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

Posted on March 27, 2012 by carrieromesievers

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.

Equuscorp Pty Ltd v Haxton – High Court’s latest pronouncement on the law of restitution

Posted on March 9, 2012 by carrieromesievers

Yesterday afternoon the High Court handed down its long-awaited restitution law judgment dealing with claims for money had and received for failure of consideration – and their assignability – in Equuscorp Pty Ltd v Haxton; Eqquascorp Pty Ltd v Bassat; Equuscorp Pty Ltd v Cunningham’s Warehouse Sales Pty Ltd [2012] HCA 7. The full judgment is now on Austlii and can be read here.

This case involved five appeals from the Victorian Court of Appeal. In the High Court three judgments were written – one by French CJ, Crennan and Kiefel JJ, one by Gummow and Bell JJ, and one by Heydon J. Their Honours dismissed the appeals, which had the effect that the respondent investors were not liable to repay funds advanced to them under loans which had been assigned to Equuscorp.

Facts

The respondents had invested in tax driven blueberry farming schemes conducted in the north-east of NSW in the mid to late 1980’s, promoted by two brothers Anthony and Francis Johnson. Investments were made in the schemes in five separate tranches. Under the schemes, investors could enter into a loan agreement with a company called Rural Finance Pty Ltd whereby Rural would advance funds payable by the investors to other companies in the scheme group, pursuant to the schemes. The schemes were designed so that investors obtained an interest in a farm and farming business with the hope of future profits and capital appreciation, together with the immediate benefit of a significant tax deduction claimable against non-farming income.

Equuscorp was an arms length financier of the group of companies controlled by the scheme promoters, the Johnson brothers. In 1997, after the scheme collapsed, the receivers and managers of Rural sold the loan agreements between Rural and the investors to Equuscorp, assigning its interests under the loan agreements and the amounts of debts owing thereunder. As a rather striking side-note, at first instance Byrne J had found that at around the time of their assignment, the 638 loan agreements were worth $52,584,005. The consideration given for the assignment was $500,000.

Contrary to s 170(1) of the then Companies Code, no prospectus or valid prospectus had been registered when the schemes were promoted, when investors were offered a “prescribed interest” and were offered loans on favourable terms to invest. After taking the assignment, Eqquscorp sued investors to recover payments due to it under the loans.

The loan agreements were found to be unenforceable for illegality. (So held Byrne J at first instance; this was not challenged in the Victorian Court of Appeal or the High Court.) This is somewhat curious, as the making of the loan agreements was not expressly prohibited by the Code; what was illegal was the offering or inviting the public to subscribe for or purchase a prescribed interest . However it appears that Byrne J held the loan agreements to be unenforceable on the common law ground of being associated with or made in furtherance of an illegal purpose (see [22-27]).

Equuscorp claimed in the alternative for restitution of the advances made under the agreements as money had and received, for failure of consideration. Essentially, the questions for the High Court were these –

Did Rural have a right of restitution for money had and received (based upon a failure of consideration)?
If yes, was such a right assignable (to Equuscorp)?
If yes to both, was it assigned by Rural to Equuscorp?

The High Court answered those questions, broadly, as follows –

No, 5:1. An entitlement to restitution here would stultify the policy and objects of the Companies Code, being the protection of investors in the position of the respondents. The investors would not be unjustly enriched if they were not compelled to make restitution. (So held French CJ, Crennan and Kiefel JJ [45]; also Gummow and Bell JJ [99]. Heydon J dissented, making some thought-provoking remarks worth considering [126-133, 134-149]. Note that at [137], Heydon J comments that despite what the Court of Appeal had held, there is no requirement of total failure of consideration in every case.)
Yes, assignable, 6:0. There was no cause of action available for Rural to assign to Equuscorp. But if there had been a right of restitution, such a right was capable of being assigned (Yes – French CJ, Crennan and Kiefel JJ [53]. Yes (tied up in yes to question 3) – Gummow & Bell JJ [74-5]. Yes – Heydon J [159])
Evenly split, 3 yes:3 no. The High Court was evenly divided on the question of whether, if there had been a right to restitution in Rural, it would have been assigned under the Deed. (No – French CJ, Crennan and Kiefel JJ [64], though they left open one aspect at [66]; Yes – Gummow & Bell JJ [74-9]; Yes – Heydon J [160-161]. Note that at first instance Byrnes J had answered yes; on appeal to the Victorian Court of Appeal – their Honours had answered no.)

Before closing, I will briefly address two aspects of this decision – the apparent state of play of unjust enrichment and the nature of claims for money had and received in Australia, and the reason why the majority found that in this case, there was no such right to restitution.

The Nature of claims for money had and received – right to restitution

At [29] French CJ, Crennan and Kiefel JJ discuss the history of claims for money had and received. They note that it was an offshoot of the old form of action of indebitatus assumpsit, which by the 17th century, had superseded the action of debt. They summarise how it went through a period of being thought to rest upon a theory of implied contract. This theory was rejected in Australia in 1987 by the High Court in Pavey & Matthews Pty Ltd v Paul, and in the UK in 1996 by the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council.

They maintain our High Court’s position that unjust enrichment does not found or reflect any “all-embracing theory of restitutionary rights and remedies”. What it does, they said, is refer to or explain categories of cases where the law does not permit one person to keep a benefit obtained from another. The concept of unjust enrichment explains the claim for money had and received, so their Honours said, in this way –

An enrichment of a defendant may be treated by the law as unjust by reason of a qualifying or vitiating factor such as mistake, duress, illegality or failure of consideration, triggering a prima facie obligation to make restitution to the plaintiff, subject to any defences such as the change of position defence (which would make an order for restitution, in turn, unjust). See their discussion at [29-30].

At [114] Gummow and Bell JJ make an enlightening observation. They observe that an action for money had and received is a legal action not an equitable suit, however it is settled in Australia that the action is a liberal action in the nature of a bill in equity. They observe for example that in the present litigation, were Equuscorp to succeed, a question would arise as to the relevance and quantification of any offsetting “tax benefit” which the respondents had received before the investment scheme collapsed.

Rural had no right to restitution here

Essentially, the majority held that where a contract is rendered unforceable by a law, a restitutionary claim will not lie where the allowance of that claim would defeat the policy of the law which made the contract unenforceable. (See Gummow and Bell JJ at [104].) To permit recovery on an action for money had and received in such a case would stultify the statutory policy of protecting investors by imposing onerous obligations upon scheme promoters to comply with statutory requirements. They held that this was the case here. Rural was not an arms length financier. It was part of the group of companies involved in promotion of the schemes. It offered loan agreements on favourable terms in furtherance of an illegal purpose (offers to take up prescribed interests without the benefit of the protections required by the Code).

In contrast, restitution can be allowed where a contract or transaction is made or a tax is paid which was rendered “illegal” by a law which, for example, requires formalities which were not met, or which restricts legal capacity, as does the doctrine of ultra vires.

At [103], the basis for the High Court majority’s view as to there being no right to restitution here, is particularly well explained by Gummow and Bell JJ. Their Honours note that the determinative issue is whether the policy of the statute law (here s 170 of the Code) denies any scope for an action for money had and received. They observe that guidance on this issue can be gained by a statement by Professor Palmer in his 1978 treatise The Law of Restitution where he says this:

“The illegality of the transaction will preclude recovery of damages for breach, or any other judgment aimed at enforcement of the contract, and the problem is whether the plaintiff can nonetheless obtain restitution of values transferred pursuant to the contract. The fact that public policy prohibits enforcement of the contract is not a sufficient reason for allowing one of the parties to retain an unjust enrichment at the expense of the other. Such a retention is warranted only when restitution is in conflict with overriding policies pursuant to which the transaction is made illegal.”

The best part

I would like to finish, admiringly, with the opening paragraph of Heydon J’s judgment. For its deft eloquence, I find it one of the most enjoyable opening passages of a judgment I have read in a while:

“The relevant transactions are set out in the preceding judgments. Those transactions are redolent of tax avoidance, suggest a preference for the beauty of the circle to the bluntness of the straight line, and indicate a single group of minds in control of superficially different entities. There is about them something of the night. However, it was not squarely suggested that the transactions were shams or that their somewhat murky atmosphere was relevant to the legal issues in these appeals. Those issues are four in number…”

PPS Newsflash: Glitches experienced in the migration of ASIC company charges to the PPS Register

Posted on March 8, 2012 by carrieromesievers

Due to technical “issues”, just over 6,000 charges were not migrated to the PPS Register from ASIC’s Australian Register of Company Charges during the data migration of 28-29 January 2012. Because those charges missed the migration deadline, ASIC cannot now migrate them and they must be registered on the PPS Register by or on behalf of each chargee/secured party. ASIC says it is notifying the affected parties.

To find out which charges failed to be migrated, check the list that ASIC has published here.

There were other problems experienced in the migration of ASIC charges –

For some reason, ASIC charges were migrated using ABNs rather than ACNs, in about two-thirds of cases. However the PPS register was expecting it to be done by ACNs, and was designed to store only a single organisation number. This has meant that searches for migrated ASIC registrations by ACN have been unreliable. Users have been advised to undertake searches using the relevant ABN, ACN and organisation name – see the PPSR announcement here.
Charges registered on the ASIC register of company charges with more than one chargee (secured party) were migrated to the PPSR with only one secured party in the “secured party group” (SPG). Approximately 25,879 registrations are affected by this problem. It has been suggested that the affected security interests will need to be re-registered by the most appropriate external party – see the PPSR announcement here.
Charges that were discharged on the ASIC register after the initial data load have been migrated to the PPSR, and appear there as current charges. Secured parties can apparently discharge these registrations on PPSR themselves, without incurring a fee.

Kassem and Secatore v COT – Third party preferences

Posted on March 6, 2012 by carrieromesievers

Last week the Federal Court handed down an interesting decision on third party preferences in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152. The Commissioner was wholly unsuccessful, and may be concerned at what this case means for his ability to continue to resist liquidators’ demands that he disgorge payments made by failing corporate taxpayers, or rather, made to the Tax Office on their behalf by third parties.

Third party preferences are where an insolvent company’s debt is paid by 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 588FC) of the Corporations Act 2001 (Cth).

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. The two companies shared the same sole director and shareholder, a Mr Russell, until at one point Mr Russell resigned as director of Antqip in favour of his daughter, although he continued to control Antqip’s business and bank accounts. The accounts of the companies were poorly kept, and indeed the computer in which the accounting records for the relevant financial years were stored had been disposed of. It appears that, as often happens, the liquidators had had to reconstruct the ledgers using what could be established by other records.

Mortlake’s liabilities to the Commissioner were recorded by the ATO in two separate accounts – the integrated client account (also known as the Running Balance Account) which recorded Mortlake’s primary tax liabilities to the Commissioner, and the Superannuation Guarantee Account which recorded its superannuation guarantee charge liabilities. The two payments in question were initially applied to reduce the balance of the Running Balance Account, but the Commissioner some months later reallocated the two payments to the Superannuation Guarantee Account in reduction of that liability. I will come back to this aspect of the case.

Mr Russell gave evidence that the two payments to the ATO were made by electronic funds transfer from Antqip’s bank account. Mr Russell’s evidence was that it was his intention that these payments were made by Antqip by way of a loan to Mortlake; indeed he said he instructed Mortlake’s bookkeeper to record the amount of those payments as a loan from Antqip to Mortlake.

The liquidators’ evidence was that there were not expected to be any distribution to any class of creditor of Mortlake, after allowing for costs of the voluntary administration and subsequent liquidation of Mortlake.

Section 588FA(1) of the Act provides –

“A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”

It should be noted that previously the authorities have established that a “transaction” for the purposes of s 588FA(1), and as defined by s 9 is a word of wide connotation and can include a composite or multi-step dealing involving a third party. Where the third party payment is made with the authority of the company it can extinguish the company’s debt to the creditor, such that it can be treated as part of a multi-step transaction to which the company is party. This may amount to the giving of a preference by the company to the creditor. (See Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; 24 ACSR 292; Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83; 64 ACSR 705 – note that special leave was granted in Capital Finance, and the High Court heard the appeal, but the parties settled prior to judgment.)

The ATO’s arguments were that the payments in question were not caught for these reasons –

The company (Mortlake) and the creditor (ATO) were not “parties to the transaction” as required by s 588FA, as the money came from a different entity (Antqip);
The company’s asset pool was not depleted by the making of the payments, as they came from the funds of another entity (Antqip). Thus, so the argument went, there was no preference over other creditors as the other creditors were not deprived of assets that would otherwise have been available on a disbtribution;
As the ATO applied the money to the Superannuation Guarantee Charge debt (a priority payment under s 556), there was no unfair preference to the ATO, as it would have received the same priority over other creditors in any event.

Nicholas J of the Federal Court in Kassem gave all three arguments short shrift –

His Honour was satisfied that the payments were made by or on behalf of Mortlake using moneys borrowed by Mortlake from Antqip and advanced to the Commissioner in accordance with Mortlake’s directions. Hence Mortlake and the Commissioner were “parties to the transaction”. [At 23-27, 36]
Mortlake borrowed from one creditor to pay another. The payments to the Commissioner made possible by that new borrowing were applied towards a pre-existing debt. Thus there was no enlargement or enhancement of the pool of assets available to satisfy the claims of Mortlake’s other unsecured creditors. It is clear the Commissioner would not have received $70,000 by way of dividend in respect of the superannuation charge debt if he had proved for it in the winding up instead of accepting the impugned payments as he did. It follows that he has received an unfair preference. [At 42-46]
The SCG argument failed also, on the basis that the priority the Commissioner claimed it would have would not obtain in the circumstances of this case. The Court must assess the unsecured creditor’s likelihood of recovery in the context of the actual winding up that eventuated, rather than a hypothetical winding up postulated to take place at the time of the impugned transaction. The evidence established that even as a priority creditor there was little prospect of the Commissioner receiving any dividend at all in the winding up of Mortlake. Therefore, contrary to the Commissioner’s argument on this too, he has received money which he would not receive if instead he was to prove for that amount in the winding up of Mortlake. It followed, so held Nicholas J, that he had received an unfair preference. [At 36-41, 45-47]

I refer to the last argument raised by the Commissioner. As noted above, the argument was that the money received was applied to the Superannuation Guarantee Charge debt (a priority payment under s 556 of the Act). As there were no other unsecured creditors of equal or higher priority, the Commissioner received no “unfair” preference, as he would have been accorded priority over the other unsecured creditors in any event. The Court rejected that argument on the basis given above, but at [47] his Honour noted that it was “unnecessary for [him] to consider whether or not the Commissioner would have been entitled to the priority he claimed to be entitled to under s 556(1)(e)”.

I query whether his Honour there was referring to the merit of the legal argument, or alluding to whether the Commissioner would have been entitled to the claimed priority, given the fact that the ATO had first credited the payments to the integrated client or Running Balance Account, and subsequently reversed that and reallocated the payment to the Superannuation Guarantee Account. I suggest it would seem extraordinary if the ATO could rely upon that reallocation, as it sought to do here, to escape the operation of Part 5.7B of the Act. It would mean that the ATO could simply reallocate payments it had previously received to pay off PAYG or GST liabilities to taxpayers’ SGC accounts, or allocate them to a different liability to that for which they were paid by or for the taxpayer, thereby circumventing any later claims for repayment by a liquidator.

This case does not involve a large amount of money, but it does involve arguments the Commissioner may want to test further. It will be interesting to see if the decision is appealed.

Grimaldi v Chameleon Mining NL (No 2) – FCAFC – Barnes v Addy, bribes and constructive trusts

Posted on March 3, 2012 by carrieromesievers

Last week a Full Federal Court bench of Finn, Stone and Perram JJ handed down a long and highly significant judgment in the latest Chameleon Mining decision, concerning dealings involving the Iron Jack Tenements in Western Australia. The full judgment – 783 paragraphs long – can be read here. The judgment includes a detailed table of contents, which can take you directly to a particular legal issue if desired.

This is essentially a case of those in a fiduciary position failing spectacularly to uphold the standards required of them by their duties and position, and misappropriating funds, diverting opportunities for themselves/their own companies, and taking secret commissions, according to the Court’s findings. The significance of this case is for its authoritative pronouncement by the plurality on a range of important issues of equity law in this country. It is notable, and fortunate, that one of the three members of the Full Court Bench was an equity jurist of the calibre of his Honour Justice Finn. This issues are listed below. First, for an overview of the facts, as found by the Court –

Chameleon claimed that several of its directors including a Mr Barnes and a Mr Roberts were guilty of breaches of their fiduciary duties to the company, and contraventions of ss 180, 181 and 182 of the Corporations Act 2001 (Cth). Phillip Grimaldi was also sued by Chameleon for breach of fiduciary duties and the same provisions of the Act, as an alleged de factor director of Chameleon or an “officer” of the company. Mr Grimaldi was a director and the controlling mind of Murchison Metals Ltd, which was also sued by Chameleon. Two transactions were at the centre of the controversy.

The first, the “Cadetta Transaction”, involved the acquisition by Chameleon negotiated for it by Mr Barnes and Mr Grimaldi of gold mining tenements in consideration for an issue of its shares. By way of what was held to have been a secret commission to Mr Grimaldi, Chameleon issued 5 million shares to Murchison. Murchison provided no consideration to Chameleon for the issue of those shares. Immediately after the allotment of shares to Murchison, Grimaldi had Murchison sell them and pay the proceeds of that sale to Winterfall (which later became Crosslands Resources Ltd).

The second transaction was really a series of dealings. Winterfall had contracted to buy the Iron Jack Tenements, but it ran out of money to pay the second instalment of the purchase price. Mr Barnes and Mr Grimaldi suggested Murchison acquire an interest in the project. Murchison and Winterfall signed Heads of Agreement under which Murchison would pay Winterfall $350,000 (which was needed to pay the Iron Jack vendors) plus Murchison would later effect a “reverse takeover” of Winterfall. Mr Grimaldi and Mr Barnes also negotiated a “spotter’s fee” for themselves in the form of shares in Winterfall (which they later exchanged for 10 million shares and 12 million options in Murchison).

Subsequently Grimaldi urged Chameleon, which had little cash, to raise capital ostensibly for exploration of a gold mine, by way of a share placement. With the knowledge of the principal Winterfall director Mr Zuks, 40% of Murchison’s payment obligation was made by Chameleon. This was held to be a missappropriation of Chameleon’s funds from the capital raising. At least some of the rest was paid by Murchison to Winterfall, using funds it had raised from the above-mentioned sale of it shares in Chameleon. In the end, Winterfall completed its purchase of the Iron Jack Tenements and Murchison completed its reverse takeover of Winterfall. The findings show that Mr Barnes and Mr Grimaldi did very well out of the deals. Chameleon, however, did not.

As noted above, the significance of this long judgment lies in the authoritative pronouncement by the Full Federal Court on a number of highly important issues of the law of equity. I recommend that anyone practising in these areas read this judgment carefully. Again, it can be read here. For now, I simply provide a heads up as to the issues upon which this judgment will undoubtedly become an oft-cited authority. They are listed in the order in which they appear, rather than in order of importance, and they are as follows –

De facto directors
Directors duties and misappropriation of funds – ss 181 and 182 of the Corporations Act
Compensation under s 1317H of the Corporations Act, and whether profits can be sought without proof of loss
Corporate knowledge – the imputation of director’s knowledge to a corporation – “fraud on the company” exception
Fiduciary duties – conflict of interest and misuse of position
Fiduciary duties – Secret commissions / bribes
Barnes v Addy – both limbs – knowing receipt and knowing assistance **important discussion at [242-270]
Constructive trusts and tracing corporate property – including whether a transaction must be avoided before proprietary relief can be awarded
Equitable remedies – flexibility – fashioned to fit the case and do what is “practically just”
Liability to account and Account of profits – including where breach of duty is only one of several sources of profit – the “just allowance” device
Account of profits – including when parties may be jointly and severally liable for profits
Interest awarded where misuse of trust moneys – including re compound interest and periodic rests
Remedies re Barnes v Addy – including whether joint and several as between fiduciary and third party participants in knowing receipt or knowing assistance
Remedies re bribes / secret commissions – including Lister & Co v Stubbs not followed
Constructive trust being an available remedy if appropriate in the circumstances.

It will be interesting to see if special leave is sought to appeal to the High Court from this judgment.

Phoenix companies targeted in suite of draft law reforms introduced

Posted on March 1, 2012 by carrieromesievers

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.

Centro class action developments – (a) privilege and (b) a bombshell

Posted on February 27, 2012 by carrieromesievers

* An updated version of this article was republished with my permission in the December 2012 issue of the Australian Corporate Lawyer’s quarterly journal, the Australian Corporate Lawyer, volume 22, issue 4, pp 26-31.

There have been some interesting developments this month in the lead up to the big Centro class action trial, which is due to commence in the Federal Court in just a few weeks (early March) before her Honour Justice Gordon and is expected to run for at least 15 weeks.

By way of background, there are 5 class actions issued in 2008 and 2010 by different sets of Centro investors, variously represented by Maurice Blackburn and Slater & Gordon. Broadly – and I stress the use of that term – the investors are suing the old Centro Properties group over the events of 2007 shortly before the group’s collapse, when they failed to disclose approximately $3.1billion of short-term debt. Centro’s then auditors PricewaterhouseCoopers were joined as a co-defendant by Centro Properties and in turn, PwC has cross-claimed against Centro. The investors are also suing the auditors PwC directly, and in those proceedings too there are cross-claims by PwC against Centro. Indeed there are a multitude of cross-claims as between Centro and PwC.

To address the interesting developments occurring this month (February) in reverse order –

The bombshell – Centro Retail Australia’s “no liability” defence

In October 2011, Barrett J of the New South Wales Supreme Court approved a new corporate group structure for Centro. Subsequently, it appears that in or about December 2011, Centro Retail Australia Ltd took over as the responsible entity (RE) for the Centro group from Centro MCS Manager Ltd.

However, it is reported that submissions made in Court on Thursday suggest that this change in RE may not have been disclosed to the market and for some time remained unknown to the parties to the class action. Michael Lee SC, counsel for the Centro investors represented by Maurice Blackburn, reportedly said that the new RE was only discovered “by happenstance” by lawyers acting for PricewaterhouseCoopers, who ran repeated corporate searches of the new Centro Group structure after it was approved in October. PricewaterhouseCoopers has now successfully applied to join Centro Retail Australia to the class action.

On Thursday in Court, Centro Retail Australia revealed what its defence would be. It was something of a bombshell revelation. Certainly Centro Retail Australia was only newly joined to the action (on 14 February), however its predecessor as RE cannot claim the same. In Court, Counsel for PwC demanded to know if Centro Retail Australia would stand in the shoes of the old RE and assume its liabilities. Pressed by Gordon J, counsel for Centro Retail Australia Norman O’Bryan SC is reported as having said that it was “highly likely” the new entity would argue that it was excluded from certain liabilities of the old Centro. He reportedly indicated reliance would be placed upon Corporations Act provisions to argue these types of liabilities were not inherited by the new responsible entity in the restructuring.

Mr Lee is quoted as having described this new defence as “a matter of potentially extraordinary significance”. If successful, it could have the effect that the shell that is Centro MCS Manager Ltd retains the key liability, such that if the class action were successful, judgment might be made against an entity without assets. Concerns were also reportedly raised in Court by Mr Lee as to whether this proposed defence had been disclosed to the NSW Supreme Court on the restructure.

The orders made by Gordon J as shown on the Federal Court portal include that Centro Retail Australia must file its defence and any cross claim by 29 February and responding pleadings be filed by 2 March. For the full article discussing last week’s hearing see the Age article here.

Kirby v Centro Properties Limited (No 2) [2012] FCA 70 – Legal Professional Privilege

On 10 February, Bromberg J handed down his reasons on an application by PricewaterhouseCoopers that various Centro companies be compelled to produce specified documents for inspection. Centro had resisted inspection on the basis that the documents or part of them were subject to legal professional privilege. His Honour had heard and determined the application urgently in November 2011, dismissing PwC’s application and giving short reasons then; full reasons now. Bromberg J, not being the trial judge allocated the various proceedings, considered and determined these questions of privilege in order to avoid the trial judge (Gordon J) being exposed to documents the subject of privilege claims.

To explain the privilege claims it is useful to give a more detailed overview of the claims made in these proceedings. It is also useful, as his Honour did, to divide the related Centro corporations concerned in the litigation into two groups. The first is the Centro Properties Group (CNP) and the second the Centro Retail Group (CER).

The first principal claim made against CNP relates to what is referred to by the parties as the ‘classification issue’. The investors allege that in publishing its financial statements for the year ending 30 June 2007, CNP misclassified debt such that its current debt was understated and its non-current debt overstated. This is claimed to be in breach of the Corporations Act 2001 (Cth), the ASIC Act 2001 (Cth) and the Fair Trading Act 1999 (Vic). CNP admits the misclassification, and its failure to comply with accounting standard AASB101, however it denies liability on various grounds.

The second principal claim made against CNP relates to what has been termed the ‘refinancing risk issue’. The gist of this claim is that CNP should have, but failed to, disclose to the market that it had short-term debt about to become due which it either could not refinance or could only refinance at greater cost. This is said to be in breach of the continuous disclosure obligations of the Corporations Act.

CNP (and CER) have claimed against CNP’s auditors PricewaterhouseCoopers on a number of bases, including claims of misleading and deceptive conduct by making various representations to CNP concerning its 2007 financial statements. CNP alleges that PwC represented that the financial statements were appropriate for approval by the CNP Board in that they complied with the Corporations Act and relevant accounting standards, including AASB101, when in fact they did not. PwC denies liability to CNP on a number of grounds, including that any such misrepresentation was caused by CNP’s failure to disclose relevant material to PwC. CNP, in turn, denies that.

The investors also make claims directly against PwC in relation to the classification issue. They assert that PwC represented that CNP’s financial accounts gave a true and fair view of CNP’s financial position, when they did not, and complied with the Corporations Act and relevant accounting standards, when they did not. PwC admits that accounting standard AASB101 was not complied with, but denies liability on other grounds.

Bromberg J noted that PwC’s application for inspection of documents – opposed on grounds of privilege – fell to be determined under the common law rather than the Evidence Act 1995 (Cth) (at [10]). His Honour cited the “12 principles” distilled by Young J in AWB Ltd v Cole and Another (No 5) [2006] FCA 1234; (2006) 155 FCR 30 at [44]. They are, in summary –

(1) The party claiming privilege bears the onus of proving that the communication was undertaken, or the document was brought into existence, for the dominant purpose of giving or obtaining legal advice.

(2) The purpose for which a document is brought into existence is a question of fact that must be determined objectively. Evidence of the intention of the document’s maker, or of the person who authorised or procured it, is not necessarily conclusive.

(3) The existence of legal professional privilege is not established merely by the use of verbal formula. There will be cases in which a claim of privilege will not be sustainable in the absence of evidence identifying the circumstances in which the relevant communication took place and the topics to which the instructions or advice were directed.

(4) Where communications take place between a client and his or her independent legal advisers, or between a client’s in-house lawyers and those legal advisers, it may be appropriate to assume that legitimate legal advice was being sought, absent any contrary indications.

(5) A “dominant purpose” is one that predominates over other purposes; it is the prevailing or paramount purpose.

(6) An appropriate starting point when applying the dominant purpose test is to ask what was the intended use or uses of the document which accounted for it being brought into existence.

(7) The concept of legal advice is fairly wide. It extends to professional advice as to what a party should prudently or sensibly do in the relevant legal context; but it does not extend to advice that is purely commercial or of a public relations character.

(8) Legal professional privilege protects the disclosure of documents that record legal work carried out by the lawyer for the benefit of the client, such as research memoranda, collations and summaries of documents, chronologies and the like, whether or not they are actually provided to the client.

(9) Subject to meeting the dominant purpose test, legal professional privilege extends to notes, memoranda or other documents made by officers or employees of the client that relate to information sought by the client’s legal adviser to enable him or her to advise. The privilege extends to drafts, notes and other material brought into existence by the client for the purpose of communication to the lawyer, whether or not they are themsleves actually communicated to the lawyer.

(10) Legal professional privilege is capable of attaching to communications between a salaried legal adviser and his or her employer, provided that the legal adviser is consulted in a professional capacity in relation to a professional matter and the communications are made in confidence and arise from the relationship of lawyer and client. Some cases have added a requirement that the lawyer who provided the advice must be admitted to practice. However in other cases, the Court has not regarded the possession of a current practising certificate as an essential precondition.

(11) Legal professional privilege protects communications rather than documents, as the test for privilege is anchored to the purpose for which the document was brought into existence. Consequently, legal professional privilege can attach to copies of non-privileged documents if the purpose of bringing the copy into existence satisfies the dominant purpose test. In Propend at 512, Brennan CJ added a qualification: the otherwise privileged copy may lose its protection if the original unprivileged document cannot be found and no other evidence is made available to prove the contents of the original.

(12) The Court has power to examine documents over which legal professional privilege is claimed. Where there is a disputed claim, the High Court has said that the Court should not be hesitant to exercise such a power.

For greater detail of each principle and the authorities cited for each , see Bromberg J’s judgment where he sets out Young J’s 12 principles in full at [11].

Observing that a practical and cost efficient approach is to be encouraged when it comes to issues relating to the discovery of documents, Bromberg J then turned to consider each class of documents in question.

Retainers and Related Documents

PwC contended that a retainer was not a document generally protected by legal professional privilege. However his Honour noted that this proposition is not absolute and the specific content of a retainer must be examined. Some communications contained within a retainer may be protected from disclosure because they are “within the sphere of protection provided by the privilege”. Centro contended that insofar as the retainers identified the nature of the legal advice sought, they were privileged to that extent.

Bromberg J agreed with Centro. His Honour also rejected PwC’s contention that privilege had been waived by Centro (see below). He also rejected PwC’s contention that legal professional privilege did not extend to a retainer because a retainer pre-dates the formation of the solicitor-client relationship.

Documents Provided by Centro to ASIC

There were two categories of these – (1) the “subpoenaed documents” provided by Centro to ASIC in the course of ASIC’s proceedings agianst Centro, and produced by ASIC pursuant to subpoenas issued in these proceedings at the behest of PwC; (2) the “other ASIC documents” – those provided by Centro to ASIC but at a later time than the subpoenas to ASIC were issued and returned.

The Subpoenaed Documents – the Hourigan Records

The vast bulk of these comprised handwritten notes taken by Elizabeth Hourigan, the Company Secretary of CNP and CER and each of their controlled entities at the relevant time. They were notes taken at Board meetings or Board Audit and Risk Management Committee meetings of the various Centro companies.

The parts of Ms Hourigan’s notes that were in issue comprised what Ms Hourigan deposed to be records of either (i) confidential communications between Board members and Centro’s General Counsel at the meeting for the dominant purpose of the General Counsel giving and the Board receiving legal advice on behalf of Centro; (ii) confidential communications between Board members and Centro’s external lawyers at the meeting for the same dominant purpose; or (iii) confidential communications between Board members at the meeting which disclosed legal advice obtained by Centro from its external lawyers. Centro’s General Counsel Mr Hutchinson gave similar evidence, including that his communications were for the sole or dominant purpose of giving legal (and not commercial advice) and that the advice he gave was independent, objective advice given in his professional capacity.

PwC did not cross-examine either Ms Hourigan nor Mr Hutchinson, but argued Centro had adduced insufficient evidence to discharge its burden of demonstrating that the documents in question were privileged. PwC contended that Centro had adopted a formulaic approach which failed to provide evidence about any particular communication, identify any author or source of each communication and provide evidence from the author or source as to the purpose of their communication.

Bromberg J rejected PwC’s arguments. He was satisfied that Ms Hourigan’s approach was not “formulaic” in the sense that no more than a bare assertion of privilege being made. It was true that evidence was not provided by the multiple authors of each separate conversation made in the multiple conversations in question, however his Honour did not deem that necessary in the circumstances. His Honour pointed to Young J’s principles 4 and 10. His Honour observed that here the calling of direct evidence from each author of a part of the conversations in question would “unduly complicate, extend and render unacceptably expensive, the process of determining privilege issues…”, and was satisfied that the evidence established that the exchanges covered by all 3 of the categories listed above came into existence for the dominant purpose of a client seeking or obtaining legal advice from that client’s lawyer, or disclosed that legal advice.

The Subpoenaed Documents – the Hutchinson Records

These were the notes prepared by Mr Hutchinson of Board meetings he attended. Privilege was claimed in respect of extracts of these. Mr Huthinson deposed that the notes were prepared by him in his capacity as General Counsel of CNP and CER and other Centro companies, for the benefit of their use by Centro as a record of what occurred at those meetings. The redacted extracts comprised his notes of confidential communications between Board members and himself which occurred for the dominant purpose of him giving legal advice to Centro, and the Board receiving it on behalf of Centro. Mr Hutchinson also deposed that these communications were made for the sole or dominant purpose of him giving and Centro receiving legal and not commercial advice or assistance and that the advice provided by him was independent objective advice given in his professional capacity.

PwC argued this evidence was too general, and there was a failure to identify the nature of the communication or whether it was a communication to Mr Hutchinson or from him. PwC also contended generally that Mr Hutchinson was unable to speak to the dominant purpose of others, for instance those that communicated with him.

Bromberg J again upheld the claim for privilege. He considered that the evidence before the Court in relation to the Hutchinson Records demonstrated that the challenged communications occurred between Centro and its independent legal adviser in uncontroversial circumstances, and provided a sufficient basis upon which the Court could be satisfied that the communications in question came into existence for the dominant purpose of Centro seeking and obtaining legal advice from its lawyer.

The Subpoenaed Documents – the Reid/Stawell Documents

There were two emails from Ashley Reid of Centro to Peter Stawell, a partner of Freehills. Their attachments had been discovered (an earlier email and attachment sent from BNP Paribas to Mr Reid). Mr Stawell gave evidence that during 2007 he provided advice to CNP and CER in relation to banking facilities with BNP Paribas and that the emails in question were forwarded to him by Mr Reid for the sole purpose of Mr Stawell providing legal advice to Centro.

PwC contended this was just a bare assertion by a lawyer as to somebody else’s purpose. However Bromberg J was satisfied that Mr Stawell’s evidence was sufficient evidence of the circumstances in which the communications were brought into existence, and that the communications by Mr Reid came into existence for the relevant dominant purpose.

The Other ASIC Documents

His Honour was satisfied that for similar reasons as for categories of the subpoenaed documents, these documents too – revealing the content of legal advice provided to Centro variously by Freehills and Middletons – were protected from disclosure by legal professional privilege.

The Investigation Documents

These documents sought by PwC comprised “file notes of interviews, witness statements and any draft or final reports” relating to any investigations conducted in or about the period December 2007 to February 2008 by any of KPMG, Middletons and/or Freehills, into the classification of the interest bearing liabilities of CNP and/or CER and related matters.

A large number of lawyers involved as either the maker or receiver of a communication with Centro in relation to these investigations gave evidence, each of whom deposed that his or her sole or dominant purpose was to give, and for Centro to obtain, legal advice and assistance under the terms of their firm’s retainer.

Aside from communications passing between Centro and its external lawyers or Centro and its internal lawyers, the Investigation Documents also included –

notes taken by Freehills and Middleton solicitors of interviews and meetings,
internal communications between solicitors at Freehills,
internal communications between solicitors at Middletons,
communications between Freehills or Middletons and KPMG,
communications bewteen Middletons and Freehills, or Middletons and Gadens, or Middletons and Strongman & Crouch.

PwC called evidence directed to show that Centro had a multiplicity of purposes in reviewing the classification issue including, primarily, the conduct of an accounting disclosure exercise to determine for operational purposes the correct classification of the debt which may have been misclassified. Even if there was an additional, legal purpose, PwC argued that the Court ought not be satisfied on the evidence before it that this was Centro’s dominant purpose.

Essentially, PwC hinted darkly that the involvement by Centro of Freehills and Middletons was a sham, contrived to cloak their investigations into what had happened with the protection of legal professional privilege, although his Honour noted they stopped short of making that submission. PwC contented that CNP and CER had statutory accounting obligations which had required the inquiry to take place, and that the belated involvement of Freehills and Middletons did not of itself cloak the entirety of that process with legal professional privilege. Nor, so PwC argued, could a factual inquiry conducted so that CNP and CER could form a view as to an accounting position, be rendered privileged just because the factual inquiry was undertaken by external lawyers or an external accounting firm.

Bromberg J accepted PwC’s contention that Centro had an additional purpose rather than just to obtain legal advice, in retaining each of Freehills/KPMG and Middletons/KPMG – the conduct of an accounting enquiry or investigation independent of management to determine the correct classification of debt. However, his Honour stated this did not persuade him that the prima facie position as to Centro’s dominant purpose having been to obtain Freehills and Middleton’s legal advice should be displaced.

Bromberg J noted that the facts of this case are readily distinguishable from a case upon which PwC placed much reliance – Robson J’s decision in Perry v Powercor Australia Ltd [2011] VSC 308, upheld by the Court of Appeal of the Supreme Court of Victoria in Powercor Australia Ltd v Perry [2011] VSCA 239. Powercor concerned investigative reports prepared by technical experts into the course of a major bushfire, which were held in the circumstances of that case not to have been privileged. Bromberg J opined that Powercor is best understood as an example of the kind of non-privileged investigation carried out for the purpose of arming central management of a corporation with actual knowledge of what its agents had done. Here, Bromberg J considered, the evidence showed that the involvement of Freehills and Middletons in the investigation of the correct classification of debt was not artificial, contrived or objectively unjustified.

As to waiver, his Honour summarised the three key principles on the implied or imputed waiver of privilege drawn from the recent judgment of Keane CJ, Downes and Besanko JJ British American Tobacco Australia Limited v Secretary, Department of Health and Aging [2011] FCAFC 107; (2011) 195 FCR 123, by reference to the two High Court decisions of Mann v Carnell [1999] HCA 66; (1999) 201 CLR 1 and Osland v Secretary, Department of Justice [2008] HCA 37; (2008) 234 CLR 275 –

(1) Legal professional privilege will be waived, whatever the intention of the person whose conduct is in question, if the conduct of the person seeking to rely upon the privilege is inconsistent with the maintenance of the privilege,

(2) The focus is now upon inconsistency of conduct, but in determinnig whether there has been an inconsistency of conduct, considerations of fairness are still relevant, and

(3) It is now clear that disclosure of the gist of a privileged communication does not necessarily effect a waiver of legal professional privilege. Whether it does in a particular case will depend on whether, in the circumstances of the case, the requisite inconsistency exists, between a disclosure on the one hand and the maintenance of confidentiality on the other. There is no necessary inconsistency in stating the effect of advice and maintaining a claim of privilege. The purpose for which the privilege-holder made the disclosure is highly relevant including whether or not the disclosure was deployed for a forensic or other advantage.

In relation to the Freehills and Middletons Retainers – PwC pointed to the fact that in the affidavit material filed by Centro in support of its claim for privilege, the task for which the solicitors had been engaged was disclosed. However, His Honour took the view that the descriptions in the affidavits as to the tasks Centro gave its solicitors were general and unspecific, when compared to the terms of the retains themselves. Even if the gist of the advice sought by Centro was disclosed, partial disclosure is not necessarily inconsistent with maintaining a claim for privilege. Indeed the objective purpose of any partial disclosure here was to persuade the Court to protect the retainers from disclosure – entirely consistent with the maintenance of confidentiality. His Honour held there was no waiver in relation to the retainers.

As to the Subpeonaed Documents and Other ASIC Documents – These documents came into ASIC’s hands by virtue of notices issued under s 30 of the ASIC Act requiring their production by Centro. Section 30 provides for a coercive process requiring production under compulsion. However ASIC had sent the notices in each case with a covering letter recognising that Centro may have a valid claim of legal professional privilege with respect to some of the documents, and was not obliged to provide such documents, although it must provide detailed information in support of that claim. Centro provided documents to ASIC in response under covering letters expressing their provision to be on a confidential basis, with an express reservation of privilege and an express lack of intention to waive privilege.

Centro sought to claim privilege in these proceedings over redacted portions of some of those documents which had been provided to ASIC with no parts then redacted. Evidence was given that the documents had been provided to ASIC unredacted for reasons of the large volume of numbers, the shortness of time in which production had had to occur, and mistakes made by inexperienced lawyers or law graduates or Mr Hutchinson working in difficult conditions.

PwC argued that the provision of the disputed extracts to ASIC was a voluntary act of disclosure to a third party which is inconsistent with the maintenance of privilege in the documents. Bromberg J acknowledged that there might have been a limited waiver by Centro as against ASIC, but not necessarily as against another person like PwC. It is not the case that voluntary disclosure to a third party necessarily waives privilege. Disclosure to a third party for a limited and specific purpose did not lead to a loss of the privilege as against a person opposed in litigation in Mann or in any of the cases referred to in Mann at [32].

As to the Investigation Documents – PwC argued that Centro had waived privilege in respect of these because its directors had made submissions relating to the investigations by Freehills, Middletons and KPMG in the course of the penalty phase of the ASIC proceeding. However Bromberg J was not prepared to impute to Centro an understanding that its directors were about to be involved in making a disclosure of the Investigation Documents, and rejected PwC’s contention that the directors did disclose the substance of the legal advice contained in the Investigation Documents.

Thus PwC wholly failed in their application, privilege in all of the documents challenged was upheld, and PwC was ordered to pay costs. The judgment may be read in full here.

His Honour made an order allowing PwC 14 days to file a written application for leave to appeal, meaning a deadline of Friday 24 February. I stand to be corrected, but my search today of the Federal Court portal discloses no such application as having been filed in any of the five proceedings concerned.

With regards to the class actions and the fast-approaching trial, we can all await further developments with interest.

Harding Investments PL v PMP Shareholding PL – shareholders oppression – postscript/update

Posted on February 13, 2012 by carrieromesievers

On 14 December last year I posted an update as to her Honour Justice Gordon’s third (30 November 2011) and fourth (8 December 2011) judgments in this case of shareholders oppression. My earlier post can be seen here.

I noted at the end of my post that the respondents PMP Shareholding PL and others had filed an application to seek leave to appeal Gordon J’s substantive shareholders oppression judgment of 27 May 2011.

Their application was listed to be heard shortly after my post, on 16 December 2011. However the Federal Court portal shows that on 15 December 2011, the respondents’ application to seek leave to appeal was dismissed by consent.

On a final note, to illustrate how this shareholders dispute over wastewater company Lotic Pty Ltd has been hard fought every step of the way, the Federal Court portal shows that on 2 March 2011 – in the lead up to the shareholders oppression trial held in May and on the same day that the respondents lost their application for security for costs – Lotic Pty Ltd (controlled by the respondents Don Gordon and Paul Dick) issued a statutory demand upon the applicant Harding Investments PL. Harding Investments PL succeeded in its application to have the statutory demand set aside on 16 May 2011 – just a day before the shareholders oppression trial proper commenced – and won yet another costs order in its favour. This, after the respondents had previously adopted what appears may have been a scorched earth stratagem of placing Lotic PL into voluntary administration on 8 November 2010, although the company subsequently executed a Deed of Company Arrangement and the directors resumed control of the company. Those events are disclosed in Gordon J’s judgments of 2 March 2011 and 27 May 2011.

Finally, it would seem, after Mr Harding was summarily and wrongfully dismissed as CEO and removed from the Board in July 2010 by the other two directors (principals of the other two shareholder companies), after enduring 6 months of what her Honour Justice Gordon has held to have been conduct in breach of the shareholders agreement and shareholders oppression in contravention of s 232 of the Corporations Act 2001 (Cth), the end of this difficult chapter may be in sight.

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 February 12, 2012 by carrieromesievers

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 February 3, 2012 by carrieromesievers

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.”

Carrie Rome-Sievers, Barrister

Developments in insolvency and commercial law