More on Willmott Forests (VSCA) & Grimaldi (HCA special leave refusal), plus new edition Mortgagee’s Power of Sale out soon

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First, further to my post on Wednesday discussing the Victorian Court of Appeal’s recent decision on disclaimer of leases by liquidators in Willmott Forests (link), my friend and colleague Sam Hopper has put an excellent analysis of the case on his blog here.

Secondly, I posted last month that the High Court of Australia had denied special leave to appeal to Mr Grimaldi, from the Full Federal Court’s important decision in Grimaldi v Chameleon Mining. That post can be viewed here and includes links to my article and other previous posts about this case. If you recall, key issues of equity and company law arose in the Full Federal Court’s decision, including de facto directors, Barnes v Addy (both limbs), secret commission/bribes, directors’ fiduciary duties and equitable remedies.

I had promised to return and post an update as to the High Court’s refusal of special leave to Mr Grimaldi. In short, the transcript (link) shows that the special leave application centred on the issue of de facto directors and officers, and that special leave was refused on grounds which included –

1. Even if Mr Grimaldi was not a director or officer, on his own case he acted as a third party consultant. Chameleon Mining had good prospects of demonstrating on the findings made that in that role he would have owed fiduciary duties to the company, and that he knowingly participated in a breach of duty by an appointed director (Mr Barnes) of the company. Thus Chameleon Mining had good prospects of demonstrating that the relief ordered by Jacobson J (and undisturbed on appeal) is supportable, even if Mr Grimaldi were not a director or officer. The contemplated appeal would therefore be futile;

2. Even if Mr Grimaldi were not a director, he was an officer. The Full Court’s reasoning is consistent with the more recent High Court decision in Shafron v ASIC [2012] HCA 18; (2012) 86 ALJR 584 (link );

3. Mr Grimaldi had insufficient prospects of demonstrating that the Full Court erred on the director issue. He had alleged that the Full Court failed to consider the governance structure of Chameleon Mining. As Heydon J observed, in fact it did.

Thirdly and finally, the third edition of Mortgagee’s Power of Sale will be released soon, written by Clyde Croft J and Robert Hay. The previous edition was released in 2004, so the updated edition will be an excellent and current resource for practitioners. For more details, see Robert’s post on his property law blog here.

Full Federal Court pronounces on third party preferences and the ATO’s practice of reallocation of payments

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Last Friday the Full Federal Court handed down its much anticipated decision in Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124.  The judgment addresses the interesting and commercially significant issue of third party preferences. It also addresses the even more interesting issue of the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (such as the integrated client account) to another (such as the superannuation guarantee or “SGER” account), and whether that enables the Commissioner thereby to avoid the reach of the unfair preference provisions.

In short, like the judgment at first instance, the result again was a comprehensive loss for the Commissioner. The appeal was dismissed with costs. The joint judgment of Jacobson, Siopis and Murphy JJ may be read in full here. My analysis of Nicholas J’s judgment at first instance in March, with more details of the facts of the case, may be read here.

Background

Briefly, third party preferences are where an insolvent company’s debt is paid by a third party (often a related entity), and the recipient creditor – here, the ATO – defends an unfair preference claim by the liquidator by pointing to the fact that the payment was made not by the company but by a third party, and arguing that the payment is not voidable as an unfair preference as it falls outside the reach of s 588FA (and s 588FC) of the Corporations Act 2001 (Cth) (“the Act”).

In this case, the tax debts of the insolvent company Mortlake Hire Pty Ltd were paid to the Tax Office by a related company Antqip Pty Ltd. This gave rise to the first substantial argument run on appeal. The Commissioner contended that what took place by Antqip paying Mortlake’s tax debts for it, was a substitution of a new creditor of Mortlake’s (Antqip), for the existing creditor (the Commissioner). On this basis, so the Commissioner argued, there was no unfairness, thus there was no “unfair preference” and therefore the payments were not caught by the provisions.

The second substantial issue concerned the purported exercise of power by the Commissioner to allocate payments received from, or on behalf of, Mortlake to an account other than that to which the funds were initially credited. The payments totalling $70,000 had been made by EFT into an ATO account, the integrated client account, for Mortlake’s indebtedness for its primary tax debts which were said to consist of income tax, GST and other related liabilities and exceeded $600,000. Four months later, the ATO had unilaterally reversed the payments made into that account and reallocated the payments to the superannuation guarantee or SGER account. Their Honours described this as a purported exercise by the Commissioner of his power under s 8AAZD of the Taxation Administration Act 1953 (Cth) (“the Administration Act”).

Tellingly, their Honours noted that this reallocation was made shortly before the commencement of the winding up of Mortlake [at 7]. What lead to this action was revealed by a file note dated 31 July 2007 made by an ATO employee. The employee had telephoned the New South Wales Supreme Court to ascertain the hearing date for a winding up application that had been filed against Mortlake. The employee was told the hearing date was set for 23 August 2007 [see 23].

At first instance, his Honour made what the Full Court described as several critical factual findings  [see 25-37] –

1. That although the funds were physically transferred to the integrated client account by Antqip, they were funds lent by Antqip to Mortlake and paid to the ATO at Mortlake’s direction;

2. That the moneys borrowed by Mortlake were applied by it in payment of a pre-existing debt;

3. That the relevant “transaction” for the purposes of s 588FA of the Act was a bipartite transaction between Mortlake and the Commissioner, not a tripartite transaction which included Antqip;*

4. That the “reallocation” by the Commissioner had the effect of increasing the balance recorded in the integrated client account and reducing the indebtedness recorded in the SGER account. The Full Court observed that Nicholas J’s use of the word “reallocate” suggested he was of the view that the funds had been initially allocated to the integrated client account;

5. That the evidence established there was little prospect of the Commissioner receiving any dividend out of the winding up.

* Respectfully, I suggest that the Full Court were wrong in this. They say that this conclusion is “clear from what his Honour said at [36]”. Respectfully, in my view, it is not. His Honour had at [36] expressed that he was “satisfied that Mortlake and the Commissioner were parties to transactions whereby the Commissioner received $70,000 from Mortlake”. Those are conditions which must be met before the preference provisions can apply – see ss 9 and 588FA(1)(a) and (b) , and see the discussion below. What Nicholas J said does not, in my view, suggest there were no other parties to the transactions, which of course Antqip was as the third party which actually made the payments, from its own funds, on Mortlake’s behalf.

First issue – “Substitution”, “transaction” and “unfairness”

“Substitution” and “Transaction”

On appeal, the Commissioner argued that Antqip was substituted as creditor for the Commissioner, as it stepped into the Commissioner’s shoes by paying Mortlake’s debt. Counsel cited no authority for this argument, and it was rejected by the Full Court as contrary to the proper characterisation of the transaction in question (see [38-39]).

The source of the payments was the bank account of Antqip, and this was said to be a clear example of a lender paying moneys advanced to a borrower’s creditor in accordance with the borrower’s directions. The Full Court observed that the position was no different than if Mortlake had borrowed the funds on overdraft from its bank and paid the creditor with those funds (see [63]).

Even if the payments were not properly characterised as a loan from Antqip to Mortlake, the Full Court noted that the payments by Antqip to the ATO were made by or on behalf of Mortlake [42] . Their Honours said that: “the transaction which s 588FA then looks at is the transaction between Mortlake and the Commissioner. That was the approach taken by Gordon J in Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339 [link] where payments were made to a creditor by a related company of the insolvent debtor.”

I pause here to suggest, respectfully, that the brevity with which the Full Court summarised Gordon J’s approach in Burness to what is a “transaction” in this context, coupled with the other matter referred to above, could create problems for Courts – and indeed companies engaging in commercial activity – seeking to apply this judgment. In my view, respectfully, it over-simplifies the analysis that her Honour undertook in Burness and often falls to be undertaken by the Courts in evaluating whether a third party payment of a company’s debt to a creditor can be treated as part of one multi-step dealing that is caught by the definition of a “transaction” in s 9 and 588FA of the Act. And it glosses over the analysis as to whether that transaction can be treated as one by the company, in the sense that (1) the company must be a party to the transaction (ss 9 and 588FA(1)(a); (2) the unfair preference must be “given by the company” under s 588FC; and (3) the creditor must have received more “from the company” than it would if it had to prove for its debt in the winding up (s 588FA(1)(b)) . (There are many cases, but the principal authority is Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; see also Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 245 ALR 528 (link))

In Burness, Gordon J’s analysis on this focussed primarily on the question of whether before a payment made by a third party of a failing company’s debt can be taken to be a payment “accepted” or “made” by the debtor company, there must be evidence of an arrangement between the debtor and third party whereby  the debtor directed or authorised the third party to make the payment, or the third party was under an obligation to the debtor to do so. Her Honour’s view was that the evidence did not need to go so high; “where the third party payment is authorised by the debtor, nothing more is required. The debt is discharged by the third party at the request of or with the acceptance of the debtor” (see [45-46] and indeed [34-47] of Burness). The reason the problem arises is that if the third party payment is unauthorised by the debtor, in law the debt is not necessarily discharged (although it may be subsequently ratified or accepted by the debtor). Without the debtor’s act making the third party’s payment effective to discharge the debtor’s debt owed to the creditor, it is more difficult for a Court to find that the debtor was a party to the transaction (as required by s 588FA) and in effect made the payment to its creditor, using the third party as its instrument.

To return to the present judgment – The Full Court noted that the conditions required for the transaction to fall within s 588FA(1) were satisfied – the company Mortlake and the creditor the Commissioner were parties to the transaction, the transaction resulted in the Commissioner receiving from Mortlake more than he would receive if the transaction were set aside and he were to prove in the winding up [at 44-46].

“Unfairness”

The Commissioner then submitted that the payments could not fall within the definition of an unfair preference in s 588FA(1), because “unfairness” is a necessary element of the definition and, in his submission, there was nothing in the payments that satisfied this requirement. Their Honours reviewed the authorities and at [54-55] said this –

“[T]he observations of the plurality in Airservices and the doctrine of ultimate effect, as applied by Ormiston JA [in Dye] to the present statutory regime, provide a short answer to [the Commissioner’s] submissions. This is because in the present case there are only two transactions between the debtor and the creditor, each of which consisted of a payment which had the ultimate effect of extinguishing the indebtedness of Mortlake to its creditor. That is to say, each transaction had the effect of paying the Commissioner 100c in the dollar in respect of Mortlake’s indebtedness of $70,000…[T]he payments constituted an unfair preference because the Commissioner received full payment of the debt whereas other creditors would receive nothing in the winding up. As Ormiston JA explained in Dye at [39], s 588FA was intended to strike down transactions that would dislocate the statutory order of priories among creditors…That is what happened in the present case.”

The Commissioner ran the submission there was no unfairness because the payments did not result in a decrease in the net value of assets available to meet the demands of other creditors. The Full Court held there was such a decrease and stated that they did not then need to determine whether there must be a diminution in the value of the debtor’s assets for a payment to be caught by the provision (see [58-61]). (See the similar argument run by the defendant in Burness at [49], although advanced in a different way.)

Second issue – Allocation of payments by the Commissioner 

The Commissioner pointed to his power to allocate payments to the SGER account by virtue of the provisions of Div 2 of Part IIB of the Administration Act. Section 8AAZD confers power on the Commissioner to allocate a primary tax debt to an RBA, such as the SGER account, which had been established for that type of tax debt. In exercising the power of allocation, the Commissioner is not required to take account of any instructions from a tax payer: see s 8AAZLE (at [68]).

The Liquidator submitted that the two payments in question were allocated to the integrated client account. He pointed to the crediting of the two payments to the integrated client account, and relied on the fact that interest charged by the ATO on the balance of that account had been calculated taking account of the reduction of the balance by virtue of the two payments.

Once so allocated, he submitted, they constituted the relevant transaction for the purposes of s 588FA(1) (see [69]). The Full Court agreed [79], holding that the transactions that fell to be considered under s 588FA(1) were the two payments made in March and April 2007. On this approach, the Commissioner’s reallocation was irrelevant to the question of whether the transactions fell within s 588FA(1).

On the evidence, their Honours could not determine whether there was an actual agreement between Mortlake and the ATO to appropriate the $70,000 to the integrated client account [77]. Therefore, their Honours said, the rule in Clayton’s Case would apply and the payments are presumed to be appropriated to the debts in the order in which the debts were incurred. However there was no evidence to establish that sequence.

Nevertheless, the Full Court saw considerable force in the Liquidator’s submission that the ATO Tax Agent Portal, recording the payments and the interest charge referred to, gives rise to a strong inference that the payments were allocated to the integrated client account. This was reinforced by the fact that the payments remained credited to that account, in full satisfaction of the pre-existing debt of $70,000, until the reversal on 1 August 2007 [78]. As noted above, their Honours concluded that the two payments were the relevant “transaction” and thus the ATO’s later reallocation and the argument they sought to mount as to the priority accorded the Commissioner for payments of superannuation guarantee charge liabilities was irrelevant.

Their Honours noted at [80 onwards] that even if they were wrong on that, the allocation or reallocation on 1 August 2007 did not change the result, in that the Commissioner still received more than he would were he to prove for the debt in the winding up, and thus received an unfair preference.

The Full Court observed that it was also implicit in the Liquidator’s submissions that on the proper construction of s 8AAZD of the Administration Act, 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 [70]). The Full Court took the view that it did not need to determine this question [88].

However in the final two paragraphs of their judgment, the plurality went on to observe that there was a further answer to the Commissioner’s claim to be able to rely upon the purposed (re)allocation which took place on 1 August 2007. The Full Court went further than the judge at first instance had done, and made a specific finding that it was plain the Commissioner took the step of reversing and (re)allocating the payments 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 on 23 August 2007” [90]. 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 amongst creditors.”

Yet, so their Honours specifically held, “that is precisely what the Commissioner intended to achieve”.

An extraordinary case. The Commissioner’s appeal was dismissed. The fact that costs were awarded against the Commissioner, suggests that despite the fact that only $70,000 was at stake and that the principles are clearly of some importance, the Commissioner has not been funding the Liquidator’s costs as is sometimes done in “test cases”. One cannot help but wonder how the Commissioner will respond to this loss at Full Federal Court level – whether he will bat on and seek special leave to appeal, or call it a day. We await any further developments with interest.

Postscript:  A final word on unilateral reallocation of payments between accounts by the ATO

The argument that the Commissioner sought to mount, relying upon his office’s unilateral reallocation, warrants a moment of slower scrutiny:  that the effect of the reallocation was to elevate the priority of the debt in the winding up of Mortlake in accordance with the provisions of s 556 of the Act, so as to give it priority over other unsecured debts. The Commissioner contended that this had the consequence that the payments could not constitute unfair preferences because, at the time of the allocation to the SGER account, there were no other outstanding debts with priority equal to or higher than that which applies to the superannuation guarantee charge under s 556(1)(e) of the Act.

If this argument had succeeded, it would mean that for each corporate taxpayer sinking towards liquidation, the Commissioner could take steps to artificially circumvent the operation of the preference provisions and stride ahead of other unsecured creditors. All the ATO need do is reverse the allocation of payments made into the taxpayer’s integrated client account, reallocate them to the SGER account, and then claim the payments were thereby out of the liquidator’s reach.

If the Commissioner is unconstrained in purporting to exercise his allocation power under s 8AAZD of the Administration Act in this way, and rely upon it to seek such an advantage, one wonders what the answer might be to this rhetorical question:

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 Commissioner from purporting to exercise  his allocation power to reallocate in the other direction? That is, what is to stop the ATO from enlarging the company’s SGC liability balance by reversing payments already made against it and reallocating them instead against GST liability recorded in the integrated client account, thereby artificially enlarging the debt that can be claimed personally against the directors? I note that the ATO has previously sought to have the DPN regime extended by the legislature to other tax liabilities including GST liabilities, however Parliament (or rather, the Parliamentary committee) has declined, and limited the extension of the DPN regime beyond a company’s PAYG to now also its super guarantee charge liability. Conceivably, the ATO could skirt around that legislative constriction too, to enlarge the size of the personal liability it can sheet home to directors. Troubling.

Re Willmott Forests Ltd – Vic Court of Appeal pronounces on whether a disclaimer of lease contracts by liquidators also terminates the lessees’ proprietary interest

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Last week the Victorian Court of Appeal (Warren CJ, Redlich JA and Sifris AJA) handed down judgment in the Willmott Forests Ltd appeal – Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202. The judgment in full may be read here.

The question on appeal was whether or not a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) (the Act). In short, the Court of Appeal held that it was. In February, Davies J of the Victorian Supreme Court had held that it was not. My earlier analysis of her Honour’s judgment may be read here.

[For completeness: Davies J subsequently handed down her judgment on the balance of the questions upon which judicial advice had been sought by the liquidators of Willmott Forests Ltd (WFL) pursuant to s 511 of the Act in April. That judgment was not part of this appeal, which concerned solely the preliminary question her Honour had decided  in February. However, should you wish to read my analysis of her Honour’s April judgment, it may be accessed here.  It includes an overview of the Willmott Forests managed investments schemes and how they were structured. Under sub-heading 3(a) “Allocation of Sale Proceeds”, there is also a useful sketch of the practical circumstances of the scheme plantations and how they were operated.]

Background

Broadly, WFL had leased certain properties to Growers (the investors in the schemes) on 25 year terms, upon which land the various Willmott Forests plantations were situated. WFL was the responsible entity and/or manager of the various forestry managed investment schemes. WFL’s liquidators wished to sell WFL’s interest in the properties, unencumbered by the leases. The liquidators proposed to disclaim the lease agreements in order to achieve and complete the sales, and sought court approval of such disclaimers and judicial advice as to certain questions that arose therefrom.

At First Instance

At first instance, before Davies J the Growers/lessees had argued that disclaimer of the lease contracts does not extinguish their proprietary interest in the land. Davies J agreed. Her Honour also held that the leasehold interests could not be characterised as liabilities or encumbrances upon the property of the lessor, and it was consequently not necessary to extinguish such interests.

For a more detailed understanding of how the lessees’ argument was mounted – and accepted – I refer you to my earlier post here. For present purposes, the judgment on appeal of Warren CJ and Sifris AJA  at [20] includes a very neat summary of the reasoning of Davies J’s first instance judgment as follows –

(a) A lease creates both contractual and proprietary rights;

(b) Under s 568D(1) of the Act, the effect of a disclaimer is to terminate ‘the company’s rights, interests, liabilities and property in or in respect of the disclaimer property, but does not affect any other person’s rights or liabilities except so far as necessary in order to release the company and its property from liability‘ [emphasis added],

(c) Although disclaimer of a lease agreement by the liquidator of a lessee would terminate all of the lessee‘s rights arising from that lease agreement, including by extinguishing the lessee‘s leasehold interest, this is not the case with the disclaimer of a lease contract by the liquidator of a lessor, [I note that the leading authority on point of Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 was a case of disclaimer by a tenant. Her Honour held that it was expressly confined to the case of disclaimer by a tenant, and declined to apply it to the reverse position here, of disclaimer by a landlord. I note that their Honours on appeal took the opposite view, see below]

(d) A leasehold interest is the property of the lessee and disclaimer of the lease by the liquidator of the lessor only terminates the lessor‘s rights, interest and liabilities under that lease (and other persons’ rights and liabilities only to the extent necessary). Such a disclaimer would not bring the lease to an end for all purposes. Specifically, such a disclaimer ‘would not bring the tenant’s proprietary interest in the land to an end’,

(e) A leasehold interest cannot be described as a liability or encumbrance upon the property of the lessor and it is not necessary to extinguish such an interest to release the lessor or its property from a liability.

The Appeal

The liquidators appealed her Honour’s decision, arguing before the Court of Appeal that disclaimer of the lease agreements would have the effect of extinguishing the leasehold interest of the Growers, under s 568D, as this was “necessary to release the company and its property from liability“.

Counsel for the Growers argued that the rights of the Growers as lessees would have accrued or become vested at the time of any disclaimer and would therefore be preserved. However their Honours disagreed, saying at [32] that the continuing and prospective obligation on a lessor to provide possession and quiet enjoyment to a lessee is not a fully accrued obligation or liability that cannot be terminated. Counsel for the liquidators of WFL argued that the word liability in s 568D(1) was wide enough to embrace the continuing obligation on the part of WFL to provide quiet enjoyment; their Honours agreed (applying Hindcastle). At [37], their Honours said this –

“If WFL is to be relieved of its obligation to provide quiet enjoyment, clearly and in context a liability, the interest of the lessee so far as tenure is concerned is directly related to and underpins such liability. The tenure must go. It is necessary to affect the Growers’ rights (tenure) in order to release WFL from its liability (possession and quiet enjoyment). The cases where rights have been preserved usually involve claims against third parties unrelated to any liability of the company in liquidation.”

Their Honours then considered at [38] whether, notwithstanding the termination of the interests of the lessee under the disclaimed contract – as necessary to relieve WFL from liability – the asserted leasehold interest remains. The trial judge had held that it did. Their Honours held that it did not. Their Honours observed succinctly that, in their opinion, if the contract is disclaimed, the leasehold interest is also extinguished [at 39]. Their Honours Warren CJ and Sifris AJA then gave detailed consideration to authorities as to lease contracts and the rights that arise under them, including the doctrines of frustration and repudiation.

At [49-50] their Honours described the principle from  Hindcastle (disclaimer of lease by tenant extinguishing the tenant’s interest in the property) and noted that they did not understand Lord Nicholls to suggest that the same consequences – determination of the leasehold interest – would not apply in the case of the liquidation of the landlord. They concluded discussion of that authority with a rhetorical question: “Why should the consequences differ if the underlying event that informs the consequences, namely termination of the contract, is the same?” With that, their Honours clearly took the view that the principle in Hindcastle could and should be extended to the case of disclaimer of leases by the landlord.

Their Honours concluded [at 58] as follows –

“For the reasons given, any leasehold interest cannot survive the termination of the very contract that created it and regulated the tenure of the Grower. It is this tenure which creates, and is the basis of, the obligation or liability on the part of WFL to provide quiet enjoyment. Section 568D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent third party. The evident policy is to permit the loss of these rights in order to enable the company in liquidation to be free of obligations so that it can be wound up without delay for the benefit of its creditors. To compensate, the rights of the affected parties are transmuted into various statutory rights and claims.” His Honour Redlich JA wrote a separate judgment, but reached the same conclusion.

A notable and important point:  Warren CJ and Sifris AJA appeared to be supported in their conclusions by the fact that the leases where not simple, Blackacre leases, but were one part of a suite of inter-related documents regulating the rights and liabilities of the various parties in these tax-driven managed investment schemes. The Growers/investors’ resources were pooled and they permitted a manager to attend to all the necessary work. In this context as with shopping centre leases, so their Honours observed at [51], it is difficult to regard the Growers/investors as holding a leasehold interest or estate. “The better view is that there is no demise of the kind that would survive any termination of the very contract that created the tenure.” And at [52]: “The notion that a commercial lease is a demise that confers an interest in land and survives the termination of the contract creating the demise is to ignore recent, significant developments in the law that suggests otherwise.”

This then would suggest that the principle for which this decision will stand authority may not apply to more simple, straightforward leases of land, as opposed to shopping centre leases (as expressly cited by their Honours) or complex commercial lease agreements, particularly those forming part of broader commercial schemes or arrangements.

Some have said that this judgment represents new law. Others may take the view that it clarifies the correct position of the law on this issue. I will leave it for you to decide. Either way, it is an important decision for insolvency and property law practitioners to be aware of and appreciate. It will be interesting to see if the Growers seek special leave to appeal the decision.

Application for costs to be paid by liquidators personally – Gusdote PL (A’or apptd) v North Queensland Development PL (In Liq) (No 5)

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On Monday this week, 30 July 2012, Emmett J rejected an application by a successful plaintiff for costs to be paid by the liquidators of the defendant personally. The full judgment may be read here – Gusdote Pty Ltd (A’or apptd) v North Queensland Land Development Pty Ltd (in liq) (No 5) [2012] FCA 783.

There had been a run of litigation leading up to this point. By way of background:

In or about 2008, prior to the administration and liquidation of North Queensland, a disputed parcel of land (upon which was situated the Willows Golf Course, Townsville) was transferred by a director of Gusdote to his own company North Queensland without the knowledge of the other directors, in clear breach of his fiduciary duties. So held Cowdroy J of the Federal Court when he made a declaration on 11 June 2010 that North Queensland held legal title to the land upon constructive trust for Gusdote, and ordered that North Queensland must account for all benefits and money received as a result of the transfer to it (link). The Liquidators (Administrators at the time of the hearing) had informed the Court that North Queensland did not oppose the granting of the relief claimed.

Gusdote then asked the Liquidators to transfer the land in question back to Gusdote. The Liquidators refused. They asserted they were under no obligation to do so, and that Gusdote should prove in the liquidation of North Queensland as an unsecured creditor.

Next, Gusdote issued these proceedings, seeking orders that upon demand the land be transferred by North Queensland back to Gusdote. The Liquidators of North Queensland opposed this, and the proceeding ended up spawning multiple judgments along the way. (As well as this judgment (No 5), see Gusdote v North Queensland; Gusdote v North Queensland (No 2); Gusdote v North Queensland (No 3)).

During the hearing that resulted in judgment No 3 in May 2011, the Liquidators had abandoned their position. Instead, accepting that the land was to be transferred back to Gusdote in due course, they argued they were entitled to a lien over the land for all costs and expenses in holding it. Accounts were then ordered to be taken.

For the purpose of the account-taking before the Registrar, the Liquidators had produced a statement of receipts and payments, said to relate to all benefits received by North Queensland re the land, and all outgoings and expenses incurred by them in connection with the land. The net position – somewhat surprising – was that Gusdote owed them nearly half a million dollars, including a quarter of a million in liquidators’ fees and legal costs. The Liquidators omitted to include in the statement the fact that North Queensland had granted several mortgages over the land in question to secure advances in excess of $3million made to third parties, which remained registered against the land. On the costs application, Gusdote asserted that this statement could not be accepted as an accounting by professional liquidators honestly setting out the sums they claimed were properly incurred in the execution of the trust (on which they held the land), which were the only moneys in respect of which they could claim a lien.

Before the Registrar taking the accounts, the Liquidators had also asserted that the Registrar was not to consider whether the sums claimed as costs and expenses were properly incurred in the execution of the trust, and that there was no occasion to bring into account the moneys advanced on the security of the mortgages over the land. Gusdote subsequently challenged the accounting taken by the Registrar and Emmett J handed down a judgment disagreeing with the approach the Liquidators had taken.

Monday’s judgment concerned Gusdote’s application that the Liquidators pay Gusdote’s costs of and incidental to this litigation personally. Gusdote argued that the Liquidators had conducted this litigation for their own personal financial interests. The Liquidators had no funds available to them in the winding up of North Queensland, or to pay costs orders made against them, but had chosen to contest Gusdote’s claims, unsuccessfully. Gusdote asserted this was not for the benefit of the unsecured creditors of North Queensland. Rather, so Gusdote argued, the Liquidators had done this for their own personal benefit, in order to enable recovery of their fees and expenses in connection with the winding up.

The Liquidators denied this. They pointed out that following the declaration and order made in March 2010 by Cowdroy J, the Liquidators had sought directions from the Queensland Supreme Court under s 96 of the Trusts Act 1973 (Qld), alternatively s 479(3) of the Corporations Act 2001 (Cth), for judicial guidance as to whether North Queensland had a reasonable basis for resisting the relief sought in this proceeding by Gusdote. On 17 November 2010, the Supreme Court of Queensland ordered that North Queensland would be justified in doing all things necessary or incidental to oppose the orders sought by Gusdote in this proceeding [21].

The Supreme Court in its reasons observed that North Queensland contended that the nature of the constructive trust declared in the 2010 proceeding was not proprietary in nature, such as to provide a basis for Gusdote to claim an entitlement to the land. Rather, North Queensland claimed it was a constructive trust that involved holding property, with a personal liability to account. The Supreme Court observed that, to the extent that Gusdote was relying on the declaration of a constructive trust being of a proprietary nature, North Queensland wished to challenge that characterisation. The Liquidators said that on the strength of that judicial advice, they caused North Queensland to defend this proceeding, as originally framed, to deny Gusdote was entitled at any time to terminate the trust and require North Queenslnd to transfer legal title to it.

The Liquidators argued that they had acted in the hope that they might ultimately produce a fund that would yield a dividend for distribution among the creditors of North Queensland. They had acted reasonably and in discharge of their duties. They had specifically declined during the course of the proceeding to take procedural points that might have occasioned unnecessary costs and inconvenience to the parties and the Court. They had done so in order to facilitate resolution of the real issues in dispute at minimal cost and inconvenience. They claimed to have at all times acted properly in discharge of their statutory responsibilities and denied they had acted solely or substantially for their own benefit. They submitted that their conduct, as contradictors, had afforded assistance to the Court.

His Honour observed that there is a recognised public interest against the imposition of personal liability on liquidators, insofar as they have acted on behalf of an insolvent company. He held Gusdote had identified nothing in the Liquidators’ conduct to justify the exceptional order now sought. He was not persuaded that the Liquidators had been motivated by personal interest in their conduct of this proceeding. The positions they had caused North Queensland to adopt were erroneous, nevertheless his Honour did not consider their positions to have been so unreasonable as to suggest they were motivated by self interest rather than the interests of the unsecured creditors.

It is interesting to ponder what the result here might have been, had the Liquidators not obtained the directions they did by way of judicial advice from the Queensland Supreme Court in November 2010.

Newsflash #2: Weston removed by Court as One.Tel special purpose liquidator

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It is being reported that – in an extroardinary move – the NSW Supreme Court has today removed Paul Weston as the special purpose liquidation of One-Tel, saying he had lost objectivity and “the capacity to properly and dispassionately focus on the purposes for which he was appointed”. The judgment is not yet on Austlii nor on the NSW Caselaw website as I post this (update: see below), but for now you can read the report on the Age website here.

After racking up at least $14 million in fees since his appointment in 2003, $5 million of which was incurred in the two year period 2009 to 2011, Mr Weston has been replaced by Stephen Parbery, a founding partner and the Chairman of PPB Advisory.

The overall liquidators of One.Tel are Steve Sherman and Peter Walker of Ferrier Hodgson. Mr Weston had been appointed as special purpose liquidator for a sole task: that of pursuing a $250 million damages claim against former directors of One.Tel, including James Packer and Lachlan Murdoch.

After at least six applications by Mr Weston for extensions of time for the serving of the writ upon the defendants, the case against Mr Packer and Mr Murdoch was finally dismissed by the NSW Court of Appeal earlier this year because of an excessive delay in serving it. In May, however, Mr Weston filed an application seeking special leave to appeal to the High Court. He has reportedly also filed fresh proceedings against Mr Packer and Mr Murdoch in the NSW Supreme Court, based in equity law, seeking to circumvent the limitation periods which constrained his previous claims.

The lack of harmony, even acrimony, between  Mr Weston and the Committee of Inspection (“COI”) – which represents the creditors – has been remarkable. It culminated in the application which was today successful, and which had been brought by Optus, One-Tel’s largest creditor, and supported by the second- and third-largest Telstra and Cisco Systems. However the bad blood apparently arose in 2008 when the COI disagreed with Mr Weston’s conduct of the case and held negotiations themselves with PBL and News Ltd to seek to settle the case. Mr Weston responded with a media release condemning the COI for their conduct in doing so, and the trouble acrimony appears to have snowballed from there. It is said that creditors passed a motion of no confidence in Mr Weston at their annual meeting in 2009, and again the following year, asking him to resign.

At an earlier hearing of this application, on 6 March 2012, Bergin CJ in Eq had reportedly referred to her concern that a liquidator held “animosity towards his creditors”. One can only imagine the malcontent engendered by Mr Weston incurring fees in conducting investigations inquiring into dealings between the main creditor, Optus, and PBL.

Her Honour Chief Justice Bergin reportedly said it had “certainly been demonstrated that the creditors have lost confidence in [Mr Weston’s] capacity to bring a dispassionate mind to bear in exercising his powers in the liquidation”, and that their loss of confidence was justifiable. Her Honour also noted concern that appropriate mechanisms had not been put in place to control expenditure.

Optus had also asked the Court for a court inquiry into Mr Weston’s conduct, but because an inquiry into his remuneration and expenses by ASIC is already under way, Bergin CJ reportedly said that this was premature. ASIC’s inquiry had been put on held pending the Court’s decision on this application, but it can be expected that it will now proceed.

On a final note, on 3 May 2012 One.Tel liquidators had obtained orders in the NSW Supreme Court from Hammerschlag J that they were justified in paying to the special purpose liquidator out of the assets of One-Tel his legal costs and disbursements for the period 1 October 2011 to 9 March 2012 in the amount of $981,424.32 plus GST. More accurately, the application was brought by Mr Weston, for an order that Messrs Sherman and Walker would be so justified. However, it is notable that those orders were made on an  undertaking from Mr Weston to repay legal costs if those costs were not properly incurred. You can imagine, then, the potential fall-out that may follow, were ASIC’s inquiry to result in findings adverse to Mr Weston. It is interesting also to note that, as pointed out in his Honour’s reasons, Mr Weston gave a further undertaking that he would provide Messrs Sherman and Walker with unredacted invoices detailing the legal fees and disbursements concerned (other than for privilege)…but only after payment was received. Justice Hammerschlag’s ex tempore judgment can be read here.

We await further developments with interest.

Postscript 21/6/12: The judgment is now available on Austlii – link.

Newsflash: Centro settlement approved by the Court this morning

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It has been reported that the $200 million Centro class action settlement reached in early May was approved this morning by Middleton J of the Federal Court of Australia. None of the shareholders participating in the class action objected to the settlement. The judgment is not up on Austlii yet, but you can read the full article on the Age website here.

It is reported that of the $200 million, $67 million will be paid by former auditors PricewaterhouseCoopers, with the balance to be paid by Centro-related companies. After legal costs and after the commission to litigation funders, it is said that shareholders are likely to share in a pool of just over $120 million.

You can read my earlier post of 8 May about the settlement reached here, my post of 17 April about some developments in the case which took place that day here, and my post of 27 February giving a brief background of the case and reporting on developments and an interesting Centro decision on the question of legal professional privilege here.

Newsflash: The ATO’s Director Penalty Bill introduced into Parliament

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Today the Tax Laws Amendment (2012 Measures No 2) Bill 2012 was introduced into Parliament which, amongst other things, will extend the potential for personal liability of directors after issue of DPNs to cover their company’s unpaid and unreported superannuation obligations, as well as PAYG. For further detail refer to my earlier post about the exposure draft of this bill here.

Submissions were due on 2 May 2012, after just a 2 week window allowed by Treasury for their receipt, but have still not been made public. This is a notably short timeframe between the deadline for submissions and the introduction of the Bill to Parliament.

You can download a full copy of the Bill here and the EM here.

ASIC releases its first annual report into liquidators and the insolvency industry

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Today ASIC released its first annual report into its supervision of the registered liquidators insolvency industry, detailing surveillance and enforcement outcomes in 2011. Issues of competence, independence and inappropriate self gain underpinned ASIC’s supervisory activity.

For the calendar year 2011, ASIC opened eight new formal investigations into registered liquidators, and concluded several others, including that against Stuart Ariff. At years end it had 10 open investigations on foot. ASIC also completed more than 200 reviews examining issues including practitioner independence, competence and remuneration. ASIC also has a program of compliance visits for registered liquidators based on risk assessment and market intelligence.

It is noteworthy that of the 426 complaints ASIC received in 2011 concerning registered liquidators (some about the same external administration), 51% required simple explanations to the complainant as to what is to be expected in an external administration, and what a liquidator is or is not entitled to do.

ASIC’s announcement of the report’s release can be read here, and the report itself can be read here.