A refresher – Liquidators’ section 483(1) applications

Section 483(1) of the Corporations Act 2001 (Cth) is concerned with the “delivery of property to the liquidator” and provides –

The Court may require a person who is a contributory, trustee, receiver, banker, agent or officer of the company to pay, deliver, convey, surrender or transfer to the liquidator or provisional liquidator, as soon as practicable or within a specified period, any money, property, or books in the person’s hands to which the company is prima facie entitled.

The section provides a summary procedure to avoid the expense of the company bringing actions against company officers and others who obtain their authority from the company, in possession of the company’s property.[1]

In short, if the company in liquidation is “prima facie entitled” to the property the subject of the application, the Court has a discretion to order it delivered up to the liquidator without resolving the issue of who is the owner of the property. This may be so even where there is a genuine dispute as to ownership of the property the subject of the application [2].

However, somewhat similarly (though not identically) to the position with applications to set aside statutory demands, this may not be the appropriate procedure to employ where there is a real question of ownership to be tried between the company and the proposed respondent to the application. There can be a fine line, though, when the dispute raised does not appear to be well-founded.

Principles

The following is my distillation of the key principles to be derived from the authorities –

  1. The issue for the Court to determine is whether the company is prima facie entitled to the property the subject of the application.[3]
  2. The Court does not inquire into and finally determine or resolve a dispute as to title to the property,[4] if there is one.
  3. The Court may determine the question of whether the company is prima facie entitled to the property and order its delivery up to the liquidator –
    1. Even if there is some evidence to the contrary,[5] and
    2. Even if there is a genuine dispute as to ownership of the property in question,[6] but
    3. Not if a claim is made by the person in whose hands the assets are found that is adverse to the company, such as a claim that that person is entitled to the assets.[7]
  4. If there is a dispute, the Court may determine that the company is prima facie entitled and order the delivery up of the property in question without resolving the issue of who is the owner of the property.[8]
  5. The Court’s jurisdiction to make the order is discretionary.[9]
  6. The persons identified in the subsection are all persons who either derive their authority from the company or are accountable to it.[10]
  7. There is authority for the proposition that “receiver” in s 483(1) refers to a receiver appointed by the company to a debtor; not a receiver appointed to the company by a secured creditor: Home v Walsh [1978] VR 688.
  8. There is authority for the proposition that a constructive trustee may not be a “trustee” for the purpose of s 483(1):  Re United English and Scottish Assurance Company; Ex parte Hawkins (1868) 3 Ch App 787; Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140; (2014) 284 FLR 320; cf Evans v Bristile Ltd (1992) 8 ACSR 344 (WASC).

Case Studies

Home v Walsh

In Home v Walsh [1978] VR 688, receivers and managers had been appointed to a company by a debenture holder prior to the winding up order and appointment of the liquidator. Thus the receivers were in possession of the moneys, property, books and records of the company. The liquidator brought an application under a predecessor of s 483(1) of the Corporations Act 2001 (s263(3) of the Companies Act 1961) for delivery up of the company’s moneys, property, books and records.

The application succeeded at first instance, but was overturned on appeal. This was on  several bases. One was that there was a genuine dispute between the parties as to the entitlement of the company to possession of the property in question. Another was that the provision is directed at “insiders” of the company – those who either derive their authority from the company or are accountable to it. Thus the expression “receiver of the company” in the provision refers to a receiver appointed by a company to its debtor; not a receiver appointed by a secured creditor to the company. In the latter case – at least on the terms of the debenture in this instance – that receiver is the agent of the secured creditor and derives its authority from and is accountable to the secured creditor, not the company.

Sidebar:  I note that this conclusion as to the extent that a receiver appointed to a company is or is not an agent for the company (vs his or her secured creditor appointed) may turn on the terms of the debenture or security agreement in question: see the line of authorities following Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407 where this question has arisen in a number of different contexts, including:  a preference dispute as to whether payments made by a receiver were payments by an agent of the company (Sheahan v Carrier Air Con); a privilege dispute in one of the many Westpoint cases (Carey v Korda and Winterbottom [2012] WASCA 228).

Boyles Sweets

Boyles Sweets (Australia) Pty Ltd (in liq) v Platt [1993] VicSC 389; (1993) 11 ACSR 76 was one of several cases where a liquidator has made an application for delivery up of property where it appeared there may have been phoenix activity and the liquidator regarded the transaction in question as a sham. In this case the liquidator applied for delivery up of two Boyles Sweets businesses, one operating at Melbourne Central and the other at the Tea Tree Plaza in South Australia, as well as some records of the company.

The respondents to the application were one of the two directors of the company (who were husband and wife) and a company related to them Madame Pier Pty Ltd. They argued that the businesses were the property of Madame Pier, and the company was merely the manager of the businesses, and relied upon a written management agreement as evidence of these matters. The liquidator agued this alleged agreement was a sham.

Hayne J observed that the weight of authority suggests that the summary procedure available under s 483(1) is not available where a claim is made by the person in whose hands the assets are found that is a claim adverse to the company. His Honour found that there was a real question to be tried as to the ownership of the business, and the liquidator’s application was denied.

Re Mischel & Co

Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140; (2014) 284 FLR 320 was another case where, on the evidence reported in the judgment, it appeared there may have been phoenix activity. The liquidator of Mischel & Co Pty Ltd applied under s 483(1) to recover the books and records of the company from Mischel & Co Advisory Services Pty Ltd, claiming the company was prima facie entitled to those books and records. The second defendant was an undischarged bankrupt, and the former director of Mischel & Co Pty Ltd. Before that company had gone into liquidation, it sold its advisory business to Mischel & Co Advisory Pty Ltd, a company controlled by the second defendant’s son. It thereafter carried on the business from the same premises. Subsequently it ceased trading and became dormant.

Upon the liquidator becoming aware of electronic books and records being stored on computers at the premises and that some work was to be done on those computers, he issued these proceedings on an urgent basis together with an application for a search order under order 37B of the Supreme Court (General Civil Procedure) Rules 2005 (Vic).  The records were seized and copies made, with orders having been made for a procedure allowing the defendants to object to inspection of any electronic book or record seized. They objected to production to the liquidator for inspection of a large quantity of the material.

This was a hearing of the liquidator’s application under rule 37.01 for inspection of that material. It was submitted for the liquidator that he believed the sale of business was sham and might be set aside, and that Mischel Advisory held the business and its assets, including the books and records, on a constructive trust for Mischel & Co. Subject to inspection of the records, separate proceedings might be initiated.

The liquidator was unsuccessful, on several bases –

  1. Robson J held that s 483(1) cannot be used to resolve the issue of whether the sale of business was a sham such that the property in question was held for the company. The Court has no jurisdiction under s 483(1) to decide the issue. (See [101])
  2. Mischel Advisory does not fall within the class of persons to whom s 483(1) may be directed, even if it was sought to characterise Mischel Advisory as a constructive trustee. Mischel Advisory was an “outsider”. (See [101])
  3. Even if that were not so, there were competing ownership claims. Michel Advisory had a claim to the property of the advisory business adverse to the liquidator. The authorities have established that the Court has no jurisdiction under s 483(1) to resolve such a contest as to ownership between the plaintiff liquidator and defendant. (See [102])
  4. Further, there was no evidence to support the contention that the company Mischel & Co was prima facie entitled to the advisory business. (See [102]).

For these reasons, his Honour held he would not exercise his discretion to order inspection under r 37.01 to assist the liquidator in seeking in s 483(1) proceedings to obtain an order for delivery up of the advisory business in the possession of Mischel Advisory.(See [103])

Note that at [71]-[96] his Honour sets out a useful review of the authorities as to the scope and purpose of s 483(1) and its predecessors.

Re United English and Scottish Assurance Company

I will finish with a case decided a century and a half ago – Re United English and Scottish Assurance Company; Ex parte Hawkins (1868) 3 Ch App 787. In this case the liquidator sought to recover moneys obtained from the company’s bankers by a creditor under a garnishee order obtained between the presentation of the winding up petition and the order for winding up. The Court held that the money could not be ordered to be returned under an English predecessor to s 483(1).

At first instance, the liquidator had successfully argued that the creditor was a “trustee” within the meaning of the section, and obtained an order for delivery up of the money. On appeal, however, the Court held that it had no jurisdiction under the provision to make such an order, on several grounds –

  1. The section applies to contributories and officers of the company, and others in the position of trustee (or, broadly, agent), and not to others. The defendant was a creditor of the company, and was not in possession of the money in a position of a trustee or receiver.
  2. The money was not the property of the company at the time of the winding up petition. It was paid to the creditor prior to the making of the winding up order.

*******

[1] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [77], citing Re United English and Scottish Assurance Company; Ex parte Hawkins (1868) 3 Ch App 787, 790.

[2] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [76].

[3] See s 483(1); see also Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 at [76].

[4] Boyles Sweets (Australia) Pty Ltd (in liq) v Platt [1993] VicSC 389, 10-11 per Hayne J; Home v Walsh [1978] VR 688, 704 per Harris J; Blackjack Executive Car Services PL v Koulax [2002] VSC 380 at [17] per Habersberger J.

[5] Home v Walsh [1978] VR 688, 704 per Harris J.

[6] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [76].

[7] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [75] citing Home v Walsh and Boyles Sweets and [96(3)].

[8] See s 483(1); see also Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [76].

[9] Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [96(2)].

[10] Home v Walsh [1978] VR 688, 700 per Harris J; Re Mischel & Co Pty Ltd (in liquidation) [2014] VSC 140 per Robson J at [96(7)].

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 – 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: The Bell Group litigation has settled

Late yesterday and today, an announcement by liquidator Tony Woodings  that the Bell Group litigation has finally settled, is being reported in the press. The case is said to be Australia’s longest and most expensive legal action, and has taken nearly two decades to resolve.

Mr Woodings’ statement noted that:  “The sum for which the case has been settled has not been disclosed. It is subject to various approvals being obtained which are necessary for the settlement to be given effect.” 

The High Court appeal had been due to be heard this month. Last week it came out that the case had been adjourned for six months and withdrawn from the High Court list pending the outcome of settlement negotiations. You can read my post discussing that and other details of the case here.

The reports have appeared inter alia in the Australian (here and here) and ABC News (here and here).

Newsflash: Bell Group litigation adjourned amidst settlement negotations

For those of you who have not yet heard, it is being reported today that the Bell Group litigation has been adjourned for six months and withdrawn from the High Court list pending the outcome of settlement negotiations. The High Court appeal had been due to be heard this month.

There is far more to this very complex and multi-faceted case, but broadly, in 1990 the Banks had agreed to extend the Group’s loans in order to allow it to restructure and remain afloat, in exchange for a range of securities. Perhaps the Banks were in too deep – some of the banks had already committed staggering percentages of their own capital base to the one client (see [1839]-[1848] of the appeal judgment). However at the time, Bell Group was on the brink of insolvency, and it was alleged that the Banks knew enough regarding Bell Group’s financial position and other relevant circumstances. When Bell collapsed in 1991, the Banks seized assets worth $280 million.

At first instance in 2008, the consortium of 20 banks including Westpac, the CBA, the NAB, HSBC Australia and a range of overseas banks including Lloyd’s TSB Bank had been found liable by his Honour Justice Owen – at the conclusion of his 2,600 page judgment – in all the circumtances, to pay approximately $1.58 billion to the liquidators of Bell Group (link).

The Banks’ appeal of that decision to the West Australian Court of Appeal substantially failed in August last year (link), and in broad terms, the Banks had been ordered to pay to the liquidators more than $2 billion.

Now, Australia’s reportedly most expensive and longest-running court case could finally, potentially, be drawing to an end. If the settlement negotiations prove to be successful, the liquidators of the Bell Group might finally be placed in a position to commence the process of making distributions to creditors, who have been waiting an exceedingly long time.

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

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

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

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

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