Merry Christmas & a note for my own amusement

Before I wish you all a Merry Christmas, I thought I would close out the year by sharing with you something that amuses me every time I notice it. (Law can be a dry field in which to practice. We find mirth where we may.)

It is this: the number of companies with the word “phoenix” in their name. Often, they seem to be construction companies, though the field is wide. And they keep popping up in the daily Rodgers Reidy Risk Watch insolvency reports, suggesting that a remarkable number don’t seem to travel too well. Or perhaps I just notice them because I find it funny. Never fails to amuse me. Every single time. Why would you do that, use such a name for your company? Is it not inviting trouble? Unwelcome attention from corporate regulators? Cracks me up.

Let’s look at some stats, shall we? –

*Note I do not suggest any such company has engaged in phoenix activity. It is simply the use of the name, that I enjoy.

  • A search on ASIC’s website shows that there are 2570 entries found containing the word “phoneix”
  • A search on ASIC’s insolvency notices database (including deregistartion notices) brings up multiple pages of current entries, including Phoenix Motor Brokers Pty Ltd (in liquidation), PAJ King Pty Ltd trading as Phoenix Air Systems (in liquidation), Phoenix Refractories Australia Pty Ltd (in liquidation) and Phoenix Hazmat Services Pty Ltd (in liquidation),
  •  A search on Austlii shows a healthy amount of litigation involving companies with the word “phoenix” in their name, including Phoenix Constructions (Queensland) Pty Ltd, Phoenix International Group Pty Ltd and Phoenix Commercial Enterprises Pty Ltd.

Anyway, perhaps I amuse only myself, but there it is. If anyone is unclear on what a phoenixing company is or does, I have written on this before here.

It has been a busy year for many of us. I have at least one part-written post not yet polished enough to post, but it can wait until the New year. It further discusses the Full Federal Court’s decision on the CGT obligations of “trustees” (including liquidators) in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133. My earlier posts on this case are here (first instance) and here (appeal).

Merry Christmas to you all, and my wishes to you and your families for a safe, happy and healthy 2015. May you enjoy a restful break, and return fighting fit for 2015.

On a serious note, thoughts turn to our fallen colleague in Sydney, Katrina Dawson. May she rest in peace. My heart breaks for her little children. For once, words fail me.

Newsflash: Great Southern settlement deed approved

Yesterday in Melbourne Justice Croft approved the deed of settlement ending the Great Southern class action proceedings – Clarke (as trustee of the Clarke Family Trust) & Ors v Great Southern Finance Pty Ltd (Receivers & Managers Appointed)(in liquidation) & Ors [2014] VSC 516. I will not make comment on this case, but instead will refer to a few key parts of the judgment –

The principal terms of the Deed of Setlement are set out at [57] and are usefully summarised at [64], which summary is reproduced here –

  1. “The insurers of GSMAL will pay $23.8 million, to be disbursed as follows:
    1. $20 million to M+K Clients, to be disbursed pro rata based upon amounts paid by each M+K Client to M+K for legal fees and disbursements;
    2. $250,000 to Javelin Asset Management Pty Ltd; and
    3. $3.55 million to be disbursed pro rata to investors who invested pursuant to a Product Disclosure Statement issued in relation to a scheme managed by GSMAL, such disbursement to take place in accordance with the terms of a proposed Scheme of Arrangement.
  2. Group Members’ loans entered into to fund the investments and now held by Bendigo and Adelaide Bank Limited (or its related entities) will be admitted as valid and enforceable, and the BEN Parties will waive interest relating to overdue amounts accrued and unpaid as at the Approval Date.
  3. Group Members’ loans entered into to fund the investments and now held by Javelin Asset Management Pty Ltd will be admitted as valid and enforceable, and borrowers with Javelin loans will have 28 days from the Approval Date to make an election to either:
    1. make payment of the outstanding loan balance in full within 14 days of making the election and receive a 20% discount on the loan balance (being the balance as at 1 May 2014); or
    2. agree to a deferred settlement with the loan balance discounted by 17% if the balance is met by way of 12 equal monthly payments; or
    3. agree to an extended term where the terms are varied so that the first 12 months after the Approval Date are interest free and then 5% per annum for the remainder of the Revised Term.
  4. The Lead Plaintiffs, on behalf of themselves and on behalf of Group Members, will release the other parties (and their related entities or persons) from all Claims arising out of the contents of each Product Disclosure Statement, the Loan Agreements and or the allegations made in or the facts giving rise to all the relevant proceedings.
  5. The Group Proceedings will be dismissed with the parties bearing their own costs.”

His Honour took the unusual step of annexing the mammoth 2012 page unpublished judgment he had written but had never been delivered (calling them the “Great Southern Reasons”) to this judgment approving the settlement deed. His Honour notes at [2] that the trial of the Great Southern proceedings had extended over 90 sitting days from October 2012 to October 2013. Judgment was reserved. On Wednesday 23 July 2014 the parties were informed that the judgment was ready and listed for delivery on Friday 25 July. Within hours, the Court was notified that the proceedings had settled.

At [3] Croft J notes that the Great Southern Reasons are not published as reasons for judgment, simply annexed to this one, which suggests that as a precedent to future cases their status may be uncertain, and perhaps something less than obiter. Nevertheless his Honour explains why he has had regard to his Great Southern Reasons in considering whether to approve the Deed at [50]-[56], in particular at [56].

7.3% of the 21000 group members notified the Court of their objections to the settlement. These are considered by his Honour from [83].

As Croft J’s approval judgment at [6] makes clear, if the proceeding had not settled and the Great Southern Reasons had been handed down as his Honour’s judgment in the case, the plaintiffs’ claims would have been wholly unsuccessful. Moreover, given the length and expense of the proceedings and the trial, costly adverse costs consequencse for the plaintiffs are likely to have followed. This settlement avoids that outcome and achieves finality in the litigation.

Practice Alert: Federal Court’s New National Framework

I commend practitioners to take note of this important Practice Alert written by my esteemed Sydney colleague Dominique Hogan-Doran. It outlines the new national structure for the Federal Court of Australia, and the incoming national framework for the regulation of the market for legal services, noting that the Legal Profession Uniform Law is expected to take effect in NSW and Victoria from early 2015. I also note that last week the Victorian Legal Services Commissioner published a useful summary of the changes here.

Newsflash: Full Federal Court dismisses appeal in CGT/liquidators decision

This is a brief heads up for those of you who have been awaiting this appeal judgment as I have. Yesterday the Full Federal Court dismissed the Commissioner’s appeal in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133. In short, the judgment confirmed that s 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) (the ITAA) only imposes an obligation upon “trustees” (including liquidators) to retain funds to pay an anticipated CGT liability once a relevant tax assessment has issued.

Edmonds J who wrote the principal judgment went so far as to say that he was “firmly of the view” that the primary judge was correct in that conclusion (at [4]). For my discussion of the first instance decision of Logan J, see my earlier post here. There is more to be said about the significance of this conclusion of the Full Federal Court, which some of you will have heard me speak about following the first instance decision. My review of this appeal judgment to follow.  ***Time has beaten me as Christmas now approaches. My review is part-written, and will now follow in the New Year.

Newsflash – ASIC’s appeal in ASIC v Franklin successful

Today the Full Court of the Federal Court of Australia allowed ASIC’s appeal, concluding that on the grounds of a reasonable apprehension of bias, Messrs Franklin, Home and Stone ought be removed as liquidators of Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd. The judgment in full is up on Austlii and may be read here. My review of the first instance decision of Davies J may be read here.

The second part of ASIC’s appeal, as to an alleged contravention of s 436DA as to disclosure in the DIRRI, was unsuccessful. I note in passing that at paragraph [38] Robertson J remarked that he did not regard the (then) IPAA’s Code of Conduct to be extrinsic material to be taken into account in construing ss 60 and 436DA of the Corporations Act.

Newsflash: AFSA announces Debtor’s Petition lodgement fee to cease

For those of you who have been concerned at the introduction of the $120 fee on lodgment of a Debtor’s Petition under the Bankruptcy Act 1966 (Cth), AFSA has announced its cessation, following a notion passed by the Senate yesterday (link). AFSA’s announcement states that the fee is no longer payable after the close of business on 23 June 2014.

For anyone interested in reading a transcript of the questioning of AFSA by Senator Penny Wright during an Estimates hearing in February on this issue, here’s the link

Newsflash – High Court judgments today in Newtronics and Hills Industries

Further to my post on Sunday, the High Court has earlier this morning handed down two important judgments – one in insolvency law (Universal Distributing principle) and one in restitution (change of position defence): Stewart v Atco Controls Pty Ltd (in liquidation) [2014] HCA 15 and Australian Financial Services and Leasing Pty Ltd v Hills  Industries Limited [2014] HCA 14.

First, the High Court unanimously allowed the appeal of the liquidator of Newtronics Pty Ltd (in liquidation) from the Victorian Court of Appeal’s decision in Atco Controls Pty Ltd (in liquidation) v Stewart [2013] VSCA 132. The High Court held that the liquidator was entitled to an equitable lien over a fund constituted by a settlement sum with respect to costs and expenses incurred in getting in the fund, being his costs and expenses in litigation against the respondent, a secured creditor, and receivers appointed by the respondent.

The bench of Crennan, Kiefel, Bell, Gageler and Keane JJ held that:  “there is no basis for excepting this case from the application of the principle in Universal Distributing (at [65]). You can read the judgment in full here, the High Court’s judgment summary here, and my analysis of the Victorian Court of Appeal decision from which this appeal was brought here.

Secondly, the High Court unanimously dismissed the appeal of Australian Financial Services and Leasing Pty Ltd from the decision of the NSW Court of Appeal in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380; (2012) 295 ALR 147, holding that the first and second respondents would not be required to repay monies that had been mistakenly transferred to them by the appellant as a result of a fraud committed by a third party, because each respondent had established a defence that they had changed their position on the faith of the receipt of the payments.

While the decision was unanimous, three judgments were written. The joint judgment was that of their Honours Hayne, Crennan, Kiefel, Bell and Keane JJ. Their Honours French CJ and Gageler J each wrote a separate judgment. You can read the judgment in full here, the High Court’s judgment summary here, and my analysis of the NSW Court of Appeal judgment from which this appeal was brought here (the second case discussed there).

More to follow – I will endeavour to return to analyse the High Court judgments in each case as soon as time allows.

Heads up #2 – Two other insolvency law appeals before the Courts

Two other insolvency law appeals have just been heard.

Today, a Full Federal Court bench of their Honours Jessup, Robertson and White JJ heard ASIC’s appeal from the decision in ASIC v Franklin (liquidator), in the matter of Walton Construction PL (in liq) [2014] FCA 68. At first instance, her Honour Davies J had refused an application by ASIC for the removal of liquidators because of an apprehension of a lack of independence and impartiality, brought under s 503 of the Corporations Act 2001 (Cth). ASIC had also claimed that the DIRRI (declaration of relevant relationships) made by the liquidators upon their appointment as administrators was deficient, and had sought a declaration that they had contravened s 436DA of the Act. This appeal decision is likely to be instructive, and worth looking out for. I wrote an analysis of the first instance decision and the then upcoming appeal in March of this year – link.

And on Friday, a Victorian Court of Appeal bench of their Honours Ashley, Neave and Almond JJA heard the directors’ appeal from the decision in Le Roi Homestyle Cookies Pty Ltd (in liquidation) v Gemmell [2013] VSC 452. This is an appeal from an interesting decision her Honour Ferguson J handed down in August last year. It concerned public examinations of directors for potential insolvent trading claims – including de facto and shadow directors – and the consequences of those individuals failing properly to maintain their privilege against self-incrimination for criminal or penalty proceedings. I wrote an analysis of that decision also, which may be read here.

I will endeavour to inform you when the appeal decisions are handed down.

Heads up – High Court to deliver two important decisions on Wednesday

This coming Wednesday 7 May 2014, the High Court of Australia will deliver two important decisions – one in restitution law, the other in insolvency law.

The first is an appeal from the decision of the NSW Court of Appeal in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380; (2012) 295 ALR 147. This is a case concerning mistaken payments due to fraud, and in particular the change of position defence. I wrote on that decision in detail last year – you can read my review of it here (second case discussed there).

The second is an appeal from the decision of the Victorian Court of Appeal in Atco Controls Pty Ltd (in liquidation) v Stewart [2013] VSCA 132. In this case the central issue concerns liquidator’s equitable liens and the Universal Distributing principle. I wrote about this case in March – you can read my review of it here. The precedent the High Court decision sets here is likely to be important for liquidators moving forward, as to there being certainty regarding whether and when they can expect to be compensated for their time and money spent in recovering assets covered by a creditor’s security.

Newsflash #2: Important case on CGT liability of liquidators appealed by the Commissioner

The Federal Court portal shows that the Commissioner of Taxation has appealed to the Full Court of the Federal Court of Australia the decision of Logan J in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116.

At first instance, the Federal Court allowed the liquidators’ objection to the Commissioner’s private ruling on the issue. It ordered that the private ruling be set aside and in lieu thereof, the first question in respect of which that ruling was made, was to be answered as follows (the other questions fell away as the answer to 1 became “no”):

Question 1:  Is the liquidator required under s 254 of the Income Tax Assessment Act 1936 (Cth) (the ITAA) to account to the Commissioner out of the proceeds of sale, any CGT liability that crystallises on the sale of an asset that belonged to the company before liquidation?

Answer:  No, given the [then] present absence of an assessment.

In that case, the company had been placed in voluntary administration on 2 March 2011, and entered a creditors voluntary liquidation on 6 April 2011. Subsequently, the liquidators caused the company to dispose of a property, which constituted a “CGT event” under the ITAA.

Logan J considered the interaction of s 254 of the ITAA with key provisions of the Corporations Act 2001 (Cth) including s 501 as to distribution of property of a company in liquidaiton, s 555 as to the pari passu rule, that except as otherwise provided by the Corporations Act, all debts and claims proved in a winding up rank equally and are paid proportionately, s 553 as to debts or claims that are provable in a winding up, and s 556 as to priority payments.

The Commmissioner’s submission was that, in the circumstances of that case, the effect of s 254(1)(d) of the ITAA was that the liquidators became liable to retain from the proceeds of sale of a particular property, when those proceeds came into their hands an amount sufficient to pay the tax that would become due in respect of the net capital gain arising from the disposal of that property. The Commissioner contended that it was not necessary for there to be a notice of assessment before the retention obligation could arise (see [19]).

The liquidators submitted that, in the absence of an assessment, there could be no obligation. In that case, no assessment had yet been issued.

His Honour agreed. He reviewed the authorities and accepted that s 254 is “but a collection provision” not one that itself triggers the taxation liability (which may arise by the operation of other provisions of the ITAA36 or ITAA97). It follows, his Honour observed, that s 254 does not provide for an “incontestable tax” in the sense described by Gibbs CJ, Wilson, Deane and Dawson JJ in MacCormick v Commissioner of Taxation [1984] HCA 20; (1984) 158 CLR 622 at 639-640.

His Honour held in favour of the liquidators, and noted at [30] that the liquidators were not subject to any present retention and payment liability, and that he would so declare.

However, his Honour then added the following remarks, perhaps sensible of the potential for this decision to be construed as applying more broadly than it ought, at [31]:

“I should also add the following. Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like the prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year. Yet further, in the event of a controversy after the issuing of an assessment as to whether the tax debt that was provable in the winding up, the liquidator would be entitled to retain the gain or some part thereof sufficient to meet the assessed tax until that controversy was resolved. Whether there proves to be such a controversy in the present case must await the course of future events. If it comes to pass, the liquidators would be entitled to seek declaratory relief from the Court to resolve it.”

Where does that leave liquidators?

Pending the appeal, caution would be wise. Clearly the prudent course is that while there may be no obligation on a liquidator to retain funds in anticipation of a potential CGT liability upon disposal of an asset, a liquidator ought bear in mind the judicial remarks that a liquidator is entitled to retain the gain until assessment.

Note too that the decision at first instance does not resolve the question of the extent to which s 254 does or does not disturb the distribution priority provisions of the Corporations Act referred to above.