Category Archives: Insolvency

Newsflash #2: Phoenixing Bill passed in the Senate

Posted on by
2

The Corporations Amendment (Phoenixing and Other Measures) Bill 2012 (the Phoenixing Bill) passed the Senate last week, on 9 May 2012. It is currently awaiting Royal Assent. For a more detailed discussion of the Phoenixing Bill as well as the Similar Names Bill, see my earlier post here .

In essence, the key amendments to the Corporations Act 2001 (Cth) introduced by the Phoenixing Bill are twofold –

1.  Conferring upon ASIC administrative power to wind up abandoned companies. This power will be triggered when –

  • it appears to ASIC that the company is no longer carrying on its business, based upon certain failures to lodge documents with ASIC (s 489F(1));
  • the company has not paid its annual review fee within 12 months of the due date (s 489F(2));
  • the company’s registration was reinstated by ASIC under s 601AH(1) (s 489F(3));
  • ASIC is of the view that the company is no longer carrying on business, and has provided notice of its intention to the directors and received no objection (s 489F(4)).

2.  Allowing for publication of insolvency notices on a central, public, ASIC-operated website, rather than in the print media or the ASIC gazette. Note that this is intended to go live as soon as 1 July 2012. See my other post from earlier this evening (link) in relation to the new draft regulations just released in this regard.

In relation to ASIC’s new power under the amendments –

Note that if ASIC orders under s 489F that a company be wound up, the company is deemed to have passed a resolution that it be wound up voluntarily under s 491 of the Corporations Act 2001 (Cth).

The stated aim of the main thrust of the Phoenixing Bill (ASIC’s new power) is the protection of workers’ entitlements in the context of phoenix activity. ASIC’s new power should enable employees of abandoned companies to access payment of some of their unpaid entitlements under GEERS, where before they were unable to do so because the company had not been placed into liquidation. Note that as part of its election commitments to workers package, the Government has indicated that it intends to replace GEERS, an administrative scheme, with a revised, but similar, legislative scheme.

An additional benefit of ASIC’s new power will be to enable a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct.

ASIC is expected to release draft guidance for public comment on how and when it will exercise this new power.

Newsflash #1: Release of draft regulations re publishing insolvency notices online

Posted on by
1

Today the Parliamentary Secretary to the Treasurer announced the release of draft regulations to implement a part of the Government’s plans to reform and modernise Australia’s insolvency framework.

The Secretary said that the establishment of a corporate insolvency notices website is aimed at reducing the costs borne by companies under external administration and provide a central repository for creditors with information on upcoming corporate insolvency events.

The draft Corporations Legislation Amendment Regulations 2012 set out the new requirements to lodge documents with ASIC for publication on the ASIC Insolvency Notices website. The draft regulations also contain details of the fees for lodgment. They have been released for consultation and may be viewed here.  The Explanatory Statement may be viewed here. The closing date for submissions is 1 June 2012 – a notably tight deadline.

The ASIC Insolvency Notices website is scheduled to go live on 1 July 2012, and is expected to replace 53,000 newspaper advertisements over the next 4 years. This is estimated to deliver approximately $15million in savings to industry over that period.

Statutory demands – risks of service by post

Posted on by
Reply

A recent Federal Court decision has highlighted the risks run by a creditor who serves a statutory demand on a company by post – Deputy Commissioner of Taxation v Manta’s on the Beach Pty Ltd [2012] FCA 417 (link). The result was that the winding up application was dismissed.

The Commissioner used the post as the means of serving the statutory demand in this case. I do not propose here to review the various provisions which permit service by post and which provide for presumptions as to by when documents sent by post are taken to have been served, including s 109X of the Corporations Act 2001 (Cth), ss 28A and 29 of the Acts Interpretation Act 1901 (Cth) and ss 160 and 163 of the Evidence Act 1995 (Cth). However see the Court’s detailed discussion of them and key authorities in another recent case of Deputy Commissioner of Taxation, in the matter of ABW Design & Construction Pty Ltd v ABW Design & Construction Pty Ltd [2012] FCA 346 (link).

Here, the Commissioner proved that the statutory demand with its supporting affidavit was sent by prepaid post in an envelope which bore the address of the defendant company’s registered office. The Commissioner also adduced evidence – which was accepted – of a system maintained at the ATO for the recording of any correspondence, including statutory demands sent by post, which end up returned undelivered or otherwise returned to sender. There was no record within that system of this statutory demand and supporting affidavit having been returned to the ATO. The Commissioner also led evidence about Australia Post’s usual delivery times.

However against this, the defendant company’s sole director Mrs Battersby succeeded in proving the documents were not received. She gave evidence that she lived at the same address as the registered address of the company. Mrs Battersby “stated unequivocally” that she did not receive any correspondence by mail from the Commissioner enclosing a statutory demand in August or September 2011. She was confident that she would remember the receipt of such a document. She gave evidence that she rarely collected the mail herself; instead her then husband would collect it from the mail box located at the side of the property, and leave any mail for her or the company on the kitchen bench at the property, or in the dining room, or on her desk; Mrs Battersby’s practice was regularly to open and review any mail including that addressed to the company; her practice was not to dispose of mail without first opening it and checking its contents. Mr Battersby confirmed her evidence as to these mail collection and placement practices. Neither was required for cross-examination.

Logan J acknowledged the element of self-interest which “attends at least Mrs Battersby’s evidence”, though he noted it does not attend Mr Battersby’s, and on balance, accepted her evidence. His Honour made a positive finding that the statutory demand and affidavit was not received at all at the company’s registered office in August or September 2011 and that Mrs Battersby first became aware of it in an email from the ATO in March 2012 (see [9-12]). His Honour noted that this carried with it a finding that the documents were not delivered to the company’s registered office in August or September 2011.

It followed, so his Honour found, that when the application for winding up was filed by the Commissioner there had been no non-compliance by the company with the statutory demand. That document had not been served on it (see [16]). His Honour did remark that perhaps if there had been more specific evidence concerning, for example, an absence of any delivery difficulties at the time in respect of mail as between Moonee Ponds and Yeppoon, as is sometimes lead, there may have been a “greater interrogative note” in respect of Mr and Mrs Battersby’s evidence.

His Honour went on to consider whether, in the absence of the presumption of insolvency afforded by non-compliance with a statutory demand, the Commissioner had satisfied the onus of proving the company was insolvent. Logan J held that the Commissioner had not. The winding up application was dismissed, with costs.

A curious decision perhaps, but it does illustrate that where service of a statutory demand is effected by post, the creditor relies only on statutory presumptions as to receipt, and has no actual proof of it. This may leave a creditor open to proof to the contrary, as occurred here, noting that the standard of proof is of course the civil standard of “balance of probabilities”. While a body serving a high volume of statutory demands like the ATO may be unlikely to alter it’s practices for reasons of cost, individual creditors serving statutory demands might be wise to consider using a well-instructed process server.

Re Willmott Forests Ltd (No 2) – s 511 power to affect third party rights, scheme land not “scheme property” and liquidators of REs

Posted on by
4

In February I posted about the decision of Davies J of the Victorian Supreme Court of 9 February 2012 on a preliminary question raised by the liquidators of Willmott Forests Ltd (WFL). The preliminary question was as to whether the liquidators could disclaim the Growers’ leases under s 568 of the Corporations Act 2001 (Cth) (the Act) with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land. Her Honour’s answer was “no”. You can read that post here.

This month, on 3 April 2012, Davies J of the Victorian Supreme Court handed down her decision on the balance of the questions she had been asked to decide under s 511 of the Corporations Act 2001 (Cth).  You can read the judgment in full here. There have been further developments in between, according to the website of one of the two grower groups, the Willmott Action Group Inc, including –

  • The Willmott Action Group Inc has issued an application in the Supreme Court to have receivers appointed to some of the schemes; and
  • The liquidators have appealed the decision of Davies J of 9 February 2012, discussed in my earlier post.
In addition, last week there was a further development –
  • The Willmott Action Group Inc has appealed this decision of Davies J of 3 April 2012.

The Willmott Action Group’s website reporting these developments can be viewed here.

Background Overview

As many of you will know, Willmott Forests is one of the more recent large agribusiness managed investment schemes to collapse, following in the steps of Great Southern, Timbercorp and Environinvest. Receivers and managers (KordaMentha) were appointed by the Willmott Group’s banking syndicate in September 2010, on the same day the Group was placed into administration. Since March 2011 the Group has been in liquidation with the former administrators, of PPB Advisory, appointed as liquidators.

WFL was the responsible entity (RE) and/or manager of 8 registered managed investment schemes (MIS), 6 unregistered “professional investor” MIS, 11 unregistered contractual MIS, and 5 unregistered partnership MIS. These MIS were forestry operations conducted on land either owned by WFL or leased by WFL from third parties. Across the schemes there were 6,329 members or “Growers”. Broadly, the Growers in each scheme held a lease (or sub-lease) from WFL with respect to the land. Growers had a right to grow, maintain and harvest trees on the parcels of land allotted to them, although the actual planting, maintaining and harvesting was the responsibility of WFL. WFL would perform these tasks under forestry management agreements, and in return Growers paid fees to WFL.

After their appointment, WFL’s liquidators were engaged in realising the assets of WFL in the course of winding up the company. After failing to attract interest from any party in acquiring the land subject to the schemes and taking over as RE and manager of the schemes, the liquidators entered into sale contracts for the sale of part of the freehold land, unencumbered by Growers’ rights, including Growers’ rights under leases and licences. A transfer of clear title to the land could not be effected unless Growers’ rights were terminated or extinguished.

On 29 June 2011, the liquidators of WFL had sought and obtained directions from Dodds-Streeton J of the Federal Court that they were justified in –

(a) amending the constitutions of the registered MIS and certain investment deeds to confer on WFL a power to terminate Growers’ rights, on condition that Court approval is obtained before doing so; and

(b) disclaiming the project documents of other MIS as onerous pursuant to s 568(1) of the Corporations Act 2001 (Cth), on condition that the Court’s consent is obtained before doing so.

Application under s 511 of the Act for Judicial Advice – Questions to be Decided 

The liquidators applied to the Court to obtain those orders and sought a range of directions under s 511 of the Act, including as to a proposed distribution of the proceeds of sale. The receivers of WFL and Growers were not joined as parties. However the receivers and two groups representing the interests of Growers – Willmott Growers Group Inc (WGG) and the Willmott Action Group Inc (WAG) – were given leave to intervene. The receivers supported the application; the Grower groups opposed it.

There were 10 questions identified for the Court’s consideration in order to determine the applications before the Court (see [34] and [129]). Those questions – together with the answers given – were –

1. Are the questions that arise for determination in the applications suitable for determination pursuant to s 511 of the Act?  Answer: Yes.

2. Are the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land? Answer: No.

*This was the preliminary question decided on 9 February 2012, with the answer given being “no” (see my previous post here). In view of that decision – now on appeal – the liquidators and purchaser GFP renegotiated the main sale contracts to exclude the land on which the contractual and partnership schemes are operated and hence did not seek a direction that they would be justified in disclaiming the leases relating to the contractual and partnership schemes. However they continued to seek orders that they would be justified in disclaiming the forestry management agreements relating to those schemes. (See [37])

3. Have the liquidators demonstrated on the material that they have acted reasonably and prudently in conducting the sale process and in entering into the main sale contracts and the HVP contract? Answer: Yes.

4. Is the allocation between land and trees justified having regard to the parties’ legal rights; specifically is any of the land owned by WFL “scheme property” in respect of the schemes? Answer: Yes and no; yes, the allocation is justified and it is correctly predicated on the basis that no, WFL does not hold its interest in the freehold and leasehold on which the schemes were conducted on trust for the members of the schemes, it is not “scheme property”.

5. Is the allocation of the sale proceeds from GFP (the main purchaser) between land and trees as proposed by the liquidators reasonable in the circumstances? Answer: Yes.

6. Having regard to the insolvency of the Willmott Group, the viaibility of the schemes and the existence of alternatives to the proposed sale, is the extinguishment of the Growers’ interests pursuant to the Liquidators’ powers under the relevant constitutions and their statutory power under s 568(1) of the Act, as the case may be, justified? Answer: Yes.

7. Is the apportionment between Growers of the sale proceeds from GFP and HVP (the purchasers), in respect of their interests in trees, as proposed by the liquidators, reasonable and justified having regard to the constituent documents of the various schemes? Answer: Yes.

8. Is the allocation of the sale proceeds of the HVP land between the liquidators’ portion (in respect of trees) and the receivers’ position (in respect of the surrender of the head lease) justified in the circumstances? Answer: Yes.

9. Is WFL’s leasehold interest in HVP land “scheme property” in respect of any of the schemes conducted upon the HVP land? Answer: No.

10. Are the liquidators justified in recovering their costs from the assets in the manner they propose? Not answered. This question was stood over for further argument.

Amongst the orders sought by the liquidators under s 511 of the Act were –

(a) a direction that the liquidators are justified in procuring WFL to enter into and perform the sale contracts;

(b) a direction that the liquidators are justified and otherwise are acting properly and reasonably in procuring WFL to terminate or surrender the project documents of the schemes, and to surrender, relinquish or release the rights of the Growers in the trees, the subject of the amended sale contracts, on the basis that the net proceeds of sale under those contracts are distributed in the manner proposed by the liquidators; and

(c) the Court’s consent to the disclaimer of the forestry management agreements of the contractual and partnership schemes (see [38]).

Her Honour observed that the effect of making these orders and taking the steps foreshadowed by them, would be to bring the schemes to an end and bring an end to all the rights of the Growers by and under the schemes, specifically their rights in relation to the trees, which are their assets (see [39]). To do that, her Honour noted the Court would need to be satisfied that the proposed allocation of sale proceeds to the Growers was appropriate (amongst other things).

I now turn to discuss several arguments advanced in the course of the application, and her Honour’s decision on those issues –

1.  Section 511 – Does it empower the Court to make orders directly affecting the rights and liabilities of third parties?

The short answer given was yes, even if those third parties are not joined, although they must have been given a property opportunity to be heard (see [56]).

Section 511 of the Act provides as follows –

“(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court….

(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.”

WAG submitted that the declarations and orders sought by the liquidators were not within the scope of the Court’s power under s 511. It argued that the Court was not empowered by s 511 to make orders directly affecting the rights and liabilities of third parties. However here, so WAG argued, the Court was being asked –

(a) to determine the rights of third parties (the Growers) to the land which is the subject of the sale contracts; and

(b) to sanction the end of the proprietary and personal rights of the Growers in these schemes (see [41]).

Her Honour considered that submission, reviewing the authorities (some concerning s 479(3) and sought to be applied by analogical reasoning), and rejected it (see [42-58]). Her Honour held (at [45]) that there was little doubt on the authorities on s 479(3) that the Court has power under that provision to make orders of a substantive nature affecting third parties. The question of whether it should exercise that power is a separate one, and is an issue of discretion, not of power. Her Honour observed that any doubt as to the Court’s power under s 511 to make orders affecting the substantive rights of third parties has been put to rest by the High Court in 2008 in Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand and the New South Sales Court of Appeal in 2009 in Hall v Poolman (see [48-53]).

Davies J held it was in the interests of the winding up of WFL to give judicial advice on –

  • the question of whether WFL’s freehold and leasehold interests are “scheme property” of the schemes,
  • the question of whether the liquidators are jusitifed in terminating and disclaiming the project documents of the schemes, and
  • the question of whether the proposed allocation of sale proceeds is justified.
Her Honour observed that the orders, if made, would enable the liquidators to complete the sale contracts in the process of realising WFL’s assets and to disclaim onerous contracts which WFL does not have the funds to perform. Obtaining the judicial advice would assist the liquidators to get on with the winding up of the company. And it was “well apparent” from the evidence that there was a need for urgency in dealing with the assets the subject of the sale contracts, because the plantations could not be maintained and the Growers could not presently exercise their rights to grow, maintain and harvest the trees on the plantations (see [57]).
2.  Was the Land on which the schemes were conducted “Scheme Property”?
The short answer was “no”. On one view, her Honour’s finding on this issue was a significant one, in terms of opening the door to permitting the sale contracts to proceed, with the proposed terms as to the distribution of sale proceeds.
The liquidators’ proposed allocation of sale proceeds was based on the premise that the land owned by or leased to WFL was not property of the various schemes, and hence was land covered by the charges under which the receivers were appointed. This question was left open in the reasons for decision given by Dodds-Streeton J in 2011, but now fell to be determined (see [59]).
Under Pt 5C.2 of the Act, property that is “scheme property” of a registered scheme is declared by s 601FC(2) to be held on trust by the RE of that registered scheme for the scheme members (Growers). For unregistered schemes, it is necessary to have regard to the terms of the schemes to ascertain the property interests held by the Growers.
Her Honour reviewed the authorities and then considered the position for each category of scheme.
For the registered schemes, Davies J considered the Product Disclosure Statements, the terms of the application forms and the nature of the Woodlots allocated and “Forestry Rights” accorded to each Grower. She concluded that while WFL contributed the use of its land for scheme purposes, it did not contribute its interest in the land. Instead, it made the land available to the Growers by way of lease and by granting “forestry rights” entitling Growers to establish, maintain and harvest a crop of trees on the land. This conclusion was supported by provisions in the constitution, which identified the land separately from the scheme property. (See [67-71])
For the professional investor schemes the conclusion was similar, the primary difference being that participants in those schemes were allocated “Hectares” on WFL’s land instead of “Woodlots” (see [72]).
For partnership schemes, again participants were required to enter into a lease agreement with WFL, and to engage WFL to undertake the actual forestry operations. The amount payable per Partnership Unit was for the rent payable under the lease and the fees due to WFL for its services. The partnership agreements defined the assets of the partnership to expressly exclude WFL’s interest in the land used by the schemes. (See [73-74]).
For contractual schemes, the contractual documents provided for what the Growers’ rights were to be, and none indicated that any rights with respect to the land were other than those conferred under the lease (see [75]).
In light of these, her Honour concluded that WFL did not contribute its interest in the land to the schemes, but simply the use of its land in accordance with the scheme documents (see [76]). Accordingly, the land did not constitute “scheme property”.
WAG submitted otherwise, arguing that the substance and effect of the scheme documents in all of the circumstances, make it demonstrably clear that WFL acquired the freehold land as scheme property, and held it beneficially as RE for the growers. Her Honour rejected this submissions (see [77-82]). This is likely to be a key point on appeal.
Her Honour also rejected an argument by WAG that the land was scheme property based on a tracing exercise (see [83-88]).
3. (a) Allocation of sale proceeds and (b) The position of liquidators of Responsible Entities – the primacy or otherwise of the best interests of Growers/investors as one of the considerations of liquidators of RE’s
(a) Allocation of Sale Proceeds
To follow the reasoning on this issue of the allocation of sale proceeds, it can be helpful to understand the practical circumstances of the scheme plantations. Liquidator Mr Crosbie gave evidence as to how they influenced why the liquidators, without available funding to continue to operate the plantations, concluded that absent a party willing to take over management and maintenance of the scheme plantations, the only available remedy was to sell the trees immediately.
Mr Crosbie gave evidence that it was in practical terms impossible for individual Growers themselves to undertake the ongoing maintenance and harvest on their own individual lots. The land owned or leased by WFL and used in the schemes had been divided into individual allocated lots, which appeared to have been done by overlaying a grid onto plantation maps. However trees were planted on a plantation-wide basis, rather than by individual lots. The lots were not delineated on the ground by access roads or other dividers or buffer zones. There were no markers to identify individual Growers’ lots or trees. GPS could not reliably assist due to the remote location of plantations and thick plantation canopies. Employing surveyors to peg out individual woodlots would be prohibitively expensive and might still not be accurate. Even if identified, a Grower whose lot was surrounding on all sides by other Growers’ lots could not access his/her/its own lot to commence harvesting individually without obtaining access across the surrounding lots for the necessary vehicles and equipment. Felling of an individual Growers’ lot would likely result in damage to trees on adjacent lots as trees fell. Outside of either thinning or harvesting, the trees needed to be maintained both to preserve the value of the trees and to prevent the risk of fire. Fire maintenance was a statutory requirement involving demanding obligations and significant expense. (See [18])
In the view of the liquidators, the Growers’ right to maintain and harvest their own trees was a theoretical right only, and could not be exercised in practice.
In terms of the allocation of sale proceeds here proposed by the liquidators, one approach was taken for the main sale contracts, another for the HVP sale contract. For the main sale contracts, the liquidators’ proposed allocation of sale proceeds to Growers was determined on the basis that the freehold and leasehold was not property of any of the schemes.
Whilst the Growers’ leases conferred proprietary rights on them as lessees, those rights were not practically capable of being exercised by individual Growers. Accordingly, the Growers’ leases did not have an independent commercial value, and the Growers should receive an amount out of the proceeds referable to the value of the trees (that are sold with the land) (see [93]).
The liquidators considered that the fairest method of apportionment amongst the Growers was to pool the proceeds and distribute them on a scheme by scheme basis. Davies J agreed that the liquidators were justified in taking this approach. (See [95])
(b) Duties owed by Liquidators of Responsible Entities (RE’s)
WAG argued that the liquidators were not acting in the Grower’s best interests in accepting the revised bid made by the purchaser GFP. They argued the trees have been sold at under market value. Her Honour noted the liquidators acknowledged the revised bid amounted to approximately 45-96% of the value set out in the Poyry trees valuation, however no party had been willing to take over the schemes, and the economic value of the trees could not be realised except as part of the land sales.
Her Honour remarked that WAG’s contention was premised on a fundamental misconception – that the liquidator of an RE owes fiduciary duties only to Growers as members of the schemes. (See [96]). On this issue, her Honour quoted a passage from the judgment of Finkelstein J in Timbercorp Securities Ltd v WA Chip & Pulp Co Pty Ltd [2009] FCA 901 and observed that the interests of Growers are a consideration of the liquidators; however they are not the only or primary consideration.
In Timbercorp at [8] Finkelstein J had observed that a liquidator of an RE which is being wound up is a fiduciary, and the principal beneficiaries of that liquidator’s fiduciary duties are those interested in the liquidation, namely the creditors and members. Sections 601FC and 601FD impose duties on an RE and its officers (which would include a liquidator of an RE) to act in the best interests of members of a managed investment scheme. At [11], his Honour remarked that ss 601FC and 601FD do not override a liquidator of an RE’s duty to those interested in the winding up, so as to require him or her to look after the interests of investors even if that be at the expense of other creditors, and that it would be quite extraordinary were that to be the case.
Davies J quoted those passages by Finkelstein J and observed that the liquidators have imposed on them the duty to act at all times with complete impartiality between the  various persons interested in the property and liabilities of the company, and that the interests of the Growers were not the only or primary consideration of the liquidators (see [96]).
For the HVP Sale contract, the receivers were a party because WFL’s rights and claims under the HVP leases fall within the scope of the charge and the receivers’ appointment, and releases from the receivers and secured creditors were a condition precedent of the sale contract. The receivers and secured creditors would not give their consent to the sale without upfront agreement with the liquidators as to the amount they would receive out of the sale proceeds. Negotiations resulted in a term of the HVP sale contract that 70% be allocated to the secured creditors, and the Growers would be entitled to 30% of the consideration referable to the trees grown on the HVP land (see [108]). Davies J reviewed the various bases upon which the liquidators concluded this was in the best interests of Growers, the receivers’ contentions, and the arguments advanced for WAG. Her Honour was satisfied there was a legal foundation supporting the proposed apportionment, and that the liquidators had acted reasonably in reaching the commercial compromise with the receivers as to the proposed allocation of sale proceeds. Her Honour also held that the liquidators were justified and acted reasonably in holding the proceeds on trust until they could be pooled and distributed to Growers with the other proceeds. (See [107-117]).
4. Challenge to sale process
Senior Counsel for WAG challenged the sale process and expression of interest campaign conducted by the liquidators, arguing that “all along” the liquidators wanted to sell the land unencumbered by the Growers’ rights. It was also argued for WAG that there was no real interest in replacing WFL as RE or in selling the land on an encumbered basis, as shown by the “rushed” expression of interest and sales campaign and the “arbitrary rejection” of those who expressed interest to assume the role of RE. However, Davies J noted that there was no evidentiary basis for making that submission, and Mr Crosbie was not cross-examined about it. Her Honour was satisfied on the basis of what was borne out by the evidence that the land was advertised for sale on both an encumbered as well as unencumbered basis, but in the context of the need for urgent funding in order to continue to maintain the plantations to prevent their wastage and the diminishment in value of the trees. Her Honour also took the view that the evidence bore out that the liquidators did not “arbitrarily” reject the expressions of interest to assume the role of RE. (See [119-121])
Her Honour concluded that the liquidators were justified in terminating the project agreements for the following reasons –
1. WFL was hoeplessly insolvent and incapable of continuing to manage the schemes,
2. The schemes themselves would not generate revenue until several years hence,
3. The land and tress were wasting and at risk of fire in the absence of adequate ongoing maintenance arrangements,
4. Davies J was satisfied that the liquidators and receivers had conducted robust sale processes and obtained the best prices reasonable available for the land and trees from financially able purchasers, and
5. No viable restructuring proposal had been advanced in relation to the schemes (other than one). There was no viable alternative that offered the prospect of comparable returns to Growers. (See [122])
For the same reasons the Court held the liquidators were justified in disclaiming the project documents of the contractual and partnership schemes. The forestry management agreements were onerous and unprofitable. (See [123])
5. Further Factors argued to militate against the Court making the directions and orders sought – see [124-128]
WAG raised three other matters it argued were against the Court making the directions and orders sought in these application –
(1) WAG was pursuing with Primary Securities Limited (PSL) the option to have PSL replace WFL as the RE of the unregistered professional investor schemes and the registered schemes. Heads of Agreement had been entered into between WAG and PSL and steps taken towards convening a meeting of Growers. However Davies J noted that PSL’s agreement was conditional, there was no actual restructuring proposal to be put at any meeting and there was no binding commitment on the part of PSL. Davies J held this did not provide justification to refuse the orders and directions sought.
(2) The termination of the project documents would amount to a default under the loan agreements some Growers had with an in-house financier of the schemes. This would bring forward the repayment date of the loans, which would produce a loss and inconvenience to the Growers, at the hand of WFL which as RE was under an obligation to act in the Growers’ best interests. WAG pointed out that the liquidators had failed to bring this matter to the attention of the Court. Again, her Honour held that this matter did not warrant the Court declining to make the orders and directions sought.
(3) WAG also argued that if the Court determined to approve the sale, the Court should direct that the proceeds be held on trust pending a further apportionment hearing, as occurred in the case of Timbercorp. However her Honour noted that (a) it was a term of the main sale contracts and the HVP sale contract that the liquidators allocate and distribute the proceeds of sale as between the Growers, the secured creditors and WFL’s unsecured creditors in the manner proposed and that the Court approve this, and (b)  she was satisified that it was just and beneficial that the Court approve the sale and approve the exercise by the liquidators of the power to terminate and disclaim the project agreements on the basis of the proposed allocations.
 Conclusion
This judgment of Davies J is a blow for Growers who had invested in the Willmott Forests schemes and, as noted above, has been appealed to the Court of Appeal of the Supreme Court of Victoria (leave was granted to appeal on 20 April 2012). We await with interest further developments in this case, including the hearing of WAG’s application for the appointment of receivers to the schemes, the appeal of Davies J’s decision of 9 February 2012 and in turn that of this judgment of 3 April 2012.

Revised version of ATO’s Director Penalty draft legislation released

Posted on by
1

Yesterday the Assistant Treasurer released draft legislation which will introduce revisions to the existing director penalty regime – although not as severe as originally sought. In November last year an earlier version of the legislation had been before Parliament, but was withdrawn by the Government in light of some strong criticisms that it had gone too far – see my post from last year here.

Last year’s version of the proposed legislation would have allowed the ATO to issue proceedings against directors personally for certain company tax liabilities without first issuing a DPN (Directors Penalty Notice), once the liability had remained unpaid and unreported for more than 3 months after the due date. In addition, the tax liabilities for which a director could become personally liable was to to be extended from only unpaid PAYG, as before, to also include superannuation guarantee liabilities.

The latter change has been retained in the new version of the draft legislation, however the former has not. DPNs are still required to be issued to directors before the ATO may issue proceedings against directors personally to recover the relevant company tax liaibilities. Another change to the draft Bill is intended to ensure that new directors have time to familiarise themselves with corporate accounts before being held personally liable for corporate debts. There is also proposed a new defence for directors liable for penalties for superannuation debts where, broadly, they reasonably thought the worker was a contractor and not an employee.

The latest exposure draft of this legislation is again intended to amend the tax law to better protect workers’ entitlements to superannuation and strengthen director obligations, but in a more measured manner. It is also intended to assist in countering phoenix behaviour. The main aspects of the amendments are –

  • extending directors’ potential personal liability for company tax debts to unpaid superannuation guarantee amounts;
  • ensuring that directors cannot have their director penalties remitted by placing their company into administration or liquidation when unpaid PAYG withholding or superannuation guarantee amounts remain unpaid for 3 months; and
  • restricting access to PAYG withholding credits for directors and their associates where the company has failed to pay withheld amounts to the ATO.

You can read the Assistant Treasurer’s press release here and the announcement on the Treasury website here. Note that on the latter webpage, there are links to the exposure draft bill and explanatory memorandum, as well as a “summary document” which sets out industry concerns raised in relation to the previous version of the Bill, and what Treasury’s response has been on each point in the new version. Treasury has called for public consultation and submissions, which are due on 2 May 2012.

Deputy Commissioner of Taxation appeals Kassem and Secatore v COT [2012] FCA 152

Posted on by
Reply

Earlier this month I posted my analysis and commentary regarding the Federal Court’s interesting decision on third party preferences in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152. You can read my post here.

Unsurprisingly perhaps, the Deputy Commissioner of Taxation has indeed lodged a notice of appeal last week on 20 March 2012. As I mentioned, this case does not involve a large sum of money, but does involve arguments the Deputy Commissioner would want to test further. It will be most interesting to see how the Full Federal Court treats this case on appeal, and the issues it raises. If the argument is run on appeal, as I would expect, I am particularly interested to see the Court’s attitude to the ATO unilaterally reallocating payments received in respect of one tax liability to apply them to a different tax liability – for the Superannuation Guarantee Charge – and then relying upon that reallocation to argue the payments could not be preferences. For a fuller discussion of the case and this issue, see my earlier post, link above.

Phoenix companies targeted in suite of draft law reforms introduced

Posted on by
4

Last year right before Christmas, the Gillard government released a set of two draft bills directed at cracking down on phoenix companies – the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). Yesterday was the deadline for submissions on the second of these Bills.

For the uninitiated, a “phoenix company” is a vehicle used by some directors of a failing company, to continue to trade on using a new entity, stepping away from and leaving the unpaid debts of the business in the shell of the old company. In other words, one day a company ceases trading and is left behind with just a pile of debts, and the next day the phoenix company, like the bird from Greek mythology, rises from the ashes, opens its doors and trades on with the same assets and customers. Often, the phoenix company bears a closely similar name to the old company, making it easier to assume the old company’s goodwill. However in some cases, the old company’s reputation is poor, so the phoenix company will trade under an entirely different banner, to avoid the taint of the old name. In either case it is a misuse of the company law concept of limited liability.

In Parliament yesterday, in debate on the second reading of the Phoenixing Bill, Joe Hockey said that Dun and Bradstreet research reveals that of companies that “became insolvent” in 2009-2010, 29% had one or more directors who had previously been involved with a failed, wound-up entity. This compares with 10% during the 2004-05 financial year. It would appear, then, that phoenix activity is on the rise. The ATO has been reported as stating that there are about 6000 phoenix companies in Australia and from 7500 to 9000 directors who will have personal liabilities under this legislation.

It was a curious move, for the government to release the two bills just 5 days before Christmas, and give interested parties tight time-frames to respond, largely running through the Summer break period – 24 January in the case of the Phoenixing Bill and 29 February for the Similar Names Bill. (Note that although the submissions received by Treasury have not been published, the Phoenixing Bill has already been introduced and read in the House of Representatives on 15 February 2012, the second reading debate has taken place yesterday and today.) This haste is especially surprising after last year’s false start as to other draft legislation designed to combat phoenix companies and rogue directors, in particular with regards to company’s taxation liabilities. On 24 November 2011 I posted the news that the government had withdrawn a bill then before Parliament, which was to increase the ATO’s powers to pursue directors personally for certain company tax liabilities – without first issuing a DPN, and broaden the range of taxes for which a director could be made personally liable – you can read my post here.

Earlier today, the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP, issued a press release to the effect that Tony Abbott and the Coalition have announced that they will “say no” to the Phoenixing Bill, which Mr Bradbury described as legislation that would ensure workers are able to access their entitlements where directors have abandoned a company. Unsurprisingly, Mr Bradbury used expressions such as “workers [should not be] dudded out of their entitlements…” and the punchline was “Tony Abbott and the Coalition should stop saying ‘no’ and back this legislation so that workers are not left out in the cold.” However the speeches I read in Hansard do not suggest a blocking of the proposed measures, rather an urge for a more careful and less hasty consideration of aspects of them.

In any event, that’s the political spin. Here is the substance of the proposed new laws.

Phoenixing Bill

This Bill proposes amendments to the Corporations Act 2001 (Cth) (the Act) which would give ASIC certain powers to address phoenixing activity. In particular, the Bill gives ASIC the administrative power to order the winding up of abandoned companies. The power would be triggered when, amongst other grounds, it appears to ASIC that a company is no longer carrying on its business.

The primary aim of this measure is the protection of workers’ entitlements, and indeed is part of the range of reforms included in the government’s Protecting Workers Entitlements Package, a 2010 federal election commitment confirmed by announcement in the 2011-12 Budget.

Already, workers employed by a failed company can seek to recover certain unpaid entitlements through the Government’s General Employee Entitlements and Redundancy Scheme (GEERS). However they can only do so if the company is placed into liquidation, which is of no assistance if the directors have simply walked away from the company without winding it up.

ASIC’s proposed new power to order the winding up of a company will enable employees more swiftly to access GEERS. It will have the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct.

A secondary set of measures in this bill are cost-saving measures aimed at facilitating the publication of corporate insolvency notices on a single publicly available website, rather than in the print media or the ASIC gazette.

Similar Names Bill

The Similar Names Bill proposes amendments to the Act which will impose personal joint and individual liability on a director for debts of a company that has a similar name to a pre-liquidation name of a failed company (or its business) of which that person was also director for at least 12 months prior to winding up. You might want to read that sentence again. The debts for which a director could become personally liable are debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. Five years. You might want to read that again too.

The bill is not proposed to have retrospective effect. It will only apply to debts incurred after the legislation comes into force, and where the winding up of the old company commenced after the legislation comes into force. Directors would not be liable for the debts of the new company when the failed company has paid all of its debts in full. There is the incentive for directors not to try to walk away from a failed company leaving unpaid liabilities in its shell. However on one view, it is a surprising approach to take, which has already lead to some confusion (see below).

Innocent directors could avoid liability by obtaining an exemption from liability from the liquidator, or a similar Court-ordered exemption, if they can establish they have acted honestly and, in all the circumstances, ought fairly to be excused from liability. Some of these concepts will be already familiar to corporations lawyers.

The liquidator, or the Court, in considering whether to grant an exemption must take a number of matters into account, including whether there were reasonable grounds to suspect insolvency at the time debts were incurred by the failed company (more familiar concepts). Another matter the liquidator or the court must consider is, in broad terms, how brazen has been the extent of “phoenix activity” in the particular case. Specifically –

  • the extent to which the new company has assumed the assets, employees, premises and contact details of the failed company, and
  • whether any act or omission by the directors was likely to create the misleading impression that the new company was the same company as the failed company.

Of course one can see the clear potential for directors of multiple companies with related names in the same corporate group to get caught by these proposed new laws. The Bill does seek to address this. It provides an exemption for directors of a similarly-named company that was carrying on business in the 12 months before the commencement of the winding up of the failed company. A question will be whether this exemption goes far enough to avoid the imposition of liability on directors with no involvement in phoenix companies or activity , beyond the intended scope and focus of these reforms.

Commentary

I have to confess when I started reading the exposure draft of the Similar Names Bill and its explanatory document, I was expecting to see that the directors of the phoenix company were being made personally liable for the liabilities of the failed company that they had sought to shed, by leaving them behind in the shell of the failed company. However, clause 596AJ of the Bill imposes personal liability upon directors for the debts of the new company, referred to as the “debtor company”, not the debts of the failed company. Unfortunately, the drafters of the explanatory document accompanying the exposure draft of the bill were confused themselves. They explain clause 596AJ accurately as imposing liability for debts of the debtor company. However in the passages explaining Court-ordered exemptions from liability (under clause 596K(1)), they refer to exemptions for liability of “some or all of the debts of the failed company to which the person is otherwise liable under clause 596AJ”. I re-checked the exposure draft again, and this explanation is inaccurate. It is to be hoped that there will be no such confusion in the final version of the Bill and its explanatory memorandum, when those documents are finalised post-submissions.

Effectively, if a phoenix company is formed, directors will want to be confident as to its trading health and adequacy of its working capital, as they may be personally liable for the debts of the new company for the next five years. This is bound to raise concern in the business community, because there may be circumstances were some directors become personally liable for something they were not involved in and were not aware was going on, through no fault or carelessness of their own. Query whether the scope for obtaining exemptions appropriately protects them, when that process could easily turn out to be expensive and drawn out. Even if a director successfully obtains an exemption from the liquidator of the failed company, without having to go to Court, clause 596AL(7) provides that the liquidator is entitled to be paid “reasonable remuneration” for making an exemption determination. Paid, that is, by the director.

Another problem may be that some phoenix companies (with same assets, same employees, same premises, same contact details, same customers) use different names from that of the company whose business they assumed, because the old name is tainted and the new entity has not wish to be affected by it. It would appear that such phoenix companies will not be caught by the proposed new laws.

Another issue is that the Similar Names Bill only addresses situations where the new company uses a similar company name to the old company or business. If the new company uses a similar business name, this would not appear to be caught by the Bill as presently drawn.

Also, the Bill does not seek to define the where the line is drawn in terms of the degree of similarity required before a name is deemed to be so similar as to “suggest an association with the failed company”. It is unknown if this omission was deliberate or not, but it could be said to be asking for trouble to provide no better guidance to the business community, and to the Courts which will be required to apply these laws.

Conclusion

I suggest it may be better if Treasury takes a more measured approach to the finalisation of the Similar Names Bill, including better consultation with the public and interested bodies than it allowed with regards to the Phoenixing Bill, and a more careful consideration of the ramifications and potential gaps or shortcomings of the Bill as presently framed. We can await developments with interest.

On a final note, on 27 January 2012, Treasury also announced the release of an exposure draft of another bill: the Personal Liability for Corporate Fault Reform Bill 2012, for which the closing date for submissions is 30 March 2012.  This is described as the first tranche of proposed amendments to Commonwealth directors’ liability legislation, and covers Treasury (non-taxation) legislation. The stated aim of these reforms is to harmonise the principled approach to the imposition of personal criminal liability for corporate fault already provided for across Australian jurisdictions. Treasury’s announcement may be read here.

Re Willmott Forests Ltd – Disclaimer of onerous property by liquidators – does the disclaimer of a lease by the landlord company’s liquidator extinguish the tenant’s proprietary interest in the land?

Posted on by
5

On Thursday (9 February), Davies J of the Victorian Supreme Court handed down her decision on a preliminary question which she was asked to decide on application by the liquidators of Willmott Forests Ltd (WFL), supported by the receivers and both Grower group intervenors.

The preliminary question was this:

Were the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?

Her Honour Justice Davies concluded that the answer to the question was “No“.

As many of you will know, Willmott Forests is one of the more recent large agribusiness managed investment schemes to collapse, following in the steps of Great Southern, Timbercorp and Environinvest. Receivers and managers (Mark Korda, Mark Mentha and Bryan Webster of KordaMentha) were appointed by the Willmott Group’s banking syndicate on 6 September 2010, the same day the Willmott Group was placed into voluntary administration and Avitus Fernandez of Fernandez Partners was appointed administrator. Ian Carson and Craig Crosbie of PPB Advisory were appointed administrators of the Willmott Group by order of the Federal Court on 26 October 2010, replacing Mr Fernandez. Mr Carson and Mr Crosbie then became the liquidators of the Willmott Group when the companies were all placed into liquidation on 22 March 2011.

WFL was the responsible entity and/or manager of 8 registered MIS, 6 unregistered “professional investor” MIS, 11 unregistered contractual MIS, and 5 unregistered partnership MIS. These MIS were forestry operations conducted on land either owned by WFL or leased by WFL from third parties. The MIS members or “Growers” had rights to grow and harvest trees on that land under project documents that included lease and licence agreements with WFL for the use and occupation of the land.

After their appointment, WFL’s liquidators had entered into 6 sale contracts for the sale of part of the freehold land, unencumbered by Growers’ rights, including Growers’ rights under leases and licences. A transfer of clear title to the land could not be effected unless Growers’ rights were terminated or extinguished.

On 29 June 2011, the liquidators of WFL sought and obtained directions from Dodds-Streeton J of the Federal Court that they were justified in –

(a) amending the constitutions of the registered MIS and certain investment deeds to confer on WFL a power to terminate Growers’ rights, on condition that Court approval is obtained before doing so; and

(b) disclaiming the project documents of other MIS as onerous pursuant to s 568(1) of the Corporations Act 2001 (Cth), on condition that the Court’s consent is obtained before doing so.

The Federal Court had expressly left the above-described preliminary question open in making the orders and directions of 29 June 2011.

It was a condition precedent of the sale contracts that by 31 January 2012, the liquidators obtain that approval and consent from the Court. (That date was later extended to 15 February 2012.)

The liquidators applied to the Court to obtain those orders, directions under s 511, and approval of their entry into the sale contracts under s 477(2B). The receivers of WFL support the liquidators’ application for those orders, directions and approval, but the Willmott Growers Group Inc and the Willmott Action Group Inc – who both had leave to intervene as contradictors – oppose it. All parties did, however, support the hearing and determination of this preliminary question as to whether the liquidators can disclaim the Growers’ leases with the effect of extinguishing their leasehold estate or interest in the subject land.

Relevantly, s 568 of the Act gives liquidators power to disclaim certain “property of the company”, including land burdened with onerous covenants, shares, property that is difficult to sell, property where the costs of selling it would exceed the proceeds of sale, and contracts. S 568(1A) provides that a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land)  except with leave of the Court. S 568(1B) provides for the Court’s power on such an application, and states that the Court may grant such leave subject to conditions, or may make orders about the contract as it considers to be just and equitable.

Section 568D(1) makes it clear that the effect of disclaimer is to terminate the company’s rights, interests, liabilities and property “for or in respect of” the disclaimed property, but that third party rights or liabilities are not affected by the disclaimer “except so far as is necessary in order to release the company or its property from liability”. Her Honour discussed the legislative intent and the authorities as to how the disclaimer provisions operate, including this remark by Lord Nicholls of Birkenhead in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 at 87 about the UK disclaimer provisions:.

“Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.”

The liquidators submitted that as with the reverse position in Hindcastle Ltd v Barbara Attenborough Associates Ltd (disclaimer by the tenant) when a lease is disclaimed by the liquidator of the landlord, the leasehold estate also ceases to exist – the tenant’s rights are extinguished. Davies J disagreed.

Her Honour took the view that the tenant’s proprietary rights in the land will continue to subsist, even though the effect of the disclaimer is that the landlord’s interests and liabilities under the lease contract have been terminated [11]. She was supported in her conclusion by –

  • Re Bastable; Ex parte The Trustee [1901] 2 KB 518 – Romer LJ held that where a trustee in bankruptcy of the vendor of a contract of sale of land disclaims the contract, he does not put himself in the position of owner of the estate, freed altogether from the purchaser’s equitable interest in the land;
  • Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 – Young J held that a disclaimer by a liquidator of an option agreement the company had entered into in respect of land it owned could not have the effect of divesting any equitable interest of the option holder, if held to exist (although the case was decided on the basis that the option holder did not hold any interest in the land).

Her Honour held that the statement of principle in Hindcastle Ltd v Barbara Attenborough Associates Ltd was expressly confined to disclaimer of a lease by the liquidator of the tenant, and the reasoning was inapposite to the disclaimer of a lease by the liquidator of the landlord, with respect to the impact on the tenant’s leasehold interest [13].

Davies J acknowledged that a disclaimer nonetheless will impact on the rights and liabilities of the tenant to the extent necessary to release the company or its property from liability. The liquidators pointed out that the Growers’ rights as lessees to occupy the land is interdependent with the rights and liabilities of the landlord to lease the land, such that a disclaimer of the lease by the landlord must mean the termination of the Growers’ leasehold estate in the leased property. Otherwise, so the liquidators argued, the disclaimer of the lease would be inutile. Her Honour said that this can be accepted, however it does not provide the answer.

Davies J returned attention to the language of the section (s 568D(1)): Is the termination of the Growers’ leasehold estates necessary to release WFL or its property from liability?

Her Honour held that it was not. Her Honour held that a tenant has different legal rights in the subject property than the rights attaching to the landlord’s reversionary interest. She noted that the property proposed to be disclaimed was the contract for lease, under which WFL had already leased the land to the Growers. Thus, so her Honour reasoned, it was unnecessary to interfere with the Growers’ property rights in order to release WFL from its liability to lease, because the leases had already been effected. The judgment can be read in full here.

An interesting conclusion. The Willmott Action Group have already reported the decision on their website and are understandably delighted. It would seem that the liquidators of Willmott Forests Ltd are in something of a pickle.  A transfer of clear title to the freehold land cannot be effected unless the Growers’ rights are terminated or extinguished. For the 16 contractual and partnership MIS at least, disclaiming the project documents has not been effective to achieve this. The application for the rest of the orders and directions will return to Court for further hearing on 27 February 2012, however the conditions precedent for the sale contracts were to be fulfilled by 15 February 2012 – in just 3 days time. We will await the next development with interest.

COT v National Skin Institute (Aust) PL – Full Federal Court rules on the Commissioner’s practice re affidavits in support of winding up applications

Posted on by
Reply

This winding up application had been brought in the Federal Court. Although it was unopposed, it was referred up to the Full Court pursuant to s 20(1A) of the Federal Court of Australia Act 1976 (Cth). This occurred because an issue of general application had arisen concerning the admissibility of three paragraphs in the Commissioner’s affidavit in support of the winding up application. They are standard paragraphs, as many of you will recognise, that the Commissioner has been using for years in such affidavits, as to the sum demanded in the statutory demand remaining due to the Commonwealth and payable by the defendant company.

The Commissioner sought to have the issue resolved for the benefit of future applications and also in relation to past winding up applications. In an unrelated case heard in December last year by Rares J, his Honour had there held that those three paragraphs were inadmissible. One can imagine the scale of the problem this  issue might have become for the Commissioner, given how many wind up applications the Commissioner instigates each year.

The three paragraphs in question were paragraphs 3, 4 and 8 of the affidavit in support, which had been sworn by an officer of the Commissioner. They were as follows –

“3.  The following facts are within my own personal knowledge and from my perusal of records and information in the possession of the Plaintiff to which I have access and with which I am familiar in my capacity as an officer of the Australian Taxation Office.

4.  On 1 June 2011 the Defendant was indebted to the Plaintiff in the sum of $400,690.50 which sum was then due by the Defendant to the Commonwealth of Australia, payable by the Defendant to the Commissioner of Taxation, and recoverable by the Plaintiff under and in pursuance of the provisions of the Taxation Administration Act 1953….

8.  At the date of affirming this affidavit, the sum demanded of $400,690.50 remains due to the Commonwealth and is payable by the Defendant to the Plaintiff.”

Before their Honours Finn, Gordon and Murphy JJ, it was argued that those paragraphs were inadmissible as they infringed the hearsay rule in s 59 of the Evidence Act 1995 (Cth) because:

  • paragraph 3 did not state the information the deponent accessed, and
  • in paragraphs 4 and 8, the deponent’s statement was mere assertion and did not state the source of her knowledge.

It was submitted that s 459Q(c) of the Corporations Act 2001 (Cth) (the Act) required the Commissioner to adduce admissible evidence to “prove” each element of the case including as to his standing as a creditor of the Company.

Regulation 5.4 of the Federal Court (Corporations) Rules 2000 also prescribes what is required of an affidavit in support of a winding up application. Their Honours made several points about regulation 5.4, one of which was that given the relationship between s 459Q and r 5.4 , the provisions need to be read together [at 13]. They observed that s 459Q requires that the deponent verifies  that the debt or total of the debts is due and payable by the company and complies with the Rules, while r. 5.4 requires that the deponent state whether, and if so to what extent, the debt or debts is still due and payable by the company at the date of making the affidavit.

Their Honours then reviewed the authorities and the legislative context of s 459Q, which was part of the reforms introduced in June 1993 by the Corporate Law Reform Act 1992 (Cth). They concluded that what is required is formal affirmation, and not proof or substantiation [at 14-20]. This accords with the approach taken by Hayne J in AZED Developments Pty Ltd v Frederick & Co Ltd (in liq) (1994) 14 ACSR 54 at 46, in the context of s 459E of the Act, where his Honour said that the statutory scheme plainly indicates an intention that the verification required by the Act and Rules is different to and less than a requirement to prove or demonstrate the debt by good evidence [at 22].

Their Honours made a couple of interesting points towards the end of their judgment, including that –

  • Under s 467A of the Act the Court may grant a winding up application notwithstanding non-compliance with s 459Q if the Company has not suffered substantial injustice. In other words, their Honours said, the parliamentary drafters of the Corporations Act accepted that compliance with s 459Q was required but recognised that non-compliance would not necessarily lead to the dismissal of the application [at 25];
  • Even if the paragraphs in dispute were inadmissible, which the Full Court found they were not, the Registrar would still have been entitled to consider them. This is because where a matter is unopposed, a judge or Registrar is at liberty to take evidence into consideration which is neither irrelevant nor prohibited by an absolute rule of law, notwithstanding that it could be objected to by an interested party, were the party present, on the ground or ground of privilege or other rule of evidence: Re Lilley, deceased [1953] VLR 98 at 101 [at 26].

Their Honours ordered that the Company be wound up in insolvency. The judgment is not long, and may be read here (full name Deputy Commissioner of Taxation v National Skin Institute (Aust) Pty Ltd [2012] FCAFC 2).

To conclude on an irrelevant but mildly amusing note, I would like to quote from Rare J’s judgment in December 2011 mentioned above where, in considering certain provisions of the Taxation Administration Act 1953 (Cth), his Honour reveals some perhaps long-felt frustration with the manner in which legislation is often amended –

“6.  The unfortunate Byzantine modern tendency of Commonwealth Parliamentary drafters to include amendments to legislation that have a series of letters after them makes the explanation of these provisions more difficult and hard to comprehend. Re-enactment of legislation with appropriate renumbering of provisions such as s 8AAZJ would simplify the comprehensibility and explanation of legislation. The absurd use of such lettering was also found in the criminal cartel provisions in ss 44ZZRF and 47ZZRG of the Trade Practices Act 1974 (Cth) that was misleadingly retitled, but not comprehensibly structured, as the Consumer and Competition Act 2010 (Cth). These are the central provisions that will have to be explained to juries, using two numbers and four letters, each time the section is mentioned in argument either to the judge or jury.”