Newsflash – ASIC’s appeal in ASIC v Franklin successful

Today the Full Court of the Federal Court of Australia allowed ASIC’s appeal, concluding that on the grounds of a reasonable apprehension of bias, Messrs Franklin, Home and Stone ought be removed as liquidators of Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd. The judgment in full is up on Austlii and may be read here. My review of the first instance decision of Davies J may be read here.

The second part of ASIC’s appeal, as to an alleged contravention of s 436DA as to disclosure in the DIRRI, was unsuccessful. I note in passing that at paragraph [38] Robertson J remarked that he did not regard the (then) IPAA’s Code of Conduct to be extrinsic material to be taken into account in construing ss 60 and 436DA of the Corporations Act.

I will return to review the Full Court’s decision and post further when time permits.

Fiorentino to fight on as CALDB orders deregistration

It has been reported that Pino Fiorentino, whose registration as a liquidator was cancelled by the Companies Auditors and Liquidators Disciplinary Board (CALDB), will be fighting the decision in the AAT, seeking a review of the evidence presented by ASIC at the CALDB hearing. See the full article with this report in the Sydney Insolvency News here. The CALDB’s media release of 8 July 2014 announcing their decision shows that the – “CALDB found that Mr Fiorentino’s failings were significant and extensive.” ASIC’s allegations included that prior to the liquidation of the company concerned, ERB International Pty Ltd, Mr Fiorentino had been contacted by a director of ERB regarding whether ERB could transfer its business to a related third party and proceed to liquidation, leaving ERB with debts including a debt owed to the State Revenue Office, which ERB could not pay. A barrister retained by Mr Fiorentino and the director advised that this was not possible unless the sale of assets was for a proper commercial value. ASIC alleged that the transfer of assets for no cash consideration to a related third party controlled by ERB’s directors went ahead anyway, and shortly thereafter went into liquidation. The CALDB’s 208-page decision and reasons repeatedly refer to this as an alleged “phoenix transaction”. That media release states that the Panel of the CALDB was satisifed that Mr Fiorentino had failed to carry out or perform his duties as a liquidator adequately and properly, finding that Mr Fiorentino had -

  • failed properly to investigate this sale of assets shortly prior to liquiation,
  • entered into a Deed of Settlement and Release with the related third party mentioned above and the directors, giving up claims against them without properly assessing the relevant issues and obtaining legal advice,
  • failed to provide notice of creditors’ meetings to persons who were or appeared to be creditors of ERB,
  • accepted invalid proxies, using his position dishonestly with the intention of directly gaining an advantage for himself, ie approval of his remuneration without the need to go to court,
  • failed to act in good faith in the best interests of ERB in relation to dealings with the State Revenue Office, and
  • failed to provide adequate reports to creditors.

The CALDB’s written reasons show that Mr Fiorentino made extensive oral submissions at the Sanctions Hearing of 17 June 2014, which included submissions that there was relevant material which ASIC should have put forward to the Board, and that the Board had made its determination on assumed facts which were “totally incorrect”. Mr Fiorentino has also asserted (see SIN report, link above) that he had obtained an expert report from McGrathNicol which he was not given the opportunity to use at the earlier hearing in February. The CALDB’s media release can be read here, and the decision and reasons may be read in full here. It should be noted that Mr Fiorentino had been appointed joint liquidator of ERB in April 2008 together with Mr William James Hamilton, whose registration as a liquidator was suspended for 6 months by the CALDB in April 2014 for reasons arising out of the same liquidation. The decision involving Mr Hamilton raises interesting issues as to the extent to which a joint liquidator, who does not have the day-to-day conduct and control of the liquidation, should be held liable for any failures to carry out or perform adequately and properly the duties of a liquidator. Mr Hamilton had argued that he should not. The CALDB, however, had found that – “…for the purposes of the execution of the function of the office of liquidator, a joint liquidator who does not have the main carriage of the matter still has to have an adequate and proper involvement in the liquidation. How that is to be assessed will depend on the circumstances of each case, but the relevant question is whether the action taken by the second liquidator is sufficient to ensure that the inherent duties of the office are adequately and properly discharged.” The CALDB’s decision and reasons as to the 6 month suspension of Mr Hamilton’s registration of 3 April 2014 may be found here, and the media release here.

Newsflash: AFSA announces Debtor’s Petition lodgement fee to cease

For those of you who have been concerned at the introduction of the $120 fee on lodgment of a Debtor’s Petition under the Bankruptcy Act 1966 (Cth), AFSA has announced its cessation, following a notion passed by the Senate yesterday (link). AFSA’s announcement states that the fee is no longer payable after the close of business on 23 June 2014.

For anyone interested in reading a transcript of the questioning of AFSA by Senator Penny Wright during an Estimates hearing in February on this issue, here’s the link

Newsflash – High Court judgments today in Newtronics and Hills Industries

Further to my post on Sunday, the High Court has earlier this morning handed down two important judgments – one in insolvency law (Universal Distributing principle) and one in restitution (change of position defence): Stewart v Atco Controls Pty Ltd (in liquidation) [2014] HCA 15 and Australian Financial Services and Leasing Pty Ltd v Hills  Industries Limited [2014] HCA 14.

First, the High Court unanimously allowed the appeal of the liquidator of Newtronics Pty Ltd (in liquidation) from the Victorian Court of Appeal’s decision in Atco Controls Pty Ltd (in liquidation) v Stewart [2013] VSCA 132. The High Court held that the liquidator was entitled to an equitable lien over a fund constituted by a settlement sum with respect to costs and expenses incurred in getting in the fund, being his costs and expenses in litigation against the respondent, a secured creditor, and receivers appointed by the respondent.

The bench of Crennan, Kiefel, Bell, Gageler and Keane JJ held that:  “there is no basis for excepting this case from the application of the principle in Universal Distributing (at [65]). You can read the judgment in full here, the High Court’s judgment summary here, and my analysis of the Victorian Court of Appeal decision from which this appeal was brought here.

Secondly, the High Court unanimously dismissed the appeal of Australian Financial Services and Leasing Pty Ltd from the decision of the NSW Court of Appeal in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380; (2012) 295 ALR 147, holding that the first and second respondents would not be required to repay monies that had been mistakenly transferred to them by the appellant as a result of a fraud committed by a third party, because each respondent had established a defence that they had changed their position on the faith of the receipt of the payments.

While the decision was unanimous, three judgments were written. The joint judgment was that of their Honours Hayne, Crennan, Kiefel, Bell and Keane JJ. Their Honours French CJ and Gageler J each wrote a separate judgment. You can read the judgment in full here, the High Court’s judgment summary here, and my analysis of the NSW Court of Appeal judgment from which this appeal was brought here (the second case discussed there).

More to follow – I will endeavour to return to analyse the High Court judgments in each case as soon as time allows.

Heads up #2 – Two other insolvency law appeals before the Courts

Two other insolvency law appeals have just been heard.

Today, a Full Federal Court bench of their Honours Jessup, Robertson and White JJ heard ASIC’s appeal from the decision in ASIC v Franklin (liquidator), in the matter of Walton Construction PL (in liq) [2014] FCA 68. At first instance, her Honour Davies J had refused an application by ASIC for the removal of liquidators because of an apprehension of a lack of independence and impartiality, brought under s 503 of the Corporations Act 2001 (Cth). ASIC had also claimed that the DIRRI (declaration of relevant relationships) made by the liquidators upon their appointment as administrators was deficient, and had sought a declaration that they had contravened s 436DA of the Act. This appeal decision is likely to be instructive, and worth looking out for. I wrote an analysis of the first instance decision and the then upcoming appeal in March of this year – link.

And on Friday, a Victorian Court of Appeal bench of their Honours Ashley, Neave and Almond JJA heard the directors’ appeal from the decision in Le Roi Homestyle Cookies Pty Ltd (in liquidation) v Gemmell [2013] VSC 452. This is an appeal from an interesting decision her Honour Ferguson J handed down in August last year. It concerned public examinations of directors for potential insolvent trading claims – including de facto and shadow directors – and the consequences of those individuals failing properly to maintain their privilege against self-incrimination for criminal or penalty proceedings. I wrote an analysis of that decision also, which may be read here.

I will endeavour to inform you when the appeal decisions are handed down.

Heads up – High Court to deliver two important decisions on Wednesday

This coming Wednesday 7 May 2014, the High Court of Australia will deliver two important decisions – one in restitution law, the other in insolvency law.

The first is an appeal from the decision of the NSW Court of Appeal in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380; (2012) 295 ALR 147. This is a case concerning mistaken payments due to fraud, and in particular the change of position defence. I wrote on that decision in detail last year – you can read my review of it here (second case discussed there).

The second is an appeal from the decision of the Victorian Court of Appeal in Atco Controls Pty Ltd (in liquidation) v Stewart [2013] VSCA 132. In this case the central issue concerns liquidator’s equitable liens and the Universal Distributing principle. I wrote about this case in March – you can read my review of it here. The precedent the High Court decision sets here is likely to be important for liquidators moving forward, as to there being certainty regarding whether and when they can expect to be compensated for their time and money spent in recovering assets covered by a creditor’s security.

Newsflash #2: Important case on CGT liability of liquidators appealed by the Commissioner

The Federal Court portal shows that the Commissioner of Taxation has appealed to the Full Court of the Federal Court of Australia the decision of Logan J in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116.

At first instance, the Federal Court allowed the liquidators’ objection to the Commissioner’s private ruling on the issue. It ordered that the private ruling be set aside and in lieu thereof, the first question in respect of which that ruling was made, was to be answered as follows (the other questions fell away as the answer to 1 became “no”):

Question 1:  Is the liquidator required under s 254 of the Income Tax Assessment Act 1936 (Cth) (the ITAA) to account to the Commissioner out of the proceeds of sale, any CGT liability that crystallises on the sale of an asset that belonged to the company before liquidation?

Answer:  No, given the [then] present absence of an assessment.

In that case, the company had been placed in voluntary administration on 2 March 2011, and entered a creditors voluntary liquidation on 6 April 2011. Subsequently, the liquidators caused the company to dispose of a property, which constituted a “CGT event” under the ITAA.

Logan J considered the interaction of s 254 of the ITAA with key provisions of the Corporations Act 2001 (Cth) including s 501 as to distribution of property of a company in liquidaiton, s 555 as to the pari passu rule, that except as otherwise provided by the Corporations Act, all debts and claims proved in a winding up rank equally and are paid proportionately, s 553 as to debts or claims that are provable in a winding up, and s 556 as to priority payments.

The Commmissioner’s submission was that, in the circumstances of that case, the effect of s 254(1)(d) of the ITAA was that the liquidators became liable to retain from the proceeds of sale of a particular property, when those proceeds came into their hands an amount sufficient to pay the tax that would become due in respect of the net capital gain arising from the disposal of that property. The Commissioner contended that it was not necessary for there to be a notice of assessment before the retention obligation could arise (see [19]).

The liquidators submitted that, in the absence of an assessment, there could be no obligation. In that case, no assessment had yet been issued.

His Honour agreed. He reviewed the authorities and accepted that s 254 is “but a collection provision” not one that itself triggers the taxation liability (which may arise by the operation of other provisions of the ITAA36 or ITAA97). It follows, his Honour observed, that s 254 does not provide for an “incontestable tax” in the sense described by Gibbs CJ, Wilson, Deane and Dawson JJ in MacCormick v Commissioner of Taxation [1984] HCA 20; (1984) 158 CLR 622 at 639-640.

His Honour held in favour of the liquidators, and noted at [30] that the liquidators were not subject to any present retention and payment liability, and that he would so declare.

However, his Honour then added the following remarks, perhaps sensible of the potential for this decision to be construed as applying more broadly than it ought, at [31]:

“I should also add the following. Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like the prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year. Yet further, in the event of a controversy after the issuing of an assessment as to whether the tax debt that was provable in the winding up, the liquidator would be entitled to retain the gain or some part thereof sufficient to meet the assessed tax until that controversy was resolved. Whether there proves to be such a controversy in the present case must await the course of future events. If it comes to pass, the liquidators would be entitled to seek declaratory relief from the Court to resolve it.”

Where does that leave liquidators?

Pending the appeal, caution would be wise. Clearly the prudent course is that while there may be no obligation on a liquidator to retain funds in anticipation of a potential CGT liability upon disposal of an asset, a liquidator ought bear in mind the judicial remarks that a liquidator is entitled to retain the gain until assessment.

Note too that the decision at first instance does not resolve the question of the extent to which s 254 does or does not disturb the distribution priority provisions of the Corporations Act referred to above.

Newsflash: High Court denies Timbercorp investors special leave to appeal

On Thursday (10 April 2014) the High Court of Australia refused special leave to appeal to the Timbercorp investors from last October’s Victorian Court of Appeal decision.

For those who would like a more detailed understanding of the case, I wrote a detailed review last October discussing the first instance judgment of his Honour Justice Judd and the appeal judgment of the Victorian Court of Appeal – link.

Broadly, the Court of Appeal had held that Judd J had not erred in any of his challenged findings. One of those was that the Timbercorp directors did not have actual knowledge of a significant risk to viability until bank support wavered. This was well after publication of the last PDS, and after the collapse of Lehman Brothers in late 2008, which was swiftly followed by the sudden termination of negotiations Timbercorp had been engaged in for the sale and leaseback of certain of its properties and forestry assets. Even then the directors were able to manage those set-backs and address them opening new negotiations with other parties, keeping the banks onside, until their support was withdrawn shortly before Timbercorp’s collapse in mid-April 2009.

The transcript of the special leave application is not yet up on Austlii. However reports are starting to appear in the press – an article appearing in Saturday’s Age is here.

Newsflash: proposed PPSA amendments to “un-deem” certain PPS leases in future

Last Wednesday 19 March 2014, a bill was introduced into Parliament to amend section 13 of the Personal Property Securities Act 2009 (Cth) to remove the provision that deems leases of serial-numbered goods of more than 90 days to be a ‘PPS lease’. The bill, called the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth), and Explanatory Memorandum may be accessed on the Federal Parliament’s website here.

The provision to be removed is s 13(1)(e). Those who are familiar with it will be aware of the questions and uncertainties to which that provision has already given rise. It should be noted however that the change, when enacted, will apply only in respect of transactions entered into after the amendment has been enacted (per ss 2 and 7 of the Bill and the insertions to Schedule 1).

The EM notes that this should simplify the deeming provisions in the PPS Act and minimise the need for small and medium hire businesses to make registrations in respect of leases of a term of less than 12 months. This should reduce the number of transactions gtiving rise to PPS leases and reduce the compliance cost born by small and medium hire businesses.

The EM also notes that the change will bring the Australian PPS Act into alignment with PPS regimes in New Zealand and Canada on this point. Thus to the extent that the activities of Australian enterprises cross over into these jurisdictions, this alignment may have benefits for Australian financiers, businesses and legal practitioners.

For those who wish to read the EM for themselves, the direct link to it is here.

References: (1) Parliament of Australia’s webpage for the Personal Property Securities Amendment (Deregulatory Measures) Billl 2014 (link); (2) Client update of Allens Linklaters entitled “PPSA Amendments for ‘Serial Numbered goods'”, wirtten by Andrew Boxall and Daniel MacPherson (link)

The High Court hears Newtronics appeal – liquidators’ liens

Last Thursday (6 March) the High Court heard the appeal in Stewart as liquidator of Newtronics Pty Ltd (in liquidation) v Atco Controls Pty Ltd (in liquidation), the central issue in which concerns liquidators’ equitable liens and the Universal Distributing principle. Presiding were their Honours Crennan, Kiefel, Bell, Gageler and Keane JJ.

Background

Very briefly, in a previous action in the Victorian Supreme Court, the liquidator of Newtronics had sued its parent company Atco and the receivers that Atco had appointed pursuant to the terms of the security it held over Newtronics’ assets. Against Atco, the liquidator of Newtronics claimed that letters of support or comfort Atco had provided to Newtronics gave rise to a contractual obligation not to call upon its secured debt until all other creditors were paid. Against the receivers, Newtronics’ claims were for trespass and conversion.

At first instance, in those proceedings, the Court found in favour of the liquidator of Newtronics as against Atco in relation to the letters of comfort, but found in favour of the receivers in relation to trespass and conversion. This judgment of Pagone J of December 2008 was appealed. Shortly before the Court of Appeal hearing, the liquidator of Newtronics and the receivers settled their dispute, resulting in the receivers paying the liquidator a settlement sum of $1.25 million. The appeal between Newtronics and Atco went ahead, and Atco was successful in a unanimous judgment of Warren CJ, Nettle and Mandie JJA of October 2009 (link). Special leave sought by Newtronics was refused in April 2010 (link).

Atco subsequently commenced the present proceedings seeking recovery of the settlement sum pursuant to the terms of its security. Its application was an appeal under s 1321 of the Corporations Act 2001 (Cth) against a decision of Newtronics’ liquidator regarding the $1.25 million settlement sum (see below). Atco argued that those proceeds of the earlier litigation were caught by the charge held by it over Newtronics’ assets, and should have been paid to it under that charge.

The liquidator of Newtronics, relying on the long-standing Universal Distributing principle, contended that he held an equitable lien over the settlement sum for his remuneration and the expenses of the earlier action against Atco and the receivers which had realised the settlement sum. Atco argued that the liquidator’s claim to the equitable lien could not be sustained in this particular case. One aspect which makes this an atypical case, is that the funds in question did not represent the realisation of an asset of the company. Rather, it was the result of advsersarial litigation brought by the liquidator against the secured creditor and its receivers, impugning the security or the creditor’s rights to enforce it, in an action in which the liquidator was ultimately unsuccessful. Atco complained of its considerable costs incurred in defending the litigation which it could not fully recover (above the amount of taxed costs).

The Universal Distributing Principle and the judgments in the present proceedings to date

In Re Universal Distributing Co Ltd (in liquidation) (1933) 48 CLR 171, the High Court held at 174 -

“The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realisation of the fund affected by the security must be borne by it.”

At first instance in April 2011 Efthim AsJ agreed that Atco was entitled to the $1.25 million. The liquidator of Newtronics appealed that decision and in July 2011 was successful (link to decision of Davies J). In the subsequent appeal judgment, it was noted that the fact that the liquidator’s costs were properly incurred appeared to have been of considerable weight in her Honour Davies J’s decision to award a lien (see [47] of the judgment of Warren CJ on appeal).

In June 2013 Atco’s appeal to the Court of Appeal was unanimously upheld by their Honours Warren CJ, Redlich JA and Cavanough AJA (link).

The Issues

At the heart of this case is an interesting contest. On the one hand, a secured creditor is asking to receive the $1.25 million fruits of litigation the liquidator undertook in execution of his duties, without having to bear the costs of realisation of those funds. The liquidator of Newtronics put his case on the basis that in performing his statutory duties he has made funds available in the liquidation that otherwise would not have been available (as to their availability, see below). The liquidator submitted in the alternative that resort may be made to a more general expression of the principle upon which an equitable lien may be conferred, that it would be unconscientious for the secured creditor to assert its rights. Indeed Davies J had held that it would unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented to the realisation or not (see generally [61]-[104] of the appeal judgment).

On the other hand, a liquidator is asking that the Universal Distributing principle apply where the liquidator acted to realise the funds not only without the willingness or consent of the secured creditor, but against the secured creditor’s interests. This point appears to have weighed in the balance for her Honour Warren CJ, who took the view at [43] that the principle as articulated in Universal Distributing requires some willingness on the part of the secured creditor to participate in the winding up. Her Honour found support inter alia from the judgment of Tadgell J in Moodemere Pty Ltd (in liq) v Waters [1988] VicRp31; (1988) VR 215 at [15]. In her Honour’s view, the fact that Atco at all times opposed the means by which the liquidator obtained the settlement sum meant Atco has not “come in to the winding up” in the way described in Universal Distributing (see [46]). In relation to Newtronics’ liquidator’s submission as to unconsientiousness, Atco relied on Falcke v Scottish Imperial Insurance Co (1887) LR 34 Ch D 234 and Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27; (2008) 232 CLR 635 as establishing that a stranger conferring a benefit in the absence of an express or implied request is not sufficient to create a liability for the cost of its conferral. As Bowen LJ said in Falcke’s Case: “…Liabilities are not to be forced on people behind their backs any more than you can confer a benefit upon a man against his will.” Newtronics’ liquidator argued (unsuccessfully) that those cases operate in a distinct field from the area of equitable liens and ought be distinguished as the liquidator was not an officious bystander but was acting pursuant to a statututory duty owed to creditors.

There are a number of complexities to this case the detail of which I do not descend into here. But to mention a few of particular note: One is that the first set of proceedings challenging Atco’s rights to enforce its security, initiated by Newtronics and its liquidator, was the subject of an indemnity funding agreement with Seeley International Pty Ltd, the major unsecured creditor of Newtronics. When Newtronics went into liquidation, Atco was owed approximately $8.75m by Newtronics; Seeley was owed approximately $13.9m. In the application for approval of the indemnity agreement before Gordon J in the Federal Court, the liquidator had explained that in funding that litigation, Seeley was not seeking to obtain a proportion of any moneys recovered. It was simply agreed that the liquidator would approach the Court pursuant to s 564 of the Act to seek orders that the Court afford Seeley priority. However as events transpired, the liquidator did not approach the Court under s 564, seek directions or inform Atco, but simply made a decision to and did pay the $1.25 million to Seeley within 2 days of receiving it, on the basis that Seeley had funded the liquidator’s costs and expenses under the indemnity agreement. It was that decision in respect of which Atco brought its appeal in these proceedings under s 1321 of the Act. Her Honour Warren CJ took the view that these were all matters that were relevant to the competing equities of the parties (see [103]).

In the particular facts of this case, then, either way, it does not appear that the liquidator was going to be left unrewarded for his work and legal expenses in creating the fund represented by the settlement sum. Either Seeley would pay them under the indemnity agreement (indeed it appears Seeley already had), or Atco will be required to pay them. However, the precedent this High Court decision sets will be important for liquidators moving forward, and there being certainty as to whether and when they can expect to be compensated for their time and money spent in recovering assets covered by a creditor’s security.

Another notable aspect of the facts of this case, is that the liquidator contended his lien secured the entirety of the $1.25 million settlement sum, as his legal costs and expenses referable to the preservation, realisation and getting in of that settlement sum were in excess of the money recovered (see [9] of the judgment of Davies J). On one view, then, the arguments as to whether equity ought allow a secured creditor to receive the fruits of a liquidator’s efforts without deduction for remuneration incurred in and the costs of those efforts are somewhat hollowed by this fact. That deduction would wipe out those fruits.

Note that in the unanimous appeal judgment, his Honour Redlich JA sets out a useful summary of his conclusions as to why no equitable lien arose in favour of the liquidator over the settlement sum at [133].

The transcript of the High Court appeal hearing makes for some interesting reading and may be read here. To the best of my knowledge this will be the first occasion since Universal Distributing in 1933 that the High Court has had the opportunity to consider in detail and pronounce upon the principles governing when the liquidator’s equitable lien will arise and its scope. We await their Honours’ decision with interest.

[References:  (1) The various judgments and transcript cited above, via Austlii; (2) Article: "High Court to consider the scope of a liquidator's lien" by Andrew Chambers, Nicole Ward and Julia Wheeler of K&L Gates, via Mondaq - link ]