A refresher – Liquidators’ section 483(1) applications

Section 483(1) of the Corporations Act 2001 (Cth) is concerned with the “delivery of property to the liquidator” and provides –

The Court may require a person who is a contributory, trustee, receiver, banker, agent or officer of the company to pay, deliver, convey, surrender or transfer to the liquidator or provisional liquidator, as soon as practicable or within a specified period, any money, property, or books in the person’s hands to which the company is prima facie entitled.

The section provides a summary procedure to avoid the expense of the company bringing actions against company officers and others who obtain their authority from the company, in possession of the company’s property.[1]

In short, if the company in liquidation is “prima facie entitled” to the property the subject of the application, the Court has a discretion to order it delivered up to the liquidator without resolving the issue of who is the owner of the property. This may be so even where there is a genuine dispute as to ownership of the property the subject of the application [2].

However, somewhat similarly (though not identically) to the position with applications to set aside statutory demands, this may not be the appropriate procedure to employ where there is a real question of ownership to be tried between the company and the proposed respondent to the application. There can be a fine line, though, when the dispute raised does not appear to be well-founded.

Principles

The following is my distillation of the key principles to be derived from the authorities –

  1. The issue for the Court to determine is whether the company is prima facie entitled to the property the subject of the application.[3]
  2. The Court does not inquire into and finally determine or resolve a dispute as to title to the property,[4] if there is one.
  3. The Court may determine the question of whether the company is prima facie entitled to the property and order its delivery up to the liquidator –
    1. Even if there is some evidence to the contrary,[5] and
    2. Even if there is a genuine dispute as to ownership of the property in question,[6] but
    3. Not if a claim is made by the person in whose hands the assets are found that is adverse to the company, such as a claim that that person is entitled to the assets.[7]
  4. If there is a dispute, the Court may determine that the company is prima facie entitled and order the delivery up of the property in question without resolving the issue of who is the owner of the property.[8]
  5. The Court’s jurisdiction to make the order is discretionary.[9]
  6. The persons identified in the subsection are all persons who either derive their authority from the company or are accountable to it.[10]
  7. There is authority for the proposition that “receiver” in s 483(1) refers to a receiver appointed by the company to a debtor; not a receiver appointed to the company by a secured creditor: Home v Walsh [1978] VR 688.
  8. There is authority for the proposition that a constructive trustee may not be a “trustee” for the purpose of s 483(1):  Re United English and Scottish Assurance Company; Ex parte Hawkins (1868) 3 Ch App 787; Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140; (2014) 284 FLR 320; cf Evans v Bristile Ltd (1992) 8 ACSR 344 (WASC).

Case Studies

Home v Walsh

In Home v Walsh [1978] VR 688, receivers and managers had been appointed to a company by a debenture holder prior to the winding up order and appointment of the liquidator. Thus the receivers were in possession of the moneys, property, books and records of the company. The liquidator brought an application under a predecessor of s 483(1) of the Corporations Act 2001 (s263(3) of the Companies Act 1961) for delivery up of the company’s moneys, property, books and records.

The application succeeded at first instance, but was overturned on appeal. This was on  several bases. One was that there was a genuine dispute between the parties as to the entitlement of the company to possession of the property in question. Another was that the provision is directed at “insiders” of the company – those who either derive their authority from the company or are accountable to it. Thus the expression “receiver of the company” in the provision refers to a receiver appointed by a company to its debtor; not a receiver appointed by a secured creditor to the company. In the latter case – at least on the terms of the debenture in this instance – that receiver is the agent of the secured creditor and derives its authority from and is accountable to the secured creditor, not the company.

Sidebar:  I note that this conclusion as to the extent that a receiver appointed to a company is or is not an agent for the company (vs his or her secured creditor appointed) may turn on the terms of the debenture or security agreement in question: see the line of authorities following Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407 where this question has arisen in a number of different contexts, including:  a preference dispute as to whether payments made by a receiver were payments by an agent of the company (Sheahan v Carrier Air Con); a privilege dispute in one of the many Westpoint cases (Carey v Korda and Winterbottom [2012] WASCA 228).

Boyles Sweets

Boyles Sweets (Australia) Pty Ltd (in liq) v Platt [1993] VicSC 389; (1993) 11 ACSR 76 was one of several cases where a liquidator has made an application for delivery up of property where it appeared there may have been phoenix activity and the liquidator regarded the transaction in question as a sham. In this case the liquidator applied for delivery up of two Boyles Sweets businesses, one operating at Melbourne Central and the other at the Tea Tree Plaza in South Australia, as well as some records of the company.

The respondents to the application were one of the two directors of the company (who were husband and wife) and a company related to them Madame Pier Pty Ltd. They argued that the businesses were the property of Madame Pier, and the company was merely the manager of the businesses, and relied upon a written management agreement as evidence of these matters. The liquidator agued this alleged agreement was a sham.

Hayne J observed that the weight of authority suggests that the summary procedure available under s 483(1) is not available where a claim is made by the person in whose hands the assets are found that is a claim adverse to the company. His Honour found that there was a real question to be tried as to the ownership of the business, and the liquidator’s application was denied.

Re Mischel & Co

Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140; (2014) 284 FLR 320 was another case where, on the evidence reported in the judgment, it appeared there may have been phoenix activity. The liquidator of Mischel & Co Pty Ltd applied under s 483(1) to recover the books and records of the company from Mischel & Co Advisory Services Pty Ltd, claiming the company was prima facie entitled to those books and records. The second defendant was an undischarged bankrupt, and the former director of Mischel & Co Pty Ltd. Before that company had gone into liquidation, it sold its advisory business to Mischel & Co Advisory Pty Ltd, a company controlled by the second defendant’s son. It thereafter carried on the business from the same premises. Subsequently it ceased trading and became dormant.

Upon the liquidator becoming aware of electronic books and records being stored on computers at the premises and that some work was to be done on those computers, he issued these proceedings on an urgent basis together with an application for a search order under order 37B of the Supreme Court (General Civil Procedure) Rules 2005 (Vic).  The records were seized and copies made, with orders having been made for a procedure allowing the defendants to object to inspection of any electronic book or record seized. They objected to production to the liquidator for inspection of a large quantity of the material.

This was a hearing of the liquidator’s application under rule 37.01 for inspection of that material. It was submitted for the liquidator that he believed the sale of business was sham and might be set aside, and that Mischel Advisory held the business and its assets, including the books and records, on a constructive trust for Mischel & Co. Subject to inspection of the records, separate proceedings might be initiated.

The liquidator was unsuccessful, on several bases –

  1. Robson J held that s 483(1) cannot be used to resolve the issue of whether the sale of business was a sham such that the property in question was held for the company. The Court has no jurisdiction under s 483(1) to decide the issue. (See [101])
  2. Mischel Advisory does not fall within the class of persons to whom s 483(1) may be directed, even if it was sought to characterise Mischel Advisory as a constructive trustee. Mischel Advisory was an “outsider”. (See [101])
  3. Even if that were not so, there were competing ownership claims. Michel Advisory had a claim to the property of the advisory business adverse to the liquidator. The authorities have established that the Court has no jurisdiction under s 483(1) to resolve such a contest as to ownership between the plaintiff liquidator and defendant. (See [102])
  4. Further, there was no evidence to support the contention that the company Mischel & Co was prima facie entitled to the advisory business. (See [102]).

For these reasons, his Honour held he would not exercise his discretion to order inspection under r 37.01 to assist the liquidator in seeking in s 483(1) proceedings to obtain an order for delivery up of the advisory business in the possession of Mischel Advisory.(See [103])

Note that at [71]-[96] his Honour sets out a useful review of the authorities as to the scope and purpose of s 483(1) and its predecessors.

Re United English and Scottish Assurance Company

I will finish with a case decided a century and a half ago – Re United English and Scottish Assurance Company; Ex parte Hawkins (1868) 3 Ch App 787. In this case the liquidator sought to recover moneys obtained from the company’s bankers by a creditor under a garnishee order obtained between the presentation of the winding up petition and the order for winding up. The Court held that the money could not be ordered to be returned under an English predecessor to s 483(1).

At first instance, the liquidator had successfully argued that the creditor was a “trustee” within the meaning of the section, and obtained an order for delivery up of the money. On appeal, however, the Court held that it had no jurisdiction under the provision to make such an order, on several grounds –

  1. The section applies to contributories and officers of the company, and others in the position of trustee (or, broadly, agent), and not to others. The defendant was a creditor of the company, and was not in possession of the money in a position of a trustee or receiver.
  2. The money was not the property of the company at the time of the winding up petition. It was paid to the creditor prior to the making of the winding up order.

*******

[1] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [77], citing Re United English and Scottish Assurance Company; Ex parte Hawkins (1868) 3 Ch App 787, 790.

[2] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [76].

[3] See s 483(1); see also Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 at [76].

[4] Boyles Sweets (Australia) Pty Ltd (in liq) v Platt [1993] VicSC 389, 10-11 per Hayne J; Home v Walsh [1978] VR 688, 704 per Harris J; Blackjack Executive Car Services PL v Koulax [2002] VSC 380 at [17] per Habersberger J.

[5] Home v Walsh [1978] VR 688, 704 per Harris J.

[6] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [76].

[7] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [75] citing Home v Walsh and Boyles Sweets and [96(3)].

[8] See s 483(1); see also Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [76].

[9] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [96(2)].

[10] Home v Walsh [1978] VR 688, 700 per Harris J; Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [96(7)].

Barnes v Addy claims and indefeasibility of title

In a Victorian Supreme Court decision handed down last week, Vickery J has confirmed that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions (ss 40-43) of the Transfer of Land Act 1958 (Vic) (TLA). The case also illustrates when a security interest described as an “Instrument of Charge” may, despite the words used, give rise to an equitable mortgage, rather than a charge. The case is Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd [2016] VSC 131.

The case involved a claim by the plaintiff (Mathieson Nominees) that it was entitled to an equitable charge over vacant subdivisional land at Point Cook in Victoria (the Property), and that it had an interest in the land capable of supporting a caveat.

Broadly, the facts of the case were these:

The plaintiff Mathieson Nominees had loaned funds of $250,000 to a company called Sprint Homes Pty Ltd to enable it to pay the deposit to purchase the Property from VicUrban. Sprint Homes was unable to raise the funds to pay the balance of $4.5m plus GST and settle the purchase. Its director registered a new company Aero Developments Pty Ltd (the defendant) and Sprint Homes nominated this company to take the transfer of land as nominee under the contract of sale (without notifying Mathieson Nominees).  The defendant Aero Developments subsequently completed the purchase, after a change of ownership and directorship, and became registered on title.

Mathieson Nominee’s loan to Sprint Homes for the deposit had been supported by several securities. One of these was a fixed and floating charge granted by the borrower Sprint Homes under an executed Instrument of Charge. The terms of this instrument included that the Charged Property was all the present and future property of Sprint Homes, wherever situated, that it was a fixed charge on all present and future estates and interests in land, and that Sprint Homes must not, without the consent of Mathieson Nominees, dispose of or otherwise deal with the Charged Property. The Instrument of Charge was registered with ASIC.

Within 6 months – Sprint Homes went into voluntary administration, Mathieson Nominees lodged a caveat over the Property claiming an interest as chargee and appointed a receiver and manager over Sprint Homes, Sprint Homes went into liquidation, and Aero Developments lodged an application with the Registrar of Titles to have Mathieson Nominees’ caveat removed. Mathieson Nominees commenced these proceedings.

In this proceeding, Mathieson Nominees sought various declarations and orders, including –

  • that Mathieson Nominees is entitled to an equitable charge over the Property, and
  • (in summary) that it have possession of and be at liberty to sell the Property.

(It abandoned an allegation that the registration of Aero Developments as proprietor of the Property was affected by fraud within the meaning of ss 42 and 44 of the TLA. It also at trial did not pursue its claims against two other defendants, being the director of Sprint Homes and a related company.)

In the judgment, the Court dealt with a number of issues worth noting.

1. Whether the Instrument of Charge gave rise to an equitable mortgage rather than an equitable charge? 

Even though the relevant instrument was termed an “Instrument of Charge”, there was a question in this case as to whether it instead gave rise to an equitable mortgage. Vickery J observed that this is a matter of the proper construction of the relevant instrument.(See [65]-[89])

His Honour discussed the four kinds of consensual security over property – pledge, contractual lien, equitable charge and equitable mortgage, and noted that an equitable lien may also arise by operation of law. Vickery J canvassed the authorities, particularly as to equitable charges and equitable mortgages.

In relation to equitable charges, his Honour in reviewing the authorities cited inter alia cited the description of the essence of an equitable charge given by Gillard J in AVCO Financial Services v White [1977] VicRp 62; [1977] VR 561, 563 –

“An equitable charge for a debt is a security whereby only a right to payment of the debt out of the property is conferred by the owner of the property to the holder of the security. The remedy of the holder of the security on default in payment of the debt was to apply to a court of equity to have the property sold and the proceeds paid into court.”

Vickery J also noted that an equitable charge is to be distinguished from a purely contractual arrangement giving rise to no proprietary right.

As to the distinction between a charge and equitable mortgage, his Honour quoted from Sykes and Walker where the authors observe:

“The most important result, so far as the difference in substance is concerned, is that the equitable mortgagee has the potentiality of full beneficial ownership through the process of foreclosure; the equitable charge as such can never attain to the position of full beneficial owner.”

His Honour noted the authors of Fisher and Lightwood’s Law or Mortgage state that:

“The principal remedies of the charge are [judicial] sale and the appointment of a receiver.”

His Honour then considered the facts in this case, and held that the Instrument of Charge which gave rise to the security claimed by Mathieson Nominees, when read as a whole, gave rise to an equitable mortgage and not an equitable charge. It gave immediate rights to Mathieson Nominees in the event of default, including the right to take possession of the property. Although Mathieson Nominees could seek a court order in aid of the enforcement process, this was not a pre-condition to enforcement. Its remedies were not confined to a judicial sale and the appointment of a receiver. (See [84]-[87]) However, little turned on this conclusion, in the end. (See [89])

2. Whether the Instrument of Charge became enforceable against the nominated purchaser Aero Developments

Mathieson Nominees argued that the Property was subject to a charge in favour of Mathieson Nominees when it was purchased by Sprint Homes, and the charge remained in place as an encumbrance on the Property, despite the nomination of a substitute purchaser.

In short, after a consideration by Vickery J of the contractual effect of the nomination, this contention was defeated by his Honour’s conclusion that Aero Developments acquired an indefeasible title upon becoming the registered proprietor of the Property pursuant to ss 40-43 of the TLA.

In the oft-cited passage from the judgment of Barwick CJ in Breskvar v Wall (1971) 126 CLR 376, 385-6, the effect of the Torrens scheme of registration of land was described thus –

“The Torrens system of registered title of which the Act is a form is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietary formerly had, or which but for registration would have had. the title it certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor.”

His Honour observed that the scheme of the Torrens legislation is such that, with very few exceptions, a purchaser who becomes the registered proprietor of an interest in land title takes free from all unregistered interests, whether he has notice of them or not (see [128]).

Vickery J noted that the statutory fraud exception arises where there is dishonest conduct on the part of the registered proprietor whose title is challenged. The emphasis in the authorities is on actual fraud on the part of the registered proprietor, although his Honour commented it has been suggested that it may be based on actual knowledge that a fraud was committed or wilful blindness to that possibility (see [124]).

Here statutory fraud was not pressed by the plaintiff, but the in personam exception to indefeasibility was sought to be relied upon. As the Privy Council said in Frazer v Walker, indefeasibility “in no way denies the right of a plaintiff to bring…a claim in personam, founded in law or equity, for such relief as a court acting in personam may grant“. However such claims must be brought under established causes of action, whether legal or equitable. Not all established causes of action, however, will found an exception on indefeasibility of title (see issue 4 below).

Thus the answer to this question of whether the Instrument of Charge became enforceable against the nominated purchaser Aero Developments, depended upon the answer to the next question.

3. Whether Mathieson Nominees had an in personam right capable of defeating the title of Aero Developments

(a) Was there any conduct on the part of Aero Developments giving rise to a personal equity which could defeat indefeasibility of title?

Vickery J held that there was no conduct on the part of Aero Developments, either before registration of its interest or after it, which gave rise to any personal equity in Mathieson Nominees such that the interest of Aero Developments as registered proprietary ought to be rendered subject to the Instrument of Charge (see [131]).

Aero Developments had changed hands and had new directors shortly before taking transfer of the land from VicUrban, and the evidence was that when it did so, it took title without any knowledge of any intention on the part of Sprint Homes or its director Mr Evans to defeat the claims of Mathieson Nominees, if ever that was their intention (see [133]). His Honour held that Aero Developments took the transfer of the Property without notice, actual or constructive, of the equitable mortgage comprised in the Instrument of Charge of Mathieson Nominees ([135] and [153]-[154]). In doing so, he noted that when Aero Developments took its transfer there was no caveat lodged against the title by Mathieson Nominees ([136]).

(b) Did Mathieson Nominees have a Barnes v Addy claim for knowing receipt and/or knowing assistance against Aero Developments

Vickery J considered the pleadings, arguments, authorities, and evidence, and held that they did not ([155]-[197]).

I pause here to note:

For those unfamiliar with what a Barnes v Addy claim is – it is a claim brought by a plaintiff not against the wrongdoer who has acted in breach of trust or of fiduciary duty, but against a third party. Third party liability is more commonly pursued by claimants where misdirected funds or property has ended up in the hands of a third party, and/or where the wrongdoer is insolvent or bankrupt. However, certain elements must be established before such a claim can succeed.

In 1874 Lord Selborne made his now famous remark in Barnes v Addy as to the liability of third parties for the breaches of duty of others in two types of cases. What he actually said was this –

[S]trangers are not to be made constructive trustees…unless [they] receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

Stemming from this brief, deceptively simple remark, much case law and academic writings have ensued. There have been shifting doctrinal analyses about the two “limbs” of Barnes v Addy (being “knowing receipt” or “knowing assistance”), debate as to the level of knowledge required under each limb (largely now settled in Australia) and debate as to the level of “dishonest and fraudulent” design required to be shown on the part of the party who acted in breach of trust or fiduciary duty as an element of the “knowing assistance” limb (there is something of a WASCA (Bell) v NSWCA (Hasler) battle being waged on this issue; I am inclined to see Hasler as the better view (link)).

Returning to the present case, here Mathieson Nominees had argued that the director of Sprint Homes Mr Evans in breach of his fiduciary duty to Sprint Homes had procured for the benefit of Aero a windfall to the detriment of Sprint Homes and its creditors ([158]). However his Honour held that on the evidence there was no breach of any relevant fiduciary duty on the part of Mr Evans to his company Sprint Homes ([171]-[194]). There were sound commercial reasons for the nomination of Aero Developments to complete the contract, and no breach of duty arose.

There having been no breach of trust, there was none of which Aero Developments, its directors and relevant agents could have known. There was no Barnes v Addy claim available to Mathieson Nominees, under either limb ([196]-[197]).

4. A Barnes v Addy claim does not defeat indefeasibility of title under the TLA

Importantly, Vickery J went further and confirmed that it has been authoritatively determined that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the TLA, observing that “the dust has settled” on the issue ([198]-[206]).

In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 Tadgell JA, with whom Winneke P agreed, held at 156-7 that a claim under Barnes v Addy was not a personal equity which defeated indefeasibility of title, saying:

“[T]o recognise a claim in personam against the holder of a mortgage registered under the TLA, dubbing the holder a constructive trustee by application of a doctrine akin to “knowing receipt” when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes…In truth, I think it is not possible, consistently with the received principle of indefeasibility as it has been understood since Frazer v Walker and Breskvar v Wall, to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because ‘it had ‘knowingly received’ trust property should in my opinion fail.”

While there had been some debate about this in Queensland ([199] and [203]) and in Western Australia where four judges of the Full Court of the WA Supreme Court followed the reasoning of Tadgell JA and Winneke P in Macquarie Bank v Sixty-Fourth Throne ([204]), in Farah Constructions v Say-Dee [2007] HCA 22; 230 CLR 89, 140 [193]-[196] the High Court resolved the question by adopting the observations of Tadgell JA in Macquarie Bank, and applying it –

“In Macquarie Bank v Sixty-Fourth Throne Pty Ltd Tadgell JA (Winneke P concurring, Ashley AJA dissenting) held that a claim under Barnes v Addy was not a personal equity which defeated the equivalent of s 42(1) in Victoria, namely the Transfer of Land Act 1958, s 42(1)… (at [193])

“That reasoning…applies here…”. (at [194])

“Although the Court of Appeal [ie the NSW Court of Appeal in Farah Constructions v Say-Dee] referred to Macquarie Bank v Sixty-Fourth Throne Pty Ltd on another point, it did not refer to that case or LHK Nominees Pty Ltd v Kenworthy in relation to indefeasibility. It ought to have followed those cases.” (at [196])

Vickery J concluded that although this outcome has been the subject of academic criticism, Farah Constructions v Say-Dee on the issue of indefeasibility has settled the law in Australia. [206]

In the end, his Honour held, Mathieson Nominees’ claims under Barnes v Addy must fail. The caveat was ordered to be removed from the title to the Property.

Take-aways

This decision is a useful reminder of the importance for lenders of lodging caveats on the title of property when a caveatable interest in property is created in their favour. In this case, the Instrument of Charge was executed by Sprint Homes on 18 April 2008, registered with ASIC on 2 June 2008 , but a caveat on the title of the Property (for the payment of the deposit on which the funds had been loaned) was not lodged until 22 January 2010 – 11 days after administrators were appointed to Sprint Homes and 3 months after Aero Developments had been registered on title.

It also contains a useful consideration of when an instrument of security may give rise to an equitable charge or an equitable mortgage, which can run contrary to the name given to the security by the parties, as it did here, and will turn more upon the proper construction of the instrument and the rights that accrue to the secured party under the agreement.

Finally, this judgment confirms that it is settled law in Australia, since the High Court’s decision in Farah Constructions v Say-Dee in 2007, that a claim under Barnes v Addy is not a personal equity which can defeat indefeasibility of title in Torrens land (see [205]-[206]).

There may remain those who will still seek a way to argue around this conclusion, but the High Court’s decision in Farah v Say-Dee – which dealt with both limbs of Barnes v Addy – is likely to present a sizeable road-block to such an attempt.

For more about Barnes v Addy claims (both limbs), the level of knowledge required to establish them (of the Baden categories of knowledge) and the dishonest and fraudulent design on the part of the party in breach of trust or fiduciary duty required to be established for the “second limb”, knowing assistance, see my 2012 article reviewing the Full Court of the Federal Court’s decision in Grimaldi v Chamelon Mining NL (No 2) [2012] FCAFC 6, which may be read here.

Comment

It is not only freehold titles to which these principles apply. Registration of leases of greater than 3 years under s 66 of the TLA also operate to confer leasehold title upon the registering lessee, and indefeasibility of that title under ss 40-44 of the TLA (see Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [51]) and Quest Rose Hill Pty Ltd v The Owners Corporation of Strata Plan 64025 [2012] NSWSC 1548 at [72]-[78]. Similarly, a mortgage acquires indefeasibility upon registration, pursuant to s 74 and ss 40-44 of the TLA: see Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 156-7, where the registered title in question was that of a mortgagee. And by way of a recent illustration, last year in Perpetual Trustees Victoria Ltd v Xiao [2015] VSC 21, Hargrave J confirmed that the fact that the mortgagor’s signature on a mortgage did not, in the absence of fraud on the part of the mortgagee finance company, affect the indefeasibility of the mortgage when registered (see [82]) or the ability of the financier to enforce the mortgage (but only to the extent of the covenant for payment contained in the mortgage – see [83]-[85] – referring to Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188, 196) – see further [86]-[107].

 

Newsflash – High Court has just handed down its decision in COT v Australian Building Systems PL (in liq)

The High Court, by a 3:2 majority, has dismissed the Commissioner’s appeals from the Full Court of the Federal Court of Australia, in Commissioner of Taxation v Australian Building Systems PL (in liq) [2015] HCA 48. You can read the summary of the judgment published by the High Court on its website here, and the judgment in full here. Four separate judgments were written: by French CJ and Kiefel J and by Gageler J in the majority; Keane J and  Gordon J each wrote separate judgments in dissent.

For some background, my previous writings on this case as it has moved through the courts can be read (in chronological order) here, here, here and here.

Tax laws v Insolvency laws – Bell Group and post-liquidation garnishee notices

Last week the Federal Court declared void two s 260-5 “garnishee” notices which had been issued by the Deputy Commissioner of Taxation to NAB requiring payment of post-liquidation tax liabilities assessed against a company in liquidation and its liquidator of over $298 million and $308 million, in The Bell Group Limited (in liq) v Deputy Commissioner of Taxation [2015] FCA 1056.

The Court held that the Commissioner had no power to issue the notices for post-liquidation tax liabilities. It held that –

  • A section 260-5 notice is an attachment for the purposes of s 468(4) of the Corporations Act (see [75]). (Section 468(4) provides that: “Any attachment, sequestration, distress or execution put in force against the property of the company after the commencement of the winding up by the Court is void.”)
  • A section 260-5 notice that relates to a post-liquidation tax-related liability does not avoid the operation of s 468(4) as a remedy specifically provided for or preserved by s 254(1)(h) of the ITAA36. It is not so preserved (see [75]). (Section 254(1)(h) of the ITAA36 provides that: “For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of the taxpayer in respect of tax.”)
  • Indeed the preferable construction of s 254(1)(h) of the ITAA36 is that it does not confer any remedy on the Commissioner against the property of a company after the commencement of the winding up of the company because such property is not “attachable property”. Thus s 254(1)(h) of the ITAA36 does not override or “trump” s 468(4) of the Corporations Act (see [66]-[69]),
  • Nor can s 468(4) be read down to permit such an attachment even if the Commissioner has some level of priority in respect of post-liquidation tax-related liabilities (pursuant to s 556(1)(a) of the Corporations Act) (see [75]),
  • Applying the High Court’s reasoning in Bruton Holdings with respect to pre-liquidation tax debts, the Commissioner also has no power to issue s 260-5 “garnishee” notices to a company in liquidation (or its liquidator) in respect of post-liquidation tax-related liabilities. The High Court’s reasoning as to the regime in s 260-45 of Schedule 1 of the TAA is equally applicable to the scheme in s 254 of the ITAA36. There is no relevant distinction between the two statutory schemes. “Both require the liquidator to set aside amounts to meet expected tax debts, but leave questions of payment and priority to the Corporations Act.” (see [79] and [81])
  • The Commissioner had no power to issue the notices in this matter. (see [81])

The Facts 

In summary the key facts – which were not in dispute (see [6]-[20]) – are these –

On 24 July 1991, a liquidator was appointed to The Bell Group Company Limited (TBGL) and related entities by the Supreme Court of Western Australia. On 3 March 2000 Mr Antony Woodings was appointed an additional liquidator, and he became sole liquidator on 21 August 2014.

Back in 2000 the well-known, long-running Bell Group litigation commenced against a number of Australian and overseas banks. On 28 October 2008 in his 2,643 page judgment, Owen J found against the banks and ordered them to pay TGBL and related entities total amounts exceeding $1.5 billion. This was increased on appeal by the WA Court of Appeal to over $2 billion.

The banks then sought and obtained special leave to appeal to the High Court. However prior to hearing, a settlement was agreed. The Deed of Settlement provided, amongst other things, for the banks to pay a settlement sum of just under $1 billion plus adjustments to the liquidator Mr Woodings to be held on trust for TGBL and related entities in certain specified proportions. Broadly, the key clauses provided that Mr Woodings held the sum on trust for each of the “Bell Judgment Creditors” in specified proportions, and that the settlement sum was to be held in an interest bearing trust account or accounts, and the same parties would have a vested and indefeasible interest in their proportion of the interest earned.

TBGL’s proportion of the settlement sum specified in the Deed in 2008 had been just over $5 million, plus a share of the adjustment amounts.

Although the Deed provided for the distribution of the settlement sum, for reasons which Wigney J observed were not necessary to go into, the funds held on trust were not distributed, either pursuant to the settlement deed or in the winding up generally. His Honour noted that it appeared not to be disputed that at some stage the funds would be distributed.

At the time of this hearing, Mr Woodings held $300 million paid pursuant to the Deed of Settlement in a NAB term deposit account in the name “ALJ Woodings as Trustee for the Bell Judgment Creditors”. This investment matured on 2 October 2015.

On Wednesday 5 August 2015 Mr Woodings, in his capacity as liquidator of TBGL (as head company of a consolidated group), caused TGBL to elect to form an income tax consolidated group under Part 3-90 of the Income Tax Assessment Act 1997 (Cth) (ITAA97), and the companies entered into a tax sharing agreement for the purposes of Division 721 of the ITAA97. It was common ground that the terms of both of these had no bearing on the validity of the garnishee notices.

On Monday 10 August 2015 the Commissioner issued a notice of assessment to TBGL as head company of the consolidated group for the 2014 income year, assessing TBGL’s taxable income in the amount of over $1 billion and the tax payable in an amount of over $308 million.

On 18 August 2015, due to a calculation error in the assessment, the Commissioner issued an amended assessment to TBGL assessing the 2014 taxable income as nearly $994 million and the tax payable as over $298 million.

Corresponding assessments were also issued to Mr Woodings in his capacity as liquidator of TBGL, relating to the same income and the assessed tax payable of over $298 million.

On 14 August 2015 the Deputy Commissioner issued the two garnishee notices to NAB – one in respect of the assessment issued to TBGL and the other to Mr Woodings. The TBGL notice specified the amount originally assessed of over $308 million, although the NAB was subsequently advised that the amount due under the notice was varied to just over $298 million.

Objections were lodged by both TBGL and Mr Woodings.

Summary – Submissions

TBGL and its liquidator submitted that the reasoning in Bruton Holdings PL (in liq) v Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346 applied to the two garnishee notices even though Bruton Holdings dealt with the scheme for pre-liquidation tax-related liabilities in s 260-45 of Schedule 1 to the Tax Administration Act 1952 (Cth) (TAA), as opposed to post-liquidation tax-related liaiblities, and involved the operation of s 500(1) rather than s 468(4) of the Corporations Act. They argued – successfully – that –

  • The Hight Court made emphatic and unequivocal statements in Bruton Holdings, in particular at [10], [19] and [39], that the power conferred on the Commissioner by s 260-5 of Schedule 1 to the TAA does not extend to the case of a company in liquidation, including where there has been a court ordered winding up.
  • The High Court’s reasoning applies equally to the case of post-liquidation tax-related liabilities. This is because post-liquidation tax-related liabilities are also the subject of a specific scheme, being the scheme in s 254 of the ITAA36 and Chapter 5 of the Corporations Act, in particular s 556.
  • That specific scheme excludes the more general provision in s 260-5 of Schedule 1 to the TAA for exactly the same reasons as those given by the High Court in Bruton Holdings in respect  of the specific scheme in s 260-45 of Schedule 1 to the TAA. (See [56])

Contrary to this, the Commissioner submitted that the reasoning in Bruton Holdings was inapplicable to the circumstances of this case because –

  • The statutory scheme in respect of post-liquidation tax-related liabilities in s 254(1) of the ITAA36 is different to the scheme in s 260-45 of Schedule 1 to the TAA in respect of pre-liquidation tax-related liabilities.
  • The main difference is that s 254(1)(h) of the ITAA36 – properly construed – specifically provides for or preserves the availability of hte Commissioner’s remedy in s 260-5 of Schedule 1 to the TAA.
  • As a result, s 254(1)(h) operates to “trump” the more general provision in s 468(4) of the Corporations Act.
  • The Commissioner pointed to several authorities which he argued provided support for the proposition that preference is to be given to specific schemes in taxation legislation designed to protect the revenue over “more general schemes in the Corporations Law”. Those authorities included the High Court’s decisions in COT v Broadbeach Properties PL [2008] HCA 41; (2008) 237 CLR 473 and DCOT v Moorebank PL [1988] HCA 29; (1988) 165 CLR 55, and the NSWCA in Muc v DCOT [2008] NSWCA 96; (2008) 73 NSWLR 378.

Alternatively, the Commissioner submitted that –

  • Even if s 254(1)(h) of the ITAA36 did not operate as he contended, the word “attachment” in s 468(4) of the Corporations Act should be read down so as to permit s 260-5 notices in respect of priority debts.
  • Post-liquidation tax-related liabilities were a priority debt because they would be an expense within s 556(1)(a) of the Corporations Act.
  • Given that priority status, there was no basis for reading the term “attachment” in s 468(4) of the Corporations Act so as to exclude the giving of a s 260-5 notice to enforce that statutory priority. (See [57]-[58])

The Judgment

His Honour Justice Wigney held that the notices were void for two related reasons –

  1. Each notice was an attachment against the property of TBGL and therefore void by operation of s 468(4) of the Corporations Act, and
  2. That conclusion supports the more general proposition that the power conferred on the Commissioner to issue notices under s 260-5 of Schedule 1 to the TAA is not available where the relevant “debtor” for the purposes of that section is a company which is being wound up (or its liquidator). That is so even where the relevant debt is for tax payable on income derived after the commencement of the winding up. (See [59]-[61])

His Honour observed that –

  • The High Court concluded in Bruton Holdings that a s 260-5 notice is an attachment for the purposes of s 500(1) of the Corporations Act. (Section 500(1) provides: Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.”) While in some respects this finding was secondary to the broader finding as to the Commissioner’s power to issue a notice in respect of a tax debt of a company in liquidation, it was nonetheless an unequivocal and unqualified finding.
  • It applies equally to s 468(4) of the Corporations Act, which is in identical terms to s 500(1) (save that the latter applies to voluntary liquidations, and the former to Court-ordered liquidations).
  • The High Court’s conclusions in Bruton Holdings at both [19] and [39] refer to winding up by court order, “thus clearly indicating that the court saw no relevant distinction between ss 468(4) and 500(1) of the Corporations Act”.

Wigney J noted that the Commissioner “in effect” accepted that a s 260-5 notice was an attachment for the purposes of s 468(4) of the Corporations Act. He referred to the Commissioner’s arguments that s 468(4) did not however render such a notice void if the notice related to post-liquidation tax-related liabilities, because either s 254(1)(h) of the ITAA36 “trumped” s 468(4), or because s 468(4) should be read down. His Honour’s assessment of these arguments at [64] was crisp and succinct: “Neither contention has any merit.”

Construction of s 254(1)(h) of the ITAA36

His Honour took issue with the Commissioner’s contentions as to the proper construction of s 254(1)(h) of the ITAA36 – see [65]-[69]. He discussed the use of the word “attachable” in s 254(1)(h), and took the view that it evinced a legislative intention to avoid any potential conflict between s 254(1)(h) and provisions such as ss 468(4) and 500(1) of the Corporations Act, that prevent attachment of certain types of property. Wigney J observed that a construction of s 254(1)(h) which allows it to operate harmoniously with ss 468(4) and 500(1) of the Corporations Act is to be preferred to one that potentially puts the provisions of two Commonwealth statutes in conflict, or results in a provision of one statute overriding (or “trumping”) a provision in another statute.

His Honour noted at [68] that this meant s 254(1)(h) effectively has no application in the case of a company in liquidation, but found that that does not militate against its availability. The subsection still has significant work to do, even if it does not apply to liquidators, because it operates also in the case of all agents and trustees who derive income in a representative capacity, or by reason of their agency. Subsection 254(1)(h) still has work to do in the case of other agents or trustees, where attachment of property under their control or management is not prevented by provisions equivalent to ss 468(4) and 500(1) of the Corporations Act.

Wigney J held that “the preferable construction of s 254(1)(h) of the ITAA36 is that it does not confer any remedy on the Commissioner against the property of a company after the commencement of the winding up of the company because such property is not attachable property.” See [69])

Whether s 468(4) of the Corps Act should be read down to permit s 260-5 notices for post-liquidation tax debts

Wigney J discussed the Commissioner’s submission that s 468(4) of the Corporations Act should be read down to permit s 260-5 notices for post-liquidation tax debts and noted that it seemed to rely on two propositions: (1) that ss 468(4) and 500(1) of the Corporations Act only operate to render void an attachment if the effect of the attachment is to secure priority for the payment of a debt that is not otherwise a priority debt; and (2) that the Commissioner has priority in respect of post-liquidation tax-related liabilities. His Honour again crisply dispatched these too: “Neither proposition is correct.” (See [70])

Whether the Commissioner has priority for post-liquidation tax debts

On this point Wigney J gave consideration to what priority is afforded the Commissioner by reason of s 556(1)(a) of the Corporations Act at [72]-[74]

  • It is not strictly correct to say that the Commissioner has priority in respect of post-liquidation tax-related liabilities by reason of s 556(1)(a) of the Corporations Act.
  • Subsection 556(1)(a) gives priority to expenses incurred by, relevantly, a liquidator, in preserving, realising or getting in property of a company, or in carrying on the company’s business.
  • By reason of s 254(1)(e) of the ITAA36, a liquidator is personally liable for the tax payable in respect of post-liquidation income to the extent of any amount that he or she has, or should have, retained under s 254(1)(d) of the ITAA36. **Sidenote: See below under the heading “Comments” – there is an important appeal that has just been heard by the High Court on ss 254(1)(d) and (e) of the ITAA36.
  • If, for whatever reason, the liquidator does not discharge the company’s tax-related liabilities from its available assets, but instead personally pays (or is required to personally pay) that amount, it might well be regarded as an expense in getting in property of the company or carrying on its business.
  • The liquidator would have priority in recovering that expense by reason of s 556(1)(a) of the Corporations Act.
  • That does not mean however, his Honour observed, that the Commissioner has priority in respect of post-liquidation tax-related liabilities.
  • Wigney J noted that in any event, that expense would not rank any higher than other expenses incurred by the liquidator that might also fall within s 556(1)(a) of the Corporations Act. If there are a number of these but insufficient assets to meet them all, they would rank equally and be met proportionally. His Honour noted that this proportionate system of entitlement would be subject to potential disruption if the Commissioner had full garnishee rights in relation to post-liquidation tax debts in those circumstances.

No Power to issue the Notices

Wigney J referred to the High Court in Bruton Holdings conclusion that the power to issue garnishee notices conferred by s 260-5 of Schedule 1 to the TAA does not extend to a company in liquidation. This is expressed three times in the judgment – at [10], [19] and [36] in clear, unequivocal and unqualified terms.

His Honour took the view that the reasoning of the High Court in Bruton Holdings, insofar as it involved consideration of the regime in s 260-45 of Schedule 1 to the TAA in respect of pre-liquidation tax-related liabilities, is equally applicable in cases which involve the scheme in s 254 of the ITAA36 in relation to post-liquidation tax-related liabilities. There is no relevant distinction between the two statutory schemes. “Both require the liquidator to set aside amounts to meet expected tax debts, but leave questions of payment and priority to the Corporations Act.”

Accordingly, Wigney J held that the Commissioner had no power to issue the notices in this matter. (See [76]-[81])

Trustee Capacity Issue 

Whilst noting it was strictly unnecessary, Wigney J addressed the submission for TBGL and its liquidator that the notices were either invalid or not engaged, because the funds held in the NAB account were held by Mr Woodings in his capacity as trustee for the Bell Judgment Creditors. By reason of the definition of “entity” in the relevant provisions of the ITAA97, Mr Woodings is taken to be a different entity in that trustee capacity, than his capacity as liquidator of TBGL.

His Honour took the view that this argument had some merit in the case of the notice referable to the liquidator Mr Woodings, having regard to the applicable proviisons of the ITAA97. NAB did not owe money to Mr Woodings in his capacity as liquidator of TBGL, but in his capacity as trustee. Therefore, even if the Woodings Notice was not void by reason of s 468(4) of the Corporations Act, it would nevertheless have no application to the NAB account. His Honour took the view that this capacity issue did not, however, affect the validity of the TBGL Notice, if it were not otherwise void by reason of s 468(4). (See [82]-[89])

COMMENT

Tax Laws v Insolvency Laws – Another current case – COT v Australian Building Systems

As many of you will know, this is not the only significant case before the courts at present, involving a clash of sorts between provisions of the tax legislation and insolvency provisions of the Corporations Act.

Just last month the High Court heard the Commissioner’s appeal from the decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133, a CGT case largely concerned with s 254(1)(d) and (e) of the ITAA36. For my previous posts discussing the first instance decision of Logan J in that case and the High Court’s hearing of the special leave application, see here and here respectively. The transcript of the hearing in the High Court can be read here.

At first instance this case was, at least in part, more squarely run as a clash between these provisions of the ITAA36 and the scheme of priority laid down by the Corporations Act; particularly notable given that the former crown priority for unpaid tax debts was abolished in the early 1980’s with the passing of legislation. However the appellable issues were narrowed by the reasons for judgment given at first instance. On appeal to the High Court, the submissions filed for the parties show that of the 3 issues raised in the appeal by the Commissioner, only one was contested by the liquidators. (The parties’ submissions may be read here.) That issue was this:

Whether, following the derivation by a trustee or agent of income profits or gains in a representative capacity, but prior to a tax assessment, s 254(1)(d) requires and authorises the agent or trustee to retain moneys then in their hands or thereafter coming to them so much as is sufficient to pay tax on it; or whether s 254(1)(d) only authorises and requires a trustee or agent to retain such moneys after an assessment for tax on the income profits or gains.

Note that the personal liability imposed upon agents and trustees (including liquidators by s 254(1)(e) applies to the extent of any amount that he or she has retained, or should have retained under paragraph (d).

It will be interesting to see the extent to which the High Court grasps the opportunity in COT v Australian Building Systems to clarify the operation of both ss 245(1)(d) and (e) in its decision in this case, and provide certainty for liquidators as to their potential scope for personal liability under s 245(1)(e). That is, as to how s 245(1)(e) operates – in light of the conclusions the Court may reach as to the proper construction of s 245(1)(d) – and the extent to which s 245(1)(e) might (as the Commissioner argued in Bell Group vis a vis s 245(1)(h)) serve to override or “trump” certain provisions of the Corporations Act; here the scheme of priorities laid down in the Corporations Act. It is unfortunate but it may be the case that as events have transpired, it may not turn out to be the ideal test case vehicle for this issue.

The Bell Group Collapse – 20+ years and counting – mixed messages as to handling of distribution 

You may recall in the chronology above that the Deed of Settlement was reached in 2008 and we presume that payments made thereunder in about 2008. The next step in the chronology recited above is the activity in August 2015 in relation to taxation matters.

Between those points in the chronology, I ought to interpose the observation that reportedly there had been other litigation both threatened and run about the distribution of money from the pool both in the WA Supreme Court and in the British High Court. In May 2015, it was reported by ABC news that according to the WA State Government, the total $1.7 billion settlement sum was going to be disbursed through a statutory authority. ABC News reported that WA Treasurer Mike Nahan had mentioned the introduction of legislation to ensure there was certainty about the process of distributing funds to treasurers. They reported that a bill had been introduced to Parliament by Dr Nahan to dissolve the companies and place the assets under the control of a statutory authority that would administer and distribute them. Dr Nahan reportedly said that the four major creditors owed money were the Insurance Council of WA, the ATO, and two other legal parties. Dr Nahan, it was reported, said that “the bill would ensure an expeditious end to the Bell litigation and the equitable distribution of the pool of funds.” One cannot know all that transpired thereafter. Perhaps the forming of the consolidated group for taxation purposes may have triggered the ATO’s actions. However it would appear possible that the Commissioner may not have concurred with the approach put forward in the bill.

Newsflash – High Court grants special leave to the Commissioner in CGT/liquidators case

This is a brief heads up for those who have been waiting for this. Last week the High Court granted special leave to the Commissioner to appeal the decision of the Full Court of the Federal Court in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133. For my discussion of the first instance decision of Logan J, see my earlier post here

It will indeed be interesting to see the High Court’s decision on this, after the appeal is heard. For those interested, the transcript of the special leave hearing may be read here. It can be seen that the Commissioner emphasised several matters in oral submissions, including the Commissioner’s propounded construction of section 254 of the ITAA 1936, and what the Solicitor-General described as “the radical differences” between sections 254 and 255, the construction of the latter having been decided previously by the High Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54; (2007) 232 CLR 598. The High Court’s decision in Bluebottle was relied on heavily by the primary judge in his reasoning.

In oral submissions, the Solicitor-General advanced the argument that section 254(1)(a) creates a taxation liability in the trustee or agent. This, of course, is contrary to what the Full Federal Court had held. See, for instance, at [25] where Edmonds J observed (with whom Collier and Davies JJ agreed):

That s 254 is a “collecting section” and has no operation to render a trustee liable to be assessed to tax if the trustee is not otherwise liable to be assessed under the provisions of Div 6 of Pt III of the 1936 Act, comes out of two more recent High Court authorities.

The Solicitor-General argued that this taxation liability which he said is created by s 254(1)(a) is ancillary to the primary liability which, he acknowledged, will rest somewhere else in the Act. But he submitted that it was a true creation of a liability as well as then being a collection mechanism. He submitted that s 254(1)(b) makes that liability more explicit, that the trustee or agent must lodge returns and “be assessed thereon” in the representative capacity. And, so he submitted, then the critical paragraph (d), which is the collection mechanism, should be read in the light of what has gone before so that it is an authority and duty to “retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is suffficient to pay tax which is or will become due in respect of the income, profits or gains.

High Court today pronounces on liquidators’ shelf orders and other extension of time orders in 2 judgments

The High Court of Australia has today handed down two judgments regarding shelf orders and other extension of time orders, both cases arising from the Octaviar liquidations.

1. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10 the Court unanimously dismissed an appeal from the NSW Court of Appeal and held that a court can make an order under s 588FF(3) of the Corporations Act 2001 (Cth) to extend the time within which a company’s liquidator may apply for orders in relation to voidable transactions, even though those transactions may not be able to be identified at the time of the order. There has previously been some discord between state courts on this issue, and this decision provides reassurance to liquidators as to the availability of shelf orders. The judgment may be read in full here, and the summary on the High Court’s website here.

2. In Grant Samuel Corporate Finance Pty Ltd v Fletcher; JP Morgan Chase Bank, National Association v Fletcher [2015] HCA 8 the Court unanimously allowed both appeals, holding that the rules of courts of the States and Territories cannot apply so as to vary the time dictated by s 588FF(3) of the Corporations Act 2001 (Cth) for the bringing of proceedings for orders with respect to voidable transactions.

Sub-section 588FF(3)(a) requires an application for orders in relation to voidable transactions to be made within a prescribed period. (Either 3 years from the relation-back day or 12 months after the first appointment of a liquidator in the winding up.) Sub-section 588FF(3)(b) allows a liquidator – only during that period (usually 3 years) – to bring an application to extend this time period.

In this case, the liquidators had applied for and obtained an order under sub-section 588FF(3)(b) extending the period within which they could bring proceedings under s 588FF(1) by four months beyond expiry of the prescribed period. During that four month extension – but after the expiry of the original period – the liquidators made a further application to again extend the period. The NSW Supreme Court made an order under r 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW) varying the extension order by changing the date by which the liquidators could bring voidable transaction proceedings. The appellants applied to set aside that variation order, and it was this which lead to this High Court appeal. The appelllants were unsuccessful at first instance, and their appeal was dismissed by a majority of the NSW Court of Appeal, but they were ultimately successful in the High Court .

The High Court held that the bringing of an application within the time required by s 588FF(3) is a precondition to the court’s jurisdiction under s 588FF(1) to make orders as to voidable transactions, and that the only power given to a court to vary the period prescribed in s 588FF(3)(a) is that given by s 588FF(3)(b). It followed, so the Court held, that once the period in s 588FF(3)(a) had elapsed, the UCPR could not be utilised to further extend the time within which voidable transaction proceedings under s 588FF(1) could be brought. (See [23] and the discussion which precedes it.)

Thus if the liquidators needed more than 4 months beyond the initial 3 years to be in a position to issue voidable transaction proceedings, they could only extend the 4 months to a longer period by also bringing a second extension application before the 3 year period had elapsed. In practice, however, it might be unlikely to become aware of the certain enough need for a longer period to make a second application so soon after the first. Perhaps, in light of this decision, we will find Courts may now become willing to grant somewhat longer extension periods than before. However that may be doubtful, having regard to the legal policy favouring certainty which underlies s 588FF(3), per the observations Spigelman CJ in BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 at 345-346 ([115] and [118]), which was quoted with approval by the High Court here (see [17]-[21]). I suggest it will usually depend upon the evidence in each case.

The judgment may be read in full here, and the summary on the High Court’s website here.

Merry Christmas & a note for my own amusement

Before I wish you all a Merry Christmas, I thought I would close out the year by sharing with you something that amuses me every time I notice it. (Law can be a dry field in which to practice. We find mirth where we may.)

It is this: the number of companies with the word “phoenix” in their name. Often, they seem to be construction companies, though the field is wide. And they keep popping up in the daily Rodgers Reidy Risk Watch insolvency reports, suggesting that a remarkable number don’t seem to travel too well. Or perhaps I just notice them because I find it funny. Never fails to amuse me. Every single time. Why would you do that, use such a name for your company? Is it not inviting trouble? Unwelcome attention from corporate regulators? Cracks me up.

Let’s look at some stats, shall we? –

*Note I do not suggest any such company has engaged in phoenix activity. It is simply the use of the name, that I enjoy.

  • A search on ASIC’s website shows that there are 2570 entries found containing the word “phoneix”
  • A search on ASIC’s insolvency notices database (including deregistartion notices) brings up multiple pages of current entries, including Phoenix Motor Brokers Pty Ltd (in liquidation), PAJ King Pty Ltd trading as Phoenix Air Systems (in liquidation), Phoenix Refractories Australia Pty Ltd (in liquidation) and Phoenix Hazmat Services Pty Ltd (in liquidation),
  •  A search on Austlii shows a healthy amount of litigation involving companies with the word “phoenix” in their name, including Phoenix Constructions (Queensland) Pty Ltd, Phoenix International Group Pty Ltd and Phoenix Commercial Enterprises Pty Ltd.

Anyway, perhaps I amuse only myself, but there it is. If anyone is unclear on what a phoenixing company is or does, I have written on this before here.

It has been a busy year for many of us. I have at least one part-written post not yet polished enough to post, but it can wait until the New year. It further discusses the Full Federal Court’s decision on the CGT obligations of “trustees” (including liquidators) in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133. My earlier posts on this case are here (first instance) and here (appeal).

Merry Christmas to you all, and my wishes to you and your families for a safe, happy and healthy 2015. May you enjoy a restful break, and return fighting fit for 2015.

On a serious note, thoughts turn to our fallen colleague in Sydney, Katrina Dawson. May she rest in peace. My heart breaks for her little children. For once, words fail me.

Newsflash: Great Southern settlement deed approved

Yesterday in Melbourne Justice Croft approved the deed of settlement ending the Great Southern class action proceedings – Clarke (as trustee of the Clarke Family Trust) & Ors v Great Southern Finance Pty Ltd (Receivers & Managers Appointed)(in liquidation) & Ors [2014] VSC 516. I will not make comment on this case, but instead will refer to a few key parts of the judgment –

The principal terms of the Deed of Setlement are set out at [57] and are usefully summarised at [64], which summary is reproduced here –

  1. “The insurers of GSMAL will pay $23.8 million, to be disbursed as follows:
    1. $20 million to M+K Clients, to be disbursed pro rata based upon amounts paid by each M+K Client to M+K for legal fees and disbursements;
    2. $250,000 to Javelin Asset Management Pty Ltd; and
    3. $3.55 million to be disbursed pro rata to investors who invested pursuant to a Product Disclosure Statement issued in relation to a scheme managed by GSMAL, such disbursement to take place in accordance with the terms of a proposed Scheme of Arrangement.
  2. Group Members’ loans entered into to fund the investments and now held by Bendigo and Adelaide Bank Limited (or its related entities) will be admitted as valid and enforceable, and the BEN Parties will waive interest relating to overdue amounts accrued and unpaid as at the Approval Date.
  3. Group Members’ loans entered into to fund the investments and now held by Javelin Asset Management Pty Ltd will be admitted as valid and enforceable, and borrowers with Javelin loans will have 28 days from the Approval Date to make an election to either:
    1. make payment of the outstanding loan balance in full within 14 days of making the election and receive a 20% discount on the loan balance (being the balance as at 1 May 2014); or
    2. agree to a deferred settlement with the loan balance discounted by 17% if the balance is met by way of 12 equal monthly payments; or
    3. agree to an extended term where the terms are varied so that the first 12 months after the Approval Date are interest free and then 5% per annum for the remainder of the Revised Term.
  4. The Lead Plaintiffs, on behalf of themselves and on behalf of Group Members, will release the other parties (and their related entities or persons) from all Claims arising out of the contents of each Product Disclosure Statement, the Loan Agreements and or the allegations made in or the facts giving rise to all the relevant proceedings.
  5. The Group Proceedings will be dismissed with the parties bearing their own costs.”

His Honour took the unusual step of annexing the mammoth 2012 page unpublished judgment he had written but had never been delivered (calling them the “Great Southern Reasons”) to this judgment approving the settlement deed. His Honour notes at [2] that the trial of the Great Southern proceedings had extended over 90 sitting days from October 2012 to October 2013. Judgment was reserved. On Wednesday 23 July 2014 the parties were informed that the judgment was ready and listed for delivery on Friday 25 July. Within hours, the Court was notified that the proceedings had settled.

At [3] Croft J notes that the Great Southern Reasons are not published as reasons for judgment, simply annexed to this one, which suggests that as a precedent to future cases their status may be uncertain, and perhaps something less than obiter. Nevertheless his Honour explains why he has had regard to his Great Southern Reasons in considering whether to approve the Deed at [50]-[56], in particular at [56].

7.3% of the 21000 group members notified the Court of their objections to the settlement. These are considered by his Honour from [83].

As Croft J’s approval judgment at [6] makes clear, if the proceeding had not settled and the Great Southern Reasons had been handed down as his Honour’s judgment in the case, the plaintiffs’ claims would have been wholly unsuccessful. Moreover, given the length and expense of the proceedings and the trial, costly adverse costs consequencse for the plaintiffs are likely to have followed. This settlement avoids that outcome and achieves finality in the litigation.

Practice Alert: Federal Court’s New National Framework

I commend practitioners to take note of this important Practice Alert written by my esteemed Sydney colleague Dominique Hogan-Doran. It outlines the new national structure for the Federal Court of Australia, and the incoming national framework for the regulation of the market for legal services, noting that the Legal Profession Uniform Law is expected to take effect in NSW and Victoria from early 2015. I also note that last week the Victorian Legal Services Commissioner published a useful summary of the changes here.

Newsflash: Full Federal Court dismisses appeal in CGT/liquidators decision

This is a brief heads up for those of you who have been awaiting this appeal judgment as I have. Yesterday the Full Federal Court dismissed the Commissioner’s appeal in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133. In short, the judgment confirmed that s 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) (the ITAA) only imposes an obligation upon “trustees” (including liquidators) to retain funds to pay an anticipated CGT liability once a relevant tax assessment has issued.

Edmonds J who wrote the principal judgment went so far as to say that he was “firmly of the view” that the primary judge was correct in that conclusion (at [4]). For my discussion of the first instance decision of Logan J, see my earlier post here. There is more to be said about the significance of this conclusion of the Full Federal Court, which some of you will have heard me speak about following the first instance decision. My review of this appeal judgment to follow.  ***Time has beaten me as Christmas now approaches. My review is part-written, and will now follow in the New Year.