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

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Section 1324 of the Corporations Act 2001 (Cth) is cast in very broad terms and, in my opinion, is a provision which is sometimes overlooked. As a separate issue, I am sure other practitioners working in the insolvency and commercial law space, will have come across cases of deadlock or shareholder oppression in an SME, where the threat is made – or even acted upon – to appoint a voluntary administrator to a company, in what is suspected to be a scorched-earth strategy.

While we cannot know and I do not suggest any such strategy was at play in this particular case, that aspect aside, these two issues otherwise came together in March of this year in an interesting ex tempore judgment of Black J of the NSW Supreme Court. In that case, s 1324 was used to seek an injunction restraining a director from appointing an administrator for what was claimed by the applicant to be an improper purpose – In the matter of O’Neill v Advantage Hearing Pty Ltd [2013] NSWSC 175.

I will set out here in full just three of the sub-sections of the provision. Sub-sections (1) and 4) are relevant to the case now discussed. Sub-section (10) is not, but it is the sub-section of 1324 which in my view tends to be over-looked, although last year there was an interesting s 1324(10) decision in Queensland by the Full Court of the Queensland Supreme Court in May (McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129, see in particular [21]-[40]). So while it is not relevant here, I also reproduce sub-section (10) below, merely to draw attention to it.

Sub-sections 1324(1) and (4) provide as follows –

“(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, conselling or procuring a person to contarvene this Act; or

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.”

“….(4)  Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).”

I recommend readers also pay attention to the other sub-sections, most notably sub-sections 1324(6) and (7), to fully appreciate just how wide the powers under this section were cast, by the legislature.

Skipping ahead, sub-section 1324(10) goes on to provide the Court with an additional, potentially far-reaching power –

“(10)  Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.” 

In this case a recently-removed director of a company called Advantage Hearing Pty Ltd, Mr Matthew O’Neill, issued proceedings seeking interlocutory and substantive relief against the company itself, a director Ms Rhonda Hughes, and another person with an interest in the company, Mr Soeren Iversen, and associated entities. The company was trustee of the Advantage Hearing Trust, which appeared to conduct a hearing assessment business. While there was controversy as to the circumstances, Mr O’Neill’s employment had been purportedly terminated and he had been removed as a director. However there were problems with the application, including as to service of the affidavits in support, the defendants did not appear, and the evidence did not properly establish all that was needed to found the claim for interlocutory relief.

The plaintiff Mr O’Neill sought an order under s 1324 that, until final hearing or further order, Ms Hughes be restrained from appointing an administrator under Pt 5.3A of the Act. Black J observed (at [3]) that the steps necessary to establish such relief “would seem to be” –

1. That there is at least a serious question that the company is not in fact insolvent or likely to become insolvent, so that the appointment of an administrator is inappropriate;

2. Implicitly, that the appointment of an administrator for an improper purpose would not only be invalid but also a contravention of the Act, for example, of Ms Hughes’ duties as a director; and

3. That a basis for interim relief under s 1324 of the Act is established, in that the balance of convenience favours interim relief.

The threat of appointment of a voluntary administrator was said to emerge from a letter from the defendants’ solicitors to Mr O’Neill’s solicitors. The letter discussed proposals to resolve the dispute between the parties. It noted that if no resolution was reached, the third defendant Mr Iversen was likely to call in a loan he had made to the company, which would render the company insolvent, and Ms Hughes would then have no alternative but to appoint an administrator. Mr O’Neill’s solicitor responded, contending that the appointment of an administrator would not be for a proper purpose, and that there was no basis for the threat of that appointment because the loan was not repayable until February 2016 under the terms of the loan deed.

His Honour considered the first letter to be inadmissible, as subject to the “without prejudice” privilege, and that it would follow that the response from Mr O’Neill’s solicitor would also be subject to the privilege.

However, even if he was wrong on that and the letters were admissible to establish a threat of the appointment of a voluntary administrator, his Honour found that the basis for the interlocutory relief sought was not established, because –

(1) The evidence did not establish, as Mr O’Neill contended, that the loan could not be called on. Mr O’Neill sought to rely upon the loan being treated as non-current in the balance sheets. The deed he relied upon was unsigned, undated and unstamped, and Mr O’Neill could give no evidence either that it was executed or that the parties had conducted themselves on the basis set out in it.

(2) There was no affirmative evidence as to the company’s solvency, which his Honour observed would at least require some scrutiny of its cash flow position, and no basis for a finding that the company was neither insolvent nor likely to become insolvent, such that a voluntary administrator could not properly be appointed. His Honour emphasised that he was not finding that the company was insolvent or likely to become insolvent. Rather, he was noting there was no evidence one way or the other, as to the company’s solvency.

As Black J astutely observed (at [8]), there may be a real question as to whether a Court would, without clear evidence of solvency, restrain the appointment of an administrator under s 436A, where the provision for such appointment is important to the mechanism for reconstruction of potentially insolvent companies, and also allows directors to avoid potential liability or insolvent trading. A potential consequence of restraining the appointment of an administrator would be that directors would in fact be exposed to potential liability for insolvent trading, if a company then continued to trade in circumstances where it had been unable to appoint an administrator when it was in fact insolvent. However, I pause here to note that the defence to insolvent trading in s 588H(5), as further described in s 588H(6), does not require that a director succeed in appointing an administrator. It requires that the person “took all reasonable steps to prevent the company from incurring the debt” which, per s 588H(6) means the Court must have regard to matters which include, but are not limited to… “any action the person took with a view to appointment an administrator of the company”. If there was clear evidence that a director took steps or evinced a clear intention to have an administrator appointed to an insolvent company, but was prevented by injunction, it is difficult to see a Court rejecting the contention that the person met these requirements of the defence, subject to other relevant circumstances. As an example of another relevant circumstance – if there were other steps the director could have taken to prevent the company incurring the debt, and he or she did not take them either, I suggest the defence may be more likely to fail.

In any event his Honour found it was possible to resolve that aspect of the application on a narrower basis: a serious question had not been established that it would be an improper step to appoint an administrator, as it had not been established that the company was plainly not insolvent and unlikely to become insolvent (at [9]).

Black J pointed out that there were other avenues available to Mr O’Neil to address the position, if an administrator is in fact appointed for an improper purpose. Those protections being –

1. The administrator himself or herself has an obligation to at least take some steps to satisfy himself or herself as to the validity of his or her appointment, and in particular to review the terms of the resolution of the board by which he or she is appointed: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422.

2. More fundamentally, the Court has jurisdiction to scrutinise the reasons given by directors for the appointment of an administrator and, if they are not objectively established, the administrator will be removed and the appointment of an administrator for a collateral purpose is potentially a breach of directors’ statutory duties: see the authorities cited at Austin and Black’s Annotations to the Corporations Act at [5.436A]. Accordingly, if an appointment of an administrator is made in circumstances where it was not objectively justified, the Court has ample powers available to invalidate the appointment. Black J expressed the view that that course seemed to be preferable, as a matter of balance of convenience, than an interlocutory injunction, in that it does not expose directors to potential liability for insolvent trading if an injunction is wrongly granted. I suggest respectfully, however, that in some cases waiting for a threatened appointment before challenging it may not be seen as preferable for a company, depending upon what effect an appointment may have upon its significant contracts or banking facilities (see below).

Mr O’Neill also pointed to the appearance of recent changes to the company’s balance sheet, recording additional liabilities to Ms Hughes and Mr O’Neill. Those could be open to challenge, but Black J took the view that that challenge could properly be brought in an application to set aside the administrator’s appointment, or at a final hearing of the proceedings.

On the issue of balance of convenience, Mr O’Neill had also contended that there would be detriment to the company if an administrator was appointed, by reason of risk to a contract with a government agency, the Office of Hearing Services. However that contract was not in evidence, such that there was no evidence of the impact of such an appointment under the terms of the contract.

I pause here to note, as mentioned above, that in some cases the appointment of an administrator will place at risk if not a significant contract or contracts vital to the business’s revenue stream, but also  a company’s banking facility. Indeed, it is possible that an appointment of itself can render a company insolvent, when it previously was able to pay its debts as and when they fell due. The difficulty for the director who has been ousted from the company in these cases in terms of an ability to pre-empt and restrain threatened conduct, is that he or she is often unable to produce the necessary evidence to obtain the orders sought, because the other directors have shut him or her out of the company and are preventing access to the company’s books and records.

Here, Mr O’Neill sought further interlocutory relief, restraining the defendants from preventing Mr O’Neill having access to certain offices of the company, access to its books and records, taking certain actions in respect of its bank accounts, and having access to its computer server. However Mr O’Neill relied upon an affidavit of some months prior, following which the defendants had given certain undertakings (not detailed in the judgment). There were assertions and counter-assertions in the correspondence between the solicitors as to whether those undertakings had been honoured or breached. There was no further evidence to establish any breach, or to establish any occasion when access had been denied to Mr O’Neill.

Black J also declined to grant an injunction restraining the defendants from preventing Mr O’Neill from engaging in his duties as an officer and employee of the company, which relief was positive in substance (although s 1324(1) expressly provides for this), and one as to ASIC recognising Mr O’Neill as a director.

An interesting case and, as is often the case with injunction applications of any sort, one which in the end came down to the quality and sufficiency of the evidence.

Something old something new

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This is a brief, useful alert regarding PPSR search results. It notes the importance of checking whether a PPSR registration is linked to an earlier registration number, which may indicate the exercise of a right of subrogation by a guarantor. The alert was written by Nicola Young of B2B Lawyers.

Newsflash: PPSA model clauses for a general security agreement released

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In a highly commendable move, last Friday the five international law firms of Allens, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose jointly released “the PPSA model clauses” for a General Security Agreement (GSA), which they had been working on together to prepare. The clauses may be found on the websites of all of those firms. Here is the link to the announcement on Allens’ site (link), and to the model clauses themselves (link).

They note that where different firms take different approaches to some essential elements of GSAs, those differences are not necessarily a matter of right/wrong, better/worse, but can cause confusion and unnecessary negotiation as parties seek to impose their preferred position on others, often based on an imperfect understanding of another firm’s approach. Without guidance, they observe, it may take a long time before the market settles.Their stated objective in jointly publishing the clauses, is to assist the functioning of the market post-PPSA, with a view to helping the market to develop a settled practice. They also believe this is in clients’ interests.

Their joint announcement reads in part as follows –

“A document that was heavily affected by the Personal Property Securities Act 2009 (Cth) (the PPSA) was the traditional fixed and floating charge….The replacement for the fixed and floating charge is now usually called a General Security Agreement (or Deed) (the GSA)…

The PPSA model clauses…represent a distillation of the [five] firms’ thinking on several important issues and are consensus positions. They are not biased towards either grantors’ or secured parties’ interests…The footnotes that accompany the clauses explain the PPSA thinking behind the decisions made in settling the [clauses]. They help understand the intended operation of these provisions. However, they do not constitute advice to any person.

These clauses have been adopted into the firms’ precedent GSAs. The firms have no objection to them being used by any other person in the market if they consider them appropriate for their precedents or a particular transaction….”

Appeal from liquidator’s decision to sell by tender causes of action against directors

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Earlier this month Rein J of the NSW Supreme Court refused to grant an interlocutory injunction sought in proceedings brought under s 1321 of the Corporations Act 2001 (Cth) (the Act) appealing from the decision of the liquidator of a company to sell certain assets of the company by tender – see In the matter of SCW Pty Ltd [2013] NSWSC 578.

The company had been placed in liquidation not because of insolvency, but because of a deadlock between the two directors, Ms Cantarella and Mr Schirato. SCW was the holding company of a group controlled by Ms Canterella and Mr Schirato, which included a company Cantarella Bros Pty Ltd, the operator of a successful business as a fresh foods wholesaler specialising in products which included coffee under the Vittoria brand. The assets of SCW included significant real estate.

The liquidator, Jamieson Louttit of Jamieson Louttit & Associates, had been in the process of selling the assets of SCW and the liquidation was close to completion. In 2011 Mr Schirato indicated his interest in purchasing SCW’s rights against Ms Cantarella in relation to her role as a director. Mr Schirato provided the liquidator with an opinion by well-known Sydney silk Robert Newlinds SC. Mr Schirato indicated he, and a corporate entity, would be willing to pay $100,000 for the potential rights of SCW against Ms Cantarella Mr Newlinds discussed in his opinion.

The liquidator considered Mr Schirato’s proposal, and the opinion. He also had the allegations investigated, and obtained an advice from his own solicitors Piper Alderman. On these bases, he formed the view that contrary to Mr Schirato’s contention, SCW had no viable causes of action against Ms Cantarella. Prudently, however, he sought judicial direction under s 479(3) of the Act as to whether he would be justified in not treating with Mr Schirato in connection with the claimed causes of action. Both directors were represented at that hearing before Brereton J. In his decision, his Honour Brereton J held that the liquidator would not be justified in refusing to treat with Mr Schirato. That judgment may be read here, and see [3]-[9] for details of the potential causes of action that Mr Schirato was interested in pursuing.

Subsequently, the liquidator established a process whereby those parties who might have an interest in paying for an assignment to themselves of SCW’s causes of action against any of the corporate officers of SCW would be given an opportunity to tender. Those officers were the two directors Ms Cantarella and Mr Schirato, Ms Wannan (an alternate director) and Mr Jones (the company secretary).

Tenders were invited by a document sent out on 12 April 2013, which included certain aspects –

(1)  A tender must not be less than $100K,

(2)  The liquidator would accept the highest offer received if the terms were complied with, and

(3)  The liquidator would seek judicial approval for the execution of the deed of assignment .

The grounds upon which the applicants, Ms Cantarella and a corporate entity, challenged the decision of the liquidator to take this step included –

1.  The use of a tender process was unfair, as it gave the tenderers no opportunity to better the offer made by another tenderer;

2.  The description of the claims against “any past or present officer of the company other than the liquidator” or any other person connected in any way to any act or omission of any past or present officers of the company was too broad. This would impede a tenderer from offering as much as they might otherwise.

3.  The terms of the indemnity the liquidator sought in the proposed deed of assignment was too broad, which would also discourage a tenderer from making its highest bid.

4.  The tenderers were to provide cheques, to be held in the account of Piper Alderman, until the Court approves the execution of a deed of assignment. This, it was argued, exposed the potential tenderer to the risk that his her or its money would not be returned.

Rein J found it notable that the applicants did not complain about the range of persons to whom the tender letter was sent; it was sent only to the former officers of the company SCW.

His Honour notes the key principles as advanced by the applicants, at [12] –

(1)  The fundamental duty of a liquidator is to obtain the highest possible price for the company’s assets sold by him or her;

(2)  Where an appeal under s 1321(1)(d) against a discretionary decision of a liquidator is brought, the Court will reverse the liquidator’s decision “only when it is satisfied he was acting unreasonably or in bad faith”: Re Jay-O-Bees Py Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565 at [46]; McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690, at [73].

There was no allegation of bad faith, but the applicants asserted that the liquidator was acting unreasonably, for the four reasons outlined above. Rein J took the view that since no point was taken that there was any unreasonableness in sending the invitation to tender only to former officers of the company, the liquidator’s decision to offer Ms Cantarella the opportunity to purchase the rights and thus stymie the claims that it appeared Mr Schirato sought to bring against her seemed fair and reasonable, as did the various aspects of the tender process challenged.

Rein J accepted that a tender process means that each tenderer does not know what the others may have bid, and thus has no opportunity to better other bids. But that is the process. Sale by tender is a legitimate method of selling property and did not appear to involve an unreasonable commercial decision. Whether it was likely to yield a higher or lesser figure than some other process, such as a round table auction, was a matter upon which the liquidator was required to exercise a commercial judgment, and he had done so. His Honour noted that a tender process had the additional advantage of removing the liquidator of involvement in a bidding process involving negotiations, which could be difficult to control.

Rein J held there was no discernible prejudice to the applicants in permitting the tender process to proceed, and he refused the injunctive relief sought.

One can see that the tender process in these circumstances put Ms Cantarella in an invidious, and expensive, position. It is indeed possible that any claims against her could, were they to be pursued, prove to be of insufficient merit. Yet even so, at this point in time, she faced a costly and unpalatable choice.

An interesting decision indeed.

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

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

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

I wrote on the Victorian Court of Appeal’s decision last year here. In short, the Court of Appeal held that a tenant’s leasehold interest could be extinguished by disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth).

In their summary of argument for special leave, Willmott Growers Group Inc noted that disclaimer of a lease by a liquidator of a corporate tenant is common (at [42]). However, they argued that disclaimer of a lease by a liquidator of a corporate lessor is a novel use of the liquidator’s disclaimer power, and that the implications of the Court of Appeal’s decision are far reaching. Tenants, particularly retail shop tenants, typically invest substantial sums into the goodwill and fit-out of their leased premises. Much of this expenditure is lost of the tenant is forced to relocate. Also, as the Court of Appeal’s decision erodes the security of tenure under a lease, it may impact upon the willingness of banks and financiers to grant finance on the security of a lease. They noted that the consequences for lessees, in particular retail tenants, are significant. The Court of Appeal had indicated at [51] that the implications of its decision extended to “shopping centre leases”. (See [36]-[41] of the applicant’s summary of argument.)

We await the High Court’s decision with interest. It is expected the appeal hearing will take place later this year, potentially August 2013, with the judgment to follow sometime thereafter.

Provisional liquidators – principles as to appointment – ASIC v ActiveSuper

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

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

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

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

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

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

The Appointment of Provisional Liquidators 

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

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

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

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

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

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

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

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

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

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

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

…

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

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

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

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

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

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

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

Prospects of Winding Up Application on Just and Equitable Ground

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

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

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

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

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

Application to the Facts Here

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

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

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

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

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

5.  MOGS appeared to be insolvent.

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

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

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

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

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

Victorian Supreme Court costs – the party/party is over

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Many practitioners will already be aware of the new costs regime coming into force in the Victorian Supreme Court next week – 1 April 2013. It is worth noting. For those who would like a handy “cheat sheet” summary, I refer you to this excellent one prepared by my friend and colleague, Paul Duggan.

Paul Duggan's avatarPaul Duggan

No April Fool’s Day jokes please.

Effective 1 April 2013 the Victorian Supreme Court has a new costs regime.

The highlights:

  • The ‘party and party basis’ (by which most Supreme Court cost bills have historically been taxed) is axed.
  • Henceforth, costs orders will generally be taxed on the more generous ‘solicitor and client basis’ (that is “all costs reasonably incurred and of reasonable amount”) although that yardstick is to be renamed the ‘standard basis.’
  • Costs on an indemnity basis remain available.
  • Solicitors’ time on the standard basis will be claimable in 6 minute units at the rate of $36 + GST per unit (ie $360 + GST per hour).
  • Unless otherwise ordered, the maximum daily allowance for counsel is $5000 + GST per day for juniors and $7500 + GST per day for silks.
  • Photocopying (currently allowable at a whopping $2.30 per page) becomes discretionary but is likely to be…

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

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

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

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

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

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

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

Their Honours observed at [91] that –

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

Yet, so their Honours specifically held –

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

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

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

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

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

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

Newflash: The Banks win special leave to appeal Bell Group to the High Court

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It is being reported that this morning, Westpac and the other 19 banks in the Bell Group litigation have won special leave to appeal their loss last year in the West Australian courts to the High Court of Australia.

At first instance in 2008 the Banks were ordered by his Honour Justice Owen to pay about $1.58 billion to the liquidators of Bell Group (link). Their appeal of that decision to the Court of Appeal of the West Australian Supreme Court failed – see that judgment here. This morning, the full bench of the High Court granted the Banks special leave to appeal.

The brief media report may be read here. And thus Australia’s reportedly most expensive and longest-running court case continues…

Refusal to adjourn winding up application, despite tax appeal

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

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

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

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

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

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

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

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

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

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

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

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

His Honour ordered that the companies be wound up.

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