Can a court grant leave to bring proceedings on behalf of a company in liquidation?

Case Name:Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd

Citation:[2007] FCA 586, Federal Court of Australia per Siopis J


Issues:• Statutory derivative actions• Application for leave under

section 237 CA• Whether Part 2F.1A CA

applies to a company in liquidation

• Best interests of a company that leave be granted

An application for leave to bring proceedings on behalf of a company in liquidation was made in this case. The court decided, after considering the various authorities, that it is better that leave cannot be granted where a company is in liquidation, although it was unable to come to the conclusion that the opposing view is wrong in law.

Part 2F.1 CA provides, inter alia, that a person may bring proceedings on a company's behalf if leave is granted under section 237 CA. The court must grant that leave if it is satisfi ed that

• the company probably will not bring the proceedings itself;• the applicant is acting in good faith; and• it is in the company's best interests to grant the application.

In this case, the fi rst plaintiff (Promaco) and the fi rst defendant (Dedline) entered into a partnership and registered a company, The Printing Place Pty Ltd (the company), to conduct a printing business. Under the agreement, Promaco would refer its printing work to the company, while one of the principals of Dedline (Mr Ripley) would manage the day-to-day company operations. The company entered into a hire purchase agreement to buy a four-colour process printer with the Bank of Western Australia Ltd. However, the company's operations were eventually unsuccessful and it ceased trading and the printer was sold.

After the company had ceased trading, but before the printer was sold, Mr Ripley used it to carry on printing jobs for Dedline. Administrators were appointed to the company and, a short time later, it went into liquidation under s446A CA. The administrator considered that the company did not have suffi cient funds to pursue any action against Dedline for the unauthorised use of the printing machine.

Some of the former directors of the company sought leave under s237 CA to bring proceedings against Mrs Ripley, alleging that she had breached her director's duty in respect of the use by Mr Ripley of the printing machine.

Justice Siopis fi rst considered the question of whether s237 CA could apply to a company in liquidation, noting that there had been several interpretations of the section in this regard (see BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2001) 19 ACLC 1,622; Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; and Carpenter v Pioneer Park (2005) 23 ACLC 93).


92

As there were different approaches to the interpretation of s237, his Honour found that the situation called for an examination of Parliament's intention in enacting Part 2F.1A. He found that the mischief that Parliament intended to address was confi ned only to that relating to the right of an aggrieved shareholder in a company, which was a going concern, to bring an action in the name of the company. He thus found that the better view was that Part 2F.1A did not apply when a company was in liquidation. However, in view of the considerable number of other single judges who had arrived at a different view, Justice Siopis did not have the 'high degree of assurance' necessary to determine the contrary view was 'plainly wrong', and could not therefore make a defi nitive ruling either way.

In any case, Justice Siopis found that the present dispute could be properly characterised as a partnership dispute and that the essence of the redress that Promaco was seeking could be achieved without involving the company. If that was so, it followed that it was not in the company's best interests to grant leave under s237 CA. Leave was therefore refused and the application dismissed with costs.

Where a company is in liquidation, the most recent authority in this area suggests that a statutory derivative action cannot be brought in the company's name, although this is open to challenge until a binding decision is handed down. In any case, such a consideration is not necessary where it can be shown that such leave is not in the company's best interests.


93

LIQUIDATION

Winding up of solvent company

Case Name:Nilant (as trustee of the property of Osborne, a bankrupt) v R L & K W Nominees Pty Ltd & Anor

Citation:Unreported, Supreme Court of Western Australia per Hasluck J


Issues:• Whether solvent company

should be wound up because of oppressive conduct or because of just and equitable grounds

• Sections 232, 461 and 467(4) CA

Under the CA, a shareholder with a complaint about how the affairs of a company are conducted may apply to wind it up. In most cases, courts are reluctant to wind up solvent companies. However, in some circumstances, it may be the only appropriate remedy.

R L & K W Nominees Pty Ltd (the company) was a family company with two members. Originally, Mr and Mrs Osborne each held a share in the company. However, Mr Osborne became bankrupt in 2003 and his share vested in the plaintiff, his trustee in bankruptcy (the trustee). Mrs Osborne was the company's sole director.

Mr and Mrs Osborne lived in a West Perth property owned by the company, while their son lived in another company-owned property.

The trustee asked the court to wind up the company because:

• Mrs Osborne had conducted, and was conducting, the company's affairs in a manner that was unfairly oppressive, prejudicial or discriminatory to members of the company or in a manner contrary to their interests in contravention of section 232(e) or s461(1)(f) CA; or

• it was just and equitable that the company be wound up under s461(1)(k) CA.

Justice Hasluck noted that winding up is a drastic remedy and that judges are extremely reluctant to wind up solvent companies. In concluding that winding up was an appropriate remedy in this case, Justice Hasluck found that:

• Mrs Osborne could not satisfactorily explain how she amassed close to $950,000 to lend to the company. In one instance, Mrs Osborne had repaid a loan of $100,000 in two years when she was earning a teacher's salary of between $687 and $800 per fortnight;

• in recent times, the company had not operated a bank account. It was appropriate for the trustee to be concerned about the company's governance and his interest in the company as a shareholder; and

• the trustee's loss of confi dence in Mrs Osborne's conduct of the company's affairs was justifi able.

Justice Hasluck concluded that the conduct of the company's affairs was oppressive to the trustee and the trustee was entitled to relief under s232(e) and s461(1)(k) CA.


94

Mrs Osborne had refused to allow the two properties to be valued, so it was not possible to calculate the trustee's share. Justice Hasluck found that the only way to determine the validity and level of the disputed loan account was to unravel the company's affairs in the course of a winding up.

Winding up is regarded as a remedy of last resort, especially in the case of a solvent company. Sometimes it will be appropriate for the complainant's share to be bought at a prescribed price. However, in cases where there are irreconcilable confl icts between the parties and the assets cannot be valued, winding up may be a suitable remedy.


95

LIQUIDATION

Court order to overcome insurance restrictions

Case Name:Re Harris Scarfe (in liquidation) & Harris Scarfe Wholesale Pty Ltd (in liquidation) (No. 3)

Citation:[2007] SASC 218, Supreme Court of South Australia, Civil Division, per Gray J


Issues:• Whether the court has

power to order the winding up of a company and appoint a liquidator where liquidators have already been appointed and that company has already been wound up

• Whether notice requirements for an application for a court-ordered appointment of liquidators can be dispensed with

If a company is already being wound up by liquidators appointed by creditors, why would those liquidators then apply to the court for an order appointing them as court-ordered liquidators? This case considers circumstances under which the court will make such an order.

On 3 April 2001, voluntary administrators were appointed to a number of companies in the Harris Scarfe group (the Harris Scarfe companies). On 3 January 2002, the relevant creditors resolved that the Harris Scarfe companies should be wound up and the voluntary administrators became the liquidators (the original liquidators). By January 2005, the original liquidators had been replaced by another set of liquidators (the new liquidators). In this case, the new liquidators applied for an order of the court:

• that the Harris Scarfe companies be wound up; • that they be appointed by the court as the liquidators; and • that notice requirements be dispensed with.

A report prepared by the new liquidators identifi ed suffi cient material to justify pursuing compensation claims against the directors for loss resulting from insolvent trading under section 588M CA. However, the liquidators were of the view that, unless the terms of a directors' and offi cers' insurance policy were applicable, the liquidators would be unlikely to be able to enforce any judgment obtained under s588M CA. The relevant insurance policy, however, excluded claims brought by liquidators that were not court-appointed.

Before the court could appoint liquidators, s459A CA provides that the court must make a winding-up order for the company.

Justice Gray considered the effect of s467B CA and prior case law and concluded that a court could order that a company be wound up, even though that company may already be in the process of being wound up voluntarily. Justice Gray stated that the nature of the exclusions contained within the insurance policy was a factor supporting the liquidators' application in this case.

Justice Gray considered that it was appropriate to make the orders sought, explaining at [27]:

The creditors should not be denied the right to recover from the insurance policy simply because the companies were wound up voluntarily rather than by order of this Court.

In relation to the application to dispense with the relevant notice requirements, Justice Gray stated that the cost burden of complying with the notice requirements constituted suffi cient grounds in this case for dispensation under s467(3)(b) CA.


96

Justice Gray accepted that, in order to provide liquidators of the relevant companies the opportunity to make a claim under an insurance policy, it was necessary to make a court order to wind up the companies and appoint the liquidators. This decision was based upon Justice Gray's assessment that creditors should not be denied the right to recover from an insurance policy just because the liquidators had been appointed by creditors rather than by the court. Justice Gray also dispensed with various notice requirements that were considered unnecessary in the circumstances.


97

LIQUIDATION

Entitlement to set off on exercise of an option

Case Name:JLF Bakeries Pty Ltd (in liquidation) v Baker's Delight Holdings Ltd



Issues:• Section 553C CA • Set off of monies owed

under a contractual option exercised after commencement of winding up

When an insolvent company is wound up, a creditor may owe money to that company because of the exercise of a contractual option. A recent decision of the Supreme Court of New South Wales has held that a creditor may be entitled to set off that amount against money owed by the insolvent company, even if the option is exercised after the company has become insolvent.

An insolvent company may have mutual credits, debts or other dealings with another person. In recognition of this, section 553C CA gives a right of set-off on a winding up. The courts have previously held that the kinds of debts that may be set off under s553C include debts that are contingent on the occurrence of a future event. In order to claim the benefi t of a set-off, s553C(2) CA also specifi es that, at the time of giving or receiving credit, the other party must not have known that the company was insolvent.

In this case, JLF Bakeries Pty Limited and Baker's Delight Holdings Limited entered into a franchise agreement. The agreement could be terminated if JLF became insolvent and included a provision that, on termination, Baker's Delight would have an option to purchase JLF's fi xtures, fi ttings, plant and equipment. JLF became insolvent and Baker's Delight subsequently terminated the agreement and exercised the option. The option was exercised after JLF had appointed an administrator, which is the relevant date for determining what claims can be admitted against an insolvent company.

The court considered whether Baker's Delight was entitled to set off the debt owed to it by JLF against the money that it owed because of exercise of the option.

The court characterised the option in the franchise agreement as a conditional contract for sale and purchase. Therefore on the date that the administration began, Baker's Delight had contracted a contingent liability that could be set off under s553C CA. JLF based its case on s553C(2) CA and claimed that Baker's Delight had knowledge of its insolvency at the time of receiving credit. The court disagreed with this argument and held that credit was given and received at the time that the franchise agreement was entered into rather than when the option was exercised. The franchise agreement gave rise to certain mutual obligations that crystallised when the agreement was terminated and Baker's Delight exercised the option.


98

The purpose of the right of set-off in a winding up is to do substantial justice between the parties. In this case, it was confi rmed that mutual dealings for the purposes of s553C CA may include contingent debts that crystallise after a company has gone into administration. If an option is exercised after a company has become insolvent, any monies owed as a result may be set off under s553C CA. Credit is considered to be given and received at the time that the parties enter the contract rather when the option is exercised.


99

LIQUIDATION

Winding-up application not an abuse of process even though brought for ulterior motives

Case Name:Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd



Issues:• Stay or summary disposal

of application to wind up company

• Whether winding-up application was an abuse of process

• Standing to make application for winding up

The defendant unsuccessfully applied for a stay or summary disposal of the plaintiff's application to wind up the defendant company. The court considered whether the plaintiff had standing to make the winding-up application and whether the plaintiff's application was an abuse of process.

The plaintiff, Australian Beverage Distributions Pty Ltd (ABD), applied to wind up the defendant, The Redrock Co Pty Ltd (Redrock), and fi led an interlocutory process for the appointment of a liquidator. Redrock's attempt to pay its debt to ABD was rejected by ABD on the basis that Redrock was insolvent. Redrock unsuccessfully applied for the stay or summary disposal of ABD's application.

Redrock argued that the originating process should be summarily dismissed because:

• when proceedings were commenced, ABD was not a creditor of Redrock;• ABD lost its status as a creditor by rejecting payment of the debt; and• the winding-up proceeding was an abuse of process.

Redrock argued that ABD was not a creditor of Redrock as no express notice in writing of the assignment of the debt had been given to Redrock. Justice White held that it was not appropriate to resolve this question on a summary application. Justice White further noted that whether ABD was a creditor did not affect its standing to commence winding-up proceedings.

Redrock also submitted that ABD lost its status as creditor when it rejected Redrock's payment of the debt. Justice White noted that the power to make a winding-up order is discretionary, and the court may refuse an application to wind up a company where a debt has been paid. Justice White stated that his preferred view was that ‘if a person has standing as a creditor at the time the application is made, the question whether a winding-up order will be made if the plaintiff is not a creditor at the time of the hearing is a matter of discretion rather than power’. The court held that a summary dismissal application was not the appropriate forum to determine whether the winding-up claim should be dismissed based on the rejection of the money and payment into court.

Redrock also contended that the winding-up claim was an abuse of process because ABD was making the claim to place pressure on it in other proceedings.


100

The court found that it was not an abuse of process, citing the proposition in Mann v Goldstein [1968] 1 WLR 1091 that ‘to pursue a substantial claim in accordance with the procedure provided and in the normal manner, though with personal hostility or even venom and from some ulterior motive…is not an abuse of process of the court…’

The court found that the proceedings were not an abuse of process because, although ABD intended to use the proceedings to subject Redrock to the cost and trouble of additional litigation, this was not the predominant reason the proceedings were brought. As a result, the court held that the proceedings should not be summarily dismissed.

Where an application to wind up a company is brought for a purpose outside the purpose for which the proceedings were designed, the application will not be an abuse of process, unless the outside purpose is the predominant purpose for which the proceeding is brought.


101

LIQUIDATION

Importance of understanding the consequences of liquidation

Case Name:Milicevic v Capital Scaffolding Pty Ltd (in liquidation)

Citation:[2007] FCA 1579, Federal Court of Australia per Graham J


Issues: • Sections 482(1) and 513

CA• Termination of a voluntary

winding up by a shareholder and contributory

This case involved an unusual application to terminate the voluntary winding-up of a company under sections 482(1) and 513 CA.

Mr Aleksic and Mr Milicevic were both shareholders who were contributories of Capital Scaffolding Pty Ltd (the company) and had a disagreement about the company's direction. They attempted to resolve their differences but were unable to do so and sought advice, which was that the most effective way to resolve their dispute was to put the company into members' voluntary liquidation. They proceeded to do this by passing the necessary special resolution at a meeting of company members. Soon after the resolution was passed, it became clear that both Mr Aleksic and Mr Milicevic had misunderstood the full implications of placing the company into members' voluntary liquidation, including the fact that:

• the company would have to cease carrying on business under s493(1) CA, except for what is required, in the liquidator's opinion, for the benefi cial disposal or winding up of the business; and

• under s495(2) CA, the directors' powers would cease on a liquidator's appointment, except as far as the liquidator or the company in general, with the liquidator's consent, approved the continuance of any of the directors' powers.

Mr Aleksic and Mr Milicevic therefore applied to the court to terminate the company's winding up on the basis that they had agreed to such a course in the mistaken belief the company could continue.

Section 513 CA provides that:

Except so far as the contrary intention appears, the provisions of this Act about winding up apply in relation to the winding up of a company whether in insolvency by the Court or voluntarily.

Section 482(1) CA provides that:

At any time during the winding of a company, the Court may, on application, make an order staying the winding up either indefi nitely or for a limited time or terminating the winding up on a day specifi ed in the order.


102

Justice Graham noted that the application was unusual but, by virtue of s513 and s482(1) CA, it could be made. After considering the evidence relating to the company's fi nancial and business success, including its profi t, number of employees and contracts, Justice Graham held that the application should be granted because both Mr Aleksic and Mr Milicevic clearly made a fundamental mistake when they decided to put the company into voluntary liquidation. As the company was in a good fi nancial position, Justice Graham considered that it was appropriate for the winding up to be terminated and for the company to continue to trade.

This case serves as a reminder of the importance of company members understanding the serious consequences of placing a company into a members' voluntary liquidation.


103

LIQUIDATION

When can a creditor bring a claim under the voidable transaction provisions?

Case Name:Edenden v Bignell



Issues: • Sections 588F and 588G• Creditors' maintainable

claims based on alleged 'voidable transactions'

At issue in this case was whether the creditors had a right to sue a company in the course of being wound up under the insolvent trading provisions in the CA.

The plaintiffs sought various forms of relief against Mr Bignell (the fi rst defendant), Mrs Bignell (the second defendant) and A J Bignell Pty Ltd (AJB) (the third defendant). AJB was a company in the course of being wound up. Mr and Mrs Bignell were directors of AJB. The plaintiffs were creditors of AJB.

The relief sought by the plaintiffs included repayment of directors' loans and dividend payments and a payment to themselves as creditors equal to the amount owing to them by AJB.

By interlocutory process, Mr and Mrs Bignell claimed an order for summary dismissal of the proceedings, or, in the alternative, an order that the plaintiffs' claims be struck out.

The plaintiffs claimed, among other things, that:

• certain transactions of AJB, in particular loan repayments and dividend payments, were 'voidable transactions' within the meaning of section 588FE CA; and

• Mr and Mrs Bignell failed to prevent the company from incurring certain debts when it was insolvent and thereby contravened s588G and s588G(2) CA.

By reason of the above, the plaintiffs argued that they had a cause of action.

The court held that only a liquidator can sue under the voidable transaction and insolvent trading provisions of the CA. Although an exception can apply to permit a creditor itself to sue for insolvent trading, this exception will only apply if the liquidator consents to the creditors suing or if the court grants leave. As the liquidator had not given consent for the plaintiffs to sue in this case, and the plaintiffs had not applied to the court for leave to sue, the court held that the plaintiffs did not have any standing to obtain the relief sought and their claim was dismissed.

This case is a reminder that creditors cannot sue under the voidable transaction and insolvent trading provisions of the CA, unless a liquidator consents to them doing so or the creditors are given leave to do so by the court.


104

LIQUIDATION

Can contractual set-off operate as a defence in winding-up proceedings?

Case Name:National Australia Bank Ltd v Idoport Pty Ltd

Citation:[2007] NSWSC 1349, Supreme Court of New South Wales per Young CJ in Equity


Issues:• A performance bonus

under an agreement with a company may constitute a ground of opposition in an application to wind up

• Contractual set-off

This case examines whether performance bonus claims under a consulting agreement and guarantee executed between two companies was a substantial ground for the defendant to raise in opposition to a claim for a winding-up order against the defendant.

Valenti Pty Ltd was an associated entity of the Australian Market Automated Quotation System Ltd (AMAQ). Valenti, AMAQ and National Australia Bank Ltd (the NAB parties) entered into a consulting agreement (the agreement) with Idoport Pty Ltd, which set out services that Idoport would provide to the NAB parties. These related to services including 'computing and communications systems' and their maintenance and development. Clause 7 of the agreement stipulated calculation and payment of performance bonuses by Valenti to Idoport and it was the calculation and liability of these performance bonuses that was in dispute. Clause 25 (b) of the agreement stipulated that Idoport irrevocably authorised Valenti to set-off any amount payable by Valenti to Idoport under the agreement against any sums due and payable by Idoport to Valenti. The clause also expressed that Valenti was not obligated to employ the set-off provision and Valenti exercised its discretion not to do so.

NAB and Idoport executed a guarantee which provided that NAB guaranteed 'due and punctual' payment of all 'Guaranteed Money', being money owed by Valenti to Idoport for the performance bonuses under the agreement. In 1998, Idoport instituted proceedings against the NAB parties for breach of the agreement.

In 2001, the NAB parties instituted notices of motion for security of costs and orders were made for Idoport and the other plaintiff, Market Holdings Pty Ltd, a company associated with Idoport, to pay security for costs. Idoport failed to pay the fi rst instalment in November 2001 and, in January 2002, Idoport's claims were dismissed by the court because of its failure to provide security. Idoport appealed; however, its appeal, along with an application for special leave to the High Court, was dismissed. In April 2005, Idoport brought separate proceedings against the NAB parties in relation to the performance bonuses that Idoport alleged were still owed. In July 2005, these proceedings were dismissed, since they offended the court's earlier 'barring orders'. Idoport again appealed; however, the appeal was dismissed by a unanimous majority with costs. A fi nal appeal was launched by Idoport to the High Court; however, this was also dismissed because of the unlikelihood of success.


105

In March 2007, the NAB parties made an application for Idoport to be wound up in respect of a judgment debt amounting to $53,892,839. Idoport claimed that this debt had been set off under the contractual provisions of the agreement and that, for this reason, the NAB parties could not be creditors under section 459P CA. The NAB parties argued that they did not owe Idoport a payable sum that could be construed as part of a contractual set-off. Chief Justice Young found that the facts of this case did not accommodate equitable set-off and that the statutory provisions and rules (such as the rule in Cherry v Boultbee (1839) 41 ER 171) set out dealings with mutual debts.

Chief Justice Young commented on the possible interpretations of how the guarantee set-off clause could be construed. He determined that, generally, the position is that 'money is only due and owing when, if not paid, the person to whom it should be paid may maintain an action for it at law or in equity' (Re Moss [1905] 2 KB 307). Further, Chief Justice Young stated that, in procedural set-off cases, a claim cannot be set off unless it is enforceable by an action that was the position in this case.

Chief Justice Young also considered whether raising the defence of set-off by Idoport amounted to the making of a claim that was excluded by the barring orders. His Honour concluded that, since contractual set-off does not require the court's involvement and is more akin to a self-help remedy, it was not a fresh proceeding and did not infringe the barring order.

After considering the evidence, Chief Justice Young concluded that Idoport did not have an arguable claim against the NAB parties for the payment of performance bonuses under the agreement and guarantee and therefore could not raise the performance bonus claim as grounds to thwart an order for Idoport to be wound up.

This case illustrates that contractual set-off is a non-judicial step capable of being exercised by a party without the court's assistance and does not amount to a new proceeding that could infringe a barring order. The case confi rms well settled law that a claim cannot be set-off unless it is enforceable by an action.


106

LIQUIDATORS

Replacing a resigning liquidator with a liquidator from the same fi rm of accountants

Case Name:Dean-Willcocks, re Militto's Transport Pty Ltd (in liquidation)

Citation:[2006] FCA 1792, Federal Court of Australia per Gyles J


Issues:• Resignation of suspended

liquidator• Replacement with a

liquidator from the same fi rm

• Section 473 CA

In this case, the Federal Court allowed a suspended liquidator to be replaced with a new liquidator from the same fi rm of accountants.

This case dealt with an application to the Federal Court under section 473 CA to replace the liquidator of Militto's Transport Pty Ltd. The liquidator was resigning because his entitlement to act as a liquidator had been suspended by court order. The proposed substitute liquidator was a principal of the same fi rm of accountants as the suspended liquidator.

The court dealt with the following two issues:

• Could the order be made prospectively, that is, a replacement in anticipation of a pending resignation?

• Was the fact that the suspended liquidator and the proposed substitute liquidator were principals of the same fi rm of accountants a bar to ordering the replacement?

In relation to the fi rst issue, the court was satisfi ed that it had the authority to make a prospective order to replace the suspended liquidator. The court cited a number of cases supporting this proposition, including Re Application of Vouris and Anor (2004) 49 ACSR 543 and Re Wily and Anor (2003) 49 ACSR 94.

In relation to the second issue, the court recognised that this case could not be regarded as an 'arm's length' replacement in any real sense because of the relationship between the parties. Concern was expressed that the replacement of the suspended liquidator with a liquidator from the same fi rm of accountants would 'not achieve very much' because of the association between the suspended liquidator and the proposed substitute liquidator. The court, however, noted that the Supreme Court of New South Wales, particularly in Vouris and Wily, had previously allowed the replacement of liquidators in similar circumstances. The court also noted that the replacement in this case would be convenient, as Militto's did not have suffi cient funds to remunerate an 'external' liquidator (ie a liquidator from a different fi rm of accountants), who would have to become familiar with the matter.

The court ordered that the proposed substitute liquidator replace the suspended liquidator as liquidator of Militto's from the date of the suspended liquidator's resignation.


107

Courts have tended to allow the replacement of a resigning liquidator with a substitute liquidator from the same fi rm of accountants. This replacement may be convenient and practical in situations where, as in this case, there are not suffi cient funds to remunerate a new, external liquidator.


108

LIQUIDATORS

Appointment of provisional liquidator in family oppression suit

Case Name:David Alexander Grace v Deborah Sharon Grace and 5 Ors

Citation:[2007] NSWSC 6, Supreme Court of New South Wales, Equity Division, per Brereton J


Issues:• Under what circumstances

will a court appoint a provisional liquidator?

• Impact of future control of companies

In what circumstances will a court make an order for a provisional liquidator to manage the affairs of a company or a group of companies? This decision, dealing with an unenviable family dispute, provides a useful example of an application of the test to be applied in such a case.

Generally, courts will only make an appointment of a provisional liquidator where there are good prospects of the plaintiff obtaining a winding-up order (or, in the case of an oppression suit, reasonable prospect of some form relief) and when, having regard to the circumstances, including the negative consequences of any appointment, it is considered that the company's assets are in jeopardy and require the protection of a liquidator.

The 'Grace Group' consisted of three companies owned by family members: Mr Grace (the plaintiff), Ms Grace and Dr Grace (the defendants). All three were directors of the companies. Mr Grace claimed to have discovered that the defendants had fraudulently or unconscionably arranged for him to transfer his controlling interest in two of the companies (inherited from his father) to the defendants at the age of 19. The transfer was subsequently confi rmed by the Family Court in an application brought by the defendants without his consent. The plaintiff's discovery prompted him to investigate the transfer and the companies' arrangements generally, which led to a souring of family relations and the exclusion of Mr Grace from some decision-making, as well as restriction of his access to company premises and records.

Justice Brereton found that Mr Grace's claim for his inherited shares that were subsequently transferred to the defendants was a serious question to be tried. If successful, Mr Grace would effectively gain control of two companies of the Grace Group. The defendants consented to orders for the winding up of these companies; however, Mr Grace merely sought the winding-up remedy as an alternative to his principal claim. His Honour accepted some prospect of Mr Grace obtaining an order to wind up the third company (on just and equitable or oppression grounds) but recognised that relief in the form of a 'buy-out' order was far more likely.


109

The court appointed a provisional liquidator for the fi rst two companies, noting that the probable destination of their future control and the attitudes of the defendants were signifi cant in this decision. In relation to the third, while his Honour recognised the existence of a signifi cant risk of inappropriate expenditure on legal costs by the majority, as well as the breakdown of the directors' relationships, he ultimately found that company management was not paralysed and that there was not otherwise a signifi cant risk of asset dissipation, particularly if interlocutory relief was granted. A variety of interlocutory orders were made, including orders restraining the defendants from dealing with company assets and access orders in relation to the company records.

This case provides an illustration of how the probable destination of future control of a company and the attitudes of defendants to any winding up can be relevant to the decision to appoint a provisional liquidator. It is also salutary to note that, while the plaintiff made out 'some' prospect of a winding-up remedy in relation to the third company, ultimately the balance of convenience weighed in favour of interlocutory relief rather than the appointment of a liquidator. This case confi rms that, in respect of applications for the appointment of a liquidator, a court will be mindful of the costs involved in making such an appointment and will be reluctant to grant the order unless there are compelling reasons to do so.


110

LIQUIDATORS

Joint and several liquidators acting unilaterally

Case Name:In the matter of Bernsteen Pty Ltd & Anor (No. 2)

Citation:[2007] FCA 48, Federal Court of Australia per Mansfi eld J


Issues:• Whether joint and several

liquidators have to exercise their powers together

• Scope of an order for production of books and records

This case examines whether a joint and several liquidator can act in his own name only. It also considers whether an order for production of books and records went beyond the scope of the liquidator's legitimate interests.

On an application brought by the initial liquidator of two companies, Mr Lock and Mr Sheehan were appointed as joint and several additional liquidators for a specifi ed purpose, namely investigating breaches of section 588G CA. Mr Lock brought an application for an order for the examination of a company director, Mr Viscariello, under s596A CA and for the production of books and records concerning the examinable affairs of the companies under s596D, which was granted (the order).

Mr Viscariello applied to have the order varied or set aside, contending:

• that Mr Lock was not entitled to have sought the order only in his own name. It was argued that, in default of a determination at the time of their appointment, s506(4) CA required not less than two of them to exercise the powers granted to them; and

• that the order should be varied on the basis that it was oppressive and sought to ascertain his personal assets and liabilities.

His Honour held that the use of the words 'joint and several', in conjunction with the words 'additional liquidators', in the order appointing them indicated that Mr Lock and Mr Sheehan were appointed jointly and severally for the limited purpose specifi ed. That order did not require them to perform their functions jointly in all respects.

On the second point, while it was appropriate to seek the production of documents relating to a person's capacity to meet a judgment, his Honour held the categories of documents covered far too great a time period and the range of documents was far too wide. The request included a wide range of records about Mr Viscariello's employment, shareholdings, property, bank accounts and other assets and interests. The court found that these requests went beyond the legitimate interests of the liquidators and varied the order to strike out the oppressive paragraphs.

When appointing more than one additional liquidator, the words 'joint and several' should be used if it is intended that each additional liquidator should be able to act separately.


111

LIQUIDATORS

Appointing a receiver as liquidator and assistance to liquidators in realising and protecting assets

Case Name:Elderslie Finance Corporation Limited v Newpage Pty Limited

Citation:[2007] FCA 61, Federal Court of Australia per Stone J


Issues:• Can a receiver of a company

be appointed its liquidator?• Will the court make freezing

and disclosure orders to help a liquidator secure the company's assets?

The court will allow a receiver to become liquidator of a company if there are good reasons to support an appointment and evidence of the receiver's independence. To help receivers and liquidators determine the validity of certain transactions, the court may make any order that is appropriate in the circumstances, including orders for disclosure and the freezing of assets.

The receiver of the defendant company applied to be appointed liquidator of the company. The company had been served with the originating process but had not entered an appearance in the proceeding. After evaluating the defendant company's fi nancial position, Justice Stone concluded that the company was insolvent.

Under the CA, a receiver of a company is deemed to be an offi cer of the company and, as such, needs the court's leave to be appointed a liquidator. As Justice Stone emphasised, a liquidator needs to be both independent and have the appearance of independence.

In this case, the receiver had no connection or relationship with the company or its directors before his appointment as receiver. The receiver had only acted in that role for a short time but had become familiar with the company's affairs and had conducted a number of investigations. There was no confl ict of interest. The court concluded that appointment of the receiver as liquidator was appropriate and justifi ed in the circumstances.

In this case, there was an allegation that a third party was paid money as part of an uncommercial transaction while the defendant company was insolvent. Although some proof had been provided, the third party was uncooperative, refused to provide information about the transaction and provided no assistance to the receiver. The approach adopted by the third party enhanced the diffi culties faced by the receiver regarding the determination of the transaction and whether it should be set aside.

Justice Stone concluded that the third party's unhelpful attitude and denial of the existence of the transaction justifi ed orders to freeze of the relevant bank account and disclosure by the third party of relevant information. The court emphasised that such orders were necessary to protect the court's processes from abuse. The orders were not solely made to preserve the assets of the applicant creditors.


112

Although a receiver is an offi cer of the company for the purposes of the CA, a court may nonetheless conclude that independence has been maintained and appoint that person as liquidator. Moreover, the court will make orders that assist a liquidator to determine and realise the assets of the company so long as the orders protect the processes of the court and are not solely made to provide security for the creditors.


113

LIQUIDATORS

Who pays the costs of a successful application to set aside examination summonses?

Case Name:In the matter of Mendarma Pty Ltd (in liquidation) (No. 2)



Issues:• Liquidator's liability to

pay costs of a successful application to have examination summonses issued by the liquidator set aside

• Whether such costs are payable by the company or the liquidator personally

• Whether, if payable by the liquidator, the liquidator is entitled to be indemnifi ed out of the company's assets

In this case, the court considered whether the costs of a successful application to set aside examination summonses should be paid by the liquidator or by the company. To the extent the costs are payable by the liquidator personally, the court considered the liquidator's right to be indemnifi ed out of the company's assets.

The liquidators appointed as part of a creditors' voluntary winding up of Mendarma Pty Ltd (the liquidators) applied for, and were issued, examination summonses against the applicants to the present application. The applicants sought and succeeded in having those summonses set aside.

The liquidators submitted that the applicants should only receive a proportion of their costs, as they were unsuccessful on many of the arguments raised. Justice White disagreed, ordering that costs should follow the event.

Justice White explained that there are two aspects to costs orders against a liquidator: the personal liability of the liquidator under the order and the liquidator's entitlement to be indemnifi ed against the liability out of the company's assets. The second question depends upon the propriety of the liquidator's conduct and whether the liquidator is acting in the company's interests in bringing the proceedings. In this case, there was no suggestion that the liquidators were not acting in the company's interests and the relevant question was whether the liquidators should be personally ordered to pay the costs of the successful applicants with the risk that the company's assets may not be suffi cient to satisfy their right of indemnity.

The law sets out the general guideline that, while costs are at the court's discretion, a liquidator who is joined to proceedings as a defendant or respondent, and who acts appropriately, should not be ordered to pay the successful plaintiff's or applicant's costs beyond the amount of assets available to the liquidator to do so. The applicants submitted that the liquidators had, in effect, commenced a proceeding by applying for the issue of examination summonses. Justice White disagreed and held that by that act they were simply seeking to investigate the company's affairs, and should therefore be treated as respondents to these proceedings. As costs should follow the event, the liquidators were liable to pay the applicants' costs and, as there was no suggestion that the liquidators acted improperly in having the examination summonses issued, Justice White did not consider that the liquidators ought to pay the applicants' costs without any limitation as to their personal liability.


114

Rule 42.3 of the Uniform Civil Procedure Rules 2005 (NSW) has the effect that an order for costs cannot be made against a person who is not a party to proceedings except in limited circumstances (which do not apply in this case). Justice White could not, therefore, order that the applicants' costs be paid out of the company's assets, as the company was not a party to the proceedings.

Justice White accordingly ordered that the liquidators were personally liable to pay the successful applicant's costs but that that personal liability was limited to the extent that there were company assets available to indemnify the liquidators for their liability under the order.

While this case does not mark a change in the law, it neatly summarises the authorities and legislation in relation to a liquidator's liability to pay an applicant's costs of successful proceedings. As a general rule, the liquidator is required to pay the applicant's costs in these circumstances and, if the company is not a party to the proceedings, the costs should be ordered to be paid by the liquidator personally, but only to the extent that the company's assets are suffi cient to ensure that the liquidator can be indemnifi ed for those costs out of the company's assets.


115

LIQUIDATORS

Court refuses application to set aside examination summonses

Case Name:Murray Roderick Godfrey as liquidator of Pobjie Agencies Pty Ltd (in liquidation) ACN 000 859 405



Issues: • Did liquidator have full

knowledge of material matters?

• Was proposed examination a dress rehearsal of cross-examination and of no benefi t to examiner?

• Did liquidator's affi davit contain material non-disclosures?

This case involves an allegation of improper purpose in relation to a successful, ex parte application for examination summonses. It explores the areas into which liquidators are entitled to investigate and considers practical examples of alleged non-disclosures by the liquidator. The case also illustrates how section 597B CA is applied where an applicant subject to a summons seeks a security for costs order.

Vero Insurance Ltd applied to the court to set aside summonses for examination and orders for document production issued on behalf of Murray Godfrey as liquidator of Pobjie Agencies Pty Ltd. The question of document production was resolved during argument. Vero submitted that the summonses should be set aside because (among others):

• It was an abuse of process because Mr Godfrey had full knowledge of all relevant matters.

• The proposed examination was a dress rehearsal of cross-examination for future litigation.

• The proposed examination was of no benefi t to Pobjie as Mr Godfrey knew, or should have known, that Pobjie had no reasonable cause of action against Vero.

• Mr Godfrey's supporting affi davit was misleading and contained material non-disclosures.

The court held:

• It is diffi cult to know when liquidators have 'knowledge' of all relevant matters. A liquidator may have reason to believe information given by a proposed examinee, but the liquidator is entitled to investigate whether the examinee would give this same information on oath.

• Liquidators may apply for examination summonses notwithstanding that proceedings against examinees have begun or are contemplated. Whether the examination is improper depends upon what is stated, or should be inferred, as the liquidator's purpose in conducting the examination.

• On an application for examination summonses, the court need not decide whether the applicant has a cause of action against the examinees. Determining if a cause of action exists is a proper purpose of an examination, which should not be pre-empted by examinees adducing evidence to demonstrate that they are not liable to the examiner.

• Although Mr Godfrey did not disclose the extent to which Vero voluntarily provided information prior to Mr Godfrey's application for the summonses, this non-disclosure was not suffi cient to set the summonses aside.


116

The applicants sought alternative orders that Mr Godfrey provide security for the costs they would incur and which they may be entitled to under s597B CA. Justice White decided there was no realistic prospect of a s597B costs order being made because Mr Godfrey had obtained the summonses with reasonable cause.

Liquidators are entitled to investigate if information provided by proposed examinees would be given on oath and whether a cause of action exists against an examinee, or persons to whom they are connected. A liquidator's express or inferred purpose in conducting an examination will determine whether or not the proposed examination is improper. Non-disclosures by a liquidator must be material and intentional to affect the validity of an examination summons. Security for costs orders under s597B CA will not be made if a summons was obtained with reasonable cause (reasonable cause being determined on the material before the court).


117

LIQUIDATORS

Benefi t of court orders vest in the offi ce of liquidator, not particular liquidators themselves

Case Name:Gazal Apparel Pty Ltd v Davies & Ors

Citation:[2007] SASC 91, Supreme Court of South Australia per Doyle CJ and Duggan and David JJ


Issues:• Whether an application to

the court by the liquidators of a company was made within time

• Whether an order obtained by the original liquidators of a company could be relied upon by subsequent liquidators of that company

This appeal raised the issue of whether an application to the court made by the liquidators of a company was made within time. The liquidators relied on an order extending time that was obtained by the previous liquidators and was expressed as an order in favour of 'the plaintiffs' rather than being in favour of the liquidators, or the liquidators from time to time, of the company. The court rejected a contention that only the former liquidators and not the current liquidators could rely on the order.

The original liquidators of Harris Scarfe Limited (receivers and managers appointed) (in liquidation) issued proceedings against Gazal Apparel Pty Ltd, claiming that payments made by Gazal to Harris Scarfe before the relation-back day were insolvent payments for the purposes of section 588FC CA or were unfair preferences for the purposes of s588FA CA, and so were voidable transactions.

Those liquidators were replaced and the subsequently appointed liquidators sought to rely on an order obtained in 2004 by the original liquidators, which extended the time for bringing proceedings by 'the plaintiffs' against Gazal. The issue before the court was whether the order operated to extend the period for the bringing of proceedings by the original liquidators only, or whether it extended the time for the bringing of such proceedings by subsequently appointed liquidators.

The court held that, despite its wording, the original order extending the period for bringing proceedings applied to the 'liquidator of Harris Scarfe'. The court noted that there was no reason to read s588FF CA in such a way that only the same person who as a liquidator obtained an order fi xing a longer period for bringing proceedings could rely on that order. The terms of s588FF do not reveal that intention on the part of the drafters of the CA. A reference to 'the liquidator' in s588FF(3)(b) CA is a reference to the person who holds the offi ce of liquidator from time to time. Accordingly, as the application by the current liquidators was made by 'the liquidators of Harris Scarfe', the order for a time extension that was obtained by the original liquidators could equally be relied upon by the current liquidators. The appeal was unanimously dismissed.

A reference to 'the liquidator' in s588FF(3)(b) CA is a reference to the person or persons that hold the offi ce of liquidator from time to time. An order obtained by a liquidator of a company is not personal to that particular liquidator and may be relied upon by any person occupying that offi ce from time to time.


118

LIQUIDATORS

Grounds to discharge examination summonses

Case Name:Onefone Australia Pty Ltd v One.Tel Ltd



Issues:• Discharge of examination

summonses• Examinations pending the

outcome in a separate but related case

• Prospects of success of action brought by special purpose liquidator

In this case, fi ve people issued with an examination summons by the special purpose liquidator of the defendants, One.Tel Ltd, sought to have the summons discharged on the basis that they were oppressive, unfair and an abuse of process.

A special purpose liquidator was appointed to One.Tel Limited (the company) to investigate the cancellation of a renounceable rights issue by the company that was underwritten by Publishing and Broadcasting Limited (PBL) and News Limited and whether any rights of action existed in relation to the cancellation of the issue.

The special purpose liquidator issued summonses under Part 5.9 CA to three offi cers of News Limited and two offi cers of PBL (the applicants) requiring them to attend for examination by the special purpose liquidator. The purpose of the examinations was to investigate the viability of litigation that the special purpose liquidator might initiate in respect of the company's cancellation of the renounceable rights issue.

The applicants applied to the court for orders discharging the summonses on the grounds that they were oppressive, unfair and an abuse of process. In doing so, the applicants relied on the following grounds:

• Two of the applicants had already been questioned in formal examination settings under section 19 of the Australian Securities and Investment Commission Act 2001 (Cth). These applicants submitted that the special purpose liquidator must have obtained suffi cient information from those examinations to form a view.

• Section 588FF(1) CA allows the court to make orders on the application of a company's liquidator if it is satisfi ed that a transaction is voidable because of the operation of s588FE. The defi nition of voidable includes 'insolvent transaction'. The applicants contended that if a company is already insolvent when the transaction is entered into, the transaction cannot be an insolvent transaction under s588FC(b). Furthermore, the cancellation of the renounceable rights issue was not a transaction, but a unilateral determination or decision.

• The applicants submitted that any examination should await the outcome in the matter of ASIC v Rich. The applicants argued that the judgment in that case may provide information to the special purpose liquidator that made it unnecessary to conduct the examinations.

Alternatively, if the examination summonses were not discharged, the applicants sought an order that the matters to be examined would be restricted to matters concerning the cancellation of the renounceable rights issue.


119

Justice Barrett found that the applicants had not proved their claims and dismissed the applications to discharge the summonses. It had not been established that the summonses were oppressive, unfair and an abuse of process. His Honour dismissed the applications on the following grounds:

• There was evidence to suggest that not all of the relevant knowledge of the potential examinees had been learnt by the special purpose liquidator.

• The special purpose liquidator was entitled to consider a range of potential causes of action. In this case, none of the potential causes of action considered by the special purpose liquidator were untenable. The court found that it would be unproductive to begin a detailed analysis of whether a possible cause of action contemplated by the special purpose liquidator was sustainable, as not all of the evidence relating to this possible cause of action was before the court.

• The court held that, if the special purpose liquidator delayed examinations until the decision in ASIC v Rich, this might result in some potential causes of action not being available to the special purpose liquidator to pursue because of the expiration of limitation periods.

This case serves as a reminder that examination summonses will not be dismissed if the liquidator has a legitimate basis to undertake the examinations.


120

LIQUIDATORS

Appropriateness of making orders under section 477(6) CA

Case Name:ASIC v Read

Citation:[2007] FCA 709, Federal Court of Australia, Western Australia District Registry, per French J


Issues:• Whether ASIC may permit

liquidators access to books obtained from privately appointed receivers

• Section 477(6) CA• Appropriateness of a regime

of judicial supervision over potential disputes

ASIC sought an order permitting the liquidators of a company to inspect and obtain copies of the company's books, which had been obtained previously from privately appointed receivers of various entities of the company. Justice French considered ASIC's application to be unnecessary and refused to make the order.

In 2006, ASIC issued notices under section 33 of the Australian Securities & Investments Commission Act 2001 (Cth) to the privately appointed receivers and managers of Westpoint Corporation Pty Ltd (the company) and associated companies to produce to ASIC certain documents in their possession, custody or control (the relevant books). On 14 December 2006, the joint and several liquidators of the company (the liquidators) wrote to ASIC seeking access to the relevant books. ASIC took the preliminary view that it was appropriate to grant access to the relevant books to the liquidators.

On 19 January 2007, ASIC invited comments from the parties it identifi ed as potentially interested in, or affected by, ASIC's compliance with the liquidators’ request. ASIC received several objections to the proposed grant of access but formed the view that these objections were not valid. On 27 April 2007, ASIC fi led an application under s477(6) CA seeking an order that the liquidators be permitted to access the relevant books. None of the objectors sought to be heard on the application.

Justice French refused to make the order sought by ASIC, on the basis that:

• if ASIC considered that the liquidators were entitled to the documents, then it should provide access without further delay;

• if there were third-party concerns, those matters could be taken up with the liquidators or the courts; and

• it is not for the court to set up a regime for the resolution of disputes that may arise between liquidators and third parties.

Justice French noted that making the order sought by ASIC might encourage parties to turn to the courts for assistance without fi rst making adequate attempts to resolve disputes themselves.

The court will only make an order under s477(6) where it is satisfi ed that the order is within its power and appropriate. In the absence of a specifi c controversy, it is not appropriate for the court to put in place a regime for judicial supervision against the possibility of a dispute.


121

LIQUIDATORS

Principles to be applied on appeal of a liquidator’s decision to reject proof of debt

Case Name:Tirrabella Pty Ltd v Struthers



Issues:• Section 1321 CA • Whether the liquidator’s

rejection of proof of debt should be reversed

The appellant sought to set aside the liquidator's decision to reject the proof of debt lodged by the appellant. The court restated the approach to be followed in cases brought under section 1321 CA where the decision under challenge is a decision regarding the admission of a proof of debt.

Tirrabella Pty Ltd lodged a proof of debt with Bolting In Pty Limited’s liquidator in which it claimed to be a creditor of Bolting. Tirrabella claimed that it became entitled to receive money under a deed with another company, Centrom Projects Pty Ltd and that, by an arrangement with Bolting, Tirrabella directed Centrom to pay the monies it was entitled to under the deed to Bolting. As a result, Bolting incurred a liability to repay the monies to Tirrabella. The liquidator rejected the proof of debt and Tirrabella brought an application under s1321 CA.

Under section 1321 CA, a person aggrieved by an act or decision of a liquidator may appeal to the court and the court may confi rm, reverse or modify the liquidator’s act or decision.

The form and content of Tirrabella's proof of debt indicated that the sum was the balance of principal outstanding for a 'loan advance'. Accordingly, it was necessary for Tirrabella to prove that Bolting owed the sum to it for a 'loan advance'.

The court confi rmed the well-established principles that, where the decision under challenge is a decision with respect to the admission of a proof of debt:

• the party claiming to be aggrieved by the liquidator's decision has the onus of proving that the debt should be properly admitted to proof; and

• the appeal is by way of hearing de novo – the court hears the matter from the beginning and is not confi ned to the evidence or materials that were originally presented to the liquidator.

Based on the evidence, in particular the accounting records of Tirrabella and Bolting, the court found that Bolting did not become indebted to Tirrabella in respect of a 'loan advance'. Rather, the court held that the funds accruing to Bolting constituted partnership property and that the debts incurred by Bolting constituted partnership debts.

Accordingly, the court found that Tirrabella failed to discharge the onus of proving the existence of the debt claimed in the proof of debt. The court confi rmed the liquidator's decision to disallow Tirrabella’s claim for the loan advance and to reject the proof of debt.


122

The case demonstrates that the court will have close regard to the form and content of the proof of debt in determining if the appellant has discharged the onus of proving the existence of the debt. Further, the court will have close regard to the evidence presented to it and it is not confi ned to the evidence originally presented to the liquidator.


123

LIQUIDATORS

The identity of the liquidator: it's the offi ce, not the individual

Case Name:Re Harris Scarfe (in liquidation) & Harris Scarfe Wholesale Pty Ltd (in liquidation) (No. 2)

Citation:[2007] SASC 186, Supreme Court of South Australia, Civil Division, per Debelle J


Issues:• The meaning of the term

'liquidator' as referred to in section 588FF CA

• Substitution of liquidators in current litigation

The substitution of liquidators appointed to the relevant companies gave rise to a question of whether the new liquidators were entitled to rely upon an order obtained by the original liquidators under section 588FF(3) CA. Although confi rming that such a substitution is not provided for by rule 31 of the Supreme Court Rules 1987 (Cth) (the SCR), Justice Debelle relied upon rule 28 of the SCR to allow it.

In March 2004, the original liquidators applied to the court for an order extending by 18 months the limitation period for applications regarding voidable transactions under s588FF(3) CA (the extension order). The court granted the order with respect to two particular sets of creditors and, as a result, the original liquidators had until October 2005 to apply for a further order for repayment of monies paid to those creditors during the relation-back period under s588FF(1) CA. No application was made by the original liquidators.

In January 2005, new liquidators were appointed and they sought to rely on the extension order. However, some of the creditors sought to set aside the extension order on the basis that the current liquidators were not entitled to rely upon it.

The new liquidators subsequently applied to be substituted or joined as parties to the original liquidators' prior applications. If the new liquidators could not be substituted or joined in the proceedings, then they would not be able to pursue those creditors at all because new proceedings could not be commenced as the limitation period had expired.

In addressing this issue, the court had to consider the following:

• whether an order for a joinder or substitution should be made;• if so, by what process should such order be made; and• from what date the order should operate.

Justice Debelle concluded that the term 'the liquidator', as referred to in s588FF(3) CA, describes the offi ce rather than a particular natural person. At [9], Justice Debelle referred to Chief Justice Doyle's fi nding in a related appeal that 'a reference to the "liquidator" in s588FF(3) is a reference to the person who holds the offi ce of liquidator from time to time.' Accordingly, the new liquidators were entitled to the benefi t of any of the orders made during the term of the original liquidators and, as such, the new liquidators should be substituted as parties to the extension order.


124

On the second issue, Justice Debelle held that an order for the joinder of the new liquidators would be inappropriate. As rule 31 SCR did not provide for substitution in the circumstances, Justice Debelle relied upon a principle relating to rule 28 SCR to avoid defeat of any proceedings because of the non-joinder of a relevant party. Justice Debelle also referred to the court's authority to dispense with the SCR under rule 3 SCR.

In considering the third point mentioned above, Justice Debelle at [15] stated that the order for substitution in the proceedings should retrospectively take effect from the date that the original liquidators were replaced.

In this decision, Justice Debelle confi rmed that the term 'liquidator' as referred to in s588FF CA incorporates any natural person who holds the position of liquidator of the company from time to time. This conclusion is of critical importance when liquidators are replaced and the new liquidators wish to be substituted as parties to existing proceedings initiated by the previous liquidators. In this case, the outcome meant that the liquidators were able to make applications for voidable transactions in reliance upon an extension of time obtained by the original liquidators.


125

LIQUIDATORS

When should the court grant leave to appoint a liquidator as administrator of a company?

Case Name:ASIC v Green Pacifi c Energy Limited ACN 004 119 304

Citation:[2007] FCA 1015, Federal Court of Australia per Emmett J


Issues:• Granting leave to a

liquidator being appointed administrator of the same company (section 436B(2) CA)

• Convening of meeting of creditors (s436E CA)

This case considers the issues that the court will take into account when deciding whether to grant leave for a liquidator to be appointed administrator of the same company. An additional question in this case concerned the operation of the CA requiring meetings of creditors to be convened.

Following an application by ASIC, Green Pacifi c Energy Limited and Green Pacifi c Energy Capital Pty Limited (the Green Companies) were both wound up on 20 September 2006 and Mr Hall was appointed by the court to be liquidator. Following his investigation into the affairs of the Green Companies, Mr Hall decided that it would be in the creditors' interests for a DOCA to be approved.

Mr Hall made an application to the court in respect of two main questions:

• that the court grant leave for him to be appointed, together with his partner of the same accountancy fi rm, as administrators of the Green Companies; and

• ancillary orders regarding meetings of creditors to be convened.

In deciding whether to grant the orders sought by Mr Hall, Justice Emmett stated that it was necessary to consider the DOCA proposal that Mr Hall wished to put to creditors. While Justice Emmett noted that whether the DOCA was approved was a matter for the creditors of the Green Companies, he noted that the proposal contemplated that all of the Green Companies' debts would be extinguished in exchange for a payment equal to approximately 83 cents in the dollar and that the related party liabilities would be extinguished entirely (a separate company assuming the liability for all of the related party liabilities).

Justice Emmett also considered a concern raised by Mr Hall in relation to ASIC's interest in the application. Before the application, ASIC notifi ed Mr Hall of a concern it had regarding a related party creditor, Richland (Australia) Pty Limited, which had unrelated creditors that could be prejudiced by the extinguishment of the debt owing to Richland by the Green Companies. Justice Emmett noted that ASIC could, if it wished, intervene in the administration of the Green Companies and, if need be, notify creditors of Richland, or require Richland to notify its creditors, of the action that Richland proposed to take in relation to the DOCA. At the time of the application, Justice Emmett stated that there was little that the court could do about it in the present circumstances but it was a matter over which the court could exercise some supervision in the future, given the various applications that would be required to be made to the court.


126

In deciding whether to grant leave to Mr Hall to appoint himself and his partner as administrators under section 436B(2) CA, Justice Emmett noted that Mr Hall had deposed to his belief that the Green Companies, contrary to the views of the directors, were insolvent. He was satisfi ed that Mr Hall had no interest in the outcome of the proceedings and therefore granted leave for him to appoint himself and his partner as administrators.

Justice Emmett then considered the question of the convening of creditors' meetings. Given the small number of creditors of the Green Companies and the signifi cant amount of communication that had already occurred between them and Mr Hall, Justice Emmett agreed that there was no need to hold the meeting of creditors provided for in s436E CA. Mr Hall also sought an order in relation to the second meeting of creditors required under s439A(1) CA. This involved the exercise of the so-called 'magic provision' under s447A CA. Although Justice Emmett was not persuaded that the variation sought by Mr Hall was essential, he acknowledged that it would avoid any possible diffi culty and therefore made an order that the administrators may convene the second meeting of creditors under s439A during the convening period, so long as the period of notice contemplated by s439A(3) was given.

For the purposes of s436B(2) CA, it is necessary for the court to consider and be satisfi ed that there is some benefi t in granting leave to a liquidator to appoint himself as administrator and that there are no circumstances that would make such an appointment inappropriate. Although the court acknowledged in this case that it is ultimately a matter for creditors to approve a proposal for a DOCA, the court must at least consider the terms of the DOCA proposal.


127

LIQUIDATORS

Over the edge: breach of liquidator's duties

Case Name:ASIC v Robert John Edge

Citation:[2007] VSC 170, Supreme Court of Victoria per Dodds-Streeton J


Issues:• Whether a liquidator

breached his fi duciary duties and contravened the CA

• Whether the court can grant remedies sought by ASIC

The defendant had been the administrator and liquidator of various companies. ASIC successfully claimed he had been in gross contravention both of duties that he owed to those companies and of the CA. He had destroyed documents, failed to lodge documents with ASIC, delegated his duties to an unqualifi ed, unsupervised and incompetent associate and had regularly drawn remuneration without valid approval.

ASIC brought proceedings against Robert Edge, claiming he had breached approximately 30 different provisions of the CA and the Corporations Regulations in the course of various liquidations and administrations. ASIC claimed that Mr Edge had:

• destroyed documents knowing that ASIC intended to investigate his conduct;• failed to lodge approximately 130 forms, reports and documents;• failed to hold creditors' meetings and obtain approval for his remuneration;• failed to execute DOCAs and fi nalise liquidations of companies; and• drawn funds for his remuneration without creditor approval.

The court listed Mr Edge's contraventions of the CA and breaches of his duties as an insolvency practitioner. It was held he had breached the CA and his obligations in relation to each appointment in question as administrator or liquidator.

The court considered section 536 CA and whether it could order a defendant to compensate the companies for monies taken from their accounts without approval. The court concluded that it had a broad power to order compensation and prohibit an insolvency practitioner from practising.

The court considered whether Mr Edge's standard practices in relation to approval of his remuneration were valid. Mr Edge claimed he sought prospective approval of fees on the basis of hourly rates without any ceiling and also sought retrospective approval for remuneration. However, he took payment of his fees while performing the work, relying on the prospective approval. Applying Re Stockford and Re Aliance, and noting the absence of any cap, the court held that the prospective resolutions were not valid and that Mr Edge had not complied with the Insolvency Practitioners Association of Australia guidelines.

The court held that it was not satisfi ed that Mr Edge had drawn the remuneration in good faith and in the belief that it had been validly fi xed. Mr Edge was ordered to pay sums drawn without approval into court and apply to a master for approval of remuneration, with ASIC as a contravener in any such application. The court also prohibited Mr Edge from practising for 10 years, noting the extensive breaches of his fi duciary duties and the CA.


128

This case illustrates some extraordinary practices of a particular administrator/liquidator leading to his being prohibited from practising for a substantial period. It also confi rms the strict requirements regarding information that a practitioner must provide to creditors when seeking approval of his or her remuneration.


129

LIQUIDATORS

Liquidator generally not personally obliged to pay costs

Case Name:Jenkins v Jonkay Pty Ltd

Citation:[2007] FCA 858 Federal Court of Australia, Victoria District Registry, per Finkelstein J


Issues:• Whether liquidator is

personally liable for costs under section 545 CA

The plaintiff in this case sought to recover the costs of his action from the liquidator. The court held that the liquidator was not personally liable for the costs of the action despite his delay.

The plaintiff, Craig Jenkins, entered into a contract with Jonkay Pty Ltd to purchase a parcel of land at Noosaville for $780,000. The plaintiff paid a deposit of $39,000 to Jonkay's estate agent on 20 September 2006, with the balance to be paid at settlement. However, as the mortgagee was in possession at the time of contract, and had not assented to the sale, they were not bound by the contract, and after a liquidator was appointed to Jonkay on 10 October 2006, the mortgagee chose to put the land up for sale rather than adopt the contract.

The plaintiff's solicitor wrote to both the agent and Jonkay's solicitors, advising that the contract was terminated and requesting a refund of the deposit. The agent sought instructions from the liquidator, who said he had no role to play in determining the completion of the contract, as the mortgagee had entered into possession. The liquidator explained that he needed to seek legal advice before giving instructions about the deposit but, as he was not funded for this advice, he could not do so.

The court found that, although the liquidator's concerns about the validity of the sale and the mortgagee's entitlements were incorrect, he was not acting unreasonably, recklessly or even negligently, as he was in a diffi cult position and unable to afford legal advice. Therefore liability for the costs was not established as required by section 545 CA.

If a liquidator delays in his or her decision on an issue because of uncertainty about the ramifi cations of the decision, this is not necessarily a wrong under the CA, and the liquidator is therefore not personally liable for costs.


130

LIQUIDATORS

Substantive rights and fi nal relief in applications under section 511 CA

Case Name:Meadow Springs Fairway Resort Ltd (in liquidation) (ACN 084 358 592) v Balanced Securities Ltd (ACN 083 514 685)

Citation:[2007] FCA 1443, Federal Court of Australia per French J


Issues:• Sections 479(3) and

511 CA• Procedural directions in

a liquidator's application under s511 CA

• Discretion of court to determine substantive rights and award fi nal relief

The liquidator brought an application under section 511 CA to determine the entitlement of various creditors to settlement proceeds. The court held that it is a matter of discretion as to whether it should consider applications under s511 CA to determine substantive rights and award fi nal relief to competing creditors.

Meadow Springs Fairway Resort Pty Ltd was placed in voluntary administration, and then liquidation, when it was unable to sell any apartments in a resort facility that it had developed.

A dispute arose between the creditors of Meadow Springs about their entitlement to settlement proceeds. The liquidator applied under section 511 CA to determine questions giving rise to the dispute and to determine the parties' entitlements. The liquidator considered that it was in the interests of the unsecured creditors to resolve the issues between the parties as expeditiously as possible.

Section 511 CA provides that:

• a liquidator, or any contributory or creditor, may apply to the court to determine any question arising out of the winding up of a company, or to exercise all or any of the powers that the court might exercise if the company were being wound up by the court; and

• the court, if satisfi ed that the determination of the question or the exercise of power will be just and benefi cial, may accede to such an application on such terms and conditions as it thinks fi t, or it may make another order on the application as it thinks just.

The court held that, in certain cases, it is appropriate in an application under s511 CA for the court to join parties with competing interests as defendants to the proceedings and to allow them to fi le cross-claims for relief. The effect of this is that the court's judgment is fi nal and conclusive as to the rights and duties of all the parties involved.

The court stated that this course may be appropriate where the evidence needed to determine the questions and claims is mainly documentary, and the evidence can be heard and determined expeditiously. Otherwise, it is open to the interested parties to commence their own substantive proceedings.

The court made directions for the trial of the application to be on agreed documents and facts as far as possible, with limited oral evidence.


131

This case demonstrates that the court will consider the need for a liquidator's application to be dealt with completely and expeditiously in making procedural directions for the hearing of an application under s511 CA. The court also confi rmed that, as a matter of discretion, it can determine substantive rights and award fi nal relief in applications under s511 CA.


132

LIQUIDATORS

Liquidator’s power to carry on a business and sell wine on behalf of former investors

Case Name:Crouch re Heritage Fine Wines Pty Ltd



Issues:• Sections 477(1) and

493 CA • Limitations on liquidator’s

power to carry on business

A liquidator wanted to increase a company’s revenue by selling wine it had previously stored. The court confi rmed that, if a liquidator carries on the company’s business post-winding up, it cannot enter into a new fi eld of activity, even if this will increase the company’s value.

Heritage Fines Wines Pty Ltd (the company) had a business where investors bought wine from it that could then be stored with the company. It also offered a brokerage service to enable investors to sell the wine in storage.

The company passed into liquidation and was then subject to voluntary winding-up.

In winding up the company, the liquidator delivered some of the stored wine to investors, and sold the wine storage operations to Wine Investment Services Pty Ltd (WIS). Following a number of requests from former investors, the liquidator sought directions from the court on whether the company could offer its services to sell wine now held by former investors or WIS.

Justice Barrett held that, in a voluntary winding up, a company is subject to two statutory limitations. First, under section 493 CA, the company must cease to carry on its business from the time the resolution for winding up is passed, except to the extent that the liquidator considers continuation of the business is required for the 'benefi cial disposal or winding up of that business'. Second, the liquidator, through s506(1)(b) CA and s477(1)(a) CA, has the limited power to carry on business to the extent necessary for its benefi cial disposal and winding up.

The ability to carry on the business is 'confi ned to the business as it existed when the resolution for winding up was passed or is taken to have been passed'. In this case, while the company had previously sold wine on investors’ behalf, this was only for wine the company stored. Justice Barrett held that the company would be entering into a new fi eld of activity because the wine had passed out of its possession. As a result, the liquidator did not have the power to undertake the proposed course of action.

Justice Barrett further held that, while a liquidator was empowered 'to do all such other things as are necessary for winding up of the affairs of the company and distributing its property' under s477(2)(m) CA, this course of action was not necessary because the winding up of the affairs and distribution of property would not be assisted or facilitated if the company provided a sales service.


133

A liquidator is not permitted to carry out an activity merely because it will increase creditors’ returns. A liquidator’s ability to carry on the business is limited to the business of the company at the time the winding-up resolution is passed.


134

LIQUIDATORS

When should a provisional liquidator be appointed?

Case Name:Emmacourt Pty Limited v Jewels of Australia Pty Limited

Citation:[2007] FCA 1483, Federal Court of Australia per Tamberlin J


Issues: • Section 472(2) CA• Appointment of a

provisional liquidator to a company – balance of convenience

At issue in this case was whether a provisional liquidator should be appointed to a company before the hearing of the winding-up application, which had been fi led but not determined.

Mr Talbot, the sole director and shareholder of Emmacourt Pty Limited, claimed that the affairs of the second respondent, PNF Systems Pty Limited, in which Emmacourt had a 25 per cent interest and of which he was one of the directors, had been conducted in such a way by the other directors and shareholders as to justify the appointment of a provisional liquidator to PNF Systems under section 472(2) CA. This section gives the court the power to appoint a provisional liquidator at any time after the fi ling of a winding-up application and before the making of a winding-up order.

Justice Tamberlin held that a court will not generally appoint a provisional liquidator unless there is a reasonable prospect that a winding-up order will eventually be made, as the appointment of a provisional liquidator can harm a company's reputation. Furthermore, an applicant for the appointment of a provisional liquidator must show some good reason for intervention before the fi nal hearing on the winding-up application to demonstrate that the liquidator's appointment is needed in the public interest, to preserve the status quo or to protect the company's assets and affairs.

Justice Tamberlin expressed the view that a court must take into account the following two factors:

• the degree of urgency established by the applicant; and • whether the company's assets need to be protected from dissipation or seizure

in the interim period.

Further, Justice Tamberlin said that, if the court has no confi dence that the affairs of a company are being carried out properly and for the benefi t of the shareholders, the appointment of a provisional liquidator will be appropriate.

Emmacourt alleged that a provisional liquidator should be appointed on the basis that overpayments had been made to another corporation by PNF Systems, contrary to interlocutory orders that were made in relation to PNF Systems and another PNF company and which were designed to preserve the status quo. Emmacourt argued that this breach was carried out knowingly and in circumstances where the making of such excess payments showed, or at least led to an inference, that the company's assets were at risk of dissipation or loss, thereby justifying the appointment of a provisional liquidator.


135

Justice Tamberlin held that this was not a suffi cient basis for the appointment of a provisional liquidator, having regard to the fact that the overpayments had been repaid and PNF Systems had given undertakings that it would not continue to jeopardise its assets by continuing to make such payments in the future. In addition, Justice Tamberlin considered that the amount of the overpayments was relatively small and not likely to put the company's assets in any jeopardy. On balance, the advantages of appointing a provisional liquidator in these circumstances did not outweigh the possible disadvantages or harm that it would cause to PNF Systems' business or reputation.

This case is a reminder that, in determining whether to appoint a provisional liquidator to a company before the hearing of a winding-up application, a court will weigh the degree to which the company's assets or affairs are in jeopardy of dissipation or seizure against the degree to which the company's business would suffer serious or irreparable harm.


136

LIQUIDATORS

Does a liquidator or trustee in bankruptcy owe duty of care to third parties?

Case Name:Mills & Ors v Sheahan

Citation:[2007] SAC 365, Supreme Court of South Australia per Debelle, Sulan and Layton JJ


Issues: • Duty of care owed by

liquidator and trustee in bankruptcy to third parties

• Liquidator liability for pure economic loss

• Confl icting duties to creditors, third parties and shareholders

This case examines the question of whether a duty of care is owed by liquidators and trustees in bankruptcy to third parties other than shareholders or creditors and concerns an application for leave relating to an order to strike out the plaintiffs' statement of claim.

The Jillian Cooper Trust (the trust) carried out farming operations. Rothmore Farms Pty Ltd (RFPL) was trustee of the trust. There were provisions within the trust deed that allowed the trustee to be indemnifi ed from the trust assets for liabilities procured on behalf of the trust. RFPL borrowed money from banks but defaulted on its loan and transferred assets of the trust to Belgravia Pty Ltd on 10 February 1993, which were subject to a lien in favour of RFPL. Belgravia then replaced RFPL as trustee of the trust.

In September 1998, RFPL was placed into provisional liquidation and Mr Sheahan became the provisional liquidator. In March 1999, orders were made for the winding up of RFPL and Mr Sheahan was appointed liquidator. In June 1999, the Federal Court ruled that RFPL was permitted to be indemnifi ed from assets held under the trust for the money it owed to the banks. The Cooper family acted as guarantors for the loans obtained by RFPL and, after RFPL defaulted, the banks enforced the guarantees obtaining sequestration orders against three members of the Cooper family. Mr Sheahan was appointed trustee in bankruptcy and, in that capacity, obtained orders to partition and sell the land owned by members of the Cooper family and Rothmore Pty Ltd. In September 1999, Mr Sheahan sold the trust's plant and equipment for considerably less than the market value. The plaintiffs alleged that Mr Sheahan owed them a duty of care in tort to take reasonable care to sell the land and equipment for their proper value and sought damages in negligence and economic loss.

The plaintiffs alleged Mr Sheahan was aware that the amount gained from the sale of assets would affect the amount of indemnity, as well as the equitable compensation sought against the plaintiffs. It was conceded by Mr Sheahan that, if the assets were sold at less than their value, the risk of loss or damage was foreseeable. However, Mr Sheahan applied for the plaintiffs' statement of claim to be struck out on the grounds that it 'disclosed no reasonable cause of action' and Justice Besanko made an order striking it out. The plaintiffs applied to the Court of Appeal for leave to appeal from the decision of Justice Besanko at fi rst instance.


137

In the Court of Appeal, Justice Debelle confi rmed that a liquidator is subject to a common law and statutory duty to exercise reasonable care and diligence (section 180(1) CA) and that they must act in good faith. The question posed in this case was whether this duty was owed to third parties other than to creditors and shareholders. The appellant plaintiffs claimed that they were owed a duty of care by Mr Sheahan in his capacity as trustee in bankruptcy in relation to the sale of land and plant equipment. Justice Debelle examined the general duties of a trustee and made the point that a trustee in bankruptcy owes the same duty of care as a trustee under general law. Further, the trustee is bound to perform their duties in a commercially sensible manner.

To shed light on whether the plaintiffs, as a third party liable to the liquidator or trustee to make up any shortfall, were owed a duty of care, Justice Debelle examined the principles set out in Perre v Apand Pty Ltd (1998) pertaining to pure economic loss. These included:

• the fact that Mr Sheahan had knowledge of the risk and its magnitude when selling the assets of the trust;

• the vulnerability of the plaintiffs – in this case, the plaintiffs were vulnerable as they had no control over whether Mr Sheahan obtained the best price for the assets; and

• that there was no prospect of indeterminacy of liability on these facts.

Justice Debelle found that Mr Sheahan did owe the plaintiffs a duty of care. Mr Sheahan had a duty to care towards RFPL (and subsequently Belgravia) to take reasonable care to sell assets for the best possible market price, as 'Sheahan knew that the proceeds of sale of the land and of the plant equipment would affect the amount of the indemnity and would affect the amount of equitable compensation or damages recovered from the plaintiff' – that is, he had total control over the assets and was in a position to make a prudent business decision in order to obtain the best price.

The Court of Appeal allowed leave to appeal and dismissed Mr Sheahan's application to strike out the statement of claim.

This case reinforces the fact that reasonable care must be taken by insolvency practitioners to ensure that assets are sold for the best possible market price, particularly in light of the duty of care that is owed to relevant third parties. Failure to do so could lead to an action by third parties, here the guarantors, in negligence and damages against the insolvency practitioner.


138

LIQUIDATORS

Application by special purpose liquidator for production of documents by third party

Case Name:Onefone Australia Pty Ltd v One.Tel Ltd



Issues: • Production of documents

to assist in the liquidator's functions

• Court-appointed liquidator engaging in ongoing court proceedings

This case involved an application by a special purpose liquidator for an order compelling a third party to produce documents. The issue for the court was whether any such order would properly be regarded as made in proceedings in which the liquidator was appointed or as adjunct to Part 5.9 examinations undertaken by the liquidator.

In this case, a special purpose liquidator (the liquidator) sought a court order under section 68 of the Civil Procedure Act 2005 (NSW) (the CP Act) that ASIC produce certain documents.

ASIC was concerned about producing the documents sought because s127(1) of the Australian Securities and Investment Commission Act 2001 (Cth) (the ASIC Act) requires ASIC to take all reasonable measures to protect from unauthorised use or disclosure information:

• given to it in confi dence or in connection with the performance of its functions or the exercise of its powers under the corporations legislation (other than the excluded provisions); or

• that is protected information.

'Protected information' is defi ned in s127B of the ASIC Act as information that is not lawfully in the public domain that is disclosed or obtained for the purposes of certain of ASIC's statutory functions.

ASIC took the view that, since provision of the requested documents to the liquidator would not be within the scope of any of its functions, it could not divulge the information in the documents sought by the liquidator, unless compelled to do so by a court order.

The liquidator sought to rely on s68 of the CP Act to obtain the relevant documents. Section 68 of the CP Act states that:

subject to the rules of the court, the court may, by subpoena or otherwise, order any person to do either or both of the following:

• to attend court to be examined as a witness, or

• to produce any document or thing to the court.

The liquidator contended that s68 of the CP Act enabled the court to make the order for the production of the documents that he sought, either because it would assist him in the performance of his functions or because it would assist him in conducting certain examinations under Part 5.9 CA.


139

The court held that the purpose of s68 of the CP Act is to facilitate proceedings in court, and a court-ordered winding up does not amount to an ongoing court proceeding such as to justify the application of s68 in the aid of fact-fi nding by a liquidator. Although the liquidator was appointed by the court under a court-ordered winding up, once in offi ce the liquidator embarks upon a statutory process of administration. Liquidators are not, by virtue of their appointment, a party to continuing court proceedings or able to resort to all the processes made available to parties in litigation.

The court also held that, while it may make an order under s68 of the CP Act to require a party to produce documents to a liquidator where those documents relate to the examinations that a liquidator is required to conduct under Part 5.9 CA, the court can only do so where the particular examinations will be assisted or facilitated by the production of the particular documents.

As the liquidator could not show that there was a basis upon which the court could order the disclosure of documents he sought under s68 of the CPA, the application was dismissed.

This case establishes that a special purpose liquidator, even though appointed by a court in relation to a court-ordered winding up, is not engaged in ongoing court proceedings. Accordingly, a court cannot order a party to produce documents to the liquidator under s68 of the CP Act. Although a court may order a party to produce documents to a liquidator where those documents relate to the liquidator's examination powers under Part 5.9 CA, the liquidator must fi rst be able to show that the particular examinations will be assisted or facilitated by the production of the particular documents.


140

PROCEDURE

Public examination power confi ned to the examinable affairs of corporations under external administration

Case Name:Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd & Anor (No. 2)



Issues:• Section 596A CA • Insurance and litigation

funding• Examination power confi ned

to examinable affairs of corporations under external administration

• Constitutional validity of s596A CA

• Unlawful authorisation by ASIC granting eligible applicant status

In this case, a plaintiff trustee, which had litigation funding, attempted to use section 596A CA to examine the examinable affairs of the corporation it was suing, to obtain details of the defendant corporation's professional indemnity insurance, notwithstanding that the corporation was not under any form of external administration. The proposed examination was held to be outside the authority of the relevant legislation.

Hayes Knight GTO Pty Ltd was an accountancy practice and, until 13 September 2004, was the trustee for the holders of debenture stock (the stockholders) issued by Performance Finance Ltd.

On 23 September 2003, following the collapse of Performance Finance, Hayes Knight appointed a receiver and manager to the assets of Performance Finance. On 13 September 2004, Hayes Knight was replaced as trustee for the stockholders by Highstoke Pty Ltd.

On 23 December 2004, Highstoke commenced proceedings against Hayes Knight in the Federal Court, seeking damages for losses suffered by the stockholders allegedly as a result of breaches of duty by Hayes Knight during its term as the trustee. The action was funded by IMF (Australia) Ltd.

On 20 May 2005, Hayes Knight informed Highstoke that its insurers had denied indemnity for Highstoke's claim.

On 26 July 2005, Highstoke requested ASIC for authorisation to apply under Division 1 Part 5.9 CA in relation to Hayes Knight (not Performance Finance). Division 1 Part 5.9 CA contains examination powers, including s596A CA. Section 596A CA states:

The Court is to summon a person for examination about a corporation's examinable affairs if:

(a) an eligible applicant applies; and

(b) the Court is satisfi ed that the person is an offi cer…of the corporation…

(iv) …when the application is made.

The term 'eligible applicant' is defi ned in s9 CA to include a person authorised in writing by ASIC to make an application under Division 1 Part 5.9 in relation to a corporation.


141

The purpose of the proposed examination by Highstoke was to obtain information about Hayes Knight's professional indemnity insurance and its other assets, to ascertain whether any judgment that Highstoke might obtain against Hayes Knight was likely to be satisfi ed. In that way, Highstoke and its litigation funder could make a commercial decision on whether Highstoke should continue the litigation against Hayes Knight.

On 3 August 2005, ASIC authorised Highstoke to make an application under Division 1 Part 5.9 CA in relation to Hayes Knight. Highstoke relied on that authorisation to obtain the issue of an examination summons, from the Federal Court, against Mr O'Brien, a director of Hayes Knight. The summons was issued under s596A CA and required Mr O’Brien’s attendance to be examined about the examinable affairs of Hayes Knight and to produce documents relating to Hayes Knight's professional indemnity insurance and asset position.

Hayes Knight was not under any form of external administration.

Hayes Knight and Mr O'Brien applied to discharge the examination summons and, in separate proceedings for judicial review, to quash ASIC's decision authorising Highstoke. Their primary contention was that the power to issue an examination summons under s596A CA, which appeared in Chapter 5 entitled 'External Administration', was to be exercised only for corporations under some form of external administration or otherwise subject to the provisions of Chapter 5.

Alternatively, they argued that, to the extent that s596A purported to confer examination powers on the court for corporations that were not under any form of external administration, it was invalid because it purported to confer power on the court that was neither judicial nor incidental to the exercise of judicial power, contrary to the separation of powers doctrine.

Highstoke and ASIC argued that s596A should not be read in the manner proposed by Hayes Knight and Mr O'Brien, as the term 'corporation' used in s596A is not qualifi ed in any way. They also argued that the exercise of the examination power in the manner proposed was either judicial, or was incidental to the exercise of judicial power in the compensation proceeding between Highstoke and Hayes Knight.

Justice French accepted Hayes Knight and Mr O'Brien's arguments in their entirety and, accordingly, discharged the summons to Mr O'Brien and quashed ASIC's decision authorising Highstoke.

Before the introduction of the CA (being Commonwealth legislation) questions as to whether provisions of the Corporations Law exceeded legislative power did not arise, as it was state legislation. That is no longer the case. For example, this case now leaves open the question of whether examinations conducted in relation to corporations under non-judicial forms of external administration, such as private appointment receiverships and voluntary administration, are invalid.


142

PROCEDURE

The limitation period under section 588FF(3) CA

Case Name:Davies v Chicago Boot Company Pty Ltd (No. 2)

Citation:[2007] SASC 12, Full Court of the Supreme Court of South Australia per Gray, Sulan and Anderson JJ

Date of Judgment: 19 January 2007

Issues:• Amending a claim under

Division 2 Part 5.7B CA outside the three-year limitation period

• Section 588FF(3) CA

While concerned with matters of pleading and procedure, the substance of this case considers the construction of the limitation provision in section 588FF(3) governing claims to recover voidable transactions.

Joint and several liquidators had been appointed to the companies in the Harris Scarfe group. The liquidators began proceedings against a supplier of goods to the group, Chicago Boot Co Pty Ltd (the supplier), seeking to set aside voidable transactions as preferences. In their capacity as liquidators of Harris Scarfe Ltd (HSL), the liquidators claimed a sum of $273,261 paid by HSL to the supplier over fi ve transactions; and as liquidators of Harris Scarfe Wholesale Pty Ltd (HSW), the liquidators claimed a HSW payment to the supplier of $43,540.10.

Following interlocutory steps, the supplier sought to amend its defence to state that it had no relationship of creditor and debtor with HSL, asserting that all goods had been supplied under a contract with HSW. In response, the liquidators proposed amendments to their claim against the supplier. They proposed alternative claims that:

• as regards the $273,261, the payments were made by HSW on HSL's behalf; and

• regarding the $43,540, that HSL had made the payment for HSW.

The supplier argued that the claims in the proposed amendments were statute-barred by the limitation provision in s588FF(3), because at the time of seeking the amendments, more than three years had passed since the relation-back-day.

The Full Court held that Rule 53 of the Supreme Court Rules 1987 (SA) empowered the court to allow the alternative claims in the amendments. Confi rming an earlier decision of the Full Court of the Federal Court, the court held that s588FF(3) prevented liquidators from commencing an action after three years had elapsed, not from amending an application begun within the limitation period.

The Rule empowering the South Australian Court to allow amendments out of time is refl ected federally and in the other states and territories, so this case is an important clarifi cation of the national approach to insolvency under the CA. The Full Court has confi rmed that liquidators may fi ne-tune applications under Division 2 Part 5.7B to refl ect changes in circumstance that come to light more than three years after the relation-back-day.


143

PROCEDURE

ASIC's liability for costs where it intervenes in proceedings

Case Name:Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd (No. 2)



Issues:• Section 1330 CA • ASIC's liability for costs

where it intervenes in proceedings

In this case, ASIC intervened under section 1330 CA and took a substantive role by fi ling detailed written submissions, and making oral submissions, on the matters under consideration. ASIC's arguments were rejected and it was ordered to pay a proportion of the successful parties' costs as from the date of its intervention.

On 23 December 2004, Highstoke Pty Ltd, in its capacity as trustee for debenture stockholders of Performance Finance Limited (receiver and manager appointed), commenced proceedings against Hayes Knight GTO Pty Ltd, the stockholders' former trustee, seeking damages for losses allegedly suffered by the stockholders as a result of alleged breaches of duty by Hayes Knight during its term as the trustee.

On 26 July 2005, Highstoke applied to ASIC for authorisation to make an application under Division 1 Part 5.9 CA in relation to Hayes Knight. The purpose of the proposed examination by Highstoke was to obtain information about Hayes Knight's professional indemnity insurance and its other assets, to ascertain whether any judgment that Highstoke might obtain against Hayes Knight was likely to be satisfi ed.

On 3 August 2005, ASIC authorised Highstoke to make an application under Division 1 Part 5.9 CA in relation to Hayes Knight. Highstoke relied on that authorisation to commence a new proceeding (the examination proceeding) in which it obtained the issue of an examination summons to Mr O'Brien, a director of Hayes Knight, requiring him to attend court to be examined about the examinable affairs of Hayes Knight.

Hayes Knight was not under any form of external administration.

Hayes Knight and Mr O'Brien applied in the examination proceeding to discharge the examination summons. They argued that the court's power to conduct an examination in connection with the examinable affairs of a corporation did not extend to companies that were not under external administration. Alternatively, if the power did purport to extend to companies that were not under external administration, it involved the exercise by the court of non-judicial power that was beyond the competence of the Parliament to confer upon it.

Hayes Knight and Mr O'Brien also brought a separate action against ASIC for judicial review (the judicial review proceeding), in which they sought to quash ASIC's decision to authorise Highstoke.

On 8 February 2006, ASIC intervened in the examination proceeding under s1330 CA.


144

The examination proceeding and the judicial review proceeding were heard together in May 2005.

ASIC, as intervener, fi led detailed written submissions in the examination proceeding and also made oral submissions in the examination proceeding by its counsel, opposing all of the arguments raised by Hayes Knight and Mr O'Brien.

Hayes Knight and Mr O'Brien's arguments were accepted in their entirety, with the result that the examination summons was discharged in the examination proceeding and ASIC's decision authorising Highstoke was quashed in the judicial review proceeding.

Hayes Knight and Mr O'Brien sought an order that ASIC, as intervener, pay a proportion of their costs in the examination proceeding as from the date that ASIC intervened. They relied on s1330(2) CA, which provides:

Where ASIC intervenes in a proceeding referred to in subsection (1), ASIC is taken to be a party to the proceeding and, subject to this Act, has all the rights, duties and liabilities of such a party.

ASIC opposed the order for costs, arguing that the ordinary rule that costs follow the event does not apply to interveners.

Justice French held that s1330 CA does contemplate that ASIC may be liable to a costs order. His Honour doubted whether any special circumstances are required to support such an order, but, in any event, found that such special circumstances were made out here. In particular, his Honour considered that ASIC was the decision-maker, which, in a sense, precipitated the proceedings by authorising Highstoke under Division 1 Part 5.9, a decision that was held to be outside its authority. Further, ASIC took a substantive, and not merely an assisting, role in the proceedings.

Accordingly, ASIC was ordered to pay a proportion of Hayes Knight's and Mr O'Brien's costs from the date of its intervention.

This case is authority for the proposition that where ASIC intervenes in a proceeding under s1330 CA and takes a substantive, and not merely an assisting, role, it may be liable to a costs order.


145

PROCEDURE

Broad power for ASIC to decide who is an 'eligible applicant' under sections 596A and 596B CA

Case Name:Ryan v ASIC; in the matter of Allstate Explorations NL (subject to deed of company arrangement)

Citation:[2007] FCA 59, Federal Court of Australia per Gyles J


Issues:• Whether a party is an

'eligible applicant' (sections 596A and 596B CA)

• Whether ASIC's decision to authorise a person as an 'eligible applicant' can be reviewed on the grounds of natural justice and other administrative law grounds

Public examinations of individuals under Part 5.9 CA can be daunting for the examinee, such as for administrators who are the subject of a complaint regarding the conduct of the administration. This case considers the powers that a decision-maker has to authorise a person as an 'eligible applicant' for the purpose of enabling that person to apply to have another summons for public examination.

Section 596A CA allows the court to summons a person for examination if an 'eligible applicant' applies for the summons. An eligible applicant is, inter alia, a person who is authorised in writing by ASIC to make applications under Part 5.9 CA.

This case involved an application by two shareholders of a company to ASIC for authorisation. ASIC granted the authorisation request without giving notice of the application to parties who would be subjected to examination and without consideration of all relevant issues. The company's administrators, who were to be examined, brought an application to reverse ASIC's decision.

The court considered ASIC's authorisation of the shareholders as eligible applicants. In dismissing the administrators' application, Justice Gyles accepted ASIC's reasoning that simply because the intended examinations would be complex and that ASIC could not reach a conclusion during its own investigations, did not mean that the examinations could not be successful. His Honour stated that the question of whether a person is an eligible applicant is an issue for ASIC to determine as the decision-maker.

Justice Gyles also considered the nature of ASIC's authorisation power in addressing a number of concerns raised by the administrators. The administrators submitted that the decision-maker had made an error of law in considering a memorandum that cited outdated legislation. His Honour held that those circumstances did not affect the validity of ASIC's reasoning. The decision-maker was familiar with the statutory provisions and the outcome was consistent with the application of the new legislative provisions.

Secondly, the administrators argued that ASIC had failed to make reasonable enquiries about the intended use of the examination power by the proposed eligible applicants. It was submitted that ASIC had not considered the nature, scope and purpose of the examinations. However, Justice Gyles stated that those considerations are not mandatory considerations and to require a threshold evaluation of those issues would undermine the role of examinations to discover information.


146

Thirdly, the administrators submitted that they had been denied natural justice because they did not receive prior notice of ASIC's enquiry of eligible applicant authorisation. His Honour held that ASIC's power to authorise a person to be an eligible applicant is a power that is anterior to any impact on other parties. The authorisation, itself, did not directly impact upon the administrators and as such there had been no requirement for notice to be given. Justice Gyles held that the administrators were not denied natural justice.

ASIC's power to authorise a person as an eligible applicant is a stepping stone for that person to apply to the court for summonses to be issued to proposed examinees. As this case clarifi es, the authorising power, while governed by principles of administrative law, is a broad power, the exercise of which does not necessarily impact upon the interests of others and as such there is a limited need for notice to other parties. The court concluded that the authorisation decision is a decision for ASIC to make and what matters need to be considered in making the decision is for ASIC to determine.

ASIC's power to authorise a person as an eligible applicant is a stepping stone for that person to apply to the court for summonses to be issued to proposed examinees. As this case clarifi es, the authorising power, while governed by principles of administrative law, is a broad power, the exercise of which does not necessarily impact upon the interests of others and as such there is a limited need for notice to other parties. The court concluded that the authorisation decision is a decision for ASIC to make and what matters need to be considered in making the decision is for ASIC to determine.


147

PROCEDURE

Calculation of periods of time 'beginning on' a specifi c day

Case Name:Morgan, in the matter of the Yourhealth Companies


Date of Judgment: 7 February 2007

Issues:• Extension of time under

section 439A CA• How to calculate periods of

time 'beginning on' a certain day

An administrator seeking an extension of time to convene a second creditors' meeting was unsure on which day the time ran out. This case is a reminder of the importance of being clear on when statutory periods begin and end.

Part 5.3A CA provides for the administration of a company. On 18 January 2007, Mr Morgan was appointed administrator under section 436A to each of fi ve companies comprising the 'Yourhealth' group.

Section 436E requires an administrator to call the fi rst creditors' meeting within fi ve business days of the administration starting. Unless the administration begins just before Easter or Christmas (when the CA gives administrators an extra week), s439A calls for a second meeting within a period of 21 days 'beginning on' the day the administration started.

In this case, Mr Morgan, with the support of all members of the creditors' committee, sought more time in which to complete his inquiries and to prepare his report for the second meeting of creditors. However, there was some confusion over exactly when the period of 21 days was up. The administrator was not sure whether the 21-day period started on the day the administration started, or on the next day.

Justice Lindgren explained that where the CA refers to a period 'beginning on' or 'commencing on' a certain day, that day is counted as 'Day 1' of the statutory period. His Honour distinguished this manner of prescribing time from other language often employed in statutes such as 'from', 'before' or 'after'.

Having cleared that matter up, Justice Lindgren granted the six-week extension sought by Mr Morgan.

A period of time that a statute says 'begins on' a particular day should be calculated by counting that day as the fi rst day of the period. It is important to check whether the statutory timeframe is for a number of days 'beginning on' or 'from' a particular day, because the Federal Court has made clear that they will lead to different answers.


148

PROCEDURE

Variation of preservation orders to release funds to meet legal costs

Case Name:ASIC in the matter of Richstar Enterprises Pty Ltd ACN 099 071 968 v Carey (No. 15)



Issues:• Section 1323 CA• Variation to preservation

orders for release of specifi ed funds to meet legal costs of person who had controlled the defendant companies

This case concerns the 'Westpoint' proceedings between ASIC and Mr Carey. Preservation orders had been made under section 1323 CA for assets held by the defendants. Mr Carey sought the release of funds from the assets to meet legal and other expenses. The applications were refused.

In the Westpoint proceedings, Mr Carey was a defendant, along with eight corporate defendants. Preservation orders had been made over the assets of the defendants, including assets agreed to be, or directed by the court as, held on trust by an entity for Mr Carey.

Mr Carey (through others) sought release of $50,000 and $300,000 from the assets of defendant companies. The $50,000 was sought to enable one corporate defendant (Richstar) to defend proceedings against it in the Supreme Court of Western Australia by two of the other defendants, in which those companies alleged that Richstar had agreed to lend them a signifi cant sum. The receivers had refused to honour the loan agreement, as it seemed to be entirely outside of Richstar's normal business, and accounted for almost all of its cash assets.

Justice French rejected the application based on the following key matters:

• there was doubt about whether the loan was genuine (being outside the normal business, and based on documents that had come into existence after the dates they purported to bear); and

• the loan proceedings were between parties who were not at arm's length, and had been brought to enable a claim to be made against the receivers.

The $300,000 was sought from the funds of another defendant (Healthcare), to enable Mr Carey to meet expenses of the ASIC proceedings. Justice French also rejected this application, as it was for the receivers to approve a release of funds given the particular preservation orders. That is, the receivers might regard the assets of Healthcare as under Mr Carey's control and therefore subject to the preservation orders and they could decide to release a modest amount of funds to Mr Carey.

The court will generally scrutinise an application by a person who has been in control of assets that are the subject of preservation orders made under s1323 for funds to meet legal costs for legal proceedings. In this instance, the court considered whether the proceedings were genuine and whether the matter was otherwise within the receivers' remit.


149

PROCEDURE

Approval sought by ASIC to release records to liquidator

Case Name:ASIC; In the matter of Westpoint Corporation Pty Ltd ACN 009 395 751 (receivers and managers appointed) (in liquidation v Read)



Issues:• Access by liquidators to

documents seized by ASIC• Appropriateness of

conditional access proposed• The court's role in disputes

relating to access to documents

In this case, ASIC sought approval to release records previously seized from a privately appointed liquidator to a court-appointed liquidator. The orders proposed by ASIC provided for third parties to object to the liquidators' entitlement to and use of the records.

ASIC applied to the court for an order permitting Mr Herbert and Mr Read, the court-appointed liquidators (the liquidators) of Westpoint Corporation Pty Ltd (receivers and managers appointed) (in liquidation) (Westpoint) to inspect and obtain copies of Westpoint's books (the documents), subject to certain conditions relating to third-party interests. The documents had previously been seized by ASIC under section 33 of the Australian Securities and Investments Commission Act 2001 (Cth) from privately appointed receivers of various entities in the Westpoint group of companies.

ASIC's application was made under s477(6) CA in response to a request from the liquidators, who claimed that they were unable to understand the fi nancial and operational manner in which Westpoint and its related entities were operated, without access to the documents. ASIC informed third parties that could potentially be interested in or affected by ASIC's intended release of the documents to the liquidators. No third parties fully pursued their objections or made an application to the court; however, several indicated to ASIC that they held concerns about ASIC's proposed release. Although ASIC took the view that the liquidators were entitled to access the documents, ASIC requested that the order provide a right for third parties to object to the liquidators' entitlement to inspect the documents and their intended use of the documents.

The court dismissed ASIC's application for the following reasons:

• as ASIC considered the liquidators were entitled to the documents, it should have provided access, particularly as none of the third parties had formally challenged ASIC's proposed release;

• if a concern from a third party arose about the liquidators' entitlement to, or particular use of, the documents, ASIC could resolve the matter with the liquidators. If agreement could not be reached, the third party could apply to the court for relief; and

• it is not the court's role to establish a regime for the resolution of disputes that may arise between liquidators and third parties. Parties should not be encouraged to invoke the court's assistance without making adequate attempts to resolve disputes themselves.


150

It is not appropriate for the court to be providing judicial protection in advance for a decision that is the proper function of ASIC. This case demonstrates that where a dispute between liquidators and third parties occurs in relation to an access request from ASIC, the parties are encouraged to resolve the dispute without court intervention.


151

PROCEDURE

Procedural irregularities in resolution to wind up: if at fi rst you don't succeed ...

Case Name:Hill v Hicom International Pty Ltd (in liquidation) ACN 070 061 344

Citation:[2007] FCA 1014 Federal Court of Australia, New South Wales District Registry, per Emmett J


Issues:• Sections 494 and 1322 CA• Whether procedural

irregularity should invalidate proceedings

In this case, the Federal Court considers whether the failure to comply strictly with the requirements of the CA will invalidate a resolution to wind up under a members’ voluntary liquidation.

The directors of two companies, Hicom International Pty Ltd and Hicom Sales Pty Ltd (collectively Hicom), resolved that declarations of solvency would be signed and meetings of the companies convened to consider resolutions that the companies be wound up under members' voluntary liquidations.

Under section 494(1) CA, a declaration of solvency must be lodged before the date on which the notices of the meeting at which the resolution for the winding up of the company is to be proposed are sent. In this case, the declarations were made on the same day as the notices of meeting were sent and not before, as required.

Section 1322 CA provides a proceeding is not invalidated because of a procedural irregularity, unless the court thinks the irregularity has caused, or may cause, substantial injustice. The liquidator applied for orders that the declarations for insolvency were not invalid.

Justice Emmett was satisfi ed that the failure to lodge the declarations before sending the notices of meeting was a procedural irregularity and that no substantial injustice had been, or was likely to be, caused to any person by reason of the failure to comply strictly with the requirements of s494.

While all efforts should be made to comply strictly with the provisions of the CA, the court has the power under s1322 to rectify contraventions. Courts will exercise this power where the contravention is a procedural irregularity and where no substantial injustice will be caused.


152

PROCEDURE

Proceedings in open court or in camera

Case Name:Re JN Taylor Holdings Ltd (in liquidation)

Citation:[2007] SASC 193, Supreme Court of South Australia per Debelle J


Issues:• Under what circumstances

does the court have the authority to close the court?

• Court power to seal up confi dential documents and other evidence

• In what circumstances should the court make orders under sections 477(2A) and 477(2B) CA?

In exceptional circumstances, the court can (and will) hear applications in closed court and make orders protecting the confi dentiality of agreements. Liquidators must show that such orders are necessary to ensure justice is done and are required to protect genuinely confi dential material.

A liquidator applied for leave to compromise a debt and to enter into an agreement to effect the compromise that would operate for more than three months, under sections 477(2A) and 477(2B) CA. In order to protect the confi dentiality of the agreement, the liquidator also applied for orders that the application be heard in closed court and that the affi davits fi led in support of the application be sealed up and not be available for inspection by any person without a court order.

Justice Debelle acknowledged that an exception to the general principle that the courts must administer justice publicly and in open court is the more fundamental principle that the chief object must be to ensure that justice is done. The court referred to its inherent power and statutory power to close the court but noted that the power is exercised very sparingly. In this case, the liquidator satisfi ed the court that the events leading to, and the agreement to, compromise the debt were confi dential and both litigation and termination of the agreement might result if those matters were disclosed.

The court also approved the compromise, after discussing the established relevant principles, on the following grounds:

• while this case involved a substantial sum of money, the liquidator had obtained the advice of senior counsel who had extensive experience of liquidations and receiverships over 15 years;

• the compromise would provide an otherwise unavailable certainty and immediate return to preference shareholders;

• the committee of inspection had been reduced to one and therefore could not approve the compromise, although that member expressed approval of the agreement; and

• the previous liquidator had entered into a similar arrangement in 1999, which was not completed and this compromise would provide a higher return for preference shareholders.

In respect of s477(2B)CA, the court considered that it was necessary for the agreement to operate for a number of years for the other party to it to obtain a benefi t and was content to approve the entry into the agreement as neither the company nor the liquidator would incur any cost.


153

This case restates the law regarding the exceptional circumstances in which the court will close the court and order that confi dential material be sealed and not be available for inspection without court order. It also restates the position in relation to the circumstances in which leave will be granted to enter into an agreement to compromise a debt. Liquidators seeking such orders must ensure that the circumstances require those orders for justice to be done and should be able to justify their commercial judgment so that there can be no lack of good faith, error in law or principle, or real and substantial grounds for doubting the liquidator's conduct.


154

PROCEDURE

Can time limit for application for compensation be extended?

Case Name:Newtronics Pty Ltd v Gjergja & Anor

Citation:[2007] VSC 195, Supreme Court of Victoria per Byrne J


Issues:• Breach of director’s

statutory duties• Sections 1317HD(2) and

1322(4)(d) CA• Whether time limit to

bring application for compensation may be extended

This decision considers whether the time limit for bringing an application for compensation under section 1322(4)(d) CA can be extended.

Section 1317HD(1) CA provides that, where a person contravenes a civil penalty provision, the corporation may recover from that person the amount of loss or damage suffered as a result of that act. In this case, Newtronics (the company) brought an application to recover compensation from its directors for breaching their duties under s232(4) CA.

Under s1317HD(2) CA, the time limit for bringing a claim is six years. In this case, the company brought the claim 11 years after the alleged breaches of duties occurred. The company sought to extend the time limit under s1322(4)(d) CA. The issue for the court was whether it should extend the limitation period for this action.

Justice Byrne held that s1322(4)(d) CA cannot be used to extend the time limit on this claim because:

• the right under s1317HD(2) CA is a statutory right conferred in addition to a corporation’s common law or equitable rights and there should be some time limitation for bringing a claim to enforce this right; and

• for policy reasons, there must be some end to disputes between a corporation and its directors so that the parties can focus on their commercial future.

Justice Byrne further noted that there was a serious risk of injustice where oral evidence must be given 13 years after the event and there had been inordinate delay in commencing the proceedings since the liquidator's appointment in February 2002.

The right to bring proceedings to recover compensation under s1317HD(2) CA is a statutory right subject to time limitations to enforce legal or equitable rights. Companies that wish to claim compensation for breaches of directors' duties must bring claims within the six-year statutory limitation period.


155

PROCEDURE

Replacement of liquidators, deed administrators and trustees

Case Name:Rocke (as liquidator of ACN 080 794 636 Pty Ltd), in the matter of ss502 and 506(4) of the Corporations Act



Issues:• Sections 447A, 449D, 473,

499(5), 502, 503 CA and s77 of the Trustees Act 1962 (Cth)

• Replacement of liquidators, deed administrators and creditors' trust trustees upon restructuring of accounting fi rm

A recent Federal Court decision allowed for the replacement of various liquidators, deed administrators and trustees of creditors' trusts after the resignation of the existing offi ceholders following the restructuring of an accounting fi rm.

The court has certain powers to make orders to replace liquidators, deed administrators and trustees under the CA and the Trustees Act 1962 (Cth).

In this case, there had been a restructuring involving an accounting fi rm (the fi rst accounting fi rm), which resulted in the effective takeover of another fi rm, (the second accounting fi rm). Employees of the second accounting fi rm had been appointed as liquidators, administrators and trustees of certain companies the subject of the application. After the restructuring, it was stated that the relevant employees would no longer be involved in the day-to-day management of the administration of the companies. Therefore, an application was made to enable employees of the fi rst accounting fi rm to replace the former employees of the second accounting fi rm as liquidators, administrators and trustees of the relevant companies.

In each application, evidence was given that:

• the replacements would provide continuity as the proposed appointees were persons involved in, and familiar with, the relevant external administrations and trusts;

• certain systems were in place at the fi rst accounting fi rm to ensure this continuity, such as the conducting of detailed fi le handovers, monthly fi le reviews and weekly leadership meetings;

• the cost of conducting creditors’ meetings to approve the resignation and appointments was estimated to range from approximately $3000 to approximately $16,000 for each relevant company; and

• the external administrations were at least approximately 75 per cent complete.

As well as seeking orders in relation to the prospective replacements, the applicants sought orders that the costs of the application be indemnifi ed from the assets of the relevant companies. This was on the basis that the costs had been properly incurred in the winding up, administration and in the creditors' trusts of the various companies.

Justice French made the orders sought by the applicants in relation to the replacements of the liquidators, administrators and trustees. In relation to the application regarding the creditors’ trusts, Justice French considered this particular application fell within the accrued jurisdiction of the court because of the close connection between the creditors’ trusts and the DOCA to which they related.


156

In relation to the application regarding costs, Justice French declined to make the orders that were sought. His Honour did not accept the submission that the reorganisation of the fi rst accounting fi rm should be regarded as an incident of the various administrations and, in effect, be part of the overhead costs. Further, Justice French noted that the matter involved a voluntary restructuring of the fi rst accounting fi rm and it was therefore inappropriate that the costs relating to this restructuring should effectively be borne by creditors.

The court may make orders regarding the replacement of liquidators, administrators and trustees in certain circumstances. It should be noted that the costs of making such an application may not be recoverable out of the assets of the companies or trusts affected by them. This is particularly so if the need for replacement arises from the voluntary restructuring of the fi rm of the insolvency practitioner concerned.


157

PROCEDURE

Is a costs order a provable debt?

Case Name:Foots v Southern Cross Mine Management Pty Ltd

Citation:[2007] HCA 56, High Court of Australia per Gleeson CJ and Gummow, Kirby, Hayne and Crennan JJ


Issues:• Section 82(1) of the

Bankruptcy Act 1966 (Cth)• Whether costs order a

provable debt

This case addressed the question of whether a costs order obtained by a successful litigant was provable in a debtor's bankruptcy and involved a close consideration of the relevant provisions of the Bankruptcy Act 1966 (Cth) (the Act).

The matter arose out of a complex, multi-party dispute in the Supreme Court of Queensland. One of the parties to the dispute was Ensham, which, relevantly, succeeded in its cross-claim against Mr Foots, who was Ensham's former CEO. On 1 September 2005, Justice Chesterman gave judgment for Ensham against Southern Cross Mine Management Pty Ltd and Mr Foots and awarded Ensham damages of about $2.4 million. On 15 September 2005, Mr Foots became a bankrupt.

Ensham applied for a costs order against Mr Foots. Mr Foots argued that any costs order made by the Supreme Court would be a debt provable in his bankruptcy within the meaning of section 82 of the Act and that any proceedings to obtain such a costs order would therefore be stayed by virtue of s58(3) of the Act (unless leave to proceed was obtained from the Federal Court or the Federal Magistrates Court). Mr Foots was also keen to obtain a fi nding that a costs order was a provable debt because this meant that he would, under s153 of the Act, be free of the debt following his discharge from bankruptcy.

At fi rst instance, Justice Chesterman held that the costs order sought by Ensham would not be a provable debt in Mr Foots' bankruptcy and therefore that the stay provisions in s58(3) were not engaged. On 3 February 2006, Justice Chesterman ordered Mr Foots to pay Ensham's costs on an indemnity basis. The Queensland Court of Appeal dismissed Mr Foots' appeal. Mr Foots appealed to the High Court.

JudgmentThe majority of the High Court (Chief Justice Gleeson and Justices Gummow, Hayne and Crennan) dismissed the appeal and held that the costs order was not a debt provable in Mr Foots' bankruptcy.

The majority carefully considered the text of s82, which states that (subject to certain exceptions):

all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy (emphasis added).


158

Mr Foots had argued that the costs order was an obligation that arose from the judgment against him awarding damages in Ensham's favour, and that it was therefore an obligation incurred before the date of his bankruptcy. He also submitted that the phrase 'all debts and liabilities' encompassed obligations that could be said to be 'incidental' to a provable debt, and that the costs award was 'incidental' to the $2.4 million damages award.

The majority rejected Mr Foots' arguments. They noted that costs orders are discretionary, and that an obligation to pay costs is, therefore, not an automatic result of an adverse judgment. Consequently, no obligation to pay could be said to have arisen until the making of the costs order on 3 February 2006, which clearly occurred after the date of Mr Foots' bankruptcy. The majority also doubted that the language of s82 was broad enough to encompass obligations 'incidental' to a provable debt, and found that, in any event, a costs order could not be said to be an 'incident' of either verdict or judgment.

Mr Foots had also sought to advance his case by relying on a line of authority based on a 19th century English case, British Gold Fields. The majority held that this case was no longer good law in Australia and cannot now be accepted as authority for a proposition that construes s82 in such a way that an untaxed order for costs made after bankruptcy is a provable debt.

Justice Kirby dissented, fi nding that the construction urged by Mr Foots gave effect to the language, purpose, context and policy of the contested provisions of the Act.

The High Court has confi rmed well settled law that a costs order in court proceedings must be ordered by the court before the bankruptcy commences in order for it to be a provable debt under the relevant provisions of the Bankruptcy Act and for it then to be discharged by bankruptcy. The court did not refer in detail to the comparable situation in corporate insolvency under s553 CA, although the majority of the High Court noted that the classes of provable debts in s82(1) are narrower than those included in s553, in relation to unliquidated damages claims.


159

RECEIVERSHIP

Appointing receivers: have you done everything you needed to do?

Case Name:Gladstone & District Leagues Club Ltd v Hutson & Ors

Citation:[2007] QSC 010, Supreme Court of Queensland per McMurdo J


Issues:• Contractual interpretation

of clause in mortgage instrument allowing for appointment of receivers

• Whether that clause permitted appointment of receivers prior to accelerating date for repayment

The applicant challenged the validity of the appointment of receivers under a mortgage debenture. It was argued that the mortgagee had not fi rst accelerated the time for payment of the secured monies as it was required to do. The court held that, under the mortgage debenture, exercising the right to appoint a receiver did fi rst require acceleration of the time for payment and the appointment was not valid.

Gladstone & District Leagues Club Ltd (the mortgagor) operated a licensed club from rented premises at Gladstone. Those premises were owned by the respondent, Club Management Pty Ltd (the mortgagee), which held a mortgage debenture over the mortgagor's property. The mortgagee asserted that the mortgagor had defaulted under the mortgage debenture entitling it to appoint a receiver. Accordingly, the mortgagee appointed receivers purportedly under a power in the mortgage debenture.

The mortgagor asserted that, upon its proper interpretation, the mortgage debenture did not authorise the appointment of receivers, absent an election by the chargee, to accelerate the time for payment of the secured monies. The mortgagor sought a declaration that the appointment was invalid and injunctive relief against the receivers.

Justice McMurdo held that the terms of the mortgage debenture did require the mortgagee to exercise its option to treat the secured monies as being immediately payable before exercising its other rights. It had not done so, and the receivers were accordingly invalidly appointed. The court granted an injunction preventing the receivers from acting on their purported appointment.

Before exercising a right to appoint receivers and managers, the contractual provisions conferring that right should be carefully checked to see whether the contract sets out any requirements that must be satisfi ed before exercising that right.


160

RECEIVERSHIP

Freezing orders as an alternative to appointment of receiver

Case Name:ASIC in the matter of Richstar Enterprises Pty Limited (ACN 099 071 968) and Carey (No. 18)



Issues:• Freezing orders• Alternative to appointment

of receiver

In appropriate circumstances, a court may make protective orders, such as freezing orders, as an alternative to the appointment of a receiver.

In this case, ASIC was conducting investigations regarding the second defendant, Mr Rundle, in his capacity as chief fi nancial offi cer of the Westpoint Group. In addition, liquidators of certain mezzanine companies had either begun, or were contemplating, proceedings against Mr Rundle. These claims also related to his conduct as chief fi nancial offi cer of Westpoint. As well as these claims, evidence was tendered of asset dissipation by Mr Rundle. A court-appointed receiver had previously been appointed by the court to investigate Mr Rundle's assets.

ASIC submitted that, although this was a case in which it may be appropriate to appoint a receiver, it had been agreed between the parties that a freezing order could be sought as a practical alternative. This was because:

• the court-appointed receiver had completed the investigation of Mr Rundle’s assets; and

• Mr Rundle had been cooperative with the court-appointed receiver and it seemed likely that he would comply with the proposed freezing orders.

The proposed freezing orders dealt with all of Mr Rundle’s property, including property held in his name as trustee jointly for a joint venture. The orders restricted:

• the manner in which Mr Rundle could deal with his property; • his rights to operate bank accounts; • his ability to leave Australia; and • also contained certain reporting obligations.

The proposed freezing orders also allowed Mr Rundle funds for the payment of reasonable legal and other professional fees for relevant proceedings and living expenses. However, Mr Rundle was required to adduce evidence to justify the permitted legal expenditure. In addition, it was proposed that Mr Rundle have a continuous obligation to ensure that his legal fees were reasonable.


161

In order for proposed freezing orders to be made, ASIC accepted that it was necessary that the court be satisfi ed that it was both within the court's power and appropriate to make the orders. It was submitted by ASIC that:

• Mr Rundle’s property and affairs were relatively simple and well suited to a freezing order regime;

• the orders had in-built reporting obligations and monitoring mechanisms;• the risk of non-compliance was outweighed by the likelihood of exposure and

potential sanctions; and• the freezing orders avoided the costs and administrative issues associated with

the appointment of a receiver.

The court was satisfi ed that the proposed orders could and should be made and the orders were made by consent.

In certain circumstances, it may be more appropriate to seek that the court make protective orders rather than appoint a receiver. In such cases, it will be necessary that the court is satisfi ed that the proposed orders are both within its power and appropriate.


162

SCHEMES OF ARRANGEMENT

Can future liabilities and the right to insurance indemnities be transferred by a scheme of arrangement?

Case Name:In the matter of Stork ICM Australia Pty Ltd; Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd

Citation:[2006] FCA 1849; (2007) 25 ACLC 208, Federal Court of Australia per Lindgren J


Issues:• Scheme of arrangement• Section 413 CA• Whether a company's

liability to potential asbestos claimants and corresponding rights of indemnity for those liabilities can be effectively transferred

Stork ICM Australia Pty Ltd (Stork ICM) proposed to transfer its property and liabilities to Stork Food Systems Australasia Pty Ltd (Stork FSA) through a scheme of arrangement under the CA. Justice Lindgren made orders approving the scheme (subject to minor alterations) after considering whether Stork ICM's liability to potential asbestos claimants and corresponding rights to insurance indemnities would become the liabilities and rights of Stork FSA.

Stork ICM and Stork FSA are Australian subsidiaries of Dutch parent company Stork NV. Since the sale of its business in 2003, Stork ICM has been in 'run-off' dealing with claims arising from its earlier business activities. Save for one exception, the only creditors or potential creditors of Stork ICM are current and potential asbestos claimants.

The court made it clear that it would not, in the exercise of its discretion, approve the scheme unless it was clearly satisfi ed that potential asbestos claimants 'would be no worse off if the order was made than they would otherwise'. In order to ensure that any arguments against the scheme or for its variation were put to the court exclusively in the interests of potential claimants, the court directed the registrar to obtain counsel to put forward such arguments and for Stork ICM to pay counsel's reasonable fees. ASIC was also granted leave to appear as a friend of the court.

Section 413 CA empowers the court to make an order transferring the whole or part of the undertaking of a company and its property and liabilities to another company. Although there were a number of mechanisms in place that could afford protection to potential claimants (such as deeds of indemnity and letters of comfort from Stork NV), the court viewed the insurances held by Stork ICM over various periods as providing the only real protection for potential claimants.

Accordingly, the court went on to consider whether s413 CA authorised an order that would have the effect of:

• making Stork FSA, in place of Stork ICM, liable to the potential claimants; and • vesting in Stork FSA the contractual right to enforce a right of insurance

indemnity in favour of Stork ICM in respect of liabilities to potential claimants.


163

The court held that the inchoate, potential and contingent liabilities of Stork ICM to potential asbestos claimants and the right to require insurers to indemnify Stork ICM were 'liabilities' and 'property' respectively within the meaning of s413 and were therefore capable of becoming the liabilities and property of Stork FSA.

The court did not view the 'no assignment without consent' provisions in the insurance policies as preventing the transfer of those policies under s413. This was because fi rst, the defi nition of 'property' in s413 includes property not capable of being assigned under the general law, and, second, the provisions only relate to an act of the insured and not to any transfer effected by the operation of s413.

This case shows the lengths the court will go to ensure that potential claimants are not any worse off under a scheme than they would be if the scheme was not approved. It also establishes that the term 'liabilities' in s413 CA will receive a broad interpretation, allowing not only present, future and contingent liabilities to be caught by a scheme but also inchoate or potential liabilities.


164

SCHEMES OF ARRANGEMENT

Is a meeting of special classes of members required?

Case Name:In the application of United Medical Protection Limited, The Medical Defence Association of Victoria and Seventy-Fifth Jonestown

Citation:[2007] FCA 631, Federal Court of Australia, Victoria District Registry, per Finkelstein J


Issues:• Whether members

with different interests necessarily belong to different classes

• Section 411 CA

In this application, two companies limited by guarantee proposed to amalgamate their respective operations through schemes of arrangement under the CA. Justice Finkelstein made orders approving the proposed schemes after considering whether meetings of special classes of members would be required.

United Medical Protection Limited (United) and the Medical Defence Association of Victoria Limited (MDAV) are companies limited by guarantee that, through subsidiaries, provide members with indemnity for claims arising from members' medical practices. The membership of both United and MDAV is effectively divided into two categories, ordinary and affi liate. Only ordinary members are:

• required to guarantee obligations;• liable to make calls for contributions of funds; and• able to speak and vote at meetings.

United and MDAV proposed to amalgamate by incorporating a new company in which members of United and MDAV would become members, and of which United and MDAV would be subsidiaries.

Section 411 CA authorises the convening of meetings of members or classes of members to consider a proposed scheme. Justice Finkelstein considered whether meetings of special classes would be required because some members would be required to pay a higher premium and some members would be required to guarantee the obligations of companies (after amalgamation).

His Honour held that a 'class' refers to those persons whose rights are suffi ciently similar to allow them to 'consult together with a view to their common interest'. However, the mere fact that members may have different considerations does not necessarily mean they belong to different classes. The test is whether the different interest so affects the rights of those members that it makes it impossible for them to pursue their own interests while at the same time pursuing the interests of others in that class. Justice Finkelstein held that the fact that some members might have to pay higher insurance premiums or might be required to guarantee obligations after amalgamation would not prevent those members from pursuing their own interests while pursuing the interests of other members in that class.


165

If meetings of proper classes are not held, the court will not sanction a scheme of arrangement. However, over-zealous subdivision may give a small group of members or creditors a right of veto that would defeat the basic object of schemes of arrangement, which is to enable large groups to achieve a compromise or effect an arrangement.

That some members, but not others, might be required to pay a higher premium for insurance or be required to guarantee obligations if the schemes were adopted is not a suffi cient reason to require meetings of special classes of members to be convened.


166

STATUTORY DEMANDS

Don't delay in applying to set aside a statutory demand

Case Name:SV Steel Supplies Pty Ltd v Palwizat

Citation:[2007] QSC 024, Supreme Court of Queensland per Cullinane J


Issues:• Section 459G CA• Section 109X CA• Impact of Christmas

holidays on time to respond to statutory demand

The Supreme Court of Queensland has issued a timely reminder to company offi cers and legal advisers to act quickly when served with a statutory demand, as the court has no discretion to extend the 21-day time limit for applications to set aside the demand.

Under section 459G CA, a company may apply to a court for an order setting aside a statutory demand served on the company within 21 days after the demand is served.

Under s109X CA, a document may be served validly on a company by leaving it at, or posting it to, the company's registered offi ce.

In this case, Palwizat's solicitors served a statutory demand by leaving it under the door of the registered offi ce of SV Steel Supplies (SV) at precisely 3.57pm on 22 December 2006. There was a sign on the door stating that the offi ce was closed for the Christmas period from 12pm that day until 8.30am on 8 January 2007.

SV applied to have the demand set aside on 16 January 2007, some 25 days after service, arguing that:

• service of the demand should not be regarded as suffi cient, as it was clear that service did not bring the demand to SV's attention until on or around 8 January 2007; or

• alternatively, that the respondent's actions constituted an abuse of process that was suffi cient to justify setting aside the service of the demand.

Justice Cullinane found that the court has no power to extend the 21-day period. Given that there was no doubt in this case that the demand had been served according to s109X CA and that the demand had come to the attention of SV (albeit belatedly), the only way in which service could be disregarded was if the court was satisfi ed that Palwizat's actions amounted to an abuse of process.

For its abuse of process claim, SV pointed to the fact that the demand was served while the offi ce was closed for two weeks and relied on a letter from Palwizat on 19 December 2006 in which Palwizat reserved the right to take enforcement action but made no reference to the possibility of serving a statutory demand.


167

The court held that the evidence could not justify a conclusion that Palwizat's actions were intended to deny SV knowledge of the demand either completely or until it would be impossible for it to make an application to have it set aside. As such, there was no abuse of process and SV's application to have the statutory demand set aside was held to be out of time.

As the court observed, this case is an example of the harshness with which section 459G CA can operate in the absence of any power of the court to extend the time for setting aside a statutory demand.


168

STATUTORY DEMANDS

Statutory demand served by new custodian claiming to be creditor set aside

Case Name:Hansmar Investments Pty Ltd v Perpetual Trustee Company Ltd



Issues:• Ambit of the 'Graywinter

Principle' • Whether the statutory

demand was for liquidated damages or a debt

• Whether new custodian claiming to be creditor can serve an enforceable statutory demand

This case provides guidance as to the detail required in an affi davit supporting an application under section 459G CA to set aside a statutory demand. It considers the difference between liquidated damages and debts, and outlines what must be placed before a court to establish that the benefi t of a contract has been assigned from one trustee to another.

Hansmar Investments Pty Ltd and Permanent Trustee Australia Ltd entered into a contract for the sale of land as purchaser and vendor respectively. Hansmar was unable to complete, so Permanent terminated the contract and forfeited the deposit.

The contract stated that Permanent held rights to the land as custodian/mortgagee for Challenger Managed Investments. When the custodian agreement was terminated, Challenger replaced Permanent with Perpetual Trustee Company Ltd. Perpetual later resold the land that was the subject of the contract with Hansmar.

Perpetual then served a statutory demand (the demand) on Hansmar, demanding the difference between the purchase price, the forfeited deposit and the resale price. The amount was described as a debt being 'money due pursuant to clause 9.3 of the contract for sale…'. Clause 9.3 of that contract provided that, under the circumstances, Permanent could either sue Hansmar to recover any 'defi ciency' on resale or to recover damages for breach of contract.

Hansmar applied to the court to set aside the demand, challenging it on the following grounds:

• no debt was owing under clause 9.3 because its liability under that clause was to pay damages, not a debt; and

• Permanent had not assigned the benefi t of the contract to Perpetual.

Perpetual submitted that the fi rst ground for challenging the statutory demand was not raised expressly or by necessary inference in the supporting affi davit, making that ground unavailable to Hansmar according to the 'Graywinter Principle'. Justice White considered the precision with which a ground of challenge must be described in the supporting affi davit. His Honour determined that it need only be raised in the supporting documentation (as his Honour found had occurred in this case), not clearly delineated either expressly or by necessary implication.


169

The court held that:

• Clause 9.3 did not contain an express promise by Hansmar to pay defi ciency on resale or reasonable costs/expenses arising out of non-compliance with the contract. However, Hansmar's agreement that the vendor could sue for such a sum created a debt within the meaning of s459E of the CA, that sum being ascertainable and not requiring assessment.

• As Perpetual did not produce a registered deed of appointment of a new trustee/retirement of an existing trustee, or a vesting order, Hansmar was indebted to Permanent and not to Perpetual.

The court set the demand aside.

To satisfy the 'Graywinter Principle', grounds challenging a statutory demand need only be raised in an affi davit supporting an application to set the demand aside. Liquidated damages are not recoverable by statutory demand but debts that are ascertainable and do not require an assessment are. A trustee that claims to have had the benefi t of a contract assigned to them must place a registered deed of a new trustee and a retirement of an existing trustee, or a vesting order, before the court to substantiate that claim.


170

STATUTORY DEMANDS

Setting aside statutory demands: mistaken belief as to indebtedness may not suffi ce

Case Name:Errichetti Nominees Pty Limited v Paterson Group Architects Pty Limited

Citation:[2007] WASC 77, Supreme Court of Western Australia per Newnes M


Issues:• Section 459H CA• Whether statutory demand

should be set aside• Whether settlement deed

liable to be set aside because of common or unilateral mistake, or unconscionability

The plaintiff sought to set aside a statutory demand on the basis that the settlement deed on which the demand was based was itself liable to be set aside for common or unilateral mistake, or unconscionability. The case illustrates the diffi culty of showing a 'genuine dispute' on the grounds of mistake.

The plaintiff and the defendant entered into a settlement deed relating to outstanding invoices for architectural services provided by the defendant. The defendant served a statutory demand requiring the plaintiff to pay the balance owing under the deed. The plaintiff applied to have the demand set aside, claiming it had not understood, when it entered into the deed, that three relevant invoices were addressed to other parties. The plaintiff contended that, when it entered the settlement deed, it had believed it owed $102,646, when the proper amount was actually $72,146. Accordingly, it claimed it had entered into the deed under a mistake and it should be set aside.

The court noted that section 459H CA permits a statutory demand to be set aside where there is a 'genuine dispute', meaning a dispute existing in fact and not spurious, hypothetical, illusory or misconceived. The issue here was whether there was a genuine dispute that the settlement deed was void by reason of common mistake. The court held that, on the evidence there was nothing capable of giving rise to such a genuine dispute and refused to set aside the defendant's demand. The reasons for that decision were that:

• the mistake relied upon by the plaintiff was as to the precise amount of the debt – this was a long way from a fundamental mistake of the type required to render the deed voidable;

• there was no evidence of a common mistake by both parties;• there would be a unilateral mistake if the defendant was effectively 'fraudulent'

in failing to correct the plaintiff's mistake. Master Newnes noted that, while it was unclear how invoices to other parties had become the plaintiff's debts, the defendant could understandably have thought the plaintiff had assumed liability for these invoices. There was no 'genuine dispute' as to a unilateral mistake; and

• the defendant's conduct was not unconscionable under s51AA of the Trade Practices Act 1974 (Cth) because the plaintiff was not subject to a special disadvantage and could have made enquiries about its indebtedness.


171

In determining whether there is a 'genuine dispute' as to a debt claimed under a statutory demand, a settlement deed giving rise to that debt may not be liable to be set aside simply because one or both parties was mistaken as to the amount of indebtedness. Relevant factors include the extent of the mistake, whether a party who is not mistaken might understandably believe there was no mistake and whether the mistaken party could have corrected its mistake by making appropriate enquiries.


172

STATUTORY DEMANDS

Does a declaration of an entitlement to an indemnity create a judgment debt against the indemnifi er?

Case Name:LawCover Pty Ltd v Swart



Issues:• Section 459E CA, s117

of the Bankruptcy Act 1966 (Cth) and s51 of the Insurance Contracts Act 1984 (Cth)

• Requirements of a statutory demand

• When is a debt a 'judgment debt'?

When serving a section 459E CA statutory demand without a supporting affi davit, creditors should ensure that the demand is for a 'judgment debt'. If the debt is not a judgment debt, the absence of an affi davit will result in the demand being ineffective.

Section 459E CA requires that a statutory demand be accompanied by a supporting affi davit unless it relates to a judgment debt. The key issue in LawCover Pty Ltd v Swart was whether the debt in a statutory demand was a judgment debt.

In an earlier proceeding, Mr Swart had obtained:

• judgment against Mr Carr, a solicitor, for $1.4 million; and• a declaration that LawCover, Mr Carr's insurer, was to indemnify Mr Carr for the

amount of the judgment.

Mr Swart attempted to enforce the judgment by issuing a statutory demand against LawCover.

In this case, LawCover applied to have the statutory demand set aside on the basis that the demand was served without a supporting affi davit. LawCover argued that the debt in question was not a 'judgment debt' and therefore, without a supporting affi davit, the statutory demand should be set aside.

The court held that the orders in the earlier proceeding clearly created a judgment debt owed by Mr Carr to Mr Swart. The orders did not, however, result in a judgment debt arising in favour of Mr Swart against LawCover. The declaration merely confi rmed the right of Mr Carr to be indemnifi ed by LawCover; it did not give Mr Swart a direct right of action against LawCover.

The court recognised that, in some situations, legislation will provide a successful party with access to insurance proceeds to satisfy an award of damages. If Mr Carr had been bankrupt, s117 of the Bankruptcy Act 1966 (Cth) may have allowed Mr Swart to recover the amount of damages from LawCover. Similarly, if Mr Carr was deceased or could not be found, s51 of the Insurance Contracts Act 1984 (Cth) may have allowed Mr Swart to recover the debt directly from LawCover. In this case, however, Mr Carr was not bankrupt, deceased or unable to be found and so Mr Swart did not have an enforceable judgment debt against LawCover.

Mr Swart's statutory demand against LawCover was therefore set aside.


173

Creditors need to be clear on whether the debt on which their statutory demand is based qualifi es as a 'judgment debt'. This case illustrates that not all court orders automatically create judgment debts between the parties.


174

STATUTORY DEMANDS

Proving service of a statutory demand: presumption of insolvency rebutted?

Case Name:Deputy Commissioner of Taxation v Trio Site Services Pty Ltd

Citation:[2007] FCA 776, Federal Court of Australia, New South Wales District Registry, per Lindgren J


Issues:• Application for winding

up in insolvency under section 459P CA for failure to comply with a statutory demand

• Question of when service of a statutory demand by post to a company's registered offi ce is effected

• Operation of s109X CA, s29 of the Acts Interpretation Act 2001 (Cth) and s160 of the Evidence Act 1995 (Cth)

• Whether defendant’s evidence that statutory demand was never received rebutted presumption as to time of service

The plaintiff applied for an order winding up the defendant in insolvency under section 459P CA for failure to comply with a statutory demand. The defendant opposed the application on the grounds that the statutory demand was never received. The primary question for Justice Lindgren was whether the evidence of non-receipt rebutted the statutory presumption as to the time of service.

The Deputy Commissioner of Taxation (the plaintiff) applied for an order winding up Trio Site Services Pty Ltd (the company) in insolvency under s459P CA for failure by the company to comply with a statutory demand.

Section 459F CA provides that the period for compliance with a statutory demand is 21 days after the demand is served. The plaintiff served the statutory demand on Tuesday, 28 November 2006 by post addressed to the company’s registered offi ce. Section 109X CA confi rms that service may be effected by posting it to a company’s registered offi ce. In this case, the company had an arrangement with the post offi ce that all postal articles addressed to the company’s registered offi ce would be diverted to a post offi ce box. A company employee would then collect the postal articles from the post offi ce box and deliver them to the company’s registered offi ce. In defence to the plaintiff’s claim of non-compliance, the company submitted that the statutory demand was never received.

Justice Lindgren addressed the question of when service of a statutory demand by post to a company’s registered offi ce is effected, in circumstances where a company diverts its mail to a post offi ce box. He also addressed the question of whether non-receipt of a statutory demand could rebut the presumption as to the time of service.

Justice Lindgren considered the operation of the following legislation regulating service by post:

• Section 29(1) of the Acts Interpretation Act 1901 (Cth) stipulates that, in cases of service by post, unless a contrary intention is proved, service is taken to be effected at the time that the article would have been delivered in the ordinary course of post.

• Section 160(1) of the Evidence Act 1995 (Cth) creates a rebuttable presumption that a postal article addressed to a specifi ed address is received at that address on the fourth working day after being posted.

• Section 29(2) of the Interpretation Act confi rms that, in the case of inconsistency between s29(1) and s160(1), the latter prevails.


175

Justice Lindgren accepted the plaintiff’s submission that s160(1) of the Evidence Act applied to create a rebuttable presumption that service of the statutory demand was effected four working days after posting (being Monday, 4 December 2006). Justice Lindgren did not consider the company to have adduced evidence suffi cient to rebut the presumption as to the time of service.

In his reasoning, Justice Lindgren referred to the case of Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87, which considered similar legislative provisions concerning service. In Fancourt, the High Court considered proof of non-delivery as effective proof of non-service, but distinguished between non-delivery and non-receipt. The court did not consider the fact of non-receipt to displace the presumption of delivery (and thus service) 'in the ordinary course of post' .

Justice Lindgren cited strong policy reasons for attributing risk arising from a company’s failure to have a facility for receipt of mail at the registered offi ce of the company (where they have chosen such an arrangement). Ultimately, Justice Lindgren held that the presumption as to the time of service could not be rebutted by evidence that an employee of the company, rather than Australia Post, was the means by which the postal article was transported from the post offi ce to the company’s registered offi ce. In light of this decision, Justice Lindgren did not consider it necessary to decide whether an arrangement for the diversion by the post offi ce of mail addressed to a company’s registered offi ce to a post offi ce box could be relied on by a company to overcome the statutory presumption as to time of service.

Justice Lindgren concluded that the presumed date of service of the statutory demand was Monday, 4 December, being four working days after posting. The company failed to comply with the demand within 21 days of that date and was therefore presumed to be insolvent. Accordingly, Justice Lindgren ordered that the company be wound up and that a liquidator be appointed.

Where an employee of a company is responsible for collecting mail diverted to a post offi ce box and delivering it to a person (for example, a director) at the company's registered offi ce, evidence that a statutory demand was not so delivered may be insuffi cient to displace the statutory presumption that the demand was delivered on the fourth working day after being posted. This is particularly the case unless the company can provide evidence of non-receipt through, for example, a log of mail received or evidence that the mail was returned to the sender.


176

STATUTORY DEMANDS

Setting aside statutory demands: is there a back door for when you are out of time?

Case Name:Global Cement (North Queensland) Pty Ltd v Benchmark Debtor Finance Pty Ltd; ARMC Concrete Products Pty Ltd v Benchmark Debtor Finance Pty Ltd

Citation:[2007] QSC 143, Supreme Court of Queensland, Trial Division, per Lyons J


Issues:• Errors in a statutory demand

suffi cient to deem the statutory demand invalid

• Abuse of process

This case considers an interesting strategy: where a debtor has failed to set aside a purportedly invalid statutory demand within time, should the debtor be able to seek a court declaration that the statutory demand is invalid and that any reliance on the statutory demand by the creditor would be an abuse of process?

On or about 16 February 2007, Benchmark Debtor Finance (the creditor) served a statutory demand on Global Cement (North Queensland) Pty Ltd and ARMC Concrete Products Pty Ltd (the debtors) for a debt that was claimed to be due and payable. The creditor's address for service was an address in New South Wales. Under section 459G CA, a debtor has 21 days from the date of service of the statutory demand to fi le and serve on the creditor an application to set aside the statutory demand.

On 9 March 2007, the debtors sought to have the statutory demand set aside and fi led proceedings in Queensland. The applications were purportedly served on the creditor at its New South Wales address for service. However, the service was deemed to be ineffective as the application was not served with a SEPA (Service and Execution of Process Act 1992) notice attached. As service was ineffective and more than 21 days had elapsed since service of the statutory demand on the debtors, the time for having the statutory demand set aside had passed.

The debtors therefore applied to the court for a declaration that the statutory demand served on the debtors was 'not a creditor's statutory demand for the purposes of the Act.'

The debtors argued that an error in the affi davit accompanying the statutory demand rendered the entire statutory demand invalid. The specifi c error identifi ed by the debtors was a reference in the accompanying affi davit to the debtor company as 'Australia World Pty Ltd'. The debtors argued this was a fundamental defect that meant the creditor had not verifi ed that the amounts claimed in the statutory demand were in fact due and owing. All other details in the statutory demand and accompanying affi davit were correct.

In considering whether this error was suffi cient to justify the orders sought, Justice Lyons considered the terms of s459J CA for the setting aside of statutory demands and expressed the view that the court should not set aside a statutory demand because of a defect in the demand unless substantial injustice would be caused. Her Honour held that the error in the accompanying affi davit was not suffi cient to justify the orders sought, as the error would not result in the statutory


177

demand being set aside in the fi rst place. The statutory demand was in all respects correct and, with the exception of the error, the accompanying affi davit correctly verifi ed the amount owed. Justice Lyons stated that the error in the accompanying affi davit should be considered an irregularity only and, as there was no other evidence of any substantial injustice, there was no basis for making the orders sought by the debtors.

In the alternative, Justice Lyons considered whether the creditor should be prevented from relying on an invalid statutory demand that could not be set aside as the time for challenging the statutory demand had passed. The debtors argued that it would be an abuse of process by the creditor to seek a winding-up order relying on an invalid statutory demand. Her Honour stated that the debtors must prove that the creditor's motive for issuing the statutory demand and seeking the winding up of the debtors was for a purpose other than recovery of the debt owed to it. Justice Lyons held that there was 'nothing to suggest any collateral or ulterior purpose on the part' of the creditor in this instance.

This case is important for two reasons. First, it confi rms that a court will not readily make a declaration that a statutory demand is 'not a statutory demand for the purposes of the Corporations Act' where the statutory demand would not be set aside in the ordinary course. Secondly, it indicates that a creditor may, in certain circumstances, be able to rely on an invalid statutory demand (which has not been set aside) to seek a winding-up order, as long as the creditor is not motivated by some ulterior or collateral purpose.


178

STATUTORY DEMANDS

Whether power to extend time may be exercised after expiry of time for compliance

Case Name:Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd

Citation:[2007] VSCA 121, Court of Appeal of Victoria per Maxwell P and Chernov, Nettle, Ashlet and Neave JJA


Issues: • Section 459G CA• When has an application to

set aside a demand been 'fi nally determined'?

• Extension of time for compliance with a statutory demand

At issue in this case was whether a court has the power to extend the time for compliance with a statutory demand where the time for compliance with that statutory demand has already expired.

Esanda Finance Corporation Ltd was a creditor of Aussie Vic Plant Hire Pty Ltd and served a statutory demand on Aussie under section 459E CA. At fi rst instance, Aussie made an application to the court to set aside the demand. The applicable period for compliance with a statutory demand when an application to set aside the demand is made is set out in s489F(2)(a) CA and depends on the application's outcome. Aussie's application to set aside the demand was dismissed and the court extended the time for compliance with the demand to 4 July 2006.

Aussie exercised its right to appeal against the dismissal of its application to a trial judge. However, the appeal was dismissed by the trial judge on the basis of a preliminary objection raised by Esanda which turned on the fact that the time for compliance with the statutory demand had expired. The Notice of Appeal fi led by Aussie had been fi led before 4 July 2006 but it was not heard by the trial judge until 28 July 2006. Aussie's appeal was accompanied by an application for an extension of the time for compliance. However, the trial judge dismissed the application and the appeal itself, holding that he was bound by the decision in Buckland Products Ltd v Deputy Commissioner of Taxation [2003] VSCA 85.

Aussie appealed to the Victorian Court of Appeal. The central question that the Court of Appeal had to determine was whether Aussie had a right to appeal against the statutory demand, despite the fact that the time for compliance with the statutory demand had expired.

In reaching its decision, the Court of Appeal fi rst considered the case of Buckland. In that case, the company had made an application, within time, to set aside a statutory demand served upon it. As in the present case, the company's application was dismissed by the master at fi rst instance. An appeal to the trial judge was also dismissed on the ground that, by the time the appeal came on for hearing, the time for compliance with the demand had expired. The Court of Appeal upheld the decision of the trial judge.

The question that the court had to decide in Buckland was when the company's application under s459G CA to have the statutory demand set aside could be said to have been 'fi nally determined'. The Court of Appeal agreed with the trial judge that the application could not be said to have been 'fi nally determined' within the meaning of s459F(2)(a)(ii) CA until the appeal from the master to the judge had been fi nally determined. The decision in Buckland was that, once the company had failed to comply with the demand under s459F(2)(a)(ii) CA, it could not be unravelled because of the exercise of a right of appeal.


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However, there was a critical difference between the circumstances in the present case and those in Buckland. In Buckland, the court was only concerned with the interpretation of s459F(2)(a)(ii) CA. No question arose under s459F(2)(a)(i) CA, as there had been no extension of time for compliance with the statutory demand. In the present case, the issue was the interpretation of s459F(2)(a)(i) CA. In this case, the master exercised the power conferred by s459F(2)(a)(i) CA to extend the time for compliance with the statutory demand. The Court of Appeal stated that, once an order has been made under s459F(2)(a)(i) CA to extend the time for compliance with a statutory demand, the determination of when the time for compliance expires is governed exclusively by s459F(2)(a)(i) and s459F(2)(a)(ii) has no application at all. The Court of Appeal held that the critical issue it had to decide was whether the power to extend the time for compliance with a statutory demand conferred by s459F(2)(a)(i) ceases to be exercisable if the time for compliance has expired before the application for extension of time for compliance is heard and determined. Aussie submitted that the power was exerciseable even though time had expired. This was upheld by the Court of Appeal. The court also held that the issue of whether the power to extend the time for compliance with a statutory demand could be exercised, despite the fact that time for compliance has expired, was a matter of statutory construction.

Accordingly, the majority of the Court of Appeal held that leave to appeal against the decision of the trial judge should be granted. It set aside the trial judge's order dismissing Aussie's appeal and held that the trial judge was empowered to grant a time extension for compliance with the statutory demand under s459F(2)(a)(i) CA, even though the time for compliance with the statutory demand had expired. The matter was remitted to the trial judge for reconsideration.

This case establishes that the court has power to extend the time under s459F(2)(a)(i) CA for compliance with a statutory demand, even where the time for compliance with that statutory demand has already expired. However, this will only apply where the court has already made an order extending the time for compliance with the statutory demand and such an application was made within time.


180

STATUTORY DEMANDS

Application to set aside a statutory demand

Case Name:Finance & Equity v Leveraged Equities; Aussie Products v Leveraged Equities



Issues:• Sections 459G, 459H and

459J CA • Application to set aside a

statutory demand – relevant thresholds

• Evidence for damages in offsetting claim

Two of the grounds upon which a party may apply to set aside a statutory demand are that there is a genuine dispute about the debt and/or the party has an offsetting claim. The threshold for establishing the existence of either of these claims is low. If an offsetting claim is for damages, there must be some evidence supporting the quantum of the claim.

Finance & Equity and Aussie Products made applications under section 459G CA to set aside statutory demands from Leveraged Equities claiming the outstanding balance of money owed under a loan. Leveraged Equities entered into agreements to lend money to Finance & Equity and Aussie Products to purchase shares and options. The parties fell into disagreement and Leveraged Equities served notices to repay.

Finance & Equity and Aussie Products claimed that, because of an alleged representation by Leveraged Equities, it would not exercise the right to repayment unless there was an event of default under the loan, in accordance with s459H CA:

• there was a genuine dispute as to the existence of the debt; or • there was an offsetting claim.

The remedies sought were that either Leveraged Equities would be estopped from departing from its alleged representation or that it would be liable for damages because of its conduct being allegedly misleading or deceptive or unconscionable.

The court stated that the threshold to raise a genuine dispute as to the existence of a debt is low and that it is enough to raise one issue with suffi cient degree of cogency to be arguable. The threshold for an offsetting claim is similarly low – all that is required is a serious question to be tried. Regardless of the low threshold, it was held that Finance & Equity and Aussie Products had not met it in either case.

The evidence adduced in relation to the alleged representation was not suffi cient to indicate that Leveraged Equities communicated that it would not rely on the terms of the loan agreement.

In relation to the offsetting claim for damages, the court stated that it is necessary to have some evidence supporting the quantum of such a claim, even though this does not have to be to the degree that would be advanced at a trial. The evidence that was presented did not demonstrate that any loss was suffered by Finance & Equity and Aussie Products as a result of borrowing the money and using it to buy shares and options.


181

The court commented that an arguable case may have existed if it had been established that a closing out was a breach of the loan agreement and that Finance & Equity and Aussie Products would have ended up in a better position at the end of the term of the loan had they not been closed out.

Although the threshold for setting aside a statutory demand is low, it is still necessary to demonstrate an arguable case. If a claim is made for damages, evidence supporting the quantum of damages must be adduced.


182

STATUTORY DEMANDS

Whether statutory demand should be set aside

Case Name:Hilldale v Leveraged Equities



Issues:• Section 459G CA• Whether statutory demand

should be set aside or reduced by the amount of loss suffered

• What constitutes a genuine dispute or offsetting claim

The plaintiff sought to set aside a statutory demand on the basis that the circumstances raised a genuine dispute as to the existence of the debt or to an offsetting claim.

The plaintiff applied under s459G CA to set aside a statutory demand that claimed the balance of an outstanding loan to the defendant. The loan resulted from an agreement entered into by the parties whereby the plaintiff was to use funds advanced by the defendant to trade in shares and options.

The plaintiff purchased shares and options in Woodside Petroleum Ltd. Under the loan agreement, the defendant had the right to close out the plaintiff's transactions. The defendant closed out the plaintiff's position in Woodside, alleging that the plaintiff’s strategy of selling put options was a breach of the loan agreement. The balance left owing to the defendant was $621,465.

The plaintiff asserted that it believed its strategy was permitted and would not have entered into the transaction if it knew the defendant was going to close out its position. The plaintiff asserted that the defendant was estopped from enforcing the alleged debt on the basis that:

• conventional or promissory estoppel precluded the defendant from demanding repayment, as it induced the plaintiff to assume the trades were permitted;

• the defendant engaged in conduct that was misleading or deceptive under the Trade Practices Act 1974 (Cth) by conveying that the transactions were permitted by the agreement; and

• it was unconscionable for the defendant to have changed its position and closed out the Woodside positions at a substantial loss to the plaintiff.

The court stated that, in order to satisfy the court that there is a genuine dispute as to the existence or amount of the debt to which the demand relates, ‘the plaintiff need only show one issue having a suffi cient degree of cogency to be arguable’. The court noted that the test is not a diffi cult or demanding one. The court’s role is simply to determine whether the claim is arguable on the basis of the facts asserted.


183

The court accepted that the plaintiff thought, as a result of the defendant's conduct, that the strategy was permitted, and found that the plaintiff met the low threshold of raising either a genuine dispute or countervailing claim to the extent of $381,221 but no more. The court ordered that the statutory demand be reduced accordingly.

This case confi rms the general principle that in determining whether a statutory demand should be set aside, the plaintiff need only establish that the existence of a genuine debt or offsetting claim is arguable.


184

STATUTORY DEMANDS

Whether company may oppose a winding-up application where it did not apply to set aside a statutory demand

Case Name:Radiancy (Sales) Pty Ltd v Bimat Pty Ltd



Issues:• Discretion to grant leave

to oppose a winding-up application

• Application of section 459S CA

• Whether existence of parallel proceedings is an abuse of process

This case concerned an application to wind up a company that did not comply with a statutory demand. The company sought leave under section 459S CA to oppose the winding-up application on grounds that it could have relied upon had it applied to set aside the statutory demand. The company also sought an order that the winding-up application be summarily dismissed.

Radiancy (Sales) Pty Ltd (RS) served eight statutory demands on Bimat Pty Ltd (the company). The company did not apply to have the statutory demands set aside. RS brought an application to wind up the company and commenced separate proceedings to establish the debt in the District Court.

The company opposed RS's winding-up application and sought to have it summarily dismissed on a number of grounds, including that the statutory demand was fraudulent and that it was an abuse of process to use the winding-up proceedings to seek recovery of a disputed debt. As these are grounds that the company could have relied on to set aside the statutory demand, the company was required to obtain leave under s459S CA.

Justice White adopted the following three considerations identifi ed by Justice Austin in Chief Commissioner of Stamp Duties v Palifl ex Pty Ltd (1999) 149 FLR 179 at 193 [49] as relevant to the exercise of the discretion to grant leave, which involve:

• a preliminary consideration of the basis for disputing the debt that was the subject of the demand;

• an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and

• an investigation of whether the dispute about the debt is material to proving that the company is solvent.

Justice White granted the company leave to oppose the winding up on the basis that:

• the debt that was the subject of the statutory demand was genuinely in dispute;• the statutory demand was unaccompanied by an affi davit;• there were valid reasons why the company did not apply to set aside the

demand; and• the company would suffer substantial injustice if leave was not given.


185

In respect of the company’s application for an order dismissing the winding-up proceeding as an abuse of process, the court held that the winding-up proceedings were not an abuse of process merely because proceedings were commenced in the District Court to establish the debt. However, Justice White dismissed the winding-up proceedings on the basis that RS was not entitled to serve a statutory demand and was not a creditor entitled to bring proceedings for the winding up of the company.

The operation of s459S CA is not confi ned to cases in which the company, through no fault of its own, does not bring an application within the prescribed period to set aside the statutory demand. The institution of parallel proceedings is not in and of itself an abuse of process. Both processes may legitimately be used to seek recovery of a debt where a statutory demand has not been set aside and leave has not been granted under s459S.


186

STATUTORY DEMANDS

Failure to challenge Commissioner's assessment may not preclude the setting aside of a statutory demand

Case Name:Zolsan Pty Ltd v Deputy Commissioner of Taxation

Citation:[2007] NSWSC 1326, Supreme Court of New South Wales per Young CJ in Equity


Issues:• Authority of the Deputy

Commission of Taxation to sign a statutory demand under section 459G CA for tax debt in a case where there had been no judgment for debt

• Whether the debt is illusory and the statutory demand should be set aside under s459H CA

The plaintiff in this case sought to set aside a statutory demand on the grounds that the Deputy Commissioner of Taxation was not empowered to sign the statutory demand and, in the alternative, that there was a genuine dispute about the amount of debt under section 459H CA. The case marks a shift in the law, by fi nding that a failure to challenge the validity of the Commissioner's notice of assessment will not preclude an order setting aside the statutory demand in certain cases.

The Deputy Commissioner of Taxation (the Commissioner) arranged for a valuation of the trading stock land of Zolsan Pty Ltd (the plaintiff) following some dissatisfaction with the plaintiff's own valuation. Based on that new valuation, the Commissioner imposed penalty taxes and additional Goods and Services Tax (GST) on the plaintiff, for which three notices of assessment were issued to the plaintiff for the three-month periods ending 30 September 2001, 31 December 2001 and 31 March 20001. The plaintiff only raised an objection to the last notice.

The Supreme Court of New South Wales was initially asked to determine whether the Commissioner had the power to sign the statutory demand and the court held that, under s459E(2)(f) CA, the demand must be signed by, or on behalf of, the 'creditor'. Although 'creditor' is not defi ned, para 255-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) states that a tax liability is payable to the Commissioner and, therefore, Chief Justice Young in Equity held that the Commissioner was authorised to sign the demand.

The plaintiff further challenged the statutory demand under s459H(1)(a) CA on the ground that there was a 'genuine dispute' between the parties about the existence or amount of the alleged debt. His Honour felt compelled to follow the long-standing authority of the Full Federal Court decision in Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 that where a person has not challenged the validity of the Commissioner's notices of assessment then they are precluded from challenging that the debt is due. As a result, they cannot seek relief under s459H CA to set aside a statutory demand for the unchallenged debt.

However, his Honour relied upon a recent decision by the Queensland Court of Appeal in Neutral Bay Pty Ltd v Deputy Commissioner of Taxation [2007] QCA 312 to conclude that the earlier authority of Hoare Bros did not prevent the setting aside of the statutory demand in this case because of some distinguishing features.


187

Of particular note were the different tax liabilities in the cases, with the decision in Hoare Bros relating specifi cally to income tax, whereas both the present case and the Neutral Bay case involved GST. His Honour reasoned that the decision in Hoare Bros was dependent on the fact that an assessment of income tax fi xes the liability and that the debt arises from that assessment, whereas in GST cases the liability arises before the assessment and could therefore be disputed after the assessment and subsequent failure to object on the part of the plaintiff in this case.

For the purposes of s495H CA, the court will not consider a failure to object to a notice of assessment as determinative of the dispute in cases excluding income taxation.


188

UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Family-related transactions will be closely scrutinised

Case Name:Welcome Homes Real Estate Pty Limited & Ors v Ziade Investments Pty Limited & Anor

Citation:[2007] NSWCA 167, Court of Appeal of New South Wales per Spigelman CJ and Hodgson and Santow JJA


Issues:• Sections s588FB, 588FDA,

588FE and 588FF CA• Uncommercial transactions

and insolvent transactions

The appellants sought a declaration that the judge had erred in concluding that the respondent company was insolvent at the time of entering into uncommercial transactions. This case confi rms the principles the court will apply in determining whether transactions are uncommercial.

Ziade Investments Pty Ltd (the company) was a company whose sole director and shareholder was the son. The company granted mortgages over two of its properties to Welcome Homes Real Estate Pty Ltd, Ritz Cinema Pty Ltd, Jalnz Constructions Pty Ltd, the father and his wife the mother, who were theparents of the son. The mother and the father were sole shareholders of Welcome Homes and Ritz Cinema and were shareholders of Jalnz Constructions. Each mortgage secured past loans said to be owed by the company.

On application by the liquidator, the trial judge held that that the mortgages were voidable transactions under section 588FE(3) CA and, although it was unnecessary to decide, the creation of interests in the mortgages in favour of the mother and father were voidable as unreasonable director-related transactions under s588FE(6A) CA.

Among the 15 grounds of appeal, the appellants claimed that the trial judge:

• erred in concluding that at the time the mortgages were granted the company was insolvent;

• failed, when determining whether the company was insolvent, to take into account or to give suffi cient weight to the willingness and ability of the father and the companies associated with him to provide fi nancial assistance to the son; and

• erred in concluding that the giving of the mortgages were uncommercial transactions.

On the question of insolvency, the Court of Appeal held that:

• where a liquidator faces diffi culties without funds and has no cooperation from the liquidated company's directors and virtually no company records, a liquidator can make inferences, but must also produce some evidence from which those inferences can be drawn; and

• in this case, there was suffi cient evidence to establish that the company was insolvent, including the liquidator's opinion, notes of meetings and the failure by the company to make interest repayments.

In deciding whether the transaction was uncommercial, the Court of Appeal held that:


189

• the trial judge correctly applied the reasonable person test;• commercial practice is relevant to the question of whether a reasonable person

may have entered into the transaction;• transactions should be closely scrutinised where there is a family relationship;• a transaction is likely to appear unreasonable where there are no benefi ts

required or expected from that transaction; and• legally defi ned and enforceable benefi ts and burdens far outweigh other less

important factors, such as a track record of assistance and an apparent willingness to rescue a company.

The test of whether a transaction is uncommercial is whether a reasonable person in the company's circumstances, would have entered into the transaction having regard to the benefi ts, detriments and benefi ts to other parties. The courts will consider what normal commercial practice is in determining this question. Family-related transactions will be closely scrutinised.


190


Payment made by a director to a third party with company funds

Case Name:Kalls Enterprises Pty Ltd (in liquidation) & Ors v Baloglow & Anor

Citation:[2007] NSWCA 191, New South Wales Court of Appeal per Giles, Ipp and Basten JJA


Issues:• Sections 588FB, 588FE,

588FF Corporations Law (same provisions as CA)

• Whether a transaction is a 'transaction of a company'

• Liability under the fi rst limb of Barnes v Addy

On the facts of this case, the majority of the Court of Appeal found that a payment made by a director with company funds to a third party in satisfaction of personal liability could be characterised as a transaction of a company. In addition, the court had to consider whether, on the facts, there had been knowing receipt of trust property by the third party.

This case concerned an appeal against a decision of Justice Hamilton in the Supreme Court of New South Wales. Mr Kalls was the director of Kalls Enterprises Pty Ltd (Kalls). Kalls owned a laundry business, Total Quality Laundry Service (Total Quality), that was sold to AA Australian Commercial Laundries Pty Ltd (AA). The shareholders of AA were Kalls and Swanhill Pty Ltd, a company controlled by Mr Baloglow. The directors of AA were Mr Kalls and Mr Baloglow. It became apparent that Mr Kalls had made misrepresentations to Mr Baloglow about the fi nancial state of Total Quality. Mr Baloglow therefore withdrew from involvement in AA and the parties agreed to and, in fact, entered into a deed whereby Mr Baloglow would receive a payment of $700,000.

Mr Kalls failed to pay the full amount to Mr Baloglow, who commenced proceedings and obtained a judgment against Mr Kalls. Mr Kalls negotiated to sell Total Quality to a third party, Decision Technology (DT). Another deed was entered into whereby $555,000 of the proceeds of the sale of Total Quality would be paid to Mr Baloglow, in satisfaction of the outstanding liability. Total Quality was sold to DT by Kalls rather than AA. Although AA owned the assets of Total Quality before the sale, Kalls had been providing the funds to conduct the business. At settlement, Mr Baloglow was paid $555,000. Some months later, both Kalls and AA went into liquidation. Both companies and their liquidators brought proceedings against Mr Baloglow, claiming that:

• Mr Baloglow should repay the $555,000 to Kalls or AA because the payment was a transaction of Kalls or AA that was a voidable transaction under section 588FE; and

• Mr Baloglow should repay the $555,000 to Kalls or AA because it was money paid in breach of fi duciary duty under the fi rst limb of Barnes v Addy (1874) LR Ch App 244. In that case, it was stated that a third party may be liable as constructive trustee where there was 'Knowing receipt'. The second limb of this case relates to 'Knowing assistance'.


191

At fi rst instance, Justice Hamilton held that the payment of the $555,000 was not part of a transaction of Kalls or AA and therefore it could not be a voidable transaction. Justice Hamilton also held that the payment of $555,000 was in breach of Mr Kalls' fi duciary duty to Kalls but not AA, although Mr Baloglow did not have the necessary knowledge for Barnes v Addy liability. Kalls, AA and the liquidators appealed the decision.

On appeal, Justices Ipp and Basten found that the relevant transaction was a transaction of Kalls and AA and was a voidable transaction under s588FE. Justice Giles agreed with Justice Hamilton at fi rst instance, though for different reasons, that the transaction was not a transaction of Kalls or AA. The plaintiffs had identifi ed the 'transaction' as a composite series of events and dealings directed towards enabling Mr Kalls to satisfy his liability to Mr Baloglow. It was agreed that a composite transaction can comprise a transaction for the purposes ofPart 5.7B CA.

Their Honours agreed that whether a transaction is a transaction of a particular company is a question of fact and will depend on the nature and extent of involvement of the company in the transaction. The Court of Appeal also agreed that it is not suffi cient to merely determine whether the company was a party to the relevant transaction. In fi nding that the transaction was a transaction of Mr Kalls, Justice Giles highlighted that Kalls and AA never undertook an obligation to pay Mr Baloglow. Kalls and AA were only involved because the sale of Total Quality was to be the source of Mr Kalls' funds.

Justices Ipp and Basten found that the transaction was one of both Kalls and AA. Justice Ipp found that, in becoming parties to the sale agreement regarding Total Quality and/or the deed whereby the proceeds of the sale would be paid to Mr Baloglow, Kalls and AA had agreed to be the source of funds for Mr Kalls. The provision of funds was of great importance in the transaction, therefore both Kalls and AA were involved to a material degree. Justice Basten reasoned that the payment of the proceeds of sale to Mr Baloglow occurred with the knowledge and consent and at the direction of the directors and shareholders of both Kalls and AA. Therefore, the transaction was a transaction of both Kalls and AA.

In relation to the claim under the fi rst limb of Barnes v Addy, the Court of Appeal held that the purchase money from the sale of Total Quality was held by Kalls on trust for AA. Mr Kalls was in breach of his fi duciary duty to Kalls because he used money for which Kalls was accountable to AA to satisfy his personal liability to Mr Baloglow. Mr Kalls was also held to be in breach of his fi duciary duties to AA. As a director of AA, he did not act in a way to preserve AA's ability to receive the proceeds of the sale of Total Quality and instead used the money in his own interests. In addition, it was found that Mr Kalls disregarded the interests of the creditors of both Total Quality and AA.


192

At fi rst instance, Justice Hamilton relied on the test applied by Justice Anderson in Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191 for the knowledge required for liability under the fi rst limb of Barnes v Addy. This was not challenged on appeal. The Court of Appeal found that, on the evidence, what Mr Baloglow knew would, to an honest and reasonable man, make out a breach of Mr Kalls' fi duciary duty owed to Kalls and AA. The Court of Appeal stated that this was suffi cient for Barnes v Addy liability.

In addition, the Court of Appeal considered that Mr Baloglow, whose knowledge included that of his solicitors, knew of a number of matters going to the likely detriment to the creditors of Total Quality. It was held that, as a minimum, it had been made out that with his knowledge, an honest and reasonable man would have thought that there was a real and not remote risk that the creditors of Total Quality would be prejudiced by payment to him of AA's money. On this basis also, there was a Barnes v Addy liability.

This case demonstrates that, when determining whether a transaction is a transaction of a company for the purposes of Part 5.7B CA, the court will look at the nature and extent of involvement of the company in the transaction. Here, a composite transaction over a period of time was capable of amounting to a 'transaction'. This case also applies the relevant test to establish the level of knowledge required for liability for receipt of trust property.


193


Running account defence not dependent on the same credit terms applying throughout the relation-back period

Case Name:Sutherland & Anor v Lofthouse & Anor

Citation:[2007] VSCA 197, Court of Appeal of Victoria per Nettle, Neave and Redlich JJA


Issues:

• Payments made under a 'running account'

• Good faith defence • Sections 588FA and

588FG(2) CA

The liquidators in this case sought to set aside a number of payments made by a company to a supplier on the grounds that they were unfair preferences. This case reviews the principles to be applied in determining whether a running account defence exists under section 588FA(3).

Colac Stockfeeds Pty Ltd’s (the company) business involved purchasing additives for livestock feed from suppliers. The liquidators sought orders to avoid payments made by the company to a supplier on the basis that they were unfair preferences. The payments were made during the relation-back period. In the fi rst instance, the trial judge rejected the creditor’s claims that it was entitled to the 'good faith' defence under s588FG(2) CA and the 'running account' defence under s588FA(3) CA.

The Victorian Court of Appeal upheld the trial judge’s decision that the payments had not been made in good faith because the creditor had reasonable grounds for suspecting that the company was insolvent and a reasonable person in those circumstances would have suspected that the company was insolvent.

In respect of the running account defence, the Court of Appeal held that:

• the operation of the running account defence is not dependent on the continuity of the same credit terms throughout the relation-back period;

• the total business effect of the series of transactions should be examined, not individual payments; and

• provided that part of the purpose of the payment is to ensure continued supply of products, it is not relevant that part of the purpose of the payment is to reduce existing indebtness.

The Court of Appeal confi rmed the general principle that where a running account is established, there will only be a preference if the net effect of the payments made during the relation-back period has been to reduce the initial level of indebtedness.

In this case, the Victorian Court of Appeal found that the running account balance was reduced by $17,329 during the relation-back period and held that these payments were unfair preferences under s588FA(3) CA.

This case confi rms the principles a court will apply in determining whether a running account defence exists. Relevantly, this case establishes that the defence is not dependent on the same credit terms applying throughout the relation-back period.


194


Steady repayment of debts as unfair preference

Case Name:Tolcher & Ors v John Danks & Son Pty Ltd

Citation:[2007] NSWSC 1207, Supreme Court of New South Wales per Bryson AJ


Issues:• Section 588FA CA• Reasonable grounds to

suspect insolvency

The Supreme Court of New South Wales decided that a company may be held to be insolvent where engaged in steady transactions of repayment of a debt. This fact may subsequently be relied upon by the liquidators of the company to make a claim of unfair preference to recover those payments under section 588FA CA.

Waddell & Son Pty Limited (the company) had opened a credit account with the defendant, John Danks & Son Pty Limited, and later entered into a franchising agreement (the agreement) with John Danks. The agreement established a business relationship that was integral to the company's business. In February 2006, the company went into administration and the fi rst two plaintiffs became its administrators, and later, its liquidators, when the company was placed into creditors' voluntary winding up by creditors. The company remained in liquidation and was the third plaintiff in the proceeding.

The plaintiffs sued for 20 payments each of $7000, a total of $140,000, which fell due within six months ending on the relation back date, 21 February 2006. They claimed that each payment was an unfair preference occurring at a time when the company was insolvent.

It was not in dispute between the parties that the 20 weekly payments were made. However, it was alleged by the plaintiffs that:

• the company was insolvent at the time the payments were made;• the defendant received more payments than the defendant would have received

if the payments were set aside and the defendant proved in the winding up; and • each of the payments constituted an unfair preference under s588FA CA, an

insolvent transaction under s588FC CA or a voidable transaction under 588FE CA.

In response, the defendant alleged:

• it became a party to the payments in good faith;• at the time it had no reasonable grounds to suspect insolvency;• any reasonable person in the defendant's circumstances would not have had

such grounds; and • the defendant provided valuable consideration and changed its position in

reliance on the transactions.


195

Justice Bryson held that there were reasonable grounds to suspect insolvency, since the company's diffi cult fi nancial circumstances had been communicated to the defendant in correspondence each month during the relevant period from 22 August 2005 to 22 February 2006. In fact, the reporting to the defendant by the company showed that the company lacked capital, was persistently late in making payments and had a declining cash fl ow and turnover.

His Honour held that the defendant had chosen to accept staggered payments from the company during the relevant period rather than to lose one of these franchise outlets and customers. Justice Bryson noted that a company in a solvent position would not require arrangements for the weekly repayment of debt.

Despite the fact that during the relevant period the company's debt went into steady decline, his Honour expressed the view that the overall picture depicted a large body of unsecured creditors. His Honour found nothing that would indicate to a reasonable person conducting the defendant's affairs that the company's insolvency had improved by August 2006, when the defendants submitted that trade with the company was under control.

It was held that each of the weekly payments, totalling $140,000, constituted an unfair preference. The defendant was ordered to repay to the company an amount equal to all the payments with costs. Judgment was reserved as to further consideration of interest.

Despite steady repayment of debts, a company may still be held to be in a state of insolvency and this may be relied upon by a liquidator to bring an unfair preference claim.


196


What constitutes a 'transaction' and is it uncommercial?

Case Name:Capital Finance Australia Limited v Tolcher

Citation: [2007] FCAFC 185, Federal Court of Australia per Heerey, Lindgren and Gordon JJ


Issues:• What constitutes a

transaction under sections 588FB or 588FA CA?

• Payments voidable as uncommercial transactions or unfair preferences

• Interest on repayment of uncommercial transactions

The liquidators in this case sought to recover payments paid by a third party to the plaintiffs, Capital Finance Australia Pty Limited (CFA) and Capital Corporate Finance Limited (CCF) (together, the Capital companies), as uncommercial transactions and unfair preferences. The liquidator also sought to recover interest on these payments from either the date of receipt or date of his appointment.

A series of transactions were entered into between the Capital companies, Lloyd Scott Enterprises (LSE), Lloyd John Scott and the National Australia Banking Group Limited (NAB), before LSE went into liquidation. The Capital companies provided a service to LSE whereby it would lease out equipment to LSE, which LSE would on-hire to its clients. LSE's rights and liabilities under its leasing agreements were covered by contracts between LSE and the Capital companies (the principal and agency agreements) dated 7 July 1995 and 1 July 2000 respectively. The liabilities arising under the agreements were not in dispute. However, subsequent to the agreements, the Capital companies, LSE and Mr Scott executed a deed (the second deed) dated 12 January 2001, which obliged LSE to make payments to the Capital companies totalling at least $10 million over four monthly instalments. This amount included not only the 'whole amounts necessary at any given time to pay out the leasing agreements', but also included 'all other amounts owed by LSE and Mr Scott pursuant to any other agreement or deed, including legal costs' (emphasis added, at [131]).

In order for LSE to meet the monthly instalments required under the second deed, LSE contracted with NAB to purchase lease equipment from CFA, who would then lease it to LSE. It was undisputed in the proceedings that LSE was insolvent at the time it entered into the second deed and on the date of each instalment.

The fi rst issue concerned what constituted a 'transaction' for the purposes of section 9 CA. The Capital companies contended that 'transaction' did not include the payments by NAB to CFA as LSE was not a party to them. However, Justice Gordon (with whom Justice Heerey agreed) held this characterisation of 'transaction' to be unduly narrow. Her Honour considered that the transactions between NAB and CFA could not be divorced from the refi nancing agreement reached between NAB and LSE, and the allocation of the NAB payments by CFA in reduction of LSE's liabilities under the second deed. Accordingly, Justice Gordon held that 'transaction' included both payments under the second deed, but also payments made by NAB to CFA.


197

The next question for the court was whether the identifi ed transactions were uncommercial under s588FB CA. It was not disputed that the transactions were made within the relation back period, or that LSE was insolvent at the time of the transactions. The issue for the court was whether it may be expected that a reasonable person in LSE's circumstances would not have entered into the transaction, taking into account the benefi ts and detriments to LSE. The second deed, in effect, sought payment of the whole amount that the lessees would ultimately pay over the life of the lease in the period of four months; payments that the Capital companies would not otherwise be entitled to, and had little or no expectation that it would receive them, under its current contract with LSE. Accordingly, it was held that the detriment was such that a reasonable person in LSE's circumstances would not have entered into the second deed. The consequence of this was that the transaction was voidable under s588FE CA, and the payments made to CFA in reduction of LSE's liability under the second deed were to be repaid to LSE's liquidator.

The third issue was whether the transactions also constituted unfair preferences under s588FA CA. This issue was dismissed. It did not automatically follow that, because the Capital companies were parties to an uncommercial transaction, they also received a preference, priority or advantage in respect of a debt owing by LSE before the second deed's execution. It was not established that such a prior debt was owing to the Capital companies.

Finally, on cross appeal, the liquidator contended that the dates from which interest was to be calculated on amounts recovered by the liquidator was to be from the date of receipt of each payment or from the date of the liquidator's appointment, rather than when the demand for the return of the monies was made. Justice Gordon rejected the submission by the liquidator that Ferrier and Knight (as liquidators of Compass Airlines Pty Ltd) v Civil Aviation Authority [1994] FCA 1571 should be disregarded when considering uncommercial transactions under s588FB CA. Her Honour rejected this view as the principles underlying Ferrier, a case concerning unfair preferences, were still applicable in this case. Where a transaction is not made under any mistake, nor illegal, there may be (as was the case here) nothing inherently wrong with the transaction until it is rendered void by the CA. Therefore, the date of interest could not apply to the receipt of monies by CFA (at [148]). As to the date of the appointment of the liquidator, to adopt this date as the relevant date would be to presume that demand for recovery would be successfully made. Thus, the date of demand is the date generally used. The court held that nothing in this case justifi ed a departure from this general position.

It is not necessary for there to exist only a single event to constitute a transaction. In this case, the court took the view that a series of events over time amounted to a transaction for the purpose of the CA. Accordingly, the court will take a broad view in relation to 'transaction' where the circumstances justify such an approach.


198

DEVELOPMENTS IN AUSTRALIA

Corporations Amendment (Insolvency) Act 2007 and Corporations Amendment Regulations 2007 (No 13)

On 20 August 2007, draft legislation dubbed 'the fi rst comprehensive package for insolvency laws since the 1988 Harmer Review' received Royal Assent. The majority of the provisions of the Corporations Amendment (Insolvency) Act 2007 (the Act) came into force on 31 December 2007.

The Parliamentary Secretary to the Treasurer, Chris Pearce, had released the draft Corporations Amendment (Insolvency) Bill 2007 for public comment (which closed on 23 February 2007), and it passed through the Senate on 9 August 2007.

The purpose of the Act is to implement a range of key changes to streamline the processes involved in insolvent external administration by increasing fl exibility, removing unnecessary regulatory burdens and refl ecting the practices that are already in use.

The Act focuses on four main areas:

Improving outcomes for creditors

Outcomes to creditors are to be improved through enhancing protection for employee entitlements, improved information to creditors, removal of unnecessary procedural requirements, and by introducing a statutory pooling process to facilitate the winding up of related companies.

Deterring corporate misconduct

The Act includes a number of provisions that are intended to punish and deter corporate misconduct primarily through the establishment of an assetless administration fund to improve the quality of information forwarded to ASIC by insolvency practitioners, and the new ASIC enforcement program targeted at phoenix company behaviour. The assetless administration fund that is targeted at deterring company phoenix behaviour has already been implemented. As at 30 June 2007, the fund has resulted in the disqualifi cation of 46 directors for a total of 154 years, with another 53 potential bannings in progress.1

In support of this initiative, the Act restores the longstanding interpretation of the non-applicability of penalty privilege in proceedings for disqualifi cation or banning orders. ASIC is provided with enhanced powers to investigate the conduct of registered liquidators.

1. Media release issued by Chris Pearce MP on 9 August 2007.

199

Improving regulation of insolvency practitioners

There is also a range of measures in the Act aimed at improving the regulation of insolvency practitioners primarily through enhancements to the registration regime administered by ASIC but also through the introduction of more fl exible disciplinary procedures. For example, the Companies Auditors and Liquidators Disciplinary Board (the CALDB) is given more power and fl exibility by providing the CALDB chairman with the option to convene pre-hearing conferences in order to fi x hearing dates or to give directions concerning the timetable for the making of submissions or evidence. The CALDB may admonish or reprimand anyone who breaches such directions.

Finetuning voluntary administration

Although it is generally acknowledged that the voluntary administration procedures currently in place are effective, the Act addresses several technical issues in order to enhance the effi ciency and cost-effectiveness of the process. These provisions largely recognise market developments and opportunities for improvement that have been identifi ed since the voluntary administration procedure was introduced in 1993 and include matters such as narrowing the circumstances in which creditors are entitled to terminate a DOCA, slightly extending the timing for the holding of creditors' meetings and the fact that a company under a DOCA may seek a court order that it need not indicate on public documents that it is subject to a DOCA.

In addition, there are certain provisions aimed at streamlining the transitions from liquidation to administration and vice versa.

The Corporations Amendment Regulations 2007 (No 13) (the Regulations) were made on 26 September 2007 and came into effect on commencement of the relevant sections of the Act, being 31 December 2007. The Regulations complement amendments made by the Act and implement reforms to the external administration provisions of the Corporations Regulations 2001.

The Regulations include provision for:

• the sending of notices and documents to creditors;• the prescription of a threshold for the compromise of debts;• processes to complement the operation of the pooling facility introduced by

the Act;• electronic communications;• the conduct of creditors' meetings;• electronic lodgment of proxy appointments; and• the use of the casting vote by the chairperson in split-vote situations.

The Regulations also make modifi cations to prescribed forms and schedules of the Corporations Regulations.

200


IPA Code of Professional Practice

In December 2007, the Insolvency Practitioners' Association (the IPA) released the fi rst part of its Code of Professional Practice (the Code), which is effective from 31 December 2007 and supports compliance with the amendments to the CA, which also comes into effect on the same date.

The purpose of the Code is twofold:1

• to educate IPA members in relation to their professional responsibilities; and• to provide a reference for stakeholders against which they can gauge the

conduct of practitioners.

The identity of the stakeholders is recognised as including creditors, employees, suppliers, regulators, the courts and the public. In corporate insolvency, the stakeholders also include contributories and directors. In personal insolvency, they are the bankrupt or debtor, the spouse of the bankrupt and the offi cial trustee and the offi cial receiver.

The Code itself is divided into three sections as follows:

• Part A sets out the overarching principles, including conduct, remuneration and practice management.

• Part B contains detailed guidance and examples to help practitioners in applying the principles set out in Part A.

• Part C contains templates and practice notes that should be adopted for use in practice.

The Code uses a three-tier hierarchy of wording to set out its requirements, including those that are compulsory (must), those that are recommended (should) and those that are optional (may). For example, in providing guidance on independence, the Code explains that 'when accepting or retaining an appointment the practitioner must at all times during the administration be, and be seen to be, independent'.2

It is recognised by the IPA that where practitioners will need to implement new systems, such as for remuneration claims, this will take time. Accordingly, the transitional provisions provide that the new systems need to be in place by 31 March 2008.

It is expected that the Code will be amended when required to refl ect amendments and developments in insolvency law and practice.

1. Page 1 of the Code.

2. Page 15 of the Code.

201


UNCITRAL Model Law in Australia

Currently, the cross-border insolvency regime in Australia is governed by Division 9 of Part 5.6 CA. The Cross Border Insolvency Bill 2007 (the Bill) was introduced into the federal Parliament on 20 September 2007 to incorporate the UNCITRAL Model Law into Australian law and the Bill was passed by the House of Representatives. However, as the Bill had not been passed by the Senate when Parliament was prorogued on 15 October 2007 in anticipation of the 24 November 2007 federal election, the Bill has now lapsed and will have to be reintroduced before Parliament if it is to be enacted. As such, the UNCITRAL Model Law and its provisions have not yet been adopted in Australia.

202


Reform of personal property security law in Australia

The Federal Government plans to reform Australia's personal property security regime to create a national registration system for personal property security agreements and a new legislative framework. At present, Australia's personal property security regime comprises about 70 pieces of State, Territory and Commonwealth legislation. The Federal Government has pledged $113.3 million over the next fi ve years to facilitate these reforms.

The proposed reforms are signifi cant and will have wide-ranging effects, both in the general context of personal property security law and in the context of insolvency. The reform package is heavily based on the New Zealand Personal Property Securities Act 1999, as well as Canadian and US legislation.

The proposed reforms, as they currently stand, include:

• the introduction of a single, national register for personal property security interests;

• the introduction of a 'functional equivalence' approach in the characterisation of security interests; and

• the removal of the distinction between fi xed and fl oating charges.

The personal property security registerThe Federal Government proposes to introduce a single, national register for personal property security interests. This register would record, in relation to a particular personal property security agreement, the lender, the borrower, and the relevant personal property. Such registers exist at a national level in New Zealand and at a provincial or state level in Canada and the US. An example of such a register that already exists in Australia is the NSW Register of Encumbered Vehicles, which is a database of security interests in motor vehicles and boats.

The 'functional equivalence' approachThe Federal Government proposes to replace the current 'formal' approach to characterising securities with the 'functional equivalence' approach, an approach that is currently employed in New Zealand, Canada and the US.

The current 'formal' approach characterises securities based on the rights that are held in the relevant property. For example, under the current law, where an entity has title over personal property in the possession of an insolvent company as security for a loan, that entity is able to repossess the relevant personal property without having to stand in line as a creditor.

203

The new 'functional equivalence' approach differs substantially from the current approach in that it involves the characterisation of securities according to the intended outcome of the underlying transaction. This new approach does not have regard to whether title vests in the debtor or the creditor. Accordingly, under this approach, where an entity has issued a loan to a company in return for title over a personal property asset of the company, that entity would be characterised as a secured creditor of the company in the case of insolvency. This is because the underlying transaction is one in which a security interest has been created in relation to the personal property. It is then irrelevant whether title vests in the creditor or in the insolvent company. Under the new 'functional equivalence' approach, registration of a personal property security is crucial in ensuring that the creditor has a secured interest that takes priority over the interests of other creditors.

The removal of the distinction between fi xed and fl oating chargesAs a consequence of the introduction of the 'functional equivalence' approach, the Federal Government proposes to remove the distinction between fi xed and fl oating charges. This is because, under the new approach, the nature of a security interest itself is not relevant. Rather, it is relevant only that the interest secures payment or the performance of some other obligation. The distinction between fi xed and fl oating charges becomes irrelevant under the new, proposed approach as both types of charges create security interests.

The reforms may include a change to the defi nition of 'fl oating charge' in the CA to provide that such a charge is a security interest in the 'circulating assets' of a company, which include assets such as currency, inventory and accounts receivable that a company may dispose of without the creditor's consent.

What now?The reforms proposed by the Federal Government introduce signifi cant changes to the current personal property security regime and will have a major effect on companies in insolvency. To date, the Attorney-General has released and obtained comments from the public on three discussion papers relating to the proposed reforms, to which the Council of Australian Governments has given its in-principle support.

204


CAMAC considers implications of Sons of Gwalia decision

The Corporations and Markets Advisory Committee's (CAMAC) discussion paper on the implications of the Sons of Gwalia decision, is concerned not only with the issue of whether to retain the principles set down in the Sons of Gwalia case, but also:

• whether equity-linked investors, such as those who hold interests via nominees or trusts, or holders of derivatives, should remain outside the scope of section 563A CA;

• how administrators should deal with aggrieved shareholders if the Sons of Gwalia ruling is to stand;

• if the current law is changed to postpone the claims of shareholders to those by conventional unsecured creditors, whether the 'fraud on the market' principle should be imported into Australian law to facilitate proof of aggrieved investor claims, making it easier for aggrieved shareholders to establish their case; and

• whether members who have claims falling within s563A are nonetheless creditors having the same rights (eg to receive information and vote at meetings) as unsecured creditors in a voluntary administration or liquidation.

CAMAC sought comments and submissions by 21 December 2007 and will now prepare a report, expected to be released in 2008.

IntroductionCAMAC released its discussion paper, Shareholder claims against insolvent companies: Implications of the Sons of Gwalia decision (the discussion paper), on 20 September 2007. The discussion paper follows a request from the then Parliamentary Secretary for the Treasurer, Chris Pearce, that CAMAC consider and report back on three issues:

• Whether the decision in Sons of Gwalia Ltd v Margaretic & Anor1 (as reported in AAR Focus: Insolvency – February 2007) should be reversed by legislation?

• If the Sons of Gwalia decision is to stand, whether any statutory reforms should be implemented to facilitate the effi cient administration of insolvency proceedings in light of such claims?

• If the Sons of Gwalia decision is to be reversed, are there any reforms to the statutory scheme to protect shareholders from the risk of acquiring shares based on misleading information?

1. (2007) 232 ALR 232.

205

The CAMAC discussion paper The discussion paper canvasses three options for dealing with shareholders who have bought shares in a company as a result of misleading conduct by that company, in circumstances where the company has proceeded into voluntary administration or liquidation (the aggrieved shareholders).

Option 1: No change

Option 1 is to allow the Sons of Gwalia decision to stand. In effect, this would allow aggrieved shareholders to rank with traditional unsecured creditors.

Facilitating the effi cient administration of insolvency proceedings

If the law is to remain unchanged, the discussion paper suggests that a range of provisions may be introduced to facilitate effi cient administration of insolvency proceedings.

Issue: Administrators are required to give written notice of creditors' meetings to as many of the company's creditors as is reasonably practicable.2 It may be diffi cult for administrators to determine whether they are required to give notice to all or some shareholders, given not all shareholders will be aggrieved shareholders.

Option: Expressly state that administrators do not have to search the share register or take other steps to identify those who may qualify as an aggrieved shareholder.3

Issue: Creditors' meetings must be held at a time and place convenient to a majority of creditors.4 Shareholders may be located across the world, making it diffi cult to identify the time and place 'most convenient' to a majority of creditors.

Option 1: Exclude aggrieved shareholders for the purposes of determining what is a time and place most convenient for the majority of creditors for creditors' meetings.5

Option 2: Give administrators more discretion to determine when and where creditors' meetings should be held.6

Issue: How should administrators determine the claims of aggrieved shareholders for the purpose of determining voting rights? In particular what constitutes a 'just estimate' of an aggrieved shareholder's claim?

Option 1: Amend legislation to clarify what constitutes a 'just estimate'. For example, a shareholder claim may be required to state the date/s of acquisition of shares; the number of securities acquired; consideration supplied; and the misconduct that is relied upon.7

2. Section 436E(3)(a) CA.

3. Discussion paper, p71.

4. Regulation 5.6.14 of the Corporations Regulations 2001 (Cth).

5. Discussion paper, p72.

6. Ibid, p72.

7. Ibid, pp 73-74.

206

Option 2: Allow an industry body to create a 'best practice' statement or guideline to assist in determining what factors ought to be taken into account by administrators when considering claims.8

Issue: How should administrators determine the claims of aggrieved shareholders for the purpose of distribution to creditors?

Option 1: Where there are multiple aggrieved shareholders with common issues, deal with these through one judicial determination, with aggrieved shareholders required to lodge claims before a cut-off date. Shareholders may be able to use existing procedures, such as representative actions under Part IVA of the Federal Court of Australia Act 1976 (Cth) or equivalent state legislation, or joinder of parties under the rules of each court.9

Option 2: Impose a rebuttable presumption that the court's determination of a common question of fact in one proceeding applies in all subsequent proceedings.10

Issue: Persons who receive remuneration out of assets of the company in liquidation are prohibited from acting as proxies. This may prevent shareholders appointing law fi rms or a litigation funder as their proxies if the fi rm or litigation funder stands to obtain a fi nancial benefi t.

Option: Allow persons acting on behalf of particular shareholders to vote as proxy, despite the possibility of obtaining fi nancial benefi t.11

The discussion paper notes that many of these issues may be dealt with under present law. For example, concerns about holding creditors' meetings at a time and place appropriate for a majority of creditors is not a problem created by the presence of aggrieved shareholders as creditors.

Option 2: reverse the effect of the Sons of Gwalia decision

The second option canvassed by CAMAC is to legislate to prevent aggrieved shareholders from participating as creditors in a voluntary administration or liquidation.12 This would mean that aggrieved shareholders' claims would be ranked after unsecured creditors in any distribution. This approach would bring Australia in line with US law.

As a modifi cation, the discussion paper suggests that equity-linked investors may be similarly precluded from participating as creditors, which would alter the current position in which equity-linked investors are not considered to be postponed by s563A CA.13 A similar provision is being proposed in relation to Canadian law.

8. Ibid, p 75.

9. Ibid, pp 75-78.

10. Ibid, pp 78-79.

11. Ibid, p 79.

12. Ibid, p 65.

13. Ibid, p 68.

207

Fraud on the marketAssuming the law is changed to postpone the rights of aggrieved shareholders behind unsecured creditors, the discussion paper considers other types of protection that can be implemented to protect shareholders against misleading information.14

Fraud on the market is an approach adopted in the US whereby individual shareholders do not need to prove personal reliance if they can show that the market generally has been misled. This approach eases the evidentiary burden on aggrieved shareholders, as they do not have to establish specifi c knowledge of, and reliance on, the misleading conduct.

The discussion paper considers that, in circumstances where a company has become insolvent, the introduction of the fraud on the market concept would only assist shareholder claimants where there are suffi cient funds remaining after payment of all traditional creditors.

Option 3: reverse the effect of Sons of Gwalia, but prioritise aggrieved investors as against other shareholders

Option 3 is for aggrieved shareholders to rank after conventional unsecured creditors in the event of a liquidation, but to be prioritised ahead of any other claims or residual rights of distribution by shareholders.15

Member claimsWhile it is accepted that shareholders who have claims against a company under s563A (the member claims) rank behind unsecured creditors in any distribution, it is unclear whether they are entitled to participate in a voluntary administration or liquidation as creditors, with information and voting rights.16 The discussion paper suggests that it may be appropriate to amend the legislation to clarify that shareholders with member claims are not creditors in the sense of having voting rights in an external administration.17

ConclusionThe discussion paper highlights a range of issues that are thrown into sharp relief by the Sons of Gwalia decision. The fi nal report is expected to be produced by CAMAC in 2008 and will hopefully provide more certainty for administrators, fi nanciers, creditors and shareholders.

14. Ibid, p 81.

15. Ibid, p 68.

16. Ibid, p 85.

17. Ibid, p 90.

208


The end of share splitting in schemes of arrangement?

When considering the use of a scheme of arrangement to effect a merger, it might be feasible from 31 December 2007 to discount the risk of concerted share splitting 'blocking' campaigns. In certain companies, or in certain contested deals, the lower spoiling risk might make viable the use of a scheme of arrangement, which might otherwise present too great an execution risk.

The new ActNew provisions of the CA came into force on 31 December 2007, introduced by the Corporations Amendment (Insolvency) Act 2007 (the new Act). The new provisions are largely unheralded in the mergers and acquisitions space, not least because the principal thrust of the new Act is to 'improve outcomes for creditors by enhancing protections for employee entitlements, providing creditors with better information about independence and remuneration, and removing unnecessary and costly procedural requirements'.1

Buried in the detail of the insolvency reform, however, is a very interesting – even ground-breaking – amendment to the provisions regulating schemes of arrangement. That amendment could overcome campaigns designed to spoil scheme mergers through the splitting of shareholdings. The amendments give a court the discretion to overlook a failure of the 'by number' test in considering whether to approve a scheme of arrangement.

When and why are schemes used to effect mergers?A scheme of arrangement is an established structure to effect mergers and is ideally suited to friendly mergers. Many of the most prominent friendly mergers in recent times have been implemented using a scheme of arrangement, including OneSteel-Smorgon Steel, Suncorp-Promina and Alinta-Babcock & Brown/Singapore Power.

One of the principal benefi ts of a scheme of arrangement is an unambiguous, 'all or nothing' outcome: ie on one day (the day of the second court hearing), both bidder and target know whether the bidder acquires 100 per cent of the target, or not. That certainty is often critical in highly leveraged mergers and one reason that fi nancial sponsors favour this structure over others, and particularly in preference to the traditional Chapter 6 takeover bid.

1. Media release, Chris Pearce MP, Parliamentary Secretary to the Treasurer, 9 August 2007.

209

Another feature of a scheme of arrangement is the threshold support required from target shareholders to bring about the 'all or nothing' result. While Chapter 6 takeover bids require a bidder to achieve 90 per cent of all shares on issue, schemes of arrangement apply thresholds to those shareholders (and their shares) present and voting at the scheme shareholder meetings. The scheme of arrangement threshold is applied to each 'class' of shareholders, and requires:

• 75 per cent by value (ie 75 per cent of the number of shares voted), the 'by value' test; and

• 50 per cent by number of shareholders voting at the meeting, the 'by number' test.

In practice, where there is usually only a single class of (ordinary) shareholders, that typically means that the scheme of arrangement by value threshold will be satisfi ed by a vote in favour by shares representing somewhere between 35-60 per cent of all shares on issue, depending on the number of shares represented by shareholders who are suffi ciently motivated to be present and voting at the scheme shareholder meeting.

The translation of the scheme of arrangement by value threshold into an absolute – ie all shares on issue – threshold of typically between 35-60 per cent represents a highly attractive benefi t, compared with the 90 per cent of all shares on issue threshold of a Chapter 6 takeover bid.

On the other hand, the by number test can generate a maverick outcome, particularly in the face of a small shareholder, or committed minority, opposition.

When is the by number threshold an issue?Institutional shareholders tend to dominate the share registers of most listed Australian companies. By value, therefore, institutional shareholders tend to dominate the 75 per cent by value threshold in schemes of arrangement.

However, size of shareholding – by value – counts for nothing in satisfying the by number test. Indeed, the greater the concentration of institutional shareholders in a scheme company, the less their impact by number in the 50 per cent threshold.

Conversely, the greater the number of shareholders each holding a small number of shares – ie 'small shareholders' – the greater their potential impact in the 50 per cent by number vote.

Therefore, the larger the number of small shareholders, the greater is their power to determine the fate of a scheme of arrangement under the by number threshold.

There have been prominent instances where the by number vote threatened to derail schemes of arrangement that otherwise comfortably satisfi ed the by value threshold. Perhaps the most prominent example was the 2003 Xstrata-MIM merger scheme of arrangement, in which the by value vote was well in excess of 90 per cent, while the by number vote was a slim majority: 58:42 per cent.

210

MIM was a notable example of small shareholder activism. It was suggested at the time that certain opponents of the merger, led by a prominent fund manager soliciting the support of small shareholders, provoked a campaign of 'share splitting' in an attempt to defeat the by number vote. Indeed, there were suggestions that institutional shareholders in favour of the scheme led a counter-campaign of share splitting to counter-act the small shareholder campaign.

Ultimately for MIM, the share splitting campaign amounted to little in court. Although the court had some evidence that one parcel of shares had been transferred into 574 parcels of 375 shares each (the threshold for a 'marketable parcel') in slightly different names but with the same address, that number was insignifi cant in the overall by number vote, and certainly did not determine the outcome. However, the court ominously observed:

Undoubtedly had vote splitting occurred to such an extent as to make it likely or even possible that a majority in number voting either for or against adoption of the scheme had been achieved by share splitting that may arguably at least have been a reason to decline to approve the scheme.2 [emphasis added]

And there's the rub. Until the new Act, courts have had no discretion to approve a scheme of arrangement that fails the by number threshold. On the other hand, courts have the discretion to refuse to approve a scheme of arrangement if it senses that the by number threshold has been manipulated, either for or against the proposal.

The situation is further aggravated, in a planning and logistical sense, by the fact that a bidder and target cannot know when launching a scheme of arrangement whether a share splitting campaign will ensue, and, if it does, by how much, if at all, it will affect the by number vote. Adding to the planning frustration is the fact that it is not until the very end of the lengthy scheme of arrangement process – either at the scheme shareholder meeting or, worse still, at the second court hearing – that bidder and target will learn the answers to those questions.

Recent experience suggests that some deals, for which a scheme of arrangement would be the most compelling deal structure, have either not been launched as schemes, or not been launched at all, for fear that the by number test would be manipulated by the share splitting of a committed group of small shareholders, or a committed group of objectors, exploiting the by number threshold.

2. Re MIM Holdings Ltd [2003] QSC 181 at 181, per Justice Ambrose.

211

Is the tail wagging the dog?If the by number test vests in small shareholders a voice in determining the outcome of schemes of arrangement that is disproportionate to their economic, by value investment in the scheme company, are the scheme of arrangement thresholds subverting true shareholder democracy?

The scheme of arrangement by value and by number thresholds have been entrenched in legislation for more than 137 years.3 However, the use of schemes of arrangement in the merger context has really only risen to prominence during the past decade or two. Among the smorgasbord of structures by which mergers may be implemented, a scheme of arrangement offers some prominent and, many say, controversial advantages.

With the advantages come pitfalls. It is simplistic to observe that the scheme of arrangement thresholds are lower than a Chapter 6 takeover bid. They are fundamentally different. The concept of shareholder democracy in a scheme of arrangement is very different to that contained in a Chapter 6 takeover bid.

The by number threshold is as much part of the fabric of shareholder democracy in a scheme of arrangement as is the by value threshold. When a bidder and a target company choose to implement their merger by way of a scheme of arrangement, they choose also to accept the concept of shareholder democracy that comes with it. They choose to accept that a determined majority of small shareholders can override the will of a three-quarter majority of shares.

There is a compelling argument that the concept of shareholder democracy in schemes of arrangement should not be subverted or undermined by deliberate spoiling campaigns, such as share splitting. If shareholder democracy in a scheme of arrangement is intended to be the application of the by value and by number thresholds to a 'genuine', 'bona fi de' vote of shareholders, there ought to be some capacity for schemes to overcome or overlook spoiling campaigns. The new Act now ensures that section 411 CA – the principal scheme of arrangement provision – has some capacity to that effect.

The new scheme threshold provisionThe Explanatory Memorandum for the Corporations Amendment (Insolvency) Bill 2007 explains concisely the intended operation of the new protection:

A members’ scheme could be defeated by parties opposed to the scheme engaging in ‘share splitting’, which involves one or more members transferring small parcels of shares to a large number of other persons who are willing to attend the meeting and vote in accordance with the wishes of the transferor. By splitting shares to increase the number of members voting against the scheme, an individual or small group opposed to the scheme may cause the scheme to be defeated. This may occur even though a special majority is achieved in terms of voting rights attaching to share capital, and if the share split had not occurred, the majority of members were in favour of the scheme. …

3. The original, rudimentary formulation appeared in the UK Joint Stock Companies Act 1870, and was received into the

(then) Australian colonies from 1891 through to 1899.

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It is proposed to amend Part 5.1 of the Corporations Act to confer a discretion on a court to approve a members’ scheme where a resolution in favour of a compromise or arrangement is passed under sub-subparagraph 411(4)(a)(ii)(B) (special majority pursuant to share capital voting rights) but is not passed under sub-subparagraph 411(4)(a)(ii)(A) (majority of members present). …

It is intended that the court would only exercise the discretion to disregard the majority vote under sub-subparagraph 411(4)(a)(ii)(A) in circumstances where there is evidence that the result of the vote has been unfairly infl uenced by activities such as share splitting, however the court’s discretion has not been limited to allow for unforeseen extraordinary circumstances. [emphasis added]

The new s411(4) CA offers some hope for scheme proponents that the 'genuine', 'bona fi de' will of shareholders will not be compromised by spoiling campaigns designed to exploit the by number threshold. The court has now been given the discretion to approve a scheme of arrangement even if the by number threshold is not satisfi ed.

While the new s411(4) CA does not itself fetter or direct the exercise of the court's discretion,4 the Explanatory Memorandum – from which the above quote is taken – appears to specify that Parliament intends for courts to exercise their discretion only…in circumstances where there is evidence that the result of the vote has been unfairly infl uenced by activities such as share splitting or otherwise to allow for unforeseen extraordinary circumstances. Moreover, the court will exercise that discretion, if at all, only at the very end of the lengthy scheme of arrangement process.

It is possible to question whether the new provision is, after all, an effective protection. Does it provide enough fl exibility and enough discretion to encourage the use of schemes of arrangement in circumstances where the bidder and target expect a concerted blocking campaign to emerge?

Thoughts on the new s411(4)Before the sweeping reforms of CLERP in 2000, shareholder democracy in Chapter 6 takeover bids often suffered manipulation, as the compulsory acquisition threshold then required a bidder starting its bid with more than 10 per cent of the target to achieve acceptances from 75 per cent by number of shareholders.5 The manipulation came to a climax in the late 1995 bid by Homestake Mining Company for Homestake Gold of Australia Limited. Shortly before the bidder registered its offer (then a 'Part A Statement'), a nominee company split a single shareholding of the target into 106 separate holdings each of 100 shares, and shortly thereafter a single shareholding was split into 918 holdings each of 100 shares. The effect of the share split was to increase the number of shareholders by about 44 per cent, making it impossible for the bidder to satisfy the 75 per cent by number of shareholders compulsory acquisition test.

4. The operative provision merely qualifi es the by number test by adding the prefi x, 'unless the Court orders otherwise'.

5. See s701(2)(c) of the Corporations Law, as it then was. With the revolution of CLERP in 2000, the Chapter 6 compulsory

acquisition 75 per cent by number of shareholders test was removed, and the ASC's discretionary intervention against share

splitting was no longer required. The threshold for compulsory acquisition is now referenced solely to the number of shares

acquired, a by value test: see s661A(1)(b) CA.

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The Homestake share splitting device was not especially subtle. Indeed, during the course of encouraging the device, target shareholders at one point were offered a free 'succulent cooked leg ham (approximately 5kgs) on the bone' for agreeing to participate in the share split.6 However, the Homestake share splitters had not counted on the Australian Securities Commission (ASC) (as ASIC then was) exercising its discretion to modify Chapter 6 to overcome the device. Exercising its discretionary powers, the ASC determined that the share splitting device undermined the shareholder democratic principles ingrained in Chapter 6.7

Applying similar rationale, during the course of the MIM matter, ASIC described 'undesirable' share splitting as follows:8

Share splitting occurs where one large parcel of shares is broken up into a large number of smaller parcels and registered in different names, in circumstances where all the new owners have agreed to vote in a pre-determined way. …ASIC considers such behaviour undesirable if it occurs in a way that distorts the true intentions of shareholders. [emphasis added]

The new s411(4) CA will clearly operate in response to fl agrant share splitting campaigns such as Homestake, or compelling evidence of a campaign like that which reportedly occurred in the MIM scheme, where that splitting is proven to have a determinative impact on the by number votes in the scheme. Like the ASC in Homestake, such circumstances are likely to invite the exercise of a court's discretion under the new s411(4).

Not all spoiling campaigns will be so obviously distorting. While the Homestake splitters appealed to the stomachs of shareholders, an appeal to the hearts and minds of shareholders or potential shareholders might be less obviously 'unfair' for the purposes of the new s411(4). Consider, for example:

• a campaign of share buying led by an industrial organisation opposed to a merger, which results in thousands of employees going on-market and acquiring small parcels of shares in order to defeat a scheme of arrangement through the by number vote;

• a campaign of small shareholders selling their shares on-market but retaining a small number to vote against the scheme; or

• a practice of custodian/nominee shareholders transferring parcels of shares to the benefi cial holders of the shares to ensure that the benefi cial holder is counted for the purposes of the by number threshold.

6. Peninsula Gold Pty Limited, Thompson & Bywaters v. Australian Securities Commission (1996) 14 ACLC 958 at 963,

Administrative Appeals Tribunal, Deputy President G L McDonald.

7. The ASC's media release at the time (3 May 1996, ASC Media release: ASC MR 96/92) displayed the ASC's disdain for

the practice: 'The ASC encourages companies to watch for signs of share-splitting, such as large batches of transfers of

small parcels of shares from one person, often to transferees at the same address. … "The ASC will favourably consider any

application for modifi cation of the Law to counteract the effect of these practices," ASC Chairman Alan Cameron said. "The

ASC is not prepared to tolerate such practices in Australian markets and will take what steps it can to ensure that they do not

succeed," he said.' The ASC's/ASIC's position was upheld on review in a number of cases: Peninsula Gold Pty Ltd & Ors v ASC

(1996) 14 ACLC 958, Peninsula Gold Pty Ltd & Ors v ASC (1996) 14 ACLC; 1,435, Brierley & Anor v Dextran Pty Ltd & Ors

(1991) 9 ACLC 30.

8. ASIC Media release 03-169 'MIM Holdings and Xstrata', Thursday, 29 May 2003.

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Would any one of these result in the by number vote being 'unfairly infl uenced', suffi cient to embolden a court to exercise its new discretion under s411(4)? There must be real doubt that it would. The court would have before it duly registered shareholders, with economic interests in the target entity, acquired like any other shareholder, albeit in generally smaller chunks, and not acquired under a fl agrant program of splitting, of the Homestake variety, nor arguably under unforeseen extraordinary circumstances. As one of the leading judges in the development of scheme law in Australia quipped, when faced with proponents of a scheme of arrangement share splitting in order to achieve (rather than defeat) the by number threshold:

Regardless of the purpose of these transfers, it is quite clear that the transferees were members of the company at the time of the meeting and entitled to vote. Accordingly their votes had to be counted.9

In other words, in the range of spoiling tactics – from the explicit Homestake variety to independent acquisitions by small shareholders in response to a rally cry from a particular opponent to the scheme – it is likely that the courts would be emboldened to exercise their new discretion in s411(4) CA in circumstances proven obviously, perhaps only fl agrantly or extraordinarily, at one end of that continuum.

ConclusionIt is a welcome development that courts have, from 31 December 2007, a discretion to overlook the failure of the by number test (50 per cent of shareholders present and voting) to approve schemes of arrangement. It is likely that a court will be confi dent to exercise the discretion provided by the new Act in circumstances where the court has compelling evidence of a campaign of share splitting, or similar extraordinary device, which the court is satisfi ed has had a determinative impact on the by number threshold result. Such campaigns might 'unfairly infl uence' or 'distort' the 'true intentions of shareholders'.

However, the new discretion is unlikely to be exercised as widely as scheme of arrangement proponents might want. Depending on the form of campaign launched to infl uence the by number vote, we believe that courts will be reluctant to extend the exercise of discretion to cases that involve a genuine and/or proportionate economic outlay or retention by 'real' small shareholders. In such cases, the proponents of schemes of arrangement will have to accept that the by number threshold is as much part of the fabric of shareholder democracy in a scheme of arrangement as is the by value threshold. By choosing to implement their merger by way of a scheme of arrangement, a bidder and target choose to accept that a determined, genuine majority of small shareholders can override the will of a three-quarter majority of shares.

9. (1987) 5 ACLC 1037 at 1041, Justice McLelland (as he then was), Supreme Court of NSW. In that case, two common

directors 'transferred 99 parcels each of 200 stock units in DAC to persons expected to be favourable to the scheme, at the

instigation of Mr Hardie, the secretary of DAC and with the acquiescence of Mr R Lord "to be sure we have the votes to put the

scheme through''.'

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ALRC proposes overhaul of credit reporting rules

In summary, the Australian Law Reform Commission's (the ALRC) recent discussion paper proposes that:

• the current credit reporting rules should be repealed and replaced by a regulation dealing only with credit reports (and not other credit information, which would be handled according to revised general privacy principles);

• the new rules for credit reports should apply to commercial credit, as well as consumer credit;

• limited 'positive' credit information be recorded on credit reporting fi les; and • a number of other changes be made to what can be included on a credit

reporting fi le, including a minimum amount for reportable payment defaults.

Overhaul of credit reporting provisionsThe ALRC's discussion paper, Review of Australian Privacy Law (the Review), proposes reforms of privacy law across a range of topics.

The Review proposes that Part IIIA of the Privacy Act 1988 (Cth) (the Act), which currently regulates credit reporting and credit information, be repealed and that credit reporting and credit information be regulated under the general provisions of the Act and a new set of Uniform Privacy Principles (UPPs). This proposal for overhaul is likely to be widely applauded by industry groups who have submitted that the current system creates unnecessary duplication and complexity.

The Review proposes the introduction of new regulations imposing obligations relating to how credit reporting agencies and credit providers handle credit reports. The proposed Privacy (Credit Reporting Information) Regulations (the Regulations) would be drafted to contain only those requirements that are different, or more specifi c, than those provided for in the proposed UPPs.

No distinction between consumer and commercial creditThe Review also proposes that the new regulations would extend to cover an individual's use of credit for any purpose, and not just for domestic, family or household purposes (as is currently the case), on the basis that the distinction between consumer and commercial credit creates needless complexity and is inconsistent with the general approach of the Privacy Act. However, the ALRC also states that it remains interested in the commercial implications of this proposal, particularly given the Consumer Credit Code does distinguish between consumer and other credit contracts.

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Access to the credit reporting systemAt present, some organisations are recognised as 'credit providers' for the purposes of the credit reporting provisions of the Act (with the result that they can access the credit reporting system), but are not 'credit providers' for the purposes of compliance with the Consumer Credit Code. For example, under the current Credit Provider Determination No 2006 (Classes of Credit Provider), corporations are deemed to be credit providers if they provide goods or services on terms that allow for the deferral of payment for at least seven days. This has led to a position where service providers such as telecommunications companies, utilities and builders may access their customers' credit information, while not being required to comply with the Consumer Credit Code because, while they provide credit, they do not make a charge for doing so.

The ALRC notes a range of arguments for and against this position (including the need of the telecommunications industry to obtain credit information to evaluate potential customers' credit risk). It proposes a simplifi ed defi nition of a credit provider in the new Regulations that would ensure that individuals and organisations who are currently credit providers for the purpose of the Act would continue to be credit providers.

However, the ALRC remains concerned about the need to tighten the defi nition of 'credit providers'. As such, the Review has queried whether the defi nition should be changed to cover only those businesses who provide goods or services on a deferred basis for at least 30 days.

Dispute resolution schemesThe Review proposes that if a credit provider provides information on defaults to a credit reporting agency, that credit provider must be a member of an external dispute resolution scheme. The objective of this proposal is to ensure that a customer has access to an independent avenue for the resolution of any complaints relating to the recording of a default on the individual's credit fi le.

Data qualityUnder the current system, credit reporting agencies are not required to check the accuracy of information provided to them by credit providers. The Review proposes introducing a requirement that credit reporting agencies monitor the quality of the data received by them for inclusion on an individual's credit fi le to ensure that the data is complete, accurate, current and relevant.

The Review also makes several other proposals that will change the kind of data available in credit reports. These proposals include:

• provisions within the Regulations that would not allow information about presented and dishonoured cheques to be reported;

• that credit reporting agencies should only be permitted to list overdue payments that are over a minimum prescribed amount; and

• that credit reporting information about individuals under the age of 18 should be prohibited.

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Comprehensive or 'positive' credit reportingThe Review proposes permitting the inclusion of certain 'positive' personal information in credit reports. This information would be limited to particulars of the type of credit account opened (eg mortgage, personal loan, credit card), the date on which the account was opened, the limit of each current credit account and the date on which each credit account was closed. Such information would only be available to credit providers on a reciprocal basis. Accordingly, only those credit providers who provide such information to the credit reporting agency would have access to this information in individual credit reports. The Review also recommends that, after fi ve years, there should be a review of the impact of allowing more comprehensive credit reporting of this kind.

Identity theftThe Review proposes allowing individuals to report to credit reporting agencies when they have been the subject of identity theft. Similarly, the Review proposes that agencies and organisations be required to notify individuals when there has been unauthorised access to their personal information. There is currently no requirement of this nature.

ConclusionCredit providers and credit reporting agencies need to be aware of the proposed amendments to Australia's privacy laws for the collection, use and disclosure of credit information. The ALRC proposes to deliver its fi nal report and recommendations to the Attorney-General by March 2008.

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Signifi cant issues with Consumer Credit Code amendments

IntroductionThe Ministerial Council on Consumer Affairs has released consultation drafts of the Consumer Credit Code Amendment Bill 2007 and Consumer Credit Code Amendment Regulation 2007 (the consultation package).

The proposed amendments to the Consumer Credit Code (the Code) contained in the consultation package are directed largely at 'fringe' credit providers, but will, if implemented, have a signifi cant impact on all credit providers, including 'mainstream' lenders. Industry associations and consumer groups have criticised the proposals in the consultation package. For example, the Australian Finance Conference, the Australian Bankers Association and Abacus, in their joint submission, criticised the amendments as 'inappropriate, [and] wrongly directed at mainstream credit providers'. A joint consumer response by consumer credit legal and fi nancial counselling services indicated that, while the intention behind the changes was strongly supported, some of the changes were 'strongly opposed' and other changes required clarifi cation or reworking.

Business purpose declaration The consultation package proposes to remove the conclusive presumption that the Code does not apply where a valid business purpose declaration has been obtained.

The proposed amendments rely on the credit provider making enquiries and being provided with information about an identifi ed purpose. They contemplate that the information might be given to the credit provider, not by the debtor themselves, but by someone else on behalf of the debtor. This is likely to mean, for example, that information about purpose will be collected from, or through, intermediaries such as fi nance brokers. This may actually make it easier for incorrect purpose information to be supplied, as the proposal contains no proviso that neither the credit provider nor any other relevant person who obtained the information about purpose from the debtor knew, or had reason to believe, at the time the information was obtained, that the credit was in fact to be applied wholly or predominantly for a purpose other than the identifi ed business or investment purpose.

Charges in the nature of interest For the purpose of disclosing the annual percentage rate and the total amount of interest charges payable, the proposed new sections 15(2) and 15(3) provide that charges 'in the nature of interest' should be taken into account.

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Although these provisions are intended to mirror s10(B) of the Consumer Credit (New South Wales) Act 1995 (NSW), the expression 'in the nature of interest', used without any defi nition, is problematic. It is not clear whether it is intended to pick up:

• anything that is in the nature of a charge for providing credit (in which case there could be overlap with credit fees and charges, which are addressed separately in the Code);

• only amounts calculated in the same or a similar way to interest (in which case it could pick up any fee calculated by reference to loan amount or outstanding balance, but would not pick up, for example, a lump sum payment payable under a shared equity product, which is calculated as a percentage of the increase in value of the security property over the period from drawdown to repayment); or

• only amounts payable by a borrower to a lender if the lender forgoes interest (in which case a lump sum appreciation payment under a shared equity product would be caught, but many other charges levied by fringe credit providers would not be captured).

It appears that the NSW Department of Fair Trading believes that an appreciation payment under a shared equity product is 'in the nature of interest', as it has issued a Statement of Regulatory Intent and Compliance Policy in relation to shared equity mortgages. That statement says that, at the time of entering into a shared equity mortgage, the annual percentage rate is not ascertainable. It states that it will be suffi cient, when disclosing the annual percentage rate in a contract for a shared equity mortgage, to disclose the method of calculation used to determine the capital gain payable to the lender when the contract ends.

Given that s15(C), which requires disclosure of the annual percentage rate, is a key requirement, any uncertainty for industry on how to comply with this obligation is unacceptable. The intention of the proposed provision should be clarifi ed, and practical diffi culties (for example, with shared equity mortgages) should specifi cally be addressed.

Reviewing fees and charges Another key proposed amendment to the Code is to enable all fees and charges (including default fees) to be subject to review under s72, on the ground that they are unreasonable. In addition to key policy and commercial issues identifi ed by industry groups in their submissions, there are signifi cant drafting issues with this proposal.

Section 72(3)

The proposed new s72(3), which describes the circumstances in which an establishment fee or charge will be unreasonable, does not preserve the concept found in the current s72(3) concerning average reasonable costs for a class of contract. This is a signifi cant omission (perhaps an inadvertent one), which would mean that credit providers would be expected to separately cost each application and settlement.

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The concept of average reasonable administrative costs for a termination or prepayment has been retained in the new s72(4) and there appears to be no reason why, in the context of what are effectively administrative costs, there should not be an ability to assess average costs.

Section 72(5)

The proposed new s72(5) states the circumstances in which default fees and charges will be unreasonable. It introduces the concept of the credit provider's 'loss'. There has been signifi cant uncertainty about the meaning of the word 'loss' in the context of the current s72(4). It seems reasonably clear that it may include a reasonable estimate of the credit provider's loss of bargain; however, there are issues in determining how that loss should reasonably be estimated.

The use of 'loss' in the new s72(5) is inappropriate. For example, take the situation where a customer misses a series of payments under a credit contract (which generally indicates they are having diffi culty in meeting their obligations) and consequently may not be able to fully repay their loan and pay interest, fees and charges at the rates and in the amounts provided for in their credit contract. On one view, the credit provider could reasonably estimate that their 'loss' arising from the default will include some proportion of the principal – that is, this wording would arguably permit a credit provider to determine that, because of the default or series of defaults, it should make a provision against the loan and that the amount of that provision is its reasonable estimate of the loss arising from the default.

On that basis, the credit provider would be entitled to recover, by way of a default fee, an amount equal to the amount it had provisioned. That would obviously be an absurd outcome and is not intended. It does, however, highlight the diffi culty with the use of the word 'loss' in this context.

Section 72(6)

The proposed new s72(6), covering the circumstances in which other fees or charges will be unreasonable, refers to 'the credit provider's reasonable underlying costs or losses that gave rise to the fee or charge'. It is not clear what meaning would be given to 'underlying'. Further, costs and losses will not, in a technical sense, give rise to the fee or charge. The fee or charge will typically be imposed to cover or recover the cost of an activity or service. The use of 'losses' in this provision is likely also to give rise to uncertainty.

Section 72(7)

The proposed new s72(7) notes that, in deciding the reasonableness of a matter under s72, the court 'may have regard to the standards of commercial practice generally'. The expression 'standards of commercial practice generally' is highly undesirable. It is not confi ned to practice in any particular market or market segment, or even to a fi nancial services context. Industry generally would have no indication of how a court would be likely to interpret that expression.

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Section 72(8)

Under the new s72(8), the court may have regard to the annual percentage rate or rates payable under 'comparable credit contracts'. Issues arise from the use of 'comparable'. For example, it is not clear whether you would look solely at the type of product or whether you would need to assess the credit risk being accepted by the lender under two credit contracts in order to determine whether they were comparable.

Further, it is not clear what degree of similarity would make products 'comparable'. For example, if the issue arose in the context of a credit card product, which card products would the court consider – only those with the same interest-free period and similar rewards programs (and query how this would be assessed) or would it look at credit cards generally?

RetrospectivityThe drafting for a new transitional provision seems to suggest that an application might be made under the new s72 in relation to a credit fee or charge levied under a credit contract entered into before that new section came into effect. If this is the intention, it gives the provision retrospective application.

The new s72 should only be applied to credit contracts entered into on, or after, the date on which that section comes into effect, or to changes to fees and charges made after the date the new section comes into effect. Any application in relation to fees imposed under credit contracts entered into before that date and not varied before that date should be considered under the current s72. Further, credit providers will need an adequate period of notice before the commencement of the new s72 to allow them an opportunity to review their credit fees and charges.

Direct debits Changes proposed in relation to direct debits are inconsistent with the Bulk Electronic Clearing System (BECS) procedures for direct debits. AAR's submission in response to the consultation package highlighted these inconsistencies, and questioned the need for the proposed changes, given that the BECS procedures require customers to be given information about cancelling direct debit authorities.

Where to from here? Given the number and nature of submissions made on the consultation package, it is to be hoped that both the substance and the drafting of the proposed changes will be reconsidered carefully.

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Long-tail liabilities: CAMAC's discussion paper and the impact on insolvency practitioners

In July 2007, the Corporations and Markets Advisory Committee (CAMAC) released a discussion paper on the treatment of unascertained future personal injury claims. It contained a number of proposals for dealing with such claims. If adopted, these proposals are likely to have signifi cant implications for insolvency practitioners in administering the affairs of insolvent companies that may, in the future, be the subject of personal injury claims, where the injuries are not yet known.

IntroductionCAMAC's discussion paper, Long-tail Liabilities: The Treatment of Unascertained Future Personal Injury Claims, released on 17 July 2007, follows a request from the Parliamentary Secretary to the Treasurer, Chris Pearce, that CAMAC consider the adequacy of arrangements under the current law for payment by a company of compensation to individuals who may have a future personal injury claim against it (so-called long-tail liabilities).1 Relevant to such liabilities is the concept of a 'mass future claim'.

The discussion paper involves the consideration by CAMAC of three key areas.

• The extension of existing creditor protections to persons with potential future injury claims.

• A procedure for dealing with those claims in an insolvency.• An anti-avoidance provision.

CAMAC invited comments and submissions on the paper by 5 October 2007 and will prepare a report which is expected to be released in 2008.

Extension of existing creditor protectionsInsolvency practitioners will be aware that the concept of 'creditor' of a company is not defi ned in the CA. The question that arises in the context of the discussion paper is whether unascertained future personal injury claimants (UFCs)2 are creditors of a company and therefore have the rights and powers of creditors under the CA.

Although the CA uses the term 'creditor' throughout, there is no defi nition of the term. Section 553(1) CA provides:

All debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.3

1. The request refers to the report of the Special Commission of Inquiry into James Hardie in 2004.

2. As defi ned in the discussion paper.

3 'Relevant date' is defi ned in s9 CA.

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The discussion paper notes that certain elements of s553(1) are clearly inapplicable to the position of UFCs, such as 'present', 'certain' and 'ascertained'. The question that arises is whether other terms such as 'future' and 'contingent' might also be inapplicable to this group owing to recent case law in this area.

The paper expresses the view that, under current Australian law, UFCs are unlikely to have the rights of creditors and cannot be bound as such. Accordingly, any UFCs would not have any provable claim in a liquidation, administration or scheme of arrangement. The discussion paper refers to current Australian case law where a UFC is not a contingent creditor. In Edwards v Attorney General4, the New South Wales Court of Appeal found that possible future tort claims by persons who had been exposed to asbestos, but were presently not ill, were not provable in a winding-up. As they did not have a completed cause of action, they were held not to be contingent creditors. The English High Court decision of T&N Limited & Ors5 had held that a completed cause of action was not required to be a contingent creditor in a scheme of arrangement in England. In T&N, Justice Richards held that Edwards did not alter his view that future tort claimants who had been exposed to asbestos, but who had not yet suffered an injury, were contingent creditors for the purpose of a scheme of arrangement in England. Following T&N, UK insolvency legislation was amended to provide that future tort claims are provable debts in a liquidation or administration.6

The discussion paper notes that courts can exercise their discretionary power to take into account the interests of UFCs in certain circumstances. An example is the Federal Court decision of Stork ICM Australia Pty Limited v Stork Food Systems Australia Pty Limited 7, which illustrated that future liability for future asbestos claims may be transferred from one company to another, along with the benefi t of insurance policies by way of a members' scheme of arrangement8.

A number of submissions9 to CAMAC supported the general idea of the extension of existing creditor protections to persons with potential future injury claims. However, that support was the subject of reservations about its effect on shareholders. In relation to shareholders, concern was expressed that the current rights of shareholders should not be further delayed or compromised in a liquidation.

The discussion paper notes that there are a number of concerns expressed about the effect of the extension of existing creditor protections on unsecured creditors. Insolvency practitioners are understandably concerned about the cost to other creditors of the increased costs of administration of an estate, delay in the distribution of any dividend and decreased dividends. Further, there are presently concerns that insolvency practitioners often have inadequate funds and company information with which to carry out the investigation of any mass future claim by UFCs.

4 [2004] NSWCA 272 – see pp 63-65 Allens Arthur Robinson Annual Review of Insolvency and Restructuring Law 2004.

5 [2006] EWHC 1447 (Ch).

6 The amendments came into force on 1 June 2006.

7 [2006] FCA 1849.

8 Note that this decision does not refer to the decision in Edwards. Query if the result would have been the same had the court

considered Edwards.

9 Including the Institute of Chartered Accountants in Australia and the Business Council of Australia.

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Procedure for dealing with those claims in an insolvencyThe discussion paper discusses the possible form of a procedure to deal with future mass claims by UFCs in the context of voluntary administration, schemes of arrangement and liquidation.

Voluntary administration

Four options that CAMAC considers might apply in a voluntary administration are as follows.

Option 1: monetary provision with or without further recourse for UFCs This would require that the administrator admits and makes provision in a

voluntary administration for a UFC in circumstances where the mass future claim test is satisfi ed. A DOCA would need to include some fi nancial provision for UFCs, for example, a separate trust into which the funds are placed for these creditors. Also contemplated is the appointment of a representative for such creditors who would have standing to challenge the proposed DOCA in court. Further, there is the possibility of the preparation of an independent expert's report on the impact of the proposed DOCA on the UFCs.

Option 2: no provision for UFCs This option provides that no provision should be made for UFCs in a voluntary

administration and simply retains the current law. However, the current law does not bind such creditors to any subsequent DOCA. The support for this option appears to be that ascertained creditors may be more inclined to agree to a partial repayment DOCA that provides some hope of corporate recovery if the proportionate return that the company can provide to them under the DOCA is higher than if the company provided for UFCs. A factor against adopting this option is that UFC creditors would have little or no protection since a proposed DOCA could provide ascertained creditors with a dividend in excess of what they might expect to receive if the company was placed immediately into liquidation and the available assets were divided between ascertained creditors and the UFCs (under the proposed liquidation procedure below).

Option 3: a certifi cate by directors The third option is to permit a vote by ascertained creditors on a DOCA that

provides for a partial repayment to creditors only if the directors have provided a certifi cate stating that the company has no UFCs or that the DOCA would not prejudice the interests of such creditors. In order to provide the certifi cate, directors would be liable if they provided the certifi cate without reasonable grounds for their belief.

Option 4: allowing a representative for UFCs to challenge a DOCA in court The fourth option is to require the administrator to appoint a legal

representative for UFCs before a vote on any DOCA. The representative would be unable to vote in relation to the proposal but would have standing to apply to the court to challenge it.

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Schemes of arrangement

The discussion paper proposes that the scheme of arrangement provisions in respect of UFCs where there is a mass future claim would be similar to those under a voluntary administration as set out above.

As with voluntary administrations, courts would be able to appoint a representative for such creditors, which would require the preparation of an independent expert's report and enable the representative to make submissions to the court before it approves the proposed compromise or arrangement.

Liquidation

The discussion paper suggests one procedure as a possible way of dealing with the claims of UFCs in a liquidation. The procedure would apply to all liquidations, whether by the court or under a members' or creditors' voluntary winding-up but not to a provisional liquidation (on the basis that this is an interim procedure only).

It is proposed that a mandatory requirement would be the obtaining of a court order for the establishment of a trust fund for UFCs. This would deal with matters such as the amount of the fund, who can act as the trustee of the fund and the remuneration of the trustee. Any claims on the trust fund would cease to be claims in the liquidation. It is further proposed that, to assist the liquidator in reaching a decision as to whether or not to apply for such an order, the directors of the company in liquidation should be required to disclose whether the company has any ascertained future personal injury claimants. By the making of the court order referred to above, the company's obligations and rights in relation to such creditors would be assigned to the separate trust fund, which would allow the liquidation to be completed.

Anti-avoidance provisionThe discussion paper notes that there is no general anti-avoidance provision in the Act. It considers whether an anti-avoidance provision should be included in any legislation dealing with long-tail liabilities and, if so, what form it should take.

The proposal contains an anti-avoidance provision that prevents persons entering into agreements or transactions that have the effect of preventing the recovery of all or a signifi cant part of amounts owing to UFCs. According to CAMAC, the purpose of such a provision would be to provide a clear statement that intentional avoidance of payment to UFCs is unacceptable. It may also be a means of deterring such behaviour. The anti-avoidance provision would be relevant in circumstances where:

• there is a mass future claim afoot, and• the company has a threshold level of information about the nature of

expected claims.

The referred proposal contemplates criminal liability for any person knowingly involved in the contravention and civil liability for any person who is party to the transaction.

226

ConclusionThe CAMAC discussion paper regarding the adequacy of arrangements under the law for the protection of UFCs indicates the present diffi culties that arise with businesses that have been involved in the manufacture and distribution of products that give rise to claims after the lapse of time. Insolvency practitioners are understandably concerned about any future legislative changes that might involve increased cost and delay in the administration of insolvent companies. However, the referral of this issue to CAMAC is hopefully a step towards creating a workable solution that not only promotes the effi cient administration of insolvent companies but also provides a measure of protection to those individuals who, in the future, may have personal injury claims against those companies.

227

DEVELOPMENTS IN ASIA

Introduction of insolvency laws in Nepal

Nepal has recently introduced the Insolvency Act 2006, which is the fi rst piece of comprehensive insolvency legislation in Nepal. Until the passing of this statute, Nepalese insolvency law was enshrined in a variety of laws, including in provisions of the Companies Act 1997 and the Partnership Act 2020. These laws did not create a comprehensive or detailed insolvency regime.

The new Insolvency Act includes provisions relating to both liquidation and corporate restructuring and, among other things:

• requires that administrators and liquidators must consult with creditors during the administration and insolvency processes;

• allows creditors, shareholders and debenture holders to initiate insolvency proceedings;

• sets out priority rules;• sets out the minimum qualifi cations required of insolvency practitioners; and• allows for the establishment of:

• a regulatory body, known as the Insolvency Administrative Offi ce; and• a commercial bench in the Nepalese courts, whose role it would be to

supervise the operation of the insolvency law.

It is unclear how the new law will operate in practice. Although the law has been in existence since 2006, the Nepalese Government has not yet established an Insolvency Administration Offi ce or commercial bench in Nepal. There is, however, a Nepalese Insolvency Practitioners Association, which was formed in 2003, and which has brought together a number of Nepalese legal and accounting professionals who will continue to play a role in the development of the insolvency profession and regime in Nepal.

228

DEVELOPMENTS IN EUROPE

Reforms to Greek Bankruptcy Code

The Greek Government has passed reforms to the country's Bankruptcy Code, which came into force on 16 September 2007. It is the fi rst signifi cant reform to the Bankruptcy Code for many decades, which was previously based on the French Commercial Code.

High costs of bankruptcy proceedings and too few business reorganisations meant that the previous bankruptcy system in Greece was not working as effi ciently as had been hoped.

The new Bankruptcy Code's objectives include the following:

• maximising the value of the debtor's assets between liquidation and reorganisation;

• giving equal treatment to creditors ranking in the same category; and• creating an effi cient bankruptcy system. This is intended to be done by

replacing the pre-existing dual bankruptcy system with a single system of liquidation and reorganisation.

Signifi cant to the reforms is the extent to which they have attempted to try to ensure the survival of the debtor's business and the removal of the stigma associated with bankruptcy. Of particular note are the following:

• The survival of the debtor's business is safeguarded by two voluntary restructuring proceedings: the conciliation proceeding and the reorganisation plan.

• The debtor is given a 'fresh start' by ensuring that the assets acquired by the debtor post-bankruptcy are ring-fenced so they are not realised to satisfy creditors' claims.

• The reforms abolish sanctions imposed personally on the debtor. For example, the term 'bankrupt' will be replaced with 'debtor'.

• A maximum duration in all bankruptcy cases will be provided, with most bankruptcies ending after 15 years.

• The reorganisation of the bankruptcy system is based on fi ve 'bankruptcy organs': the Bankruptcy Court, the judiciary reporter, the judge, the syndicos (trustee) and the creditors' committee.

In addition, the Bankruptcy Code will in the future adopt the UNCITRAL Model Law.

229

DEVELOPMENTS IN EUROPE

Changes to Hungarian bankruptcy law favour secured creditors

Changes to the Hungarian Bankruptcy Act 1, effective from 1 January 2007, give priority to secured creditors (other than fl oating charge holders) in the event a debtor becomes insolvent.

The need for change The amendments were introduced in response to the uncertainty faced by creditors in recent years in selecting the most effective approach by which to take security under Hungarian law. To overcome what has been viewed as an unsatisfactory regime, creditors were resorting to 'atypical' forms of security, such as the use of sale and repurchase arrangements and assignments by way of security. These forms of security do not involve taking a mortgage, charge, lien or pledge and, accordingly, are not universally accepted.

The objective of the amendments was to offer secured creditors (fl oating charge holders to a lesser extent) a prioritised position in the event of a debtor's insolvency and to make it less desirable for creditors to enter into atypical security arrangements. It was also intended to allow enterprises to raise credit on more favourable terms and to make creditors feel more secure in giving credit in return for smaller amounts of collateral.

The amendmentsBefore the changes, in the event a debtor went into liquidation, secured creditors were entitled to 50 per cent of the sale of property pledged as security, decreased by the costs of sale. The amendments enable secured creditors (other than fl oating charge holders) to receive 100 per cent of the sale price, less the costs of maintaining and protecting the condition of the property, the costs of sale and the liquidator's fee.

Floating charge holders are entitled to receive only 50 per cent of the sale proceeds, less the costs of sale. The privileged position is also intended to be given to unsecured creditors who have a registered right of execution or who have started the execution process and, in the course of execution, the asset has been seized.

The privileged position is not given to a secured creditor who is a member, executive offi cer or employee in a managerial position of the debtor, or a close relative or spouse of such persons, or if the debtor is a business organisation under majority control.

1. Section 5 of Act VI of 2006 amending Act XLIX of 1991 on Bankruptcy Proceedings, Liquidation Proceedings and

Members' Voluntary Dissolution

230

DEVELOPMENTS IN GREAT BRITAIN

Can a fl oating charge be recharacterised?

At issue in this case was whether a fl oating charge took effect as a fi xed charge despite the label used by the parties in the security documents to describe the charge as fl oating.

An investment scheme was operated by Elliott's Solicitors plc (the lender) under which clients' invested funds were advanced to borrowers under loan agreements secured by fi rst fi xed charges supported by fl oating charges over real property. Each loan formed the basis of a different trust whose benefi ciaries were the borrowers. The trustee of the Russell-Cooke Trust Company (the trust) was appointed by the court in place of the fi rst defendant, Mr Elliott, and the second defendant, Elliott Solicitors plc, after the Law Society of England and Wales had intervened into their practices as solicitors.

An issue arose in relation to seven loans made to Causeway Investments UK Limited (the borrower), which were subject to secondary securities in addition to the fi rst registered charges. The mortgage deeds provided for a fi xed charge over the property acquired by the loan and secondary security over other assets owned by the borrower, secured by 'fl oating deeds'. The term 'fl oating deed' was further defi ned as a 'fl oating charge until otherwise converted into a fi xed charge pursuant to further provisions of the document or by operation of law'. The deeds contained widely drawn restrictions on the powers of the borrower to dispose of and deal with any of the assets the subject of the secondary security without the consent of the lender. The proper classifi cation of the secondary securities, whether fi xed or fl oating charges, had ramifi cations for the priority of the clients in the allocation of the realised secondary securities.

The trust made an application for relief, including an order as to the correct distribution of the fund held by the trust as trustee of a number of trusts, the benefi ciaries of which included the defendants. The distribution of the fund turned on whether the secondary charge was fi xed or fl oating.

The High Court determined that the secondary securities were subject to fi xed, and not fl oating, charges. The court acknowledged that this case was the converse of the more typical claim that a charge expressed to be a fi xed charge was in law a fl oating charge, seen in cases such as Re Spectrum Plus Limited (in liquidation) [2005] 2AC 680. Nevertheless, it decided that the re-characterisation principle could work both ways and, on a proper construction of the documents, the nature of the rights and obligations created in respect of the charged assets were inconsistent with the nature of a fl oating charge. It was irrelevant that the charges were described as 'fl oating'. The essential characteristic of a fl oating charge is the ability of the chargor to manage and control the charged asset, and withdraw it

Case Name:The Russell-Cooke Trust Company v Elliott and others

Citation:[2007] 1443 (Ch), England and Wales High Court, Chancery Division, Mann J


Issues: • Whether a fl oating charge

can be re-characterised as a fi xed charge, having regard to the totality of the charge documentation

231

from the security without the permission or consent of the chargee: Re Coslett Contractors Limited [1998] Ch 495. The borrower's rights were so circumscribed that the charges created were actually fi xed charges.

In determining whether a charge is fi xed or fl oating, the court will consider all of the documentation creating the charge and the rights and obligations arising from it. The court will examine the language used in the documents and then the level of control exercised over the charged assets to ascertain the true legal effect of the documentation, rather than merely acceding to the label attached by the parties.

232


Duty of disclosure of a bank in a co-workout arrangement

Case Name:National Westminster Bank PLC v Rabobank Nederland

Citation:[2007] EWHC 1056 (Comm), High Court of Justice, Queen's Bench Division, Commercial Court, per Coleman J


Issues:• Duty of full disclosure and

duty of good faith between co-workout banks

• Recovery of costs incurred in defending proceedings when the commencement of those proceedings are a breach of contract?

The plaintiff and the defendant, which had each extended a credit facility to a debtor, engaged in a 'workout' arrangement. Under a deed of transfer, the plaintiff assigned the debt owing to it to the defendant. However, the plaintiff did not inform the defendant that it had made separate loans to the directors of the debtor. The court considered whether the plaintiff owed a duty of disclosure to the defendant.

In March 1996, National Westminster Bank PLC (NatWest) and Rabobank Nederland (Rabobank) each agreed to extend an unsecured credit facility of US$50 million to the Yorkshire Food Group plc (YFG). The business of YFG was substantially carried on by its American subsidiaries in California.

When the fi nancial position of YFG signifi cantly deteriorated, it gave notice to NatWest that its trading position may be in breach of the fi nancial covenants in the credit facility. Both banks agreed to put YFG into a 'workout' and appointed accountants to investigate and advise on the best course of action to protect recovery of as large a proportion of the lending as possible.

Further to the accountants' recommendations, each bank increased its lending by US$4.5 million to enable YFG to pay for crops for its processing business, in the hope that profi ts derived from sales would substantially improve YFG's fi nancial condition. However, YFG's fi nancial position continued to deteriorate, despite further advances by each bank.

NatWest and Rabobank entered into a deed of transfer (the deed) in September 1997 by which Natwest assigned the debt owed to it by YFG to a subsidiary of Rabobank, for a price which represented a discount of nearly £11.3 million. Under the deed, Rabobank:

• agreed to release NatWest from any obligations and liabilities relating to the credit facility; and

• agreed not to bring any claims against NatWest.

While the banks exchanged information before entering into the deed, Natwest did not disclose that, from March 1996, until the date on which the deed was signed, it had advanced substantial sums to the directors and former directors and managers of YFG by way of personal loans.

233

Rabobank brought proceedings in the Californian courts alleging, among other things, that NatWest had:

• breached its duty of good faith and its fi duciary duty;• negligently failed to disclose information; and• aided and abetted breaches of duties by a subsidiary of YFG.

The Californian Court of Appeal stayed the claims pending the result of English proceedings that had been commenced by NatWest.

In the English proceedings, NatWest claimed the costs incurred by it in the Californian proceedings on the basis that those proceedings breached the deed's release provisions. Rabobank counterclaimed by alleging that NatWest had breached a good faith agreement by failing to disclose the existence of its personal loans to the directors of YFG and that it had made misrepresentations to Rabobank, which also related to NatWest's non-disclosure of its personal loans to YFG's directors.

Both banks put forward expert evidence in regard to the practices of banks in co-workout agreements. Justice Coleman found that the London banks in the 1990s considered that it was good practice for co-creditors to disclose information that related to a debtor's assets, liabilities and business. This disclosure was limited to what each bank thought was material to the transaction. After noting that the banks were not under a legal duty of disclosure, Justice Coleman found that a bank could not justifi ably rely on the provision of information by another bank in the absence of a specifi c contract that required wider or more specifi c disclosure. Rabobank's misrepresentation claims were dismissed.

Justice Coleman also dismissed Rabobank's claim for a breach of the good faith agreement, noting that the substance of the wording was intended to ensure that the parties made a genuine effort to arrive at common ground and it did not operate as a warranty as to the full disclosure of all information material to the 'workout'.

Finally, Justice Coleman held that NatWest could recover the costs that it had incurred in the Californian proceedings, as those proceedings breached the release in the deed.

This case confi rms that co-workout banks do not owe a legal duty of disclosure to each other in the absence of a specifi c disclosure agreement. Furthermore, co-workout banks will not owe a duty of good faith to one another if they have agreed only to negotiate in good faith. To enable it to rely on the full disclosure of information by a co-creditor, a bank that is involved in a co-workout arrangement should enter into an agreement that requires full disclosure from the other creditor.

234


Discussion paper on banking reform: protecting depositors

In October 2007, HM Treasury, the Financial Services Authority and the Bank of England published a discussion paper to reform the present framework to protect depositors. The discussion paper sought views on the outcomes that any new framework should achieve (submissions closed on 5 December 2007). It is intended that the discussion paper is the fi rst stage of obtaining comments from all stakeholders, with the UK Government intending to follow the discussion paper with a consultation document in early 2008.

The discussion paper notes that the recent challenges to the current systems in place for dealing with banks in distress and that arrangements for compensating depositors should enhance fi nancial stability.

The discussion paper notes that any reform must meet the following objectives1:

• it must be able to be understood by retail depositors who are confi dent they are protected by an appropriate, credible and reliable guarantee that operates within a reasonable time frame;

• it must maintain wider market confi dence with full transparency about the framework that would come into play in the event of a bank in distress; and

• it must preserve the critical banking services appropriate to all the customers of the bank for whatever time is necessary to effect an orderly transition to another banking provider.

The UK Government has indicated two key areas where it wishes to introduce reforms, which are2:

• whether there are further reforms required to enable the Financial Services Compensation Scheme to make a greater contribution to depositor confi dence; and

• whether, if a bank falls into distress and an alternative solution is unable to be organised quickly, there is a case for preserving some of the critical banking functions for a specifi ed period.

It is apparent that the accelerated timetable laid down by the relevant UK authorities refl ects the urgency that is being attached to ensuring that a workable solution is found to the diffi cult issues arising in times of fi nancial instability and to ensure that depositors are protected.

1. Page 8 of the discussion paper.

2. Page 9 of the discussion paper.

235

DEVELOPMENTS IN THE UNITED STATES

Cross-border insolvency: COMI and the Bear Stearns decision

The recent decision of the United States Bankruptcy Court in Bear Stearns provides a clear and useful guide to the interpretation of the concept of centre of main interests (COMI) in the US. This concept is central to the recognition procedures in the UNCITRAL Model Law on Cross-Border Insolvency, which has been enacted in the US by Chapter 15 of the US Bankruptcy Code. Legislation introduced into the Australian Parliament on 20 September 2007 will enact the Model Law into domestic Australian law. The Bear Stearns decision is important because it is likely to be followed by Australian courts when interpreting and applying the concept of COMI in Australia.

In summary• The location of a debtor's COMI will be of strategic signifi cance for fi nanciers,

creditors and insolvency practitioners in cross-border insolvencies. • Bear Stearns1 clarifi es the strength and operation of the presumption in the

Model Law that the debtor's COMI is where its registered offi ce is located. The decision stands for three propositions: • that courts will not merely rubber-stamp applications for recognition; • that the presumption will operate only in a case where there is no dispute

as to the location of the debtor's COMI. Where there is a dispute, the location of the debtor's registered offi ce is simply evidence of the location of its COMI, which can be outweighed by evidence supporting an alternative location; and

• the foreign representative bears the burden of proving where the debtor's COMI is.

• If this decision is followed in Australia, fi nanciers, creditors and insolvency practitioners may be able to defeat applications for recognition of a foreign proceeding as a 'foreign main proceeding' or 'foreign non-main proceeding' more easily, provided that they can point to some evidence to rebut the presumption.

1. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund (In Prov Liq) and in re Bear Stearns High-Grade

Structured Credit Strategies Enhanced Leverage Master Fund No. 07-12383 and No. 07-12384 (Bankr. S.D.N.Y.

Aug 30, 2007).

236

The facts In early 2007, joint provisional liquidators (JPLs) were appointed to two Bear Stearns hedge funds (the funds).2 The funds were registered in the Cayman Islands and a bankruptcy proceeding was instituted in the Grand Court of the Cayman Islands to liquidate both funds. The JPLs fi led petitions under Chapter 15 of the US Bankruptcy Code to have the proceeding in the Cayman Islands recognised as a 'foreign main proceeding' and to be granted relief fl owing from that recognition, namely a stay of proceedings in all other jurisdictions, or, in the alternative, to have the proceeding recognised as a 'foreign non-main proceeding' in order to take advantage of the court's discretion to order a stay on all other proceedings.

There were no objections to these petitions from other interested parties.

The context Chapter 15 of the Bankruptcy Code enacts the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) into US domestic law. Under the Model Law, a foreign proceeding can be recognised as either a 'foreign main proceeding' or 'foreign non-main proceeding'. This determination is based on the location of the debtor's COMI. COMI is not defi ned in the Model Law or in the Bankruptcy Code. In determining its meaning, courts have had regard to the Guide to Enactment of the Model Law, EU insolvency conventions and regulations, and decisions of foreign courts.

The decision The central question before the Bankruptcy Court was whether the Cayman Islands was the location of the debtors' COMI. The JPLs raised two arguments in support of such a fi nding, namely that:

• none of the other interested parties had objected to the Cayman Islands proceeding being recognised as the 'foreign main proceeding'; and

• because the Cayman Islands was where the funds' registered offi ces were located, there was a presumption that their COMI was the Cayman Islands.

Judge Lifl and rejected both arguments and found that the debtors' COMI was the US. Consequently, the JPLs were denied the automatic stay on all US proceedings, which would have resulted from recognition of the Cayman Islands proceeding as a 'foreign main proceeding'.

Rejecting the JPLs' fi rst argument, Judge Lifl and stated that the court is not a rubber stamp for an application for recognition. The court could question the merits of an application on its own motion and test its basis. Judge Lifl and disagreed with the decision in SPhinX3 insofar as that decision indicated that non-objection by interested parties would make the process a rubber-stamp exercise.

2. Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd (In Provisional Liquidation) and Bear Stearns High-

Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.

3. In re SPhinX Ltd, 351 B.R. 103 (Bankr. S.D.N.Y. 2006).

237

On the basis of statements in the JPLs' own application, the court found that there was ample evidence that the funds' COMI was the US:

• there were no employees or managers in the Cayman Islands; • the funds' investment manager was located in New York; • the administrator that ran the funds' back-offi ce operations was in the US, along

with the funds' books and records; • before the commencement of the proceedings, all of the funds' liquid assets

were located in the US; • the majority of the funds' investors were registered in the Cayman Islands, but

they had the same minimum profi le in the Cayman Islands as did the funds; and

• the funds' investor registries were located in Ireland and their accounts receivables were located throughout Europe and the US.

The Model Law states that, in the absence of 'proof' to the contrary, the location of the debtor's registered offi ce would be its COMI. By contrast, Chapter 15 of the Bankruptcy Code uses the word 'evidence'. The drafters had made this change, the judge noted, in order to make it clearer that the burden of proving the location of the debtor's COMI falls squarely on the foreign representative. The proposed Australian enacting legislation, the Cross-Border Insolvency Bill 20074, retains 'proof' as its preferred terminology. Whether an Australian court will consider this distinction important remains to be seen.

The decision in Bear Stearns also deals with the operation of the presumption. Its purpose, the judge noted, is to permit speedy action when there is no dispute about the location of the debtor's COMI. It would cease to operate if there is such a dispute. In that case, a court must be satisfi ed on the evidence as to the location of the debtor's COMI; the location of the debtor's registered offi ce would simply be one piece of evidence in relation to the location of its COMI.

This fi nding is signifi cant because it departs from the approach in SPhinX, where it was suggested that courts should not overturn the presumption in the absence of objection by interested parties, even in the face of compelling evidence supporting a fi nding that the debtor's COMI was somewhere other than where its registered offi ce was located.

Accordingly, the court held that the proceeding in the Cayman Islands could not be recognised as a 'foreign main proceeding'.

Judge Lifl and similarly rejected the JPLs' application to have the proceeding recognised as a 'foreign non-main proceeding' and, thus, denied them the opportunity to apply for a discretionary stay. The judge found that the nature of the funds, as tax-exempt companies, precluded them from carrying out any business or economic activities other than that which was necessary for the furtherance of their off-shore business. Therefore, the funds' activities could not constitute an 'establishment in the Cayman Islands for the conduct of non-transitory economic activity'.

4. This Bill has now lapsed and will have to be reintroduced before Parliament if it is to be enacted – see p201.

238

Effect of the decision in Australia Decisions in the US will certainly affect the way Australian courts interpret and apply the concept of COMI under the proposed Australian enacting legislation. An Australian court would need to consider the enacting legislation, the Model Law, enacting legislation in other Model Law jurisdictions and foreign decisions in interpreting and applying the concept of COMI. Indeed, the Model Law and the Explanatory Memorandum to the Cross-Border Insolvency Bill 2007 expressly envisage such an approach by Australian courts in interpreting the enacting legislation.

We expect that this decision would be followed in Australia and note that it is consistent with the decision of the European Court of Justice in Eurofood.5

ConclusionClearly, this is an important decision for fi nanciers, creditors and insolvency practitioners in Australia. It provides a useful guide to the interpretation of the COMI concept and propounds a substantive, rather than formulaic, approach to the issue. It remains to be seen whether Australian courts will follow its interpretation and application of the COMI concept. However, we expect that they will do so.

The JPLs have now appealed this decision and an outcome is awaited.

5. Eurofood IFSC Ltd Case C-341/04.

INDEXACCC v ASIC 51

Ad'Tel Digital Systems Group Pty Ltd (in liquidation) v Future Corporation Australia Ltd 64(formerly Telco Australia Ltd) & Ors

ASIC; In the matter of Westpoint Corporation Pty Ltd ACN 009 395 751 149(receivers and managers appointed) (in liquidation v Read)

ASIC in the matter of Richstar Enterprises Pty Limited (ACN 099 071 968) 160and Carey (No. 18)

ASIC in the matter of Richstar Enterprises Pty Ltd ACN 099 071 968 v Carey (No. 15) 148

ASIC v Green Pacifi c Energy Limited ACN 004 119 304 125

ASIC v Krecichwost & Ors 39

ASIC v Read 120

ASIC v Robert John Edge 127

Ausino International Pty Ltd v Apex Sports Pty Ltd 23

Ausino International Pty Ltd v Apex Sports Pty Ltd 89

Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd 178

Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd 99

Australian Capital Reserve Limited (administrators appointed) v High Tower Investments 35Pty Limited (administrators appointed); in the matter of High Tower Investments Pty Limited (administrators appointed)

Buzzle v Apple Computer 67

Capital Finance Australia Limited v Tolcher 196

Chandra & Anor v Perpetual Trustees Victoria Ltd & Ors 75

Crouch re Heritage Fine Wines Pty Ltd 132

David Alexander Grace v Deborah Sharon Grace and 5 Ors 108

Davies v Chicago Boot Company Pty Ltd (No. 2) 142

Dean-Willcocks, re Militto's Transport Pty Ltd (in liquidation) 106

Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd 85

Deputy Commissioner of Taxation v Dick 65

Deputy Commissioner of Taxation v Trio Site Services Pty Ltd 174

Deputy Commissioner of Taxation v Wellnora Pty Limited 40

Deputy Commissioner of Taxation v Wellnora Pty Ltd (No. 2) 45

Dwyer & Anor v R-Jay Pty Ltd 87

Edenden v Bignell 103

Elderslie Finance Corporation Limited v Newpage Pty Limited 111

Emmacourt Pty Limited v Jewels of Australia Pty Limited 134

Errichetti Nominees Pty Limited v Paterson Group Architects Pty Limited 170

Farnsworth v ASIC 56

Finance & Equity v Leveraged Equities; Aussie Products v Leveraged Equities 180

Fincorp Group Holdings Pty Limited 25

Foots v Southern Cross Mine Management Pty Ltd 157

Gazal Apparel Pty Ltd v Davies & Ors 117

General Homes v Jonathon B & Leanne A Caelli trading as JC Electrical 27

General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd 73

GIO General Ltd v Sabko Pty Ltd 49

Gladstone & District Leagues Club Ltd v Hutson & Ors 159

Global Cement (North Queensland) Pty Ltd v Benchmark Debtor Finance Pty Ltd; 176 ARMC Concrete Products Pty Ltd v Benchmark Debtor Finance Pty Ltd

Glodale Pty Ltd v Investec Bank (Australia) Ltd 78

Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd 19

Hansmar Investments Pty Ltd v Perpetual Trustee Company Ltd 168

Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd & Anor (No. 2) 140

Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd (No. 2) 143

Hilldale v Leveraged Equities 182

Hill v Hicom International Pty Ltd (in liquidation) ACN 070 061 344 151

In the application of United Medical Protection Limited, The Medical Defence Association 164of Victoria and Seventy-Fifth Jonestown

In the matter of Bernsteen Pty Ltd & Anor (No. 2) 110

In the matter of Global Food Equipment Pty Ltd (under administration); Carter v 33Global Food Equipment Pty Ltd

In the matter of Mendarma Pty Ltd (in liquidation) (No. 2) 113

In the matter of Stork ICM Australia Pty Ltd; Stork ICM Australia Pty Ltd v 162Stork Food Systems Australasia Pty Ltd

Jamieson Louttit v Kolln 42

Jenkins v Jonkay Pty Ltd 129

JLF Bakeries Pty Ltd (in liquidation) v Baker's Delight Holdings Ltd 97

Kalls Enterprises Pty Ltd (in liquidation) & Ors v Baloglow & Anor 190

La Trobe Capital & Mortgage Corporation Ltd v REA Australasia Pty Ltd 54

LawCover Pty Ltd v Swart 172

Leonard Thomas Hinde 31

Malhotra v Tiwari & Ors 29

Mark Damian Charles Roufeil & 1 Or v Noel Linder & 1 Or 62

Meadow Springs Fairway Resort Ltd (in liquidation) (ACN 084 358 592) v 130Balanced Securities Ltd (ACN 083 514 685)

Milicevic v Capital Scaffolding Pty Ltd (in liquidation) 101

Mills & Ors v Sheahan 136

Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) 37& Ors

Morgan, in the matter of the Yourhealth Companies 147

Murray Roderick Godfrey as liquidator of Pobjie Agencies Pty Ltd (in liquidation) 115ACN 000 859 405

National Australia Bank Ltd v Idoport Pty Ltd 104

New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd & 12 Ors 71

Newtronics Pty Ltd v Gjergja & Anor 154

Nilant (as trustee of the property of Osborne, a bankrupt) v R L & K W Nominees Pty Ltd 93& Anor

Noxequin Pty Ltd v Deputy Commissioner of Taxation 83

Onefone Australia Pty Ltd v One.Tel Ltd 118

Onefone Australia Pty Ltd v One.Tel Ltd 138

Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd 91

Radiancy (Sales) Pty Ltd v Bimat Pty Ltd 184

Re Evans & Tate Ltd (administrators appointed) (receivers and managers appointed); 43Ex Parte Jones

Re Harris Scarfe (in liquidation) & Harris Scarfe Wholesale Pty Ltd (in liquidation) (No. 2) 123

Re Harris Scarfe (in liquidation) & Harris Scarfe Wholesale Pty Ltd (in liquidation) (No. 3) 95

Re JN Taylor Holdings Ltd (in liquidation) 152

Rocke (as liquidator of ACN 080 794 636 Pty Ltd), in the matter of ss502 and 506(4) 155of the Corporations Act

Ryan v ASIC; in the matter of Allstate Explorations NL (subject to deed of company 145arrangement)

Silvia & Anor v Brodyn Pty Limited 21

Southern Wine Corporation Pty Ltd (in liquidation) v Perera 79

Sutherland & Anor v Lofthouse & Anor 193

Sutherland v Johnson Property Holdings 47

SV Steel Supplies Pty Ltd v Palwizat 166

The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No. 3) 81

The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No. 4) 60

Tirrabella Pty Ltd v Struthers 121

Tolcher & Ors v John Danks & Son Pty Ltd 194

Vukasin v ASIC 58

Welcome Homes Real Estate Pty Limited & Ors v Ziade Investments Pty Limited & Anor 188

Westbury Holdings Kiama Pty Ltd v ASIC 52

Williams v Scholz & Anor 69

Zolsan Pty Ltd v Deputy Commissioner of Taxation 186

10898 insolvency 1 front section - allens · ©allens arthur robinson 2008 written and published by...

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