Category Archives: Insolvency

Newsflash / case review – First major PPSA decision in Australia handed down

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And it is not good news for owners. It may seem counter-intuitive for lawyers and insolvency practitioners who were taught long-standing rules of property law, and have until now advised and operated in that context. However when it comes to personal property it is clear now that in Australia, to put it simply, ownership is no longer king.

Just over a week ago, on 27 June 2013, the first major PPSA decision in Australia was handed down by Brereton J in the New South Wales Supreme Court:  In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852.

The case involved three civil construction vehicles located in the Northern Territory, identified by their VINs; a caterpillar wheel loader (the 930), a 30 tonne caterpillar excavator (the 330), and a 20 tonne caterpillar excavator (the 320).

A company Maiden Civil (P&E) Pty Ltd (Maiden) had been engaged between 2010 and May 2012 to undertake civil construction work in the Northern Territory. It had acquired possession of the Caterpillars with the assistance of Queensland Excavation Services Pty Ltd (QES), under a hire-purchase type of facility used in many industries. Broadly, QES purchased the Caterpillars chosen by Maiden and then leased them to Maiden at a premium. Pre-PPSA, by gaining title to the Caterpillars pending the paying out of the lease term, this arrangement was considered to give the finance-provider the best security possible. However post-PPSA, as we are learning, ownership is no longer king. Without registering what is deemed under the Act to be a “security interest”, priority in the particular personal property can be lost, even for the owner of the personal property.

To break the financing arrangement employed here down into its elements –

  • The vendor sold the Caterpillars to QES in 2010
  • QES paid the deposits to the vendor, and the balances were financed by Esanda (for the 320) and Westpac (for the 330 and 930), secured against the home of QES’s principal Mr Callum Rutherford and guaranteed by Mr Rutherford and a related  company
  • Concurrently (more or less) with the payment of the deposits to the vendor, QES received from Maiden funds that corresponded with the amounts of the deposits
  • Maiden took possession of the Caterpillars
  • Thereafter, QES invoiced Maiden on a periodical basis for amounts that corresponded to finance charges payable by QES to Esanda and Westpac, plus ten percent, which Maiden paid
  • In March 2011, Maiden provided to QES the funds required to pay out the Esanda finance in respect of the 320, and QES thereupon discharged that finance
  • After 23 March 2011, QES rendered no further invoices to Maiden in respect of the hire of the 320
  • QES continued to render invoices in respect of the 330 and 930, and Maiden continued to pay them, if irregularly.

In about March 2012, Maiden sought short-term finance from a third party, Fast Financial Solutions Pty Ltd (Fast). Fast’s solicitors prepared the documentation, including a Loan Agreement for a three-month loan of $250,000 and a General Security Deed. The Deed attached schedules listing Maiden’s property, including the Caterpillars, and sent these to Maiden’s lawyer on 2 May 2012.The General Security Deed purported to grant to Fast a “security interest” in, inter alia, the Caterpillars. The documents were executed by Maiden and by Fast on 31 May 2012. Fast transferred funds into an account as directed by Maiden.

Already by July 2012 there were a number of events of default under clause 11.1 of the General Security Deed, and on 27 July 2012 Fast appointed receivers and managers.

Following their appointment, the receivers claimed possession of the Caterpillars. Maiden entered into voluntary administration on 27 August 2012 and then liquidation on 24 September 2012.

The contest as to the superior interest in the Caterpillars was between –

1. QES, who claimed to be the owner of the 330 and 930 Caterpillars, and of the 320,

2. The financier and secured creditor, Fast, and

3. The parties claiming a lien over the 320 (it was unclear if this was a company called Central Plant Hire (NT) Pty Ltd or a Mr Cullenane).

His Honour Brereton J addressed the key issues in turn.

1. Who was the “true owner”?

QES claimed to be what his Honour referred to as the “true owner” of the Caterpillars, having purchased them and hired them to Maiden. This was disputed.

His Honour held that the arrangements between QES and Maiden included that upon payout of the relevant financier from whom QES had obtained funding for a particular Caterpillar, title to the Caterpillar would be transferred to Maiden. The arrangement was not a mere lease, but included an agreement to transfer title upon discharge of the finance (see [17]). In the meantime, QES was the legal owner of the Caterpillars, having acquired title from the vendor and being the sole recourse for Esanda and Westpac.

His Honour concluded (at [18]) that Maiden was the “true owner” of the 320, having paid out its finance. However QES was the “true owner” of the 330 and 930, and thus had a claim in competition with Fast as to the 330 and 930. His Honour observed that while the case ultimately fell to be resolved according to the system of priorities established by the PPSA, “the notion of title – or ‘true ownership’ – is not irrelevant”.

Brereton J does not explain this last remark further. I suggest that, as the rest of the judgment demonstrates, its relevance is not to the resolution of the competing claims, but is confined to determining whether an asserted “true owner” retains an interest in the asset in question at all. In this case, his Honour held that this issue resolved the question as to QES’ claim to an interest in the 320 in the negative, such that as to that Caterpillar, there was no competition at all. As to the the other two Caterpillars, the 330 and 930, QES’ claim to ownership held good. For those Caterpillars, then, the analysis proceeded to the next stage – the competition between claimed interests in those Caterpillars.

2. The security interests in the Caterpillars

(a) Meaning of “security interest” 

Section 12(1) of the PPSA defines “security “interest in this way –

“A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).”

Section 12(2) lists examples of such transactions which may provide a security interests in personal property.

Importantly, section 12(3) then provides –

“A security interest also includes the following interests, whether or not the transaction concerned, in substance, secures payment or performance of an obligation:

(a) the interest of a transferee under a transfer of an account or chattel paper,

(b) the interest of a consignor who delivers goods to a consignee under a commercial consignment, 

(c) the interest of a lessor or bailor of goods under a PPS lease.”

I pause there to note that section 12(3) is the provision which makes it clear that ownership or title to goods is deemed a “security interest” under the PPSA, and is subject to its provisions.

A “PPS lease” is defined in section 13 to mean a lease or bailment of goods –

(a) for a term of more than one year,

(b) for an indefinite term (even if determinable by either party within a year),

(c) for a term of up to a year that is automatically renewable if the total of all the terms might exceed one year,

(d) a term of up to a year, where the lessee or bailee consensually retains substantially  uninterrupted possession of the property for at least a year from the day they took possession, or

(e) for goods that may or must be described by serial number, for a term of more than 90 days in certain circumstances, or less than 90 days in certain circumstances.

There are certain exclusions from the definition of a “PPS lease” in sub-sections 13(2) and (3). Relevantly, sub-section 13(2)(a) excludes a lease by a lessor who is not regularly engaged in the business of leasing goods.

(b) QES’s interest

It was common ground that if QES was the owner of any of the Caterpillars, this was a “security interest” within the meaning of the PPSA. Although the lease of the Caterpillars from QES to Maiden was not in writing, and there was no evidence of any agreed term, his Honour found that the hire was continuous, was for a period of more than a year, and that Maiden retained uninterrupted possession of the Caterpillars for more than a year. On this basis, his Honour held (at [24]) that sub-sections 13(1)(b) and/or 13(1)(d) of the PPSA were satisfied, such that the agreement between QES and Maiden was a PPS lease. His Honour also held that sub-section 13(1)(e)(ii) and/or (iii) was also satisfied, as the Caterpillars were goods that may or must be described by serial numbers and were in Maiden’s possession for more than 90 days.

The exclusions from the definition of “PPS lease” in sub-section 13(2) did not apply. His Honour accepted that the income from hiring the three machines was QES’s only income, and that it was Mr Rutherford’s intention to continue to let the Caterpillars for hire on short-term rentals. His Honour held that on that basis it was not established that QES was not regularly engaged in the business of leasing goods (at [24]).

I pause here to note respectfully that I harbour some doubt as to the correctness of that conclusion. Whether what would appear to have been a one-off transaction coupled with an intention to continue to hire those vehicles is sufficient to denote a regular engagement in the business of leasing goods may be, I suggest, open to question.

In any event, Brereton J held that as the leases of the Caterpillars by QES to Maiden were PPS leases within the meaning of s 13 of the PPSA, it followed that QES’ interest in the Caterpillars, as lessor, was a “security interest” within PPSA s 12(3)(c).

(c) Enforceability of security interests against grantors – “attachment”

(In this case, the relevant “grantor” as that term is used by the PPSA was Maiden, the lessee of the Caterpillars.)

Section 19 is the key provision here. Subsection 19(1) provides that attachment is required before a security interest is enforceable. Subsection 19(2) provides that a security interest attaches to the relevant personal property (“collateral”), relevantly, where the grantor has rights in the collateral, or power to transfer rights in it to the secured party (at (a)).

Subsection 19(5) provides –

“For the purposes of paragraph 2(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (inlcuding an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.”

Brereton J observed that here, pursuant to s 19(5), Maiden – as PPS lessee in possession of the Caterpillars – had rights in them to which a security interest could attach. His Honour noted that these rights are not limited to possessory rights, but can also be proprietary rights. He noted there are equivalent provisions in the New Zealand and Canadian PPS legislation, and at [26] quoted the following remark of Iacobucci J of the Supreme Court of Canada in Re Giffen [1998] 1 SCR 91; (1998) 155 DLR (4th) 332:

“Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest in the car that could be asserted against the lessee and against a third party claiming a right in the car. However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in the car through the lessee including trustees in bankruptcy. In order to protect its secuirty interest from such claims, the lessor must therefore perfect its interest through registration of its interest…, or repossession of the collateral… The lessor did not have possession of the car, and it did not register its security interest. Thus, prior to the bankruptcy, the lessor held an unperfected security interest in the car.”

At [27]-[29], his Honour considers key provisions of the New Zealand PPSA and certain New Zealand judgments, discussing conceptually how the rights of a lessee in leased goods are not merely possessory but are also proprietary, such as to permit a secured creditor to acquire rights in priority to those of the lessor (or, as Brereton J puts it, the “true owner”).

At [29] of Brereton J’s judgment, there is a quote from a Canadian article by Bridge, Macdonald, Simmonds and Walsh, “Formalism, Functionalism and Understanding the law of Secured Transactions” (1999) 44 McGill LJ 567 at pp 602-603, where the authors suggest that under the US Uniform Commercial Code and the Canadian legislation:

“The internal logic of the Article 9 and PPSA priority regime is premised on a rejection of derivative title theory in favour of registration as the principal mechanism for ranking priority both among secured creditors and as between the secured creditor and the debtor’s general creditors including the trustee in bankruptcy….On this interpretation, ostensible ownership – in the radical sense of bare possession or control of the collateral – has effectively replaced derivative title for the purposes of determining the scope of the secured debtor’s estate at the priority level.” 

At [30]-[31] Brereton J refers to a  2005 decision of the New Zealand Court of Appeal which, as the enactment of the PPSA in Australia subsequently approached, was the case which certainly caught the attention of those of us in Australia coming to grips with the concepts and potential effects of the new regime. The case was that of Waller v New Zealand Bloodstock Ltd [2005] NZCA 254; [2006] 3 NZLR 629.

In brief summary, in 1999 a financier took a debenture over the assets of a farming company which it registered on 1 May 2002, the day the PPSA commenced in New Zealand. In 2001, the farming company had leased a stallion named Generous from the stallion’s owner for a term of more than one year. The owner did not register its interest as owner/lessor. In 2004, the owner/lessor terminated the lease and repossessed Generous. Shortly thereafter, the financier appointed receivers to the farming company, under its debenture. The receivers sued the stallion’s owner for possession, claiming that the financier was entitled to priority under the PPSA. The New Zealand Court of Appeal held that the lease ammounted to a “PPS lease”, that the owner/lessor’s interest amounted to a “security interest” under the PPSA, that the financier had given value for its security interest under the debenture, that the farming company had rights in the stallion under the PPS lease, and that the financier’s security was enforceable against the stallion’s owner/lessor. As the financier’s security interest had been perfected by registration, it took priority over the competing security interest of the stallion’s owner/lessor, as with respect to priority of competing security interest, the principle nemo dat quod non habet was ousted by the PPSA.

Robertson and Baragwanath JJ of the NZ Court of Appeal observed (at [54]) that because the lease was for a term of more than one year, then for the limited purpose of priority of securities, the contracutal language of the agreement to lease (which provided that title to Generous would remain with the owner/lessor) was overridden by statute, and instead of its previously inviolable title to the stallion, the owner/lessor was deemed to have a statutory “security interest”, which was liable to be overridden by a competing security interest. A salient lesson indeed.

(d) Fast’s Interest

Here Fast, the financier, under its General Security Deed with Maiden, was granted a “security interest” in the “personal property” to secure the due payment of the “secured moneys”. Clause 1.1 of the Deed defined “personal property” to mean all of Maiden’s assets, including all personal property in which Maiden had rights, whether then or in the future, including the serial numbered “collaterals” listed in schedules, which included the Caterpillars.

His Honour held that the General Security Deed was a “security agreement”, and the interest created in Fast’s favour was  a “security interest” within the meaning of the PPSA (at [34]). Pursuant to s 19(2), Fast’s security interest had attached to the Caterpillars when it gave value for its security interest by advancing the funds referred to in the Loan Agreement and General Security Deed. Once it had attached, it was enforceable by Fast against Maiden the grantor, pursuant to s 19(1).

(e) Priority between competing security interests – the key provisions

Both QES and Fast held “security interests” in Caterpillars 330 and 930. The competition between the two interests was to be resolved not by title, but by priority under the rules laid down in the PPSA.

Section 55 sets out the default priority rules. Broadly –

  • Where two security interests in the same collateral are both unperfected, the first in time takes priority (in terms of the order of attachment) – s 55(2)
  • Where one security interest is perfected and another in the same collateral is not, the former has priority – s 55(3)
  • Where two security interests in the same collateral are both perfected, the first in time takes priority (in terms of the order of perfection, and so long as perfection has remained continuous) – s 55(4), (5) and (6).

Section 21 sets out the main rule for perfection. In broad terms and all other things being equal, registration will in many cases achieve perfection. However, it is more complicated than that.

Under subsection 21(1), a security interest in a particular collateral is perfected if either –

(a) it is perfected or temporarily perfected by force of the PPSA; or

(b) all of the following three things apply –

(i) the security interest is attached to the collateral,

(ii) it is enforceable against a third party, and

(iii) sub-section (2) applies.

Subsection 21(2) applies if –

(a) the security interest has been registered and its registration remains in effect, or

(b) the secured party has possession of the collateral (not by seizure or repossession), or

(c) the secured party has control of the collateral, for certain specified kinds of collateral (These are not relevant here. They include certain types of credit instruments, but curiously, (vi) is “satellites and other space objects”).

Note that subsection 21(1)(b)(ii) above directs attention to whether a security interest is enforceable against a third party. For the answer to this, regard must be had to section 20.

Section 20 governs the enforceability of security interests against third parties. Subsection 20(1) relevantly provides that a security interest is enforceable against a third party only if it –

(a) is attached to the collateral, and

(b) either –

(i) the secured party has possession,

(ii) the secured party has perfected the security interest by control, or

(iii) a security agreement that provides for the security interest covers the collateral in accordance with subsection (2).

Section 20(2) provides, relevantly, that a “security agreement” must be evidenced in writing with certain details addressed, and either signed or adopted by the grantor.

(f) Competition between the security interests of QES and Fast 

For Fast, in terms of enforceability against third parties, Brereton J concluded that s 20(1)(a) was satisfied, as Fast’s security interest had attached to the Caterpillars. The General Security Deed was a security agreement evidenced in writing signed by Maiden as grantor within s 20(2)(a)(i), contained a description of the particular collateral (s 20(2)(b)(i)), and contained a statement that a security interest was taken in all of the grantor’s present and after-acquired prorperty (s 20(2)(b)(ii)). Accordingly, the security agreement “covered the collateral” for the purposes of s 20(1)(b)(iii), and Fast’s security interest in the Caterpillars was therefore enforceable against a third party, including QES.

In terms of the perfection of Fast’s security interest, his Honour noted that as it had attached to the Caterpillars, this meant that s 21(1)(b)(i) was also satisfied. As it was enforceable against a third party s 21(1)(b)(ii) was satisfied. And as it had been registered and the registration remained effective within the meaning of s 21(2)(a), s 21(1)(b)(iii) was satisfied. It followed that Fast’s security interest in the Caterpillars was perfected under the PPSA. That was all common ground. (See [39]-[40])

However, his Honour observed at [41] that for QES – it had not registered its security interest in respect of any of the Caterpillars, and they were therefore not perfected (subject to what appears below). Section 55(3) therefore applied, so that Fast’s perfected security interest in the Caterpillars had priority over QES’s unperfected security interest in them. His Honour also observed that QES’s security interest was vulnerable on the grounds that it was not enforceable against third parties under s 20, because there was no security agreement that covered the collateral for the purposes of s 20(1)(b)(iii). While the PPS leases were “security agreements”, they were not evidenced in writing as required by s 20(2), thus s 20(1)(b) was not satisfied (see [41]).

(g) Transitional security interests – deemed perfection?

QES contended that its security interest in the Caterpillars had priority as “transitional security interests” which were, it argued, perfected by force of the Act immediately before the registration commencement time (see [42]).

Chapter 9 of the PPSA sets out the transitional rules.

Section 308 defines “transitional security interest” to mean –

“a security interest provided for by a transitional security agreement, if –

(a) in the case of a security interest arising before the registration commencement time – this Act would have applied in relation to the security interest immediately before the registration commencement time, but for section 310 [which provides the Act only starts to apply to security interests at the registration commencement time]; or

(b) in the case of a security interest arising at or after the registration commencement time:

(i) the the transitional security agreement is in force immediately before the registration commencement time provides for the granting of the security interest; and

(ii) this Act applies in relation to the security interest.”

Section 311 provides for the enforceability of transitional security interests against third parties, by applying the law that applied immediately before the registration commencement of the PPSA (which was 1 February 2012):

“Despite section 20, a transitional security interest is enforceable against a third party in respect of particular personal property if it would have been so enforceable under the law that applied to the enforceability of security interests immediately before the registration commencement time, and as if this Act had not been enacted (whether the secuity interest arises before, at or after the registration commencement time).”

Section 320 provides a guide to priority rules for transitional security interests, relevantly –

  • A perfected transitional secuirty interest has priority over an unperfected security interest (whether transitional or not), because of s 55(3)
  • A perfected transitional security interest has priority over a perfected non-transitional security interest, because of ss 55(5), 322 and 322A
  • An unperfected transitional security interest has priority over an unperfected non-transitional security interest, because of sections 55(2) and 321
  • A perfected security interest (whether transitional or not) has priority over an unperfected transitional security interest, because of section 55(3).

Section 322 provides for the deemed perfection of transitional security interests. I note that this provision is likely to be crucial for many transitional security interest holders, although not for the unfortunate QES.

The main rule as to the perfection of transitional security interests, set out at s 322(1) is this –

“A transitional secuity interest in collateral is perfected from immediately before the registration commencement time, whether the security interest arises before, at or after the registration time (including a transitional security interest that arises after the end of the month that is 24 months after the registration commencement time).

Note 1: As a result of this subsection, the priority time for a transitional security interest under subsection 55(4) will be immediately before the registration commencement time, as long as the security interest remains continuously perfected.”

Subsection 322(2) then provides for when a transitional security interest stops being perfected under s 322(1), which is at the earliest of the following times –

(a) when the security interest is perfected by registration under Division 6 (by migration),

(b) when the security interest is perfected by preparatory registration under Divison 7,

(c) when a registration under Division 6 or 7 is amended so that the registration perfects the security interest,

(d) when the security interest is otherwise perfected by registration, or is perfected by possession or control,

(e) when the security interest is otherwise perfected (but not temporarily perfected) by this Act, other than under this section,

(f) the end of the month that is 24 months after the registration commencement time [so after 31 January 2014].

Subsection 322(3) then provides for an exception – that subsections 322(1) and (2) do not apply to a transitional security interest in collateral if the interest is of a class prescribed by regulations made for the purposes of this subsection.

Brereton J explains at [47] that s 322 interacts with s 55 through s 21(1)(a), which provides that a security interest in particular collateral is perfected if the security interest is temporarily perfected, or otherwise perfected, by force of the Act.

Here, Fast and the receivers of Maiden accepted that any security interest of QES in the Caterpillars was a “transitional security interest” within s 308 and that, but for s 322(3), the effect of ss 322(1) and (2) would be to give QES’s security interest priority over Fast’s security interest, even though it was not registered on the PPS register. However, Fast and the receivers contended that s 322(3) applied so as to exclude QES’s interest from protection under s 322.

Regulation 9.2 of the Personal Property Securities Regulations 2010 provides that a transitional security interest is prescribed for the purposes of s 322(3) where it is registrable on a transitional register and where it was not registered on the relevant register prior to the registration commencement time.

Under section 10, “transitional register” has the meaning given it by s 330, which is contained in Division 6 (Migration of personal property interests).

Section 330 provides as follows –

“This Division applies if, at or after the migration time, and before the registration commencement time:

(a) an officer or agency of the Commonwealth, a State or a Territory gives the Registrar data, in relation to personal property, that is held by the officer or agency in a register (a transitional register) maintained under a law of the Commonwealth, a State or Territory; and

(b) the data is given in the approved form; and

(c) the Registrar accepts the data.”

The Northern Territory Register of Interests in Motor Vehicles and Other Goods was a register existing prior to the PPSA, data from which was migrated to the PPS Register within the meaning of s 330. Accordingly, it was a “transitional register” within the meaning of the PPSA.

The Caterpillars, being wholly propelled by a volatile spirit and not used on a railway or tramway, had qualified as “motor vehicles” and thus also of “prescribed goods”, for the purposes of the relevant NT Register Act. A “registrable interest” under the NT Act included a lessor of the prescribed goods, and QES’s interest in the Caterpillars was a registrable interest.

Accordingly, QES’s interest in the Caterpillars as lessor was registrable on a transitional register within the meaning of the PPSA (being the NT Register), but they had not been so registered prior to the registration commencement time. His Honour held at [55] that in those circumstances, the exception in s 322(3) of the PPSA applied, and the protection otherwise afforded to transitional security interests by subsections 322(1) and (2) did not avail QES.

(h) Further arguments by QES

QES ran another argument, to the effect that perfection of its security interest pre-PPSA fell to be determined according to the law of Queensland, not the Northern Territory, and that if the Caterpillars were not registrable on a transitional register in Queensland, then the exception in s 322(3) was not attracted. His Honour at [57]-[68] discussed this argument and the provisions of the PPSA dealing with governing laws for goods, noteably ss 233-238, in particular s 238, and rejected it.

QES ran a further, quite interesting argument that Fast and the receivers had no enforceable right to possession, as Maiden no longer had a right to possession of the Caterpillars (QES having terminated the leases), the receivers’ rights to deal with the Caterpillars deriving from, and being no greater than, those of Maiden. As His Honour observed at [69], the first limb of this submission was, in substance, that the grantor Maiden had a mere right to possession under the leases, that Maiden (and its receivers) have repudiated the lease by denying QES’s title and failing to pay rent, that QES has accepted the repudiation, terminated the lease and re-assumed possession; and accordingly, that neither Maiden nor its receivers nor Fast could have any further right to possession under the lease. The second limb invoked s 112(1) of the PPSA, which provides that in exercising rights and remedies provided by PPSA Chapter 4, a secured party may deal with collateral only to the same extent as the grantor would be entitled to so deal with the collateral.

In rejecting the first limb of this argument, his Honour noted the following –

  • s 267(2) of the PPSA provides that any security interest granted by a corporation that is unperfected at the commencement of its administration or winding up vests in the corporation (at [70]),
  • Thus upon commencement of the administration and/or the winding up of Maiden, QES’s unperfected security interests in the Caterpillars vested in Maiden. There is an exception in s 268(1)(ii) in respect of PPS leases of serial numbered goods, but it did not apply because one or more of s 13(1)(a) to (d) applied, as Maiden as lessee retained possession under the lease for more than a year (at [72]),
  • The practical effect was that QES’s security interest was extinguished; QES had no further interest in the Caterpillars, and Maiden held them subject only to the perfected security interest of Fast (at [72]).

Moreover, his Honour noted that Maiden did not have a mere right to possession under the QES leases, but also proprietary rights to the extent that it could grant security interests to third parties. The PPSA sees such a transaction as, in substance, a security transaction, even though in form it is a lease. Thus it treats the lessee under a PPS lease as the grantor of a security interest with rights in the collateral (the personal property), and the lessor as a security party. His Honour noted that as the Canadian and New Zealand cases show, the PPSA recognises that a lessee may validly and effectively grant security interests in the collateral to third parties, that can take priority over the lessor’s unperfected interest, because the lessee is regarded for that purpose as having rights in the collateral (see [73]). Maiden acquired possessory and proprietary rights in the Caterpillars upon taking possession of them, and granted a security interest in them to Fast under the General Security Deed.

As to the second limb of QES’ argument, invoking s 112 of the PPSA and effectively arguing the nemo dat rule, his Honour dismissed this also and concluded that Fast’s priority entitled it to possession of the Caterpillars, either under the General Security Deed or pusuant to Chapter 4 of the PPSA. He also noted that s 116 of the PPSA provides that Chapter 4 does not apply in relation to property while a person is a controller of the property as a receiver or receiver and manager. His Honour also expressed the view that this was not affected by s 51F of the Corporations Act 2001 (Cth). (See [75]-[82].)

(i) The lien claim of Central or Mr Cullenane

It seemed that one of either Central or Mr Cullenane was in possession of the 320 Caterpillar and claimed a lien, arising from an oral agreement with a Maiden director that Central/Mr Cullenane would have security over unspecified equipment of Maiden for work done by him “said to be” to the value of $60,000. His Honour mildly observed that Mr Cullenane had exercised this purported right to take the 320 as it was the only machine left on the job site that was not locked.

His Honour noted there was no admissible evidence of these matters, and there was nothing to suggest any such interest could prevail against Fast. In particular, s 21(2) did not apply as there was nothing to suggest the interest had been registered, and his seizure of the 320 had not amounted to perfection. Moreover any such security interest being unperfected, it too would have vested in Maiden upon the commencement of its administration and/or winding up, pursuant to s 267 of the PPSA. (See [83]-[85].)

Conclusions

His Honour concluded at [86]-[95] that –

1. Maiden was the true owner of the 320, although QES was the true owner of the 330 and 930.

2. Fast had a security interst in all three Caterpillars pursuant to the General Security Deed, which attached to the Caterpillars, was enforceable against third parties, and perfected by registration.

3. QES had a security interest in the 330 and the 930 as a lessor under a PPS lease. QES had not registered is security interest on the PPS Register. While it was a transitional security interest, it had been registrable on a transitional security register (the NT motor vehicle Register). QES had failed to so register at the relevant time, thus the exception in s 322(3) applied and the protection (of “deemed perfection”) otherwise afforded to transitional security interests in ss 322(1) and (2) did not avail QES.

4. Accordingly, QES’s security intertest was unperfected. In those circumstances s 55(3) applied, such that Fast’s perfected security interest in the Caterpillars had priority over QES’s unperfected security interest in the 330 and 930.

5. Moreover, upon Maiden going into administration and/or liquidaiton, Maiden became entitled to the Caterpillars – subject to the perfected security interest of Fast – because QES’s (and Central’s or Mr Cullenane’s, if any) unperfected secuity interest thereupon vested in Maiden.

6. The Receivers and Fast had enforceable rights of possession of the Caterpillars against those defendants who presently possessed them, flowing from events of default under the General Security Deed having occurred, s 112 not affecting Fast’s entitlements and Chapter 4 not applying.

It will be interesting to see if this decision is appealed. In the meantime, aside from my query mentioned above as to his Honour’s finding that the QES-Maiden lease was a “PPS lease”, as it did not fall within the exclusion in s 13(2)(a), I would anticipate that this judgment by his Honour Brereton J will be relied upon and applied as authoritative. It ought be closely considered by any practitioner advising upon the operation of the PPSA in such circumstances.

This case serves as a stark illustration for any who were not already aware, that the PPSA has changed the playing field significantly when it comes to personal property; particurly as to long-held notions of the primacy of the rights of the owner of personal property leased or bailed to a third party. Where that third party subsequently fails, the rules have been changed fundamentally, when it comes to a competition between a prior, unregistered owner/lessor, and a subsequent registered secured creditor. As I observed at the outset: to put it simply, ownership is no longer king.

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

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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

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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.

Newsflash – High Court grants special leave to appeal in Willmott Forests – disclaimer of leases

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Yesterday the High Court granted special leave to appeal the Victorian Court of Appeal’s decision in Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

The transcript of the special leave application is not yet up on Austlii. However my friend and colleague Sam Hopper has posted a very useful update on his blog here. Also the parties’ summaries of argument are available online here (scroll down to the table for proceeding M99 of 2012).

I wrote on the Victorian Court of Appeal’s decision last year 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).

In their summary of argument for special leave, 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 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 decision with interest. It is expected the appeal hearing will take place later this year, potentially August 2013, with the judgment to follow sometime thereafter.

Provisional liquidators – principles as to appointment – ASIC v ActiveSuper

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Last month in ASIC v ActiveSuper Pty Ltd (No 2) [2013] FCA 234, Gordon J considered an application by ASIC brought pursuant to s 472(2) of the Corporations Act 2001 (Cth) (the Act) to have Michael McCann and Graham Killer of Grant Thornton in Brisbane appointed joint and several provisional liquidators to a company called MOGS Pty Ltd (MOGS). ASIC sought the appointment to secure and preserve MOGS’ assets pending the final hearing of ASIC’s winding up application against MOGS, and to empower an independent expert to investigate MOGS’ affairs and report back. The application was successful. The judgment provides a useful opportunity to review the principles governing when a provisional liquidator will be appointed.

MOGS was a company that rode the wave of Australian investor interest of recent years in the distressed real estate market in the United States. ASIC alleged that MOGS had received funds from investors (principally the trustees of self-managed superannuation funds) by two routes – funds raised pursuant to a so-called “US Realty Memorandum” for investment into distressed real estate in the USA but loaned, at least, by the 5th-8th defendants to MOGS; and funds raised pursuant to so-called “product placement memoranda” for investment with the 9th-10th defendants but loaned, at least in part, by entities associated with those defendants to MOGS.

ASIC submitted that there was substantial evidence that MOGS had committed, or been knowingly concerned in, a number of contraventions of the Act including breaches of s 1041H(1) (misleading and deceptive conduct in respect of a financial product or service), s 911A(1) (provision of financial services without a relevant licence) and s 727(1) (offering securities without a current disclosure document lodged with ASIC.

During the course of argument it became apparent – for the first time – that MOGS was, at least to some extent, acting as trustee of the MOGS Unit Trust. Up to that point, despite extensive affidavit evidence, there was no evidence of that fact. It was unclear whether the criticised transactions were undertaken by MOGS in its own right, or as trustee of the MOGS unit trust.

Gordon J expressed surprise that MOGS had failed to inform the Court that it was a trustee of the MOGS Unit Trust, provide the Court with a copy of the Trust or identify the unitholders, although her Honour noted that ASIC had been aware of MOGS’ status, but had apparently not turned its mind to these questions either until the issue was raised by the Court. Gordon J also raised the possibility of replacing the trustee under s 80 of the Trusts Act 1973 (Qld). Subsequently, ASIC sought leave to amend its interlocutory application to seek additional orders, including that the provisional liquidators also be appointed as replacement trustees of the MOGS Unit Trust pursuant to s 80 of the Trusts Act 1973 (Qld).

One of the affidavits filed for the defendants was sworn by one of the MOGS directors, the 14th defendant Mr Stonehouse. Her Honour made the telling remark that this affidavit was important both for what it did, and what it did not, say.

The Appointment of Provisional Liquidators 

As usual, her Honour provides an excellent distillation of the key principles – see the passages at [11]-[18] and the authorities there cited for each of the premises and principles below.

Section 472(2) gives the Court power to appoint a provisional liquidator at any time after the filing of a winding up application, before the making of the order. The Court has a wide and complete discretion as to whether or not to make the appointment; the grounds on which a provisional liquidator may be appointed are infinite.

On the other hand, such an appointment is a drastic intrusion into the affairs of the company. It will not be done if other measures would suffice to preserve the status quo. Therefore there must be good reason for this early intervention.

Her Honour sets out the six principles distilled by Tamberlin J in ASIC v Solomon (1996) 19 ACSR 73 at 80, often cited in this context (see [16] of this judgment to see the authorities Tamberlin J cites for these principles) –

1.  The court should only appoint a provisional liquidator where it is satisfied that there is a valid and duly authorised winding up application and that there is a reasonable prospect that a winding up order will be made;

2.  The fact that the assets of the corporation  may be at risk is a relevant consideration;

3.  The provisional liquidator’s primary duty is to preserve the status quo to ensure the least possible harm to all concerned and to enable the court to decide, after a further examination, whether the company should be wound up;

4.  The court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience. The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact;

5.  It may be appropriate to appoint a provisional liquidator in the public interest where there is a need for an independent examination of the state of accounts of the corporation by someone other than the directors;

6.  Where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company’s affairs would be properly conducted with due regard for the interests of shareholders, it may be appropriate to appoint a provisional liquidator.

Gordon J then set out 6 of the further 8 considerations listed by Tamberlin J as applicable in Solomon’s case that would also weigh in this case in favour of the appointment of a provisional liquidator (see [17]) –

…

(b)  There was on any view at present, a substantial deficiency of assets against liabilities which had not been contested. Not a case of marginal insolvency;

(c)  There was a demonstrated lack of control over the assets of several corporations arising from the intermingling of moneys between the corporate respondents. For practical purposes they have been administrateed as if comprising a single undertaking operated to suit the whims or purposes of Mr Solomon without due regard to their individual best interests;

(d)  No proper records had been kept of the moneys lent to or distributed between the corporate respondents which were received from investments made with Mr Solomon. For example, it appeared that investment moneys procured to be invested in taxis and share markets had been diverted to publishing ventures of Mr Solomon and his personal enterprises;

(e) Mr Solomon was the controlling mind and will of the corporate respondents and faced a conflict of interest. He was a debtor to the investors and liable to them in respect of moneys advanced and at the same time he was a creditor of the corporate respondents as a result of the on lending to them. They had no doubt received the funds with notice that they were placed by the investors with Mr Solomon for investment in nominated ventures. Mr Solomon proposed to engage in further commercial activities through the corporate respondents and to obtain further credit;

(f)  It was essential, in these circumstances, that an independent person be appointed who could ensure that any remaining funds ware not further diverted by Mr Solomon for other ventures or intermingled with additional moneys. An independent person would be in a position to realise the assets, determine the claims and administer the remaining funds evenly as between the investors free from any personal or pecuniary interest in the outcome;

(g)  There was cogent evidence that moneys may have been obtained illegally by offering prescribed interests in contravention of the Corporations Law. The corporate respondents were no doubt on notice of such illegality.

At [18] her Honour noted that there was, arguably, one qualification to these principles:  that where an application to appoint a provisional liquidator is made, and the relevant company appears, the onus is not as heavy on the applicant.

Prospects of Winding Up Application on Just and Equitable Ground

In order to make the assessment referred to in 1 above – whether there is a reasonable prospect of a winding up order being made – Gordon J considered the prospects of ASIC’s application to wind up MOGS on the just and equitable ground under s 461(1)(k) of the Act (see [19]-[24] and the authorities referred to). Her Honour noted it has long been established that a company may be wound up where there is ” a justifiable lack of confidence in the conduct and management of the company’s affairs” and thus a risk to the public interest that warrants protection. In ASIC v ABC Fund Managers Ltd (No 2) [2001] VSC 383; (2001) 39 ACSR 443 at [119] Warren J (as her Honour then was) set out three general fundamental principles –

(1)  There needs to be a (justifiable) lack of confidence in the conduct and management of the affairs of the company. This may arise where after examining the entire conduct of the affairs of the company the Court cannot have confidence in the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company;

(2)  In these types of circumstances it needs to be demonstrated that there is a risk to the public that warrants protection. This may point to a winding up order being necessary to ensure investor protection; where a company has not carried on its business candidly and in a straightforward manner with the public; or where a winding up order may be justified in order to prevent and condemn repeated breaches of the law; and

(3)  There is a reluctance on the part of the courts to wind up a solvent company. A stronger case may be required where the company is prosperous, or at least solvent. Solvency, however, is not a bar to the appointment of a liquidator on the just and equitable ground, where there have been serious and ongoing breaches of the Act.

In regards to both (1) and (2), her Honour observed that there is significant overlap between matters relevant to this assessment and the just and equitable ground, and matters which weigh in favour of the exercise of the Court’s discretion to appoint a provisional liquidator.

Application to the Facts Here

In this case, briefly, ASIC pointed to the following grounds as justifying the appointment of a provisional liquidator to MOGS –

1.  In excess of $4 million raised from Australian investors and received by MOGS appeared to have been dissipated by MOGS. Both the receipt and dissipation of those funds required investigation;

2.  MOGS had engaged in transactions with no apparent commercial purposes, failed to comply with its obligations, and there were accounting inconsistencies and inaccuracies for which there was no or no satisfactory explanation;

3.  MOGS had contravened the law including by maintaining inadequate accounts and records;

4.  The information provided by one of the two directors, Marina Gore, lacked veracity; and

5.  MOGS appeared to be insolvent.

The evidence showed that it was likely that MOGS was no longer the trustee of the MOGS Unit Trust, as a result of ASIC having filed the wind up application, under the terms of the Unit Trust Deed providing for automatic removal. According to the other director Mr Stonehouse, acting as trustee of the Unit Trust was MOGS’ sole activity. MOGS’ own asset position was limited. As Gordon J neatly summarised MOGS’ position at [43] – its substratum was gone.

However there was another problem:  In spite of its position just outlined, the evidence showed that MOGS  continued to operate. Its accountant filed an affidavit reporting MOGS’ operating profit for the first fix months of the 2013 financial year at around $5 million and rising.The accountant in his affidavit asserted that as long as MOGS’ funding facility remained in place MOGS remained solvent, but that the directors had said that funding arrangement would be immediately terminated if a provisional liquidator was appointed, leaving it unable to fund and complete property developments that were underway. This funding facility was provided by third parties. However in the evidence the defendants put forward, those funding parties were not identified, the terms of the arrangements were not disclosed, nor the extent to which the facilities were drawn down, and the accountant’s assertion of the effect of the appointment of a provisional liquidator – which was mere hearsay evidence – was not addressed or explained by the directors in evidence.

It is apparent from the judgment that her Honour was alive to and dissatisfied with the gaps in the evidence for the defendants and the uncertainty as to the capacity in which MOGS was trading with “wholly innocent third parties”, including self-managed superannuation funds. Gordon J held that in the circumstances, it was appropriate and in the public interest that a provisional liquidator be appointed to MOGS (see [49]).

MOGS sought to argue that Corporations Acts remedies were not appropriate for trust companies, citing an oppression case in support. Her Honour gave this argument short shrift (see [52]-[53]).

Gordon J found that there was a reasonable prospect that a justifiable lack of confidence in the conduct and management of MOGS, and a case for winding up of MOGS on the just and equitable ground, would be made out at trial. It was therefore appropriate that a provisional liquidator be appointed to MOGS with specified powers, and for there to be a report back to the Court and ASIC.

Update – ATO’s statement on unfair preference case and reallocation of payments

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Last year I reviewed the Federal Court’s decision and the Full Federal Court’s decision on appeal in a third party preference case against the Commissioner of Taxation, which had an interesting twist. My review of the first instance decision of Nicholas J of March 2012 in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152 is here. My review of the appeal decision of September 2012, Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124, is here.

The interesting issue in this case was the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (in this case, the integrated client account) to another (in this case, to the superannuation guarantee or “SGER” account), and whether that enables the Commissioner thereby to avoid the reach of the unfair preference provisions.

An argument the Commissioner advanced unsuccessfully both at first instance and on appeal, was that the fact that the payments were (re)allocated to the SGER account in respect of the company’s superannuation guarantee charge liability, meant that there was no unfair preference. A payment of an SGC liability is a priority payment under s 556 of the Corporations Act, so the argument went, and therefore there was no unfair preference to the Commissioner, as he would have received the same priority over other creditors in any event.

In this case, the Full Federal Court went further on this issue than Nicholas J had done. The Full Federal Court noted that the evidence showed that on 31 July 2007, an ATO employee had telephoned the NSW Supreme Court to ascertain the date of the hearing of the application to wind up the relevant company, and was told it was set for 23 August 2007. The next day, 1 August, the relevant payments were “reallocated” by the ATO.

The Full Federal Court made a specific finding (at [90]) that it was plain the Commissioner took the step of reversing and (re)allocating the payments from the integrated client account to the SGER account –

“with a view to obtaining a priority over other unsecured creditors in the event that [the petitioning creditor] obtained a winding up order when the matter was due to come before the Supreme Court.”

Their Honours observed at [91] that –

“It is a fundamental principle of the law of unfair preferences that the present statutory regime, and its predecessors are…intended to render void any transaction which, if allowed to stand, would dislocate the statutory order of priorities among creditors.”

Yet, so their Honours specifically held –

“…that is precisely what the Commissioner intended to achieve.”

Extraordinary. The Full Court observed that it was implicit in the Liquidator’s submissions that on the proper construction of s 8AAZD of the Taxation Administration Act 1953 (Cth), the power of allocation does not extend to a power of reallocation to another ATO account. Thus the Commissioner had no power to so reallocate (at [70]). The Full Court took the view that it did not need to determine this question (at [88]). I discuss this issue in greater depth in my review of the decision (here).

The Commissioner’s response? It escaped my notice at the time, but on 23 November 2012, the Commissioner published a Decision Impact Statement on the case (link). In it the Commissioner notes that he did not apply to the High Court for special leave to appeal the decision.

On this issue here discussed, the Commissioner points to the fact that it was not necessary for the Full Federal Court to make a decision about the Commissioner’s powers to allocate or reallocate payments. The Commissioner then states –

“This decision does not affect the Commissioner’s powers to allocate payments received by taxpayers in accordance with the two methods set out in Division 3 of Part IIB of the Taxation Administration Act 1953.”

It would appear that despite the findings of the Full Federal Court as to the ATO’s conduct, the Commissioner has no intention of taking steps to change the internal practices of the ATO as to reallocations made between the accounts of failing companies. Troubling. Particularly so, one might think, now that directors can be made personally liable for the unpaid and unreported superannuation guarantee charge liabilities of their companies (since 30 June 2012). What is to stop the ATO from unilaterally reallocating payments in the reverse direction, depending upon which way it considers it may best maximise the revenue to be recovered?

Refusal to adjourn winding up application, despite tax appeal

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Earlier this week, the Federal Court gave judgment in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (no 2) [2013] FCA 208 (link). The case is a handy illustration of the fact that where the Commissioner applies to wind up a company, it may proceed to obtain the order even though a company has lodged an appeal as to the tax liability upon which the statutory demand was founded.

The Commissioner had served a statutory demand in April 2011. The company filed a s 459G application for an order setting it aside. It argued it had a genuine dispute as to the amount or existence of the debt, pursuant to s 459H(1). It had lodged an objection to the Commissioner’s assessment, the objection had been disallowed, and the company had taken steps to challenge the objection decision in the Administrative Appeals Tribunal. On that occasion, Barrett J in a pithy and emphatic 8 paragraphs, dismissed that proceeding in September 2011 – see In the matter of Bayconnection Property Developments Pty Ltd [2011] NSWSC 1048.

Then in November 2011 the Commissioner filed an application under s 459P to winding up the company on the ground of insolvency. This was first heard in April 2012. It was common ground that the Court was required to presume that the company was insolvent, pursuant to s 459C(2)(a), as it had not complied with the Commissioner’s statutory demand.

On that occasion (link), Robertson J adjourned the Commissioner’s winding up application, pending the outcome of the defendant company’s challenge to the Commissioner’s assessment of its tax liability. It had issued proceedings under s 14ZZM of Pt IVC of the Taxation Administration Act 1953 (Cth), in the Administrative Appeals Tribunal. The Commissioner conceded, as he had in Broadbeach at [13], that:

“Notwithstanding the presumption of insolvency that would apply under s 459C(2)(a)…upon the hearing of such winding up applications the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in proceedings under Pt IVC of the Administration Act, if those proceedings then still be on foot…”.

Robertson J accepted that the company had a “reasonably arguable” case in those proceedings. The company submitted, and it was accepted, that it was insolvent only by reason of the alleged tax debt – it had no other third party creditors. It was no longer trading and had not been for some years. On that occasion, Robertson J exercised his discretion in s 459A of the Act (“On an application under s 459P, the Court may order that an insolvent company be wound up in insolvency.” ) and adjourned the winding up application. His Honour also made an order under s 459R(2) extending the period within which the wind up application must be determined (the specified period being within 6 months of the application being made).

The Tribunal then heard the tax matter over five days in August 2012 and reserved its decision. The Tribunal handed down its decision on 29 January 2013. The company (and its related defendant companies) lodged a notice of appeal to the Federal Court within time, and the tax appeal was listed for first directions on 14 March 2013. (Robertson J was hearing this winding up application on 8 March 2013.)

Before Robertson J, the defendant companies again contended that there was and would be no debt to the Commonwealth by virtue of their tax appeals. While the Court was required to presume they were each insolvent, pursuant to s 459C(2)(a) of the Act, each company was insolvent only by reason of the tax debt in question.

Robertson J turned to the fresh exercise of his discretion, on this occasion, under s 459A. His Honour took into account the general principles set out in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10 at [77], bearing in mind that that was a case about whether or not execution of a judgment debt should be stayed and a case where there had been no hearing on the merits, the appeal under Pt IVC of the Taxation Administration Act not having been hard.

His Honour identified the following factors which he took into account at [15], in refusing the adjournment application on this occasion –

  • It is the taxpayer which bears the onus of persuading the Court that a stay ought be granted in the particular circumstances
  • That great weight must be given to the clear legislative policy which gives priority to the recovery of taxation revenue notwithstanding that the taxpayer has a Pt IVC proceeding on foot
  • That it is too narrow a view of the discretion to grant a stay merely because Pt IVC proceedings are pending or because on review of those proceedings there appears to be an arguable case
  • That in cases where the Court considers that it is in a position to assess the merits of pending Pt IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits but the taxpayer needs to have more than merely an arguable case
  • That irrespective of the merits of pending Pt IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax
  • That more weight would be given to the merits factor if the case is one where the Deputy Commissioner has abused his position.

Robertson J found it significant that the tax appeal from the AAT to the Federal Court was on, and limited to, questions of law. Whereas he had held in April 2012 that each company had an arguable case which extended to the facts, the position now was that each defendant company was limited to questions of law. His Honour considered the grounds, and found that they were not reasonably arguable (at [26]). His Honour found that even if he was wrong on that and the grounds of the tax appeal were reasonably arguable, they were not strong, and the clear legislative policy which gives priority to the recovery of taxation revenue, would outweigh any merits of the appeal to this Court. Perhaps even the highly esteemed tome, Fary on Adjournments, would not have aided the defendant companies in staving off the result, in this case.

His Honour ordered that the companies be wound up.

For those interested, I refer you to my case review last month of HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45, a most interesting case involving the dismissal of an application by a company to set aside a statutory demand issued by the Commissioner (link).

Newsflash: ITSA’s new Online Service for Bankruptcy Notices commences today

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ITSA (Insolvency and Trustee Service Australia) has been developing a re-designed website with new online services to be rolled out. Today it has announced the launch of stage 1 of its new online service to enable its personal insolvency clients to log on and transact with ITSA at any time 24/7.

The first stage relates to Bankruptcy Notices and commences today. Applications for the issue of bankruptcy notices can now be submitted and managed online. Trustees in bankruptcy access the online services through the Trustee online access portal. Note that ITSA is currently decommissioning existing html, paper and pdf forms used for Bankruptcy Notices – anyone with queries about this should call ITSA’s service centre on 1300 364 785 or check the website (link).

ITSA has said it will be expanding the functionality of its new online services later in 2013.

Statutory demands from the Tax Office – HC Legal Pty Ltd v DCOT [2013] FCA 45

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On Tuesday the Federal Court dismissed an application by a company trading as a law firm to set aside a statutory demand issued by the ATO. It is an interesting case and the judgment provides a useful reminder that even though a company may have challenged a tax assessment and an objection or appeal proceedings are pending, this is no bar to the Commissioner issuing a statutory demand, and does not of itself provide grounds to have one set aside. The judgment of Murphy J is that in HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45.

In applications to set aside a statutory demand, the ATO is in a privileged position compared with anyone else. This is because even where the taxpayer disputes the tax debt, the ATO  has the benefit of several legislative provisions which have the effect of deeming notices of assessment and declarations as conclusive evidence that the amounts and particulars are correct and due. The Hight Court has held that the operation of those provisions cannot be sidestepped by an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 (Broadbeach Properties).

Before turning to the substantive part of the case, I will first briefly address two other aspects.

Applications for review of a Federal Court Registrar’s decision

HC Legal Pty Ltd v DCOT was in fact a rehearing de novo of the set-aside application which had first been made to a Registrar and dismissed. The plaintiff (HCL) had then made application for a review of the Registrar’s decision pursuant to s 35A(5) of the Federal Court Act 1976 (Cth). His Honour said the following in relation to the nature of applications for review of a Federal Court Registrar’s decision, at [4] –

“It is uncontroversial that the application involves a rehearing de novo, at which the parties may adduce further evidence. The Court is to exercise its discretion afresh, unfettered by the decision of the Registrar: Martin v Commonwealth Bank of Australia [2001] FCA 87; (2001) 217 ALR 634 at [6] and [12]; Mazukov v University of Tasmania [2004] FCAFC 159 at [22]-[27]; Callegher v ASIC [2007] FCA 482; (2007) 239 ALR 749 at [46].”

Background – The contractual arrangement

This case involved a rather curious contractual arrangement, which lead directly to the tax liability and statutory demand that followed. The law firm in question Hambros and Cahill Lawyers (HCL) was a small one, with two lawyers as its directors. In December 2011, HCL entered into an agreement with an entity related to the winemaker Andrew Garrett (Holy Grail). Under the agreement, for a fee, Holy Grail granted HCL the exclusive rights to provide legal services to Mr Garrett’s associated entities. Not only might it be thought unusual for a law firm to purchase the rights to represent clients, but the size of the fee HCL agreed to pay for this right was staggering: $45m plus GST – a total of $49.5m. HCL was to pay this fee pursuant to a vendor finance agreement, the vendor being Holy Grail and the borrower being HCL. The effect of this was that HCL did not need to advance any funds at the time.

In early 2012, when HCL came to lodge its BAS for that last quarter in 2011, it stated it had made a capital purchase in the sum of $49.5m in the last quarter of 2011, and claimed input tax credits from the Commissioner in the sum of $4.5m for the GST paid on that purchase. After deductions for GST amounts it owed, the input tax credits it claimed came to $4,491,954, which the Commissioner then remitted to HCL. There was no evidence as to what then happened to that money in the hands of HCL, but HCL’s counsel informed the Court that it had been used to pay certain expenses of the firm, pay a deposit to purchase Seabrook Chambers in Melbourne, and the balance of $2m each was distributed to the two directors, posted in the books as a loan, although each director had paid back $350,000 to HCL.

As Murphy J put it: “The Commissioner’s concern regarding the transaction and the claim for input credits of $4.491 was immediately apparent.” Shortly thereafter the Commissioner froze HCL’s bank accounts and moved to audit the firm.

In May 2011, following the audit, the Commissioner assessed HCL as liable to pay $4.5m in GST. However, although the ATO’s Running Balance Account (RBA) statement for the company showed that GST liability as relating to the last quarter of 2011, the notice of assessment referred to the first quarter of 2012. Under a separate notice, with the correct tax period cited, there was also a penalty imposed of $2.5m.

On 19 June 2012 HCL lodged its objection to the assessment and penalty.

On 4 July 2012 the Commissioner served the statutory demand, seeking payment of $6.95m – $4.5m in GST, $2.25 penalty and interest charges.

On 11 September 2012 the Commissioner sent a letter enclosing a new, revised assessment to HCL, asserting the first notice had contained a typographical error and that the correct tax period was the last quarter of 2011. This was followed by an email from the Commissioner’s office referring to the error in the first assessment.

The Statutory Demand – Was there a “genuine dispute” such that it should be set aside?

The Court may set aside a statutory demand on the basis that there is a genuine dispute about the existence or amount of the debt to which the demand relates: s 459H(1)(a) and (3) of the Corporations Act 2001 (Cth) (the Act).

In the hearing before the Registrar, HCL had not contended that there was a genuine dispute under s 459H because, said Murphy J in his judgment, of the statutory protection afforded to debts arising from tax assessments. In the Broadbeach Properties case referred to above, the High Court said this at [57]-[58] –

“Section 459G applications by taxpayers are not Pt IVC proceedings and production by the Commissioner of the notices of assessment and of the GST declarations conclusively demonstrates that the amounts and particulars in the assessments and declarations are correct ([Taxation] Administration Act, Sch 1, s 105-100 [now s 350-10]; [Income Tax] Assessment Act, s 177(1)). That being so, the operation of the provisions in the taxation laws creating the debts and providing for their recovery by the Commissioner cannot be sidestepped in an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner.

“The matter was explained, with respect, correctly by Williams J in Bluehaven Transport Pty Ltd v Deputy Federal Commissioner of Taxation (2000) 157 FLR 26 at 32. The use by the Commissioner of the statutory demand procedure in aid of a winding up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue. The phrase “may be recovered” in ss 14ZZM and 14ZZR of the Administration Act applies to the statutory demand procedure. That state of affairs places the existence and amounts of the “tax debts” outside the area for a “genuine dispute” for the purposes of s 459H(1) of the Corporations Act.”

To consider that for a moment: In other words, the effect of the legislative provisions cited in the first of these two paragraphs is that when it comes to debt recovery, the ATO’s claims are in a sense “bulletproof” – the notices of assessment and declarations they issue are treated as conclusive evidence that they are correct as to the amount and particulars of the tax liabilities. The effect of the provisions in the second paragraph is that the Commissioner can continue with recovery actions even if a review on objection or an appeal pending, as if no such review or appeal were pending.

While HCL did not run it before the Registrar, before Murphy J, HCL advanced the argument that there was a genuine dispute under s 459H(1). HCL argued that the Commissioner had conceded the first notice of assessment was flawed, pointing to the issue of the second notice, and the ATO correspondence about the error. HCL argued that this negated the first assessment on which the statutory demand was predicated.

His Honour rejected these arguments, on a number of grounds –

  • The Commissioner had not discharged the first assessment made, as evidenced by the RBA statement showing no adjustment;
  • The contentions of HCL were misconceived as they equated an “assessment” with a “notice of assessment”, the former being the official act or operation of the Commissioner, the second being the piece of paper informing of it (see [31]-[32] and the authorities and provisions there cited);
  • The first notice of assessment with its error as to the relevant tax period did not affect the assessment itself. Indeed under s 105-20(1), Schedule 1 of the Taxation Administration Act 1953 (Cth), the assessment would remain valid even if notice of the assessment was not given at all ([33]-[34]);
  • It was clear, including from HCL’s objection and submissions, that HCL was not mislead by the error in the first notice ([35]);
  • In any event, the Commissioner corrected the error by way of the second notice of assessment, which was provided prior to the hearing. The existence of a genuine dispute must be determined at the time the Court hears the application (see [36] and the authorities there cited);
  • The Commissioner also has the benefit of s 8AAZI of the Taxation Administration Act, which provides that the production of an RBA statement is prima facie evidence that the RBA was duly kept and that the amounts and particulars in the statement are correct. The relevant RBA was in evidence before the Court and showed that the amount reflected in the statutory demand was the amount of HCL’s debt to the Commissioner as at the date of the statutory demand (see [37]-[38] and [40]-[41]);
  • Various other legislative provisions have the effect that the amounts set out in the RBA statement were now due and payable by HCL: see subsection 8AAZH(1) of the Taxation Administration Act 1953 (Cth), and s 255-5 and 255-1 of Schedule 1 of that Act (see [39]);
  •  The Commissioner also relied upon the above-mentioned s 350-10 of Schedule 1 of the Taxation Administration Act, which provides that the production of a notice of assessment is conclusive evidence that the assessment was properly made, and the amounts and particulars of the assessment are correct. His Honour was not persuaded that in the circumstances of this case that provision operated as the Commissioner contended, with regards to the first notice of assessment. However in light of his conclusions above, it was unnecessary to decide this question (see [41]).

The Court found that HCL’s contentions raised a spurious rather than bona fide or real ground of dispute. His Honour did not accept that the error in the first notice of assessment gave rise to a genuine dispute under s 459H of the Act as to the existence or amount of the debt to which the statutory demand related. The assessment itself was unchanged. (See [42] and the authority there cited.)

Whether the Statutory Demand should be set aside for some other reason

HCL also argued that the statutory demand should be set aside as there was “some other reason” which would justify the Court’s exercise of its discretion to do so pursuant to s 459J(1)(b) of the Act. HCL based this upon the Commissioner’s conduct, upon the fact that HCL had disputed the assessment by lodging an objection, and upon the contention that it had a reasonably arguable case on its objection.

In Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 19 ACSR 125 at 139, the Full Federal Court observed that the discretion might be exercised where it is “shown that the Commissioner’s conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice.”

Later judgments have indicated that the discretion is of broad compass, and Murphy J expressed the view that he did not consider the Court in Hoare Bros was seeking to exhaustively set out the situations it comprehends (although I suggest it provides a useful guide). HCL argued, and his Honour accepted, that it was not necessary to show that substantial injustice would be caused if the discretion were not exercised, although he qualified that, noting that in Broadbeach the High Court had overturned one of the decisions HCL relied upon in this submission. In other words, it indeed might be necessary to demonstrate substantial injustice would follow were the statutory demand allowed to stand.

HCL argued that the existence of proceedings disputing a tax assessment may be relevant to the exercise of the discretion, and pointed to a line of authority in support of that view (see [46]). However, as his Honour noted –

  • Section 14ZZM of the Taxation Administration Act provides –“The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.”
  • Section 14ZZR provides – “The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending.”
  • In 2008 in Broadbeach, subsequent to the authorities HCL relied upon, the High Court observed at [60]-[61] that – “[T]he hypothesis in the present appeals must be…that there is no “genuine dispute” within the meaning of s 459H(1). Both the primary judge and the Court of Appeal emphasised the importance of the disruption to taxpayers, their other creditors and contributories that would ensure from a winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the Commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the Commissioner upon the statutory demand system….The “material considerations”…which are to be taken into account, on an application to set aside a statutory demand, when determining the existence of the necessary satisfaction for para (b) of s 459J(1) must include the legislative policy, manifested in ss 14ZZM and 14ZZR of the Administration Act, respecting the recovery of tax debts notwithstanding the pendency of Pt IVC proceedings.” 
  • His Honour considered that the legislative policy in ss 14ZZM and 14ZZR is that tax assessments are to be paid, even though a review or appeal is on foot;
  • His Honour also pointed to the judgment of Olney J in Kalis Nominees Pty Ltd v Deputy Commissioner of Taxation 91995) 31 ATR 188 at 193 where Olney J – with a note of regret at the end – said: “…The policy of the law would be defeated if a demand were set aside under s 459J(1)(b) simply because a review of an objection decision is pending. A taxpayer must, in the context of a case of this nature, demonstrate more than the fact that he disputes his liability for the tax as assessed and that he is actively pursuing his remedies. It is both unnecessary and undesirable to endeavour to list the circumstances which would justify the exercise of the discretion under s 459J(1)(b) except to say that in the case in which the Commissioner is not shown to have acted oppressively or to have treated the applicant in a manner different from other taxpayers in a similar position, it is not appropriate that the discretion to set aside the demand should be exercised. Section 459J(1)(b) does not provide an occasion for the Court to express its views on the reasonableness or otherwise of the taxation legislation.” 

In response, HCL pointed to the concession the Commissioner had made in Broadbeach that upon the hearing of a winding up application, the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in pending proceedings in which it was objecting to the tax assessment. HCL argued that there was no reason why the existence of a “reasonably arguable” case cannot be taken into account at the statutory demand stage, rather than at the winding up stage as suggested by their Honours in Broadbeach.

His Honour rejected this also. In Broadbeach at [62] the Hight Court had said –

“…Such consideration [of the time which has elapsed and the progression of the Part IVC proceedings towards determination], if it were supported by evidence of the state of progression of the Pt IVC proceedings, would be relevant in the operation of Pt 5.4 of the Corporations Act, if at all, at the later stage of the hearing of any winding up application.” 

In any event, Murphy J could not be satisfied on the evidence before him that HCL had a reasonably arguable case, and HCL did not seek to develop its submissions beyond a mere assertion that its acquisition of the right to provide legal services was a “creditable acquisition” within the meaning of the GST Act, and that it was therefore entitled to the input tax credit of $4.5m claimed.

In relation to conduct of the Commissioner which it argued justified the Court exercising its discretion under s 459J(1)(b) to set aside the statutory demand for “some other reason”, HCL pointed to –

  • the Commissioner’s freezing of HCL’s accounts – which lasted for 1 day,
  • an alleged breach of undertaking to defer recovery proceedings – his Honour found that the agreement was only for the Commissioner to defer them until after an extension for HCL to lodge its objection had expired, which the Commissioner did,
  • a refusal to agree to defer recovery until after the determination of HCL’s objection and any appeals – the Commissioner refused to do so unless HCL was prepared to provide acceptable security for the debt, which HCL declined to provide,
  • the garnishee notice the Commissioner issued and directed to HCL’s bank – which resulted in recovery of a small amount and which was rescinded after a short time, and
  • HCL’s suspicion that the assessments were tainted by bad faith. It had made several FOI requests for the Commissioner’s documents relating to the freezing of accounts and the audit, and had received documents in response – his Honour found none of the documents he was taken to evidenced any bad faith on the part of the Commissioner.

His Honour held that in all the circumstances of the case he did not consider the Commissioner’s actions, considered individually or collectively, were unconscionable, oppressive, abusive, or productive of substantial injustice. There was nothing to justify the exercise of his discretion.

His Honour noted, perhaps wryly, that 11 months later, HCL and its directors still had the benefit of the almost $4.5m remitted to it by the Commissioner. He dismissed the application to set aside the statutory demand and awarded costs of the application, and of the hearing before the Registrar, against HCL.

I will endeavour to monitor the Federal Court portal to see if the judgment is appealed, and if so will post an update to that effect.

**Update 26 June 2013:  The decision was not appealed, and the company is now in liquidation.

Three newsflashes (two ironically juxtaposed) and a hohoho

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Yesterday saw two developments on the same day; both insolvency practitioner-related and, as you will see, that the two occurred on the same day was certainly ironic. First, the Parliamentary Secretary to the Federal Treasurer and Attorney-General released an exposure draft of the primary amendments to be included in the Insolvency Law Reform Bill. The Bill implements the first tranche of reforms previously released in a proposals paper directed at modernising and harmonising the regulatory framework applying to insolvency practitioners in Australia, and how they are registered, disciplined and regulated. The stated aims include to increase transparency and accountability, and improve communication, high professional standards and the community’s confidence in the effective regulation of insolvency practitioners. For more information and to read the exposure draft and its accompanying explanatory material, go to the Treasury’s webpage here. The closing date for submissions is 8 March 2013.

The second development yesterday was the revelation that accounting firm RSM Bird Cameron had issued proceedings against a former partner in the firm, an insolvency practitioner of 20 years standing, which included allegations of breaches of fiduciary duty and fraud. Yesterday Chief Justice Warren of the Victorian Supreme Court delivered judgment on an injunction application the liquidator had issued, seeking to restrain Fairfax Media Ltd from publishing the allegations. Her Honour, after reviewing the key principles derived from the authorities and considering the submissions made by the parties, refused the application.

The third newsflash, on a different topic, is the recent announcement by the Victorian Supreme Court as to changes to the procedure for appeals from a decision of an Associate Justice, to commence on 1 January 2013. The principal amendments are to Rule 77.06 et seq of the Supreme Court (General Civil Procedure) Rules 2005, are contained in the Supreme Court (Associate Judges Appeals Amendment) Rules 2012 (link). Essentially, appeals from Associate Judges to a Judge of the Trial Division will be by way of re-hearing (such that error must be shown), rather than by a re-hearing de novo. Procedures will include a requirement that Notices of Appeal be served within 14 days. For more information, click on the above link to the announcement, and see new Practice Notice 4 of 2012 (link).

The amendments include the addition of a new Rule 16.5 to the Supreme Court (Corporations) Rules 2003, to apply the new procedures also to appeals from Associate Judges in corporations matters. New Rule 16.5 will further provide that an appeal will lie to the Court of Appeal:

  • in an application under s 459G of the Corporations Act (applications to set aside statutory demands); and
  • in respect of any matter referred to an Associates Judge by a Judge of this Court under Rule 16.1(3).

Finally, Merry Christmas to all, and my wishes to you and your families for a happy and healthy 2013. My apologies that the busy demands of my practice have reduced my rate of writing on this site in recent months. May you all enjoy a wonderful and restful break in the weeks to come.