Extending time for convening the second meeting of creditors

In January Gardiner AsJ delivered his reasons for orders made in December 2016 granting an extension of time for the convening of the second creditors’ meeting in Re Southern Riverina Dairy Group Pty Ltd (Administrators appointed) [2017] VSC 4. The case provides a handy reminder of when such orders are likely to be made, and the judgment includes a useful summary of the key legal principles and the reasons for which the courts tend to grant such extensions.

Facts

Southern Riverina Diary Group Pty Ltd operated a 320 hectare dairy farm in southern New South Wales, and milked about 750 cows. In 2016 Souther Riverina experienced financial difficulties. It reached a point where it was unable to meet its financial obligations, became the subject of various court judgments in 2016 and was facing a pending wind up application. (There was evidence that the petitioning creditor’s issues with the Company had been resolved, but that another creditor had applied to be substituted as petitioning creditor.) The Company had seven employees and it appeared the ATO may be owed unpaid Superannuation Guarantee Charges. There were multiple secured creditors owed a total amount of approximately $2.7 million, and a preliminary assessment of the total of unsecured debts was in excess of $4.569 million.

The Administrators of Southern Riverina – Glenn Franklin, Jason Stone and Petr Vrsecky – had been appointed by secured creditors of the Company under s 436C of the Corporations Act on 6 December 2016. If not extended, the convening period for the second meeting of creditors was to expire on 12 January 2017, pursuant to s 439A(5)(a) (see [2]).

The Administrators’ application for extension of time was heard on 19 December 2016. There was evidence of several DOCA proposals in the process of being formulated, but not yet submitted . One of the directors had asked for more time to formulate a DOCA proposal, and requested the second creditors meeting be held after 7 February 2017. Another potential investor was interested in putting forward a DOCA proposal but required until February 2017. There was a further complication in that one potential investor would need to go through the Foreign Investment Review Board process, which was said to take six weeks.

The Administrators submitted that they needed the further time to complete their investigations into the Company’s affairs, and to prepare a proper and informative report to creditors. The report is required to contain their opinions and the reasons for those opinions pursuant to s 439A(4) of the Act, as to whether it would be in the creditors’ interests for the Company to execute a proposed DOCA, for the administration to end, or for the Company to be wound up. This is difficult to do when the DOCA proposals were not yet received and able to be considered as to merit, and comparisons reached as to likely returns under those proposals as compared with a liquidation.

Unusually, the Administrators filed the application prior to holding the first creditors meeting (at [24]). This was because of the timing of the administration and the looming interruption of the Christmas period. The meeting was held several days before the hearing, and the evidence was that all creditors in attendance had indicated their support of the extension of time (including the creditor who had applied to be substituted as petitioning creditor in the wind up application). No objection was raised. The secured creditors who were owed the majority of secured debt had informed the Administrators they had no objection. Other secured creditors had not attended the first meeting nor given their proxy. His Honour observed that presumably, given the attitude of the proposed substituted creditor, it would assent to an adjournment of the winding up application, which would be a powerful factor in the exercise of the Court’s discretion under s 440A(2) of the Act when that matter returned to Court on 25 January 2017.

On 19 December 2016 his Honour made the orders extending the convening period under s 439A(6). The primary reasons (cited at [5]) for the Administrators’ seeking the extension were –

(a) to facilitate the progression and consider the proposals intended to be made for a DOCA,

(b) so the Administrators could be in a position to prepare a report to creditors in advance of the second meeting containing the requisite opinions as to the three options referred to in s 439A(4).

Legal Principles and Key Factors 

The principles to be applied in these applications have been summarised by Judd J in Algeri; Re Colorado Group Ltd [2011] VSC 260 and by Dodds-Streeton J in Re FEA Plantations Ltd [2010] FCA 468.

In Re Colorado Group, Judd J observed at [24] –

When an application is made for an extension of time to convene a meeting, the court will attempt to strike a balance between the expectation that the administration will be conducted relatively speedily and summarily, and the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders. Where the relevant business group is large and complex, or there is a prospect of successful realisation of assets through negotiations with third parties, as in the present case, the administration process is often given more time. There is no place for a predisposition against granting an extension.

In Re FEA Plantations Ltd (quoted with approval by Judd J in Re Colorado Group), Dodds-Streeton J observed at [19] –

Relevant authorities recognise that strict compliance with the tight timeframes for convening the second meeting (statutorily imposed to avoid the prolongation of the voluntary administration procedure and its concomitant moratorium and impact on rights) may not be feasible in large and complex administrations, if the administrators are to produce informed recommendations based on adequate investigations, and a sufficiently comprehensive and detailed report capable of providing meaningful assistance to the creditors in deciding the fate of the company.”

In Re Riviera Group Pty Ltd [2009] NSWSC 585; (2009) 72 ACSR 352 at [13] Austin J had noted that extensions had been granted for the following broad categories of reasons –

  1. The size and scope of the business,
  2. Substantial offshore activities,
  3. Large number of employees with complex entitlements,
  4. Complex corporate group structure and intracompany loans,
  5. Complex transactions entered into by the company (for example securities lending or derivatives transactions),
  6. Complex prospects of recovery proceedings,
  7. The time needed to execute an orderly process of disposal of assets,
  8. The time needed for thorough assessment of a proposal for a deed of company arrangement,
  9. Where the extension will allow sale of the business as a going concern,
  10. More generally, that additional time is likely to enhance the return for unsecured creditors.

(See the passages set out at [26] of Gardiner AsJ’s judgment and the cases there cited for each of these categories.)

Application of Principles

Gardiner AsJ noted that in Re Colorado Group Judd J had pointed to the administrators’ inability to prepare and circular a meaningful report to creditors so as to comply with their obligations under s 439A(4) of the Act. Similarly here, Gardiner AsJ found that the preparation of such a report in the absence of receipt and analysis of the foreshadowed DOCA proposals, would be premature.

His Honour also noted that in Re Diamond Press Australia Pty Ltd [2001] NSWSC 313, Barrett J considered that the Court’s function was to strike a balance between the expectation that the administration would be speedy, and the requirement that undue speed should not prejudice sensible and constructive actions directed towards maximising the return to creditors.

Based on the evidence in this case, Gardiner AsJ identified the following factors as prominent and in favour of the grant of the extension sought (at [29]) –

  1. the time needed for a thorough assessment of DOCA proposals,
  2. additional time was likely to enhance the return for unsecured creditors, and
  3. it would enable the preparation of a report which complied with the requirements of s 439A(4) of the Act.

Gardiner AsJ also took into account in this case the following factors (note there is some overlap between these factors set out from [31] and summarised below, and those his Honour identified as prominent at [29]) –

  1. the fact that the extension proposed was modest and was focussed around information received as to the timing of DOCA proposals – at [31]. (As to the former, without the extension the report to creditors would need to be issued by 23 December 2016 and the second meeting held by 10 January 2017 – see [21].)
  2. the intervention of the Christmas holiday period – at [32]-[33]
  3. the need for there to be fully formed proposals capable of proper analysis, in order for administrators to form opinions and produce a proper report to creditors in accordance with their statutory obligations – see discussion at [34]
  4. whether the creditors generally support the extension – they did – see [35]
  5.  if no extension were granted, the administrators would be forced to convene the second creditors meeting and recommend it be adjourned and held at a later time, with the associated wasted expenditure – see [36]
  6. there was evidence of a potential better return to creditors on a DOCA as opposed to an immediate winding up, a matter that has been recognised as relevant to the balancing exercise the Court undertakes on an extension application – [37] & [39]
  7. the significant factor of any material prejudice to those affected by the moratorium imposed by administrations, including lessors of property. Here those owners, although informed, had not taken objection to the proposed extension. There was no evidence of likely prejudice to them, and indeed the potential for benefit. The majority secured creditors supported the extension – [38].

His Honour held there were substantial grounds for making the order sought for extension of time under s 439A(6) of the Act. His Honour also made several ancillary orders, including a Daisytek order, permitting the administrators to convene the second meeting at any time during the extended convening period or within 5 business days thereafter.  (see [40]-[44])

Comment

This decision provides a handy reminder of the key legal principles that apply and the categories of factors which will tend a Court to favour the granting of an application for extending the convening period of a second meeting of creditors in a voluntary administration.

Practitioners should take care when it comes to preparation of the affidavit evidence . Note that even where there may be an apparently good case with factors favouring an extension of time, practitioners should also be mindful of matters tending against. It is important to consider the impact of an extension, and to inform the Court with evidence of any prejudice that an extension may occasion, as well as the attitude of creditors to the proposed extension. Without this evidence properly put before it, the Court cannot weigh up reasons to extend against the consequences of an extension, and may be less likely to grant the order sought. As Gardiner AsJ observed at [30], the Court will be mindful as to whether –

  1. the evidentiary case has been properly prepared,
  2. there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and
  3. the Court is satisfied that the administrators’ estimate of time has a reasonable basis.

(These remarks of his Honour at [30] set out the matters drawn from the judgment of Austin J in Re Riviera at [14].)

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)].

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: 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.

When will a DOCA be terminated on the grounds of commercial morality?

Happy New Year, and welcome to my first post for 2014. At the end of last year, the Queensland Court of Appeal handed down judgement in a notable case, in favour of termination of a deed of company arrangement on public interest grounds. The DOCA had been approved by related party creditors, but their Honours took the view that it was detrimental to commercial morality by precluding public investigation into questionable related-party dealings of a company in administration – in Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to a Deed of Company Arrangement) [2013] QCA 405.

Background

In 2005 Prime Project Development (Cairns) Pty Ltd (Prime) and Promoseven Pty Ltd (Promoseven) entered into a joint venture agreement to carry out a property development in Cairns. The joint venture vehicle was a company named Bluechip Development Corporation (Cairns) Pty Ltd (Bluechip). HSBC provided $21 million to fund the development, secured by a first registered mortgage. Both Prime and Promoseven advanced millions of dollars in funds to Bluechip to progress the development, some of which was secured by a second registered mortgage given by Bluechip over the development.

The development was completed in 2009, and was then progressively being sold down by Bluechip. HCBC’s indebtedness was discharged, save for the claim of one subcontractor. However by 2010 Prime and Promoseven were in dispute. Promoseven succcessfully applied to have Bluechip wound up in insolvency, and Prime was ordered to pay Promoseven’s costs (relevantly, making Promoseven a creditor of Prime).

At the heart of the case, was this:  In August 2011, Prime transferred all of its interest in the Bluechip mortgage – alleged to have been valued at some $9 million – to a related company Refund. This dealing is discussed in more detail below.

Prime went into administration in May 2013. It had eleven creditors on administration. One was Promoseven. Of the other ten creditors, nine were related parties. The related parties voted to adopt a DOCA which would give the unrelated creditors a return of 4.3 to 7.4 cents on the dollar. Without a liquidation, there would be no investigation into the affairs of Prime and no public examination of its directors.

Promoseven applied inter alia under s 445D of the Corporations Act 2001 (Cth) for an order terminating the DOCA on the basis that it produced an injustice, by precluding an investigation into Prime’s pre-administration related-party dealings.

Promoseven also relied upon s 600A of the Act, which deals with the powers of the court where the outcome of voting at a creditors’ meeting has been determined by related entities. Broadly, it empowers the Court to make certain orders, including an order setting aside the resolution, if it is satisfied inter alia that the resolution would not have passed without the related party votes, and that the voting outcome was contrary to the interests of creditors or a class of creditors as a whole, or is unreasonably prejudicial to the interests of the non-related creditors.

(It should be noted that under reg 5.3A.07(1)(a) of the Corporations Regulations (2001) (Cth), a company that has executed a DOCA that is later terminated under s 445D by the court, “is taken to have passed a special resolution under s 491 that the company be wound up voluntarily“.)

First Instance

As the Court of Appeal noted at [42], under s 445D there are effectively four grounds upon which a DOCA can be terminated. These are –

(a) if effect cannot be given to the deed without injustice or undue delay – s445D(1)(e);

(b) if the deed, or something done under it, would be oppressive, unfairly prejudicial to, or unfairly discriminatory against, one or more of the creditors – s 445D(1)(f)(i);

(c if the deed, or something done under it, is contrary to the interests of the creditors of the company as a whole – s 445(1)(f)(ii); and

(d) if the deed should be terminated for some other reason – s 445D(1)(g).

At first instance, Martin J of the Queensland Supreme Court noted that under sub-section 445D(1)(e) it is the “effect” of the deed rather than its purpose which is to be considered. The question, his Honour said, is whether the effect of the deed is unfair or inequitable in the impact it has upon one or more of the creditors bound by it (at [15]).

In considering s 445D(1)(f), his Honour said a court does not proceed “upon mere possibility or speculation, it makes a determination on the characteristics of the deed as they are seen to be at the date of the hearing“. One looks, his Honour said, to the effect of the deed as a whole and assesses its unfairness, if any, to the applicant being in mind the scheme of Pt 5.3A and the interests of other creditors, the company, and the public generally (at [16]).

The applicant Promoseven made two allegations –

(1) That the vast majority of creditors were related entities of Prime. The inference ought be drawn that the creditors who voted for the DOCA were either controlled by or friendly to Prime. This does not of itself require that enything be done, but it detracts from the arguments for the DOCA that a majority of creditors has made a commercial decision as to what is in the interest of creditors as creditors (at [23]);

(2) The DOCA would have the effect of precluding investigation into the transfer by Mr Knell of a chose in action (a second registered mortgage) valued at $9 million to a related company called Refund (at [24]).

In relation to this last point, his Honour remarked pointedly that Promoseven did not allege that it was inevitable that this transaction would be unwound; rather it argued that the transaction “might be voidable” and “there is a prospect” that proper enquiries into Prime’s affairs would result in a greater return to creditors than that offered under the DOCA (at [25]).

He noted that even if the transfer were set aside, Promoseven had failed to demonstrate the unfairness or prejudice required to engage the various sections on which it relied – (at [31]). Martin J also observed that the administrators had recommended the DOCA, and there was unchallenged expert evidence that whilst the DOCA would result in a small dividend to creditors, under a winding up the likely return to creditors would be nil (at [27]).

Martin J cited the object of Pt 5.3A of the Act, set out in s 435A which provides –

“The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”

His Honour took the view that the orders sought by the applicant Promoseven would be inconsistent with the object of Pt 5.3A (at [31]), and that Promoseven could not demonstrate the effect necessary to engage s 445D or the prejudice which s 600A requires to be shown (at [32]). (There was also an issue as to whether the liquidators would be funded properly if the DOCA was set aside and the company was wound up – see [33]).

His Honour was in little doubt of the correct course to take on this application. He held that “the overwhelming weight in the balance of this application” was that even if the company was liquidated and the transfer was unwound, the creditors would suffer. In dismissing the application, he observed:

“While the public interest is an element to be considered, the applicant’s case did not rise high enough to demonstrate that it was sufficient to overcome the other factors to which I have referred.”

The Appeal Decision

The Court of Appeal disagreed, and took an entirely different approach.

The Court examined the dealings between the related companies Prime and Refund in greater detail, and had distinct reservations about the commerciality of the arrangement, in particular –

  • on the face of the Agreement there was no attempt to quantify the value of Prime’s half interest in the second mortgage, making it difficult to conclude that it was sold for value, particularly between related entities (at [53]);
  • the purchase price was difficult to identify. It was defined to mean “$3,710,701.23 plus any lawful adjustments to the loan account as at the date of completion or revision thereafter made hereunder“. The sum stated was acknowledged in Recital B to be simply the state of the loan account between the companies as at a certain date (at [54]);
  • the purchase price was then met not in the form of money, but by the issuing of redeemable preference shares by Refund. The Agreement said nothing about payment being made that way. There was no evidence as to how that came to pass. However 3,710,702 shares were issued to Prime which, on the face of it, suggested that each preference share was worth one dollar. But there was no evidence that this was so (at [55]);
  • the Administrators’ Report was the only source of evidence about the adjustments to the purchase price. It noted that a final accounting was completed on 21 March 2013, resulting in Refund being required to and issuing a further 4,668,658 preference shares to Prime. However there was no evidence to show that this equated to an advance of $4,668,658. And there was nothing to show why Refund was “required” to issue further preference shares (at [56]);
  • the question of the value of the redeemable preference shares in Refund was unanswered. The Administrators’ Report was the only source of information on this, but it was not sworn and the basis for some of the information it set out was not apparent. What information there was, cast doubt on the true worth of the preference shares (at [57]);

The effect of the agreement was that Prime sold its interest in the mortgage – its only substantive asset – to Refund for a consideration, the value of which would be determined by Refund, and dependent on how Refund chose to structure its business affairs (impacting whether any dividends would become payable to redeemable preference shareholders, like Prime). Related though they were, Prime could not control how Refund went about its affairs. Their Honours concluded that the result was that the consideration was uncertain, if not illusory (at [58]).

What made it worse – particularly notable where transparency was a problem – was Recital G, which provided that the purchase price would be left outstanding, by way of loan or similar transaction, so that “the start up business activities of [Refund] may be funded“. Nowhere was it explained why it would be in Prime’s interest to defer receipt of the purchase price to this end. Prime was divesrting its only substantive asset. It was not at all clear why it had any legitimate interest in being Refund’s benefactor, the Court noted (at [59]).

The Court of Appeal remarked twice on the fact that even though the transaction was between companies controlled by “the one set of directors” (a husband and wife Mr and Mrs Knell), no director went on oath to depose as to the rationale of the agreement. It required explanation, and they did not explain it. The Court said it made it very difficult to reach a conclusion that there was commercial justification to the Agreement (at [50]-[51] and [60]).

There were also a series of related transactions, which raised concerns. In summary –

  • Prime subsequently contracted with a company called Bypass to purchase $4.2 million worth of shares in Bypass, in part-payment of which it transferred to Bypass the 3,710,702 preference shares it held in Refund. (These were the shares Refund had issued to Prime, in part satisfaction of the price Refund had to pay to purchase Prime’s interest in the second mortgage over Bluechip.)
  • Then in June 2012, Bypass transferred those 3,710,702 preferential shares in Refund to another related company called Radanco (owned and operated by Mr Knell’s nephew), purportedly for $10 million. The ASIC document detailing that transaction was signed by Mrs Knell.
  • Less than 2 months later, those same shares were purportedly transferred by Radanco to MDA, another company controlled by Mr and Mrs Knell, for only $15,000. Mrs Knell signed the ASIC document for that transaction also. (It was this company – MDA – which had proposed the DOCA in question, proposing to contribute $80,000, most of which was to pay administration costs.)

There was no material put before the Court explaining how it could be commercially justifiable that the same shares which are transferred for $10 million in June 2012 could then be transferred for $15,000 two months later. Nor, in the face of allegations by the Knell family that Prime did not in fact contract to purchase Bypass shares and that there had been a fraud, did they explain why two Knell family companies would then seek to take transfers of shares which had been obtained from Prime in circumstances of fraud. The Court remarked that those unexplained transactions did little to dispel the sense that Prime had been involved in transactions without an apparent commercially justifiable basis.

The Court of Appeal concluded that the circumstances surrounding Prime’s transfer of its interest in the mortgage to Refund was such that an investigation by a liquidator should not be prevented by the related parties forcing a DOCA on the other creditors. A public examiation of the affairs was warranted, and the institution of claw back litigation may prove to be warranted. It would, in the sense of the terms used by the Full Federal Court in Emanuele v ASC (1995) 63 FCR 54 at 69-70, “be deterimental to commercial morality to dispense with the opportunity which the winding up law provides for the investigation of the affairs of Prime” (at [84]).

The Court of Appeal did not consider that the absence, at that point in time, of a final commitment to fund a liquidator in full to completion of the liquidation weighed against the conclusion.

Comment

This case illustrates how fine a line it can sometimes be between success and failure, on applications to terminate deeds of company arrangement. The Court at first instance took one approach and reached a firm conclusion that the DOCA should stand; the Court of Appeal took an entirely different approach, with a different emphasis and analysis, and unanimously reached the opposite conclusion.

Cases such as these tend to turn on their own facts in the same way that, for example, shareholders oppression actions do. In each case it will be a matter of evaluating and adding together the various aspects and circumstances of the pre-administration dealings in question to test whether, considered together, the balance is tipped in favour of scrutiny of what took place, over letting a decision of creditors to endorse a DOCA stand. If, as was the case here, there is a lack of transparancy or certainty about key aspects of an arrangement where a significant asset is being transferred away from the company, and questions are raised which are not answered or explained by those who could do so, it becomes more likely that a Court may conclude that the interests of the public require investigation into what took place. In Promoseven, the Court was so concerned that it gave precedence to the public interest in commercial morality, without requiring that it be satisfied as to the utility of the investigations and the likelihood of a satisfactory recovery and better return for creditors.

One example of a case where the balance tipped the other way, was the NSW Court of Appeal’s decision in Vero Insurance Ltd v Kassem [2011] NSWCA 381; (2011) 86 ACSR 607. There, although Young JA noted that the transactions had ‘some indicia that they are worthy of investigation‘, all three judges of the Court of Appeal declined to terminate the DOCA, considering that good reason is required to override the choice of a majority of creditors to enter a DOCA. An example of another case where, like in Promoseven, the balance tipped in favour of terminating the DOCA which was described by the Court as “a device by which Mr Triguboff and his associated companies are avoiding scrutiny of a number of highly questionable transactions the net effect of which is to allow TMPL to walk away from a tax debt of $19,551,033.77…” is Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to a Deed of Company Arrangement)(No 3) [2011] FCA 1403.

 

Newsflash: High Court today dismissed Willmott Forests appeal

In a 4:1 judgment the High Court today held that liquidators of landlord companies – not only liquidators of tenant companies – can disclaim leases under s 568(1) of the Corporations Act 2001 (Cth), and that the disclaimer terminates the tenants’ rights arising under the leases. The judgment in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed)(In Liquidation) [2013] HCA 51 is now on Austlii and can be read in full here.

The majority was French CJ, Hayne, Kiefel and Gageler JJ, with his Honour Gageler J delivering his own judgment. The dissenting judgment was that of Keane J.

Their Honours French CJ, Hayne and Kiefel JJ identified the central question of construction of s 568(1) as being whether a lease granted by a landlord company to a tenant is “a contract” within the meaning of s 568(1)(f). It is, according to their Honours, by virtue of s 568(1A) of the Act which provides that “[a] liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court”  (see [4]). The question then became whether the reference to “a lease of land” in s 568(1A) should be read as referring to any lease to which the company is a party, or only to leases of which the company is the tenant? Their Honours concluded the former was correct.

Broadly, the power of disclaimer of liquidators under s 568(1) is expressed as a one to “disclaim property of the company”. What such “property” includes is then set out in sub-paragraphs, (f) of which is “a contract”.

The appellant advanced two principal arguments. The first was that the only relevant property of the landlord company capable of being disclaimed was its unsaleable reversionary interest in the land the subject of the leases; the second, that the tenants’ leasehold estates would survive disclaimer of the lease contracts (see [27]). Their Honours French CJ, Hayne and Kieffel JJ considered and rejected the first of these arguments at [28]-[50] and the second at [51]-[55].

In relation to the second, their Honours held that it follows from the operation of s 568D(1) that, from the effective date of the disclaimer, the company’s liability to provide the tenant with quiet enjoyment of the lease property and the tenant’s rights to quiet enjoyment of the property are terminated. If the tenant suffers loss thereby, the tenant may prove for that loss in the winding up (see [8]). At [57], to make the point clear, their Honours expressly held that from the day on which the disclaimer takes effect, each tenant’s estate or interest in the land would be terminated.

Strikingly, though, their Honours added their own observation, under the sub-heading of “Questions not considered”, demonstrating a consciousness of at least some of the ramifications of their judgment, a matter to which I will later return:

Obviously, a tenant whose lease has been disclaimed by the liquidator of a landlord may consider that being left to proof as an unsecured creditor in the winding up gives little effective compensation for what has been taken away. Whether that is so in this case was not examined in argument and is not considered. Nor has there been any occasion to consider in this case whether the liquidators require the leave of the “Court” before disclaiming the investors’ leases or, if they do require leave, what considerations would inform the decision to grant or refuse leave. It may be noted that the Act does provide expressly, in s 568B(3) that the “Court”, on application, may set aside a disclaimer “only if satisfied that the disclaimer would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors” (emphasis added). Again, however, whather or how that provision would apply in this case was not explored in argument.”

Heads Up – Willmott Forests High Court Appeal – Judgment imminent

The High Court of Australia is to hand down judgment in the Willmott Forests High Court appeal this Wednesday 4 December. I will be interstate for a mediation, but will provide an update as soon as I am able.

To refresh your memories as to developments to this point –

  • February 2012 – The first instance decision of Davies J of the Victorian Supreme Court as to whether the disclaimer of a lease by the liquidator of the landlord’s company extinguishes the tenant’s proprietary interest in the land is handed down. Her Honour held that it did not – see my post here;
  •  September 2012 – The Victorian Court of Appeal overturns the judgment of Davies J and holds that a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) – see my post here;
  • May 2013 – The High Court grants special leave to appeal that decision – see my post here;
  • August 2013 – The High Court hears the appeal – see my post here.

No doubt many of us are awaiting the High Court’s decision with interest.

Snapshot updates on Willmott Forests, phoenixing and new offers of compromise rules

Willmott Forests

Earlier this month the High Court heard the appeal against the Victorian Court of Appeal’s decision in Re Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

I wrote on the Victorian Court of Appeal’s decision last year here. (My reviews of earlier Willmott Forests decisions are here and here.) In short, the Court of Appeal held that a tenant’s leasehold interest could be extinguished by disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth). The transcript of the High Court hearing of the appeal from that decision may be read here, and the parties’ written summaries of argument are available online here (under the heading for proceeding M99 of 2012).

The Victorian Court of Appeal’s decision has excited some controversy. In their summary of argument for special leave to appeal from that decision, Willmott Growers Group Inc noted that disclaimer of a lease by a liquidator of a corporate tenant is common (at [42]). However, they argued that disclaimer of a lease by a liquidator of a corporate lessor is a novel use of the liquidator’s disclaimer power, and that the implications of the Court of Appeal’s decision are far reaching. Tenants, particularly retail shop tenants, typically invest substantial sums into the goodwill and fit-out of their leased premises. Much of this expenditure is lost of the tenant is forced to relocate. Also, as the Court of Appeal’s decision erodes the security of tenure under a lease, it may impact upon the willingness of banks and financiers to grant finance on the security of a lease. They noted that the consequences for lessees, in particular retail tenants, are significant. The Victorian Court of Appeal had indicated at [51] that the implications of its decision extended to “shopping centre leases”. (See [36]-[41] of the applicant’s summary of argument.)

We await the High Court’s judgment with interest.

Update on draft legislation targeting phoenix companies

Early last year I wrote about a set of two draft bills that had been released by the Gillard government directed at cracking down on phoenix companies. These were the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). You can read my detailed discussion of those two draft Bills here.

Briefly, the Phoenixing Bill comprised two measures. One was to give ASIC administrative powers to order the winding up of abandoned companies. The primary aim of this measure was said to be the protection of workers’ entitlements, and their ability to access GEERS, with the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct. The second set of measures in that Bill was to facilitate the online publication of corporate insolvency notices. As many of you will know, this Bill was enacted last year and ASIC’s insolvency notices website went live in July 2012.

The draft Similar Names Bill proved to be more controversial. Broadly, it proposed amendments to the Corporations Act which would impose personal joint and individual liability on a director for debts of a company that has a similar name to a pre-liquidation name of a failed company (or its business) of which that person was also director for at least 12 months prior to winding up.  The debts for which a director could were to become personally liable were debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. There was to be scope for directors to obtain exemptions from liability.

My comments on that draft Bill may be read here. There were numerous other fairly significant criticisms made of the draft legislation, set out in submissions lodged by a number of bodies concerned with the proposals, including the Australian Institute of Company Directors and the Law Council of Australia. Their criticisms included that the exposure draft drew no distinction between failed companies, and those abandoned or placed into liquidation for the purpose of engaging in phoenix activity; it did not define “fraudulent phoenix activity” or require a dishonest intention on the part of directors to defraud or deceive creditors before it imposed personal liability; and that it effectively reversed the presumption of honesty or “innocence”, unless the contrary were proven.

It appears that those submissions and the draft reforms were under consideration, as that Bill was not then introduced to Parliament. Indeed it had still not been introduced by the time of the dissolution of Parliament and the onset of the caretaker conventions ahead of the upcoming federal election. Thus the future of the draft Bill, or any other legislative measures to be taken to address phoenix activity, will be a matter for a future federal government to consider.

New Victorian Supreme Court Rules on Offers of Compromise

These are to come into effect on 1 September 2013 and can be read here.

The amendments include a new rule 26.02(4) which requires the issue of costs to be expressly addressed in an offer of compromise. Offers of compromise may be expressed to be inclusive of costs, if preferred by the offeror. New rule 26.02(4) requires that:

“An offer of compromise must state either – 

(a) that the offer is inclusive of costs; or

(b) that costs are to be paid or received, as the case may be, in addition to the offer.”

Note that the minimum time for which an offer of compromise must remain open to be accepted remains 14 days (r 26.03(3)), although there has been an adjustment to the timeframe for payment to be made post acceptance, where the offer does not provide otherwise (increases to 28 days – see the amendment to rule 26.03.01.)

New rule 26.08(4) provides for a defendant whose offer of compromise is unreasonably refused to be awarded standard costs up to the time of the offer and indemnity costs thereafter, unless the Court otherwise orders.

New rule 26.08.01 provides for Courts to take into account pre-litigation offers when making a determination as to costs. Thus offers made even when no litigation is yet on foot ought be given careful consideration. Potentially, the unreasonable refusal of a pre-litigation offer could leave a party exposed to an increased costs order.

Use of s 1324 to restrain a director from appointing an administrator

Section 1324 of the Corporations Act 2001 (Cth) is cast in very broad terms and, in my opinion, is a provision which is sometimes overlooked. As a separate issue, I am sure other practitioners working in the insolvency and commercial law space, will have come across cases of deadlock or shareholder oppression in an SME, where the threat is made – or even acted upon – to appoint a voluntary administrator to a company, in what is suspected to be a scorched-earth strategy.

While we cannot know and I do not suggest any such strategy was at play in this particular case, that aspect aside, these two issues otherwise came together in March of this year in an interesting ex tempore judgment of Black J of the NSW Supreme Court. In that case, s 1324 was used to seek an injunction restraining a director from appointing an administrator for what was claimed by the applicant to be an improper purpose – In the matter of O’Neill v Advantage Hearing Pty Ltd [2013] NSWSC 175.

I will set out here in full just three of the sub-sections of the provision. Sub-sections (1) and 4) are relevant to the case now discussed. Sub-section (10) is not, but it is the sub-section of 1324 which in my view tends to be over-looked, although last year there was an interesting s 1324(10) decision in Queensland by the Full Court of the Queensland Supreme Court in May (McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129, see in particular [21]-[40]). So while it is not relevant here, I also reproduce sub-section (10) below, merely to draw attention to it.

Sub-sections 1324(1) and (4) provide as follows –

“(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, conselling or procuring a person to contarvene this Act; or

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

“….(4)  Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).”

I recommend readers also pay attention to the other sub-sections, most notably sub-sections 1324(6) and (7), to fully appreciate just how wide the powers under this section were cast, by the legislature.

Skipping ahead, sub-section 1324(10) goes on to provide the Court with an additional, potentially far-reaching power –

(10)  Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.” 

In this case a recently-removed director of a company called Advantage Hearing Pty Ltd, Mr Matthew O’Neill, issued proceedings seeking interlocutory and substantive relief against the company itself, a director Ms Rhonda Hughes, and another person with an interest in the company, Mr Soeren Iversen, and associated entities. The company was trustee of the Advantage Hearing Trust, which appeared to conduct a hearing assessment business. While there was controversy as to the circumstances, Mr O’Neill’s employment had been purportedly terminated and he had been removed as a director. However there were problems with the application, including as to service of the affidavits in support, the defendants did not appear, and the evidence did not properly establish all that was needed to found the claim for interlocutory relief.

The plaintiff Mr O’Neill sought an order under s 1324 that, until final hearing or further order, Ms Hughes be restrained from appointing an administrator under Pt 5.3A of the Act. Black J observed (at [3]) that the steps necessary to establish such relief “would seem to be” –

1. That there is at least a serious question that the company is not in fact insolvent or likely to become insolvent, so that the appointment of an administrator is inappropriate;

2. Implicitly, that the appointment of an administrator for an improper purpose would not only be invalid but also a contravention of the Act, for example, of Ms Hughes’ duties as a director; and

3. That a basis for interim relief under s 1324 of the Act is established, in that the balance of convenience favours interim relief.

The threat of appointment of a voluntary administrator was said to emerge from a letter from the defendants’ solicitors to Mr O’Neill’s solicitors. The letter discussed proposals to resolve the dispute between the parties. It noted that if no resolution was reached, the third defendant Mr Iversen was likely to call in a loan he had made to the company, which would render the company insolvent, and Ms Hughes would then have no alternative but to appoint an administrator. Mr O’Neill’s solicitor responded, contending that the appointment of an administrator would not be for a proper purpose, and that there was no basis for the threat of that appointment because the loan was not repayable until February 2016 under the terms of the loan deed.

His Honour considered the first letter to be inadmissible, as subject to the “without prejudice” privilege, and that it would follow that the response from Mr O’Neill’s solicitor would also be subject to the privilege.

However, even if he was wrong on that and the letters were admissible to establish a threat of the appointment of a voluntary administrator, his Honour found that the basis for the interlocutory relief sought was not established, because –

(1) The evidence did not establish, as Mr O’Neill contended, that the loan could not be called on. Mr O’Neill sought to rely upon the loan being treated as non-current in the balance sheets. The deed he relied upon was unsigned, undated and unstamped, and Mr O’Neill could give no evidence either that it was executed or that the parties had conducted themselves on the basis set out in it.

(2) There was no affirmative evidence as to the company’s solvency, which his Honour observed would at least require some scrutiny of its cash flow position, and no basis for a finding that the company was neither insolvent nor likely to become insolvent, such that a voluntary administrator could not properly be appointed. His Honour emphasised that he was not finding that the company was insolvent or likely to become insolvent. Rather, he was noting there was no evidence one way or the other, as to the company’s solvency.

As Black J astutely observed (at [8]), there may be a real question as to whether a Court would, without clear evidence of solvency, restrain the appointment of an administrator under s 436A, where the provision for such appointment is important to the mechanism for reconstruction of potentially insolvent companies, and also allows directors to avoid potential liability or insolvent trading. A potential consequence of restraining the appointment of an administrator would be that directors would in fact be exposed to potential liability for insolvent trading, if a company then continued to trade in circumstances where it had been unable to appoint an administrator when it was in fact insolvent. However, I pause here to note that the defence to insolvent trading in s 588H(5), as further described in s 588H(6), does not require that a director succeed in appointing an administrator. It requires that the person “took all reasonable steps to prevent the company from incurring the debt” which, per s 588H(6) means the Court must have regard to matters which include, but are not limited to… “any action the person took with a view to appointment an administrator of the company”. If there was clear evidence that a director took steps or evinced a clear intention to have an administrator appointed to an insolvent company, but was prevented by injunction, it is difficult to see a Court rejecting the contention that the person met these requirements of the defence, subject to other relevant circumstances. As an example of another relevant circumstance – if there were other steps the director could have taken to prevent the company incurring the debt, and he or she did not take them either, I suggest the defence may be more likely to fail.

In any event his Honour found it was possible to resolve that aspect of the application on a narrower basis: a serious question had not been established that it would be an improper step to appoint an administrator, as it had not been established that the company was plainly not insolvent and unlikely to become insolvent (at [9]).

Black J pointed out that there were other avenues available to Mr O’Neil to address the position, if an administrator is in fact appointed for an improper purpose. Those protections being –

1. The administrator himself or herself has an obligation to at least take some steps to satisfy himself or herself as to the validity of his or her appointment, and in particular to review the terms of the resolution of the board by which he or she is appointed: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422.

2. More fundamentally, the Court has jurisdiction to scrutinise the reasons given by directors for the appointment of an administrator and, if they are not objectively established, the administrator will be removed and the appointment of an administrator for a collateral purpose is potentially a breach of directors’ statutory duties: see the authorities cited at Austin and Black’s Annotations to the Corporations Act at [5.436A]. Accordingly, if an appointment of an administrator is made in circumstances where it was not objectively justified, the Court has ample powers available to invalidate the appointment. Black J expressed the view that that course seemed to be preferable, as a matter of balance of convenience, than an interlocutory injunction, in that it does not expose directors to potential liability for insolvent trading if an injunction is wrongly granted. I suggest respectfully, however, that in some cases waiting for a threatened appointment before challenging it may not be seen as preferable for a company, depending upon what effect an appointment may have upon its significant contracts or banking facilities (see below).

Mr O’Neill also pointed to the appearance of recent changes to the company’s balance sheet, recording additional liabilities to Ms Hughes and Mr O’Neill. Those could be open to challenge, but Black J took the view that that challenge could properly be brought in an application to set aside the administrator’s appointment, or at a final hearing of the proceedings.

On the issue of balance of convenience, Mr O’Neill had also contended that there would be detriment to the company if an administrator was appointed, by reason of risk to a contract with a government agency, the Office of Hearing Services. However that contract was not in evidence, such that there was no evidence of the impact of such an appointment under the terms of the contract.

I pause here to note, as mentioned above, that in some cases the appointment of an administrator will place at risk if not a significant contract or contracts vital to the business’s revenue stream, but also  a company’s banking facility. Indeed, it is possible that an appointment of itself can render a company insolvent, when it previously was able to pay its debts as and when they fell due. The difficulty for the director who has been ousted from the company in these cases in terms of an ability to pre-empt and restrain threatened conduct, is that he or she is often unable to produce the necessary evidence to obtain the orders sought, because the other directors have shut him or her out of the company and are preventing access to the company’s books and records.

Here, Mr O’Neill sought further interlocutory relief, restraining the defendants from preventing Mr O’Neill having access to certain offices of the company, access to its books and records, taking certain actions in respect of its bank accounts, and having access to its computer server. However Mr O’Neill relied upon an affidavit of some months prior, following which the defendants had given certain undertakings (not detailed in the judgment). There were assertions and counter-assertions in the correspondence between the solicitors as to whether those undertakings had been honoured or breached. There was no further evidence to establish any breach, or to establish any occasion when access had been denied to Mr O’Neill.

Black J also declined to grant an injunction restraining the defendants from preventing Mr O’Neill from engaging in his duties as an officer and employee of the company, which relief was positive in substance (although s 1324(1) expressly provides for this), and one as to ASIC recognising Mr O’Neill as a director.

An interesting case and, as is often the case with injunction applications of any sort, one which in the end came down to the quality and sufficiency of the evidence.

Appeal from liquidator’s decision to sell by tender causes of action against directors

Earlier this month Rein J of the NSW Supreme Court refused to grant an interlocutory injunction sought in proceedings brought under s 1321 of the Corporations Act 2001 (Cth) (the Act) appealing from the decision of the liquidator of a company to sell certain assets of the company by tender – see In the matter of SCW Pty Ltd [2013] NSWSC 578.

The company had been placed in liquidation not because of insolvency, but because of a deadlock between the two directors, Ms Cantarella and Mr Schirato. SCW was the holding company of a group controlled by Ms Canterella and Mr Schirato, which included a company Cantarella Bros Pty Ltd, the operator of a successful business as a fresh foods wholesaler specialising in products which included coffee under the Vittoria brand. The assets of SCW included significant real estate.

The liquidator, Jamieson Louttit of Jamieson Louttit & Associates, had been in the process of selling the assets of SCW and the liquidation was close to completion. In 2011 Mr Schirato indicated his interest in purchasing SCW’s rights against Ms Cantarella in relation to her role as a director. Mr Schirato provided the liquidator with an opinion by well-known Sydney silk Robert Newlinds SC. Mr Schirato indicated he, and a corporate entity, would be willing to pay $100,000 for the potential rights of SCW against Ms Cantarella Mr Newlinds discussed in his opinion.

The liquidator considered Mr Schirato’s proposal, and the opinion. He also had the allegations investigated, and obtained an advice from his own solicitors Piper Alderman. On these bases, he formed the view that contrary to Mr Schirato’s contention, SCW had no viable causes of action against Ms Cantarella. Prudently, however, he sought judicial direction under s 479(3) of the Act as to whether he would be justified in not treating with Mr Schirato in connection with the claimed causes of action. Both directors were represented at that hearing before Brereton J. In his decision, his Honour Brereton J held that the liquidator would not be justified in refusing to treat with Mr Schirato. That judgment may be read here, and see [3]-[9] for details of the potential causes of action that Mr Schirato was interested in pursuing.

Subsequently, the liquidator established a process whereby those parties who might have an interest in paying for an assignment to themselves of SCW’s causes of action against any of the corporate officers of SCW would be given an opportunity to tender. Those officers were the two directors Ms Cantarella and Mr Schirato, Ms Wannan (an alternate director) and Mr Jones (the company secretary).

Tenders were invited by a document sent out on 12 April 2013, which included certain aspects –

(1)  A tender must not be less than $100K,

(2)  The liquidator would accept the highest offer received if the terms were complied with, and

(3)  The liquidator would seek judicial approval for the execution of the deed of assignment .

The grounds upon which the applicants, Ms Cantarella and a corporate entity, challenged the decision of the liquidator to take this step included –

1.  The use of a tender process was unfair, as it gave the tenderers no opportunity to better the offer made by another tenderer;

2.  The description of the claims against “any past or present officer of the company other than the liquidator” or any other person connected in any way to any act or omission of any past or present officers of the company was too broad. This would impede a tenderer from offering as much as they might otherwise.

3.  The terms of the indemnity the liquidator sought in the proposed deed of assignment was too broad, which would also discourage a tenderer from making its highest bid.

4.  The tenderers were to provide cheques, to be held in the account of Piper Alderman, until the Court approves the execution of a deed of assignment. This, it was argued, exposed the potential tenderer to the risk that his her or its money would not be returned.

Rein J found it notable that the applicants did not complain about the range of persons to whom the tender letter was sent; it was sent only to the former officers of the company SCW.

His Honour notes the key principles as advanced by the applicants, at [12] –

(1)  The fundamental duty of a liquidator is to obtain the highest possible price for the company’s assets sold by him or her;

(2)  Where an appeal under s 1321(1)(d) against a discretionary decision of a liquidator is brought, the Court will reverse the liquidator’s decision “only when it is satisfied he was acting unreasonably or in bad faith”: Re Jay-O-Bees Py Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565 at [46]; McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690, at [73].

There was no allegation of bad faith, but the applicants asserted that the liquidator was acting unreasonably, for the four reasons outlined above. Rein J took the view that since no point was taken that there was any unreasonableness in sending the invitation to tender only to former officers of the company, the liquidator’s decision to offer Ms Cantarella the opportunity to purchase the rights and thus stymie the claims that it appeared Mr Schirato sought to bring against her seemed fair and reasonable, as did the various aspects of the tender process challenged.

Rein J accepted that a tender process means that each tenderer does not know what the others may have bid, and thus has no opportunity to better other bids. But that is the process. Sale by tender is a legitimate method of selling property and did not appear to involve an unreasonable commercial decision. Whether it was likely to yield a higher or lesser figure than some other process, such as a round table auction, was a matter upon which the liquidator was required to exercise a commercial judgment, and he had done so. His Honour noted that a tender process had the additional advantage of removing the liquidator of involvement in a bidding process involving negotiations, which could be difficult to control.

Rein J held there was no discernible prejudice to the applicants in permitting the tender process to proceed, and he refused the injunctive relief sought.

One can see that the tender process in these circumstances put Ms Cantarella in an invidious, and expensive, position. It is indeed possible that any claims against her could, were they to be pursued, prove to be of insufficient merit. Yet even so, at this point in time, she faced a costly and unpalatable choice.

An interesting decision indeed.