Vic Court of Appeal denies liquidators approval of proposed settlement agreement

Recently the Victorian Court of Appeal upheld a decision to deny liquidators approval of a proposed settlement in McDermott and Potts as liquidators of Lonnex Pty Ltd (in liquidation) [2019] VSCA 23. The creditors had been opposed to the settlement.

Background

The liquidators of Lonnex (Ross McDermott and John Potts) had commenced proceedings pursuing claims which arose from a striking series of transactions. Lonnex and a related company Millennium Management Pty Ltd each operated two medical practices at different locations in Melbourne. The day after establishing a tax consolidated group with related entities, Lonnex and Millennium both sold their assets – their 4 clinics – to Lonnex & Millennium Management Holdings Pty Ltd (LMMH) for $22m and $18m respectively. These amounts were payable at LMMH’s option by way of intercompany loans.

On the same day, Lonnex and Millennium forgave those loans.

Under the transactions LMMH acquired some of their liabilities. However others, principally those owing to the Commissioners of Taxation and State Revenue, were left with Lonnex and Millennium. The owner of the shares in LMMH, Dr Geoffrey Edelsten, subsequently onsold them.  (See [4]-[6])

The liquidators of Lonnex claimed inter alia that the release of the debts given by Lonnex to LMMH was an uncommercial transaction under s 588FB of the Corporations Act 2001 (Cth), and an unreasonable director-related transaction under s 588FDA, and sought judgment in the sum of $22m. The liquidator of Millennium (Andrew Yeo) subsequently issued a corresponding proceeding.   LMMH’s defence included arguments that the forgiveness of the loans was part of a larger composite transaction under which benefits flowed to Lonnex and Millennium, such that the impugned transactions were neither uncommercial nor unreasonable. (See [8])

Lonnex’s creditors were recorded in the judgment as including the Commissioner ($7.7m), the State Revenue Office ($264K), “perhaps” Dr Edelston ($3.6m) and minor creditors including Medicare. (See [10])

The Commissioner had funded Lonnex’s liquidators to conduct the Lonnex proceedings up to mediation. Agreement had not been reached on funding beyond that. (See [11])

Following mediation, Lonnex’s liquidators made applications under s 477(2B) and the then s 511 of the Corporations Act for orders directing that they were justified in compromising the proceeding and approving their entry into terms of settlement accordingly. An associate judge refused that application. The liquidators sought leave to appeal. The Commissioner of Taxation, being the largest creditor, appeared in opposition to the liquidators’ application. (See [2]) Indeed the proposed settlement was opposed by the Commissioner, the State Revenue Office, and the trustee in bankruptcy. (See [10])

Broadly, the liquidators argued that the proposed settlement was a reasonable commercial outcome and that they had not been put in funds to contest the proceeding further. The Commissioner disputed the wisdom of accepting the settlement and wanted a different liquidator appointed to pursue Lonnex’s litigation. (See [2]) Senior Counsel for the Commissioner informed the Court of Appeal that if Millennium’s liquidator Mr Yeo were to take over as liquidator of Lonnex, the Commissioner would be prepared to enter into a funding arrangement with him, and that Mr Yeo had consented to act as liquidator of Lonnex.

On the appeal, the liquidators submitted that the associate judge’s discretion had miscarried on several grounds. There was argument on the following issues –

  1. the significance of the fact that funding of the liquidation and the liquidators’ past and future expenses and liabilities had not been secured,
  2. the significance of the creditors’ opposition to the proposed settlement,
  3. the relevance and content of the legal opinion, and
  4. whether the proposed settlement was in the interests of creditors. (See [41])

Another proposed ground of appeal was the liquidators’ contention that the associate judge erred, or his discretion miscarried, in failing to give reasons or adequate reasons, for refusing leave under s 477(2B). (See [40]) The associate judge had stated that the s 477(2B) application was refused for the same reasons as the s 511 application. (See [62])

The Provisions

After the filing of the application, s 511 of the Corporations Act was repealed and replaced by the Insolvency Law Reform Act 2016 (Cth). The liquidators submitted that the principles which formerly covered s 511 applications applied equally to the replacement provisions contained in the Insolvency Practice Schedule (Corporations), namely ss 90-15 and 90-20. The case therefore proceeded as an application under s 511.

To pause here – for any practitioners looking to bring an application now under s 90-15 – I note that on an application for directions in Walley, In the matter of Poles & Underground Pty Ltd (Admin Apptd) [2017] FCA 486 at [41], Gleeson J observed that the question of whether to exercise the power in s 90-15 was “to be answered by reference to the principles applied to the exercise of the discretions previously contained in s 479(3) and s 511 of the Act”. This has since been approved in El-Saafin v Franek (No 2) [2018] VSC 683 at [110] (application by administrators for directions), in Re Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481; (2018) 125 ACSR 355 at [8] (application for directions), in Krejci (liquidator), re Community Work Pty Ltd (in liq) [2018] FCA 425 at [46] (application for directions and for s 477(2B) approval), in GDK Projects Pty Ltd re Umberto Pty Ltd (in liq) [2018] FCA 541 at [33] (application for the appointment of special purpose liquidators), and in an unreported decision in which I appeared last year for the liquidator Re Cameron Lane Pty Ltd (in liquidation); Playaround Pty Ltd v Peter Robert Vince, Supreme Court of Victoria, 14 August 2018 (appeal from the rejection of a proof of debt).  

Returning to the present case, section 511 of the Corporations Act relevantly provided –

(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

Section 477(2B) of the Corporations Act provides –

Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

(a) without limiting paragraph (b), the term of the agreement may end; or

(b) the obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.

I pause here to draw attention to the fact – sometimes overlooked – that s 477(2B) is framed as a prohibition. However, if a liquidator has entered into such an agreement without prior creditor or court approval, it can in some cases be possible to obtain retrospective approval from the court (nunc pro tunc). Such an application is often made together with an application under s 1322(4)(a) and (d). By way of example, two cases in which I appeared for the liquidators in obtaining such approval are –

Principles

The Court of Appeal reviewed the key authorities at [63]-[91]. The passages cited by their Honours  focussed upon several issues, including notably the importance of the views of the creditors. For instance at [66] their Honours cited this passage from the judgment of Lindley LJ in Re English, Scottish & Australian Chartered Bank [1893] 3 Ch 385, 409 –

If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be

At [72] the Court repeated the oft-cited observation of Giles J considering an earlier provision (s 377 of the NSW Companies Code prior to 1992 – authorisation to compromise) in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83, 85-6 –

In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator… That is not to say that it rubber stamps whatever is put forward by the liquidator but … the court is necessarily confined in attempting to second guess the liquidator in the exercise of his power, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected…to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.

The Court observed that, significantly, Giles J went on to say that it is for these reasons that the attitudes of creditors are ‘important’ in these applications. (See [73])

Following their review of the authorities, their Honours then distilled the following principles at [92]

  1. The nature of the inquiry undertaken by the court when approval is sought under s 477(2B) in relation to a proposed compromise of litigation is different from the nature of inquiry the court undertakes under s 511 when a liquidator seeks directions in relation to such a compromise.
  2. On a directions application the court must be positively persuaded that the liquidator’s decision to enter into the compromise is, in all the circumstances, a proper one. This necessarily involves a broad consideration of all the relevant circumstances. A direction will exonerate the liquidator.
  3. In contrast, the discrete consideration of an application under s 477(2B) involves a more circumscribed inquiry. The court reviews the liquidator’s proposal, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene. An order under s 477(2B) does not constitute an endorsement of the proposed compromise. An approval will not exonerate the liquidator.
  4. Given that the nature of the inquiry undertaken in relation to the directions application is broader than that under s 477(2B), it would usually be convenient to deal with with directions application first, and often that consideration would substantially overtake any discrete consideration of the application under s 477(2B).
  5. The court always pays due regard to the commercial judgment of the liquidator, and, on both applications, the attitudes of creditors are also important.
  6. On both applications, but particularly the application for directions, it would ordinarily be expected that a liquidator would have obtained appropriate legal advice in relation to the proposed compromise, and the nature and content of that advice is a relevant consideration.
  7. While the focus of s 477(2B) is delay, the inquiry under s 477(2B) still requires consideration of the substance of the proposed compromise. If a related application for directions reveals either that the directions should, or should not, be given, discrete consideration of the application under s 477(2B) may be superfluous.

Their Honours then added this at [93]

It can be seen that the authorities present a tension in the circumstances of the applications the subject of the present case. The liquidator is ordinarily best placed to determine what course the liquidation should take, in the interests of creditors, any contributors and the proper recovery of the costs and expenses of the liquidation. the court will generally not enter into the merits of that determination, confining itself to the question whether the proposed course is a proper one for the liquidator to take. At the same time, the interests and wishes of creditors are highly influential and the creditors are, if properly informed, in the best position to evaluate what is in their own interests. As such, the views of the creditors as to the merits of the present proposal are a highly material consideration.

Principles from Newtronics – s 477(2B)

I pause here to note that the principles here distilled by the Court of Appeal are somewhat informed by the circumstances of this case, and partly focussed upon the different functions served by each of s 477(2B) and s 511. On s 477(2B) applications, the Courts often cite and apply the principles as distilled by her Honour Justice Gordon in Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375. It may be useful to repeat them here –

  1. The Court does not simply “rubber stamp” whatever is put forward by a liquidator. (The passage by Giles J in Re Spedley Securities, reproduced above, is often quoted in full together with this principle. Note that its final sentence makes clear that the key consideration is whether the proposal is for the benefit of creditors.)
  2. A Court will not approve an agreement if its terms are unclear.
  3. The role of the Court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable.
  4. In reviewing the liquidator’s proposal, the task of the Court is – “[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in…a hearing de novo [but]…simply to review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidator, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the ‘expeditious and beneficial administration’ of the winding up.
  5. Further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a “grossly excessive profit”,
  6. Generally, the Court grants approval under s 477(2B) only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company.

(See Newtronics at [26] and the authorities there cited.)

Application 

The Court of Appeal – in the unanimous judgment of Whelan AP and McLeish and Hargrave JJA – held that the associate judge had not erred.

Their Honours found that the associate judge was correct to regard the wishes of creditors as a “very important consideration”. Indeed they noted that “he would have erred not to have done so” (see [98]). It was clear, however, that the associate judge did not consider himself bound to act in accordance with the creditors’ wishes, taking account of other matters including the funding position, the legal opinion tendered, the relevance of the Millennium proceeding and the possibility that Mr Yeo might be placed in funds to conduct the Lonnex proceeding. Their Honours noted that the fact that the source of those funds would be the principal creditor served to highlight the importance, in this case, of the attitude of creditors to the proposed compromise of the Lonnex proceeding. (See [95] & [98])

The Commissioner had also submitted that there would be adverse consequences for the Millennium proceeding if the Lonnex proceeding were to be settled, which the Court accepted had considerable force. (See [99])

The Court found the absence of funding for the Lonnex liquidators to continue the liquidation was not an “overriding factor” in this particular case. Here there were alternative options, including that the liquidators could resign so that Mr Yeo could be appointed. (See [95]-[96]) Notably, however, the Court observed that in a different case where no compromise has been achieved, it might be proper for a liquidator to discontinue litigation if funds to continue to conduct it are unavailable. (See [97])

Takeaway

This case serves as a warning to liquidators to take heed of the attitude of creditors to a proposed settlement of a claim, particularly majority, unrelated creditors. Certainly it is a reminder that the Courts will treat the creditors’ judgment of what is in their own commercial interests as of importance, in considering an application for approval to enter into a settlement deed and for directions.

Having said that, this was a somewhat unusual case. Each case will turn on its own facts. It will not always be the case when it comes to settling a proceeding that there is another proceeding arising out of the same transaction/s running in parallel, which may be adversely impacted by the settlement. Moreover, where liquidators are without the funds or a creditor willing to fund litigation, there will not always be an alternative convenient option waiting in the wings, of another liquidator who has consented to act with a creditor willing to fund him (and the majority creditor at that).

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 – 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.

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.

ASIC appeals the decision in ASIC v Franklin (liquidator), in the matter of Walton Construction PL (in liq) [2014] FCA 68

On 13 February 2014 the Federal Court 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 20001 (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. The case is that of Australian Securities and Investment Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68.

It is important to note that ASIC did not challenge the liquidators’ independence and impartiality in the performance of their duties either as adminstrators, and then as liquidators, of the companies (Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd). Rather, it was a matter of the appearance to the hypothetical fair minded observer. ASIC contended that a reasonable apprehension of a lack of independence and impartiality existed because of the following matters –

  • they were appointed administrators on the referral of the Mawson Group, which provides business advisory and restructuring services to companies in financial difficulty;
  • the Mawson Group had worked with the companies prior to their collapse;
  • shortly prior to going into administration the companies had assigned debts and sold assets, which transactions the liquidators would need to investigate, where –
  • * the other parties to the transactions appeared to be connected with the Mawson Group, based on company searches, and
  • * the effect of the debt assignments and asset sales was the transfer of a significant part of the business of the companies,
  • there was a need to investigate whether those transactions could be challenged as uncommercial transactions or unreasonable director-related transactions, whether the directors had breached their duties, and whether Mawson Group personnel were involved in such breaches, where –
  • * the Mawson Group was involved in the appointment of the insolvency practitioners who would be investigating the transactions involving entities connected to the Mawson Group,
  • * the Mawson Group had referred six other voluntary administrations to the firm of the liquidators,
  • * these referrals had generated a material volume of work with significant fees for the firm, and
  • * in 3 of the other 6 administrations, there were also antecedent transfers of assets and debt assignments by the companies, to entities connected with the Mawson Group.

ASIC contended that the significance of these matters was that the liquidators must investigate Mawson Group’s involvement in those transactions, and those associated with Mawson Group, in circumstances where the liquidators’ firm had an ongoing commercial relationship with the Mawson Group which generated significant fees for the firm, and where the persons who would be the subject of those investigations included those who referred the appointments to them. ASIC submitted that these matters gave rise to a reasonable perception or apprehension that the liquidators would not bring an impartial and unprejudiced mind to the investigation of the pre-appointment transactions, and would favour interests assocated with the Mawson Group at the expense of the interests of creditors, whether consciously or not.

This perception or apprehension of a lack of independence would be heightened by the alleged lack of full disclosures in the DIRRI, so ASIC contended, in the mind of the hypothetical fair minded observer.

The Legal Principles

Her Honour Davies J had regard to the following legal principles –

  1. It is settled law that a liquidator may be disqualified from continuing to act in the winding up of a company where the hypothetical fair minded observer would perceive a lack of independence or impartiality on the part of the liquidator in the discharge of his or her functions, even where independence and impartiality have in fact been maintained (see [2] and the authorities there cited);
  2. The disqualification principle gives due recognition to the requirement that liquidators must not only be independent and impartial, they must be seen to be independent and impartial, which is fundamental to the integrity of the winding up process (see [2] and the authorities there cited);
  3. Thus the discretion under s 503 of the Act will commonly be exercised in favour of removing a liquidator where it appears that the liquidator is in a position of apparent conflict because of some relationship (direct or indirect) or connection (see [2] and the authoriites there cited; note that I would query the use of the word “commonly” here);
  4. The test for determining whether a hypothetical fair minded observer would apprehend a lack of independence and impartiality requires the articulation of a logical connection between the matters which, it is said, may impede or inhibit the liquidators from acting impartially in the interests of all creditors in the discharge of their duties, and the feared deviation from discharging their duties and responsibilities impartially (see [6] and the authorities there cited);
  5. The test is an objective test viewed through the legal fiction of the hypothetical fair minded observer, and the apprehension of lack of independence must be reasonably formed. For the apprehension to be reasonable, it is axiomatic that the apprehension must be informed and arise upon an understanding of the actual circumstances in which the claim of apprehended lack of independence is made (see [6]).

The Court’s Decision

The question of the “logical connection” referred to in 4 above proved to be the tripping point. ASIC pointed to the character and nature of the liquidators’ business association with the Mawson Group, where the Mawson Group was involved in the very transactions that would need to be investigated, and the lawfulness of the conduct of the Mawson Group would come into question.

However the Court held that the logical connection was not made out. Davies J took the view (at [8]-[9]) that the knowledge attributed to the fair minded observer, appropriately informed, would include –

  • an awareness about the functions and duties of liquidators;
  • an awareness that liquidators have statutory duties and responsibilities that they must discharge;
  • an awareness  that it is the liquidators’ duty to discover whether any transactions are voidable, whether any conduct of persons has been in breach of the Act or given rise to some other civil or criminal liability;
  • knowledge that the liquidators’ firm is commonly referred voluntary administrations and other insolvency work by solicitors, business advisors and accountants, and that this was the nature of the liquidators’ firm’s business relationship with Mawson Group;
  • knowledge that as Mawson Group was a business advisory firm providing corporate restructuring advice to troubled companies, and its relationship with the companies in this case was a professional one;
  • knowledge that there is nothing about the conduct of the other insolvencies referred by Mawson Group to the liquidators’ firm that brings the firm’s independence and impartiality into question, having regard to their professional relationship with the Mawson Group; and
  • knowledge that if there was any deficiency in the DIRRI, such deficiency was inadvertent and not intended.

With an appreciation of those matters, the Court concluded, the fair minded observer may reasonably conclude that the liquidators would similarly discharge their statutory duties and responsibilities impartially and as required by law, uninfluenced by their relationship with the Mawson Group (at [9]).

The Court was not persuaded that there was any substance in the claim of apprehended lack of independence, and refused the application to remove the liquidators (at [10]).

Section 436DA – Disclosure in the DIRRI

At the time of their appointment as administrators, the (now) liquidators declared in the DIRRI that:

“The [companies were] referred by Mr P McCurry of Mawson Group, who refers us insolvency type matters from time to time. Referrals from solicitors, business advisors and accountants are common place and do not impact on our independence in carrying out our function as Administrators…”.

ASIC’s complaint was that this did not go far enough, and ought also have addressed why they did not believe that this referral relationship resulted in any actual or perceived conflict of interest or duty, in the context of the additional factor here – the potential need to investigate transactions involving the Mawson Group. ASIC contended that this omission meant the DIRRI was deficient by failing to meet the requirement of s 60(1)(b). ASIC contended that even if the liquidators were not aware of the involvement of Mawson Group in transactions they would need to investigate at the time of making the DIRRI, s 436DA(5) required that they update the DIRRI with the information when they did become aware of it. ASIC argued that the creditors needed to know that the Mawson Group may be investigated, to enable them to make an informed decision about whether to replace the administrators.

Davies J observed that the starting and end point is s 60 of the Act. Her Honour considered the policy objectives of s 60 and the passages in that regard in the relevant 2007 explanatory memorandum, commenting also upon the relevant 2004 Parliamentary Joint Committee Report and the 1998 CAMAC Report at [14]-[17].

However her Honour referred to the High Court’s judgment in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 91 ACSR 359 at [39] and cautioned against looking at what the EM says over construing the text of s 60. Whilst accepting that the primary purpose of the DIRRI is to enable creditors to make informed decisions about whether to replace an administrator, the content of the DIRRI is a matter prescribed by statute, and it is necessary to examine what the section requires.

The Court noted that the liquidators had disclosed their firm’s business association with Mawson Group and explained why the referral relationship did not compromise their independence in carrying out their function as administrators. ASIC argued that the liquidators had not gone far enough in the DIRRI, but the Court disagreed and declined the declaration ASIC sought (at [22]-[23]).

Decision Appealed

The Federal Court of Australia portal shows that ASIC lodged a notice of appeal last week on 26 February 2014. Consent orders were made by Jessup J on 28 February 2014 that the hearing of the appeal be expedited and listed for hearing on an estimate of one day. The portal also shows that the appeal is listed for a callover before Marshall J on 29 April 2014.

Comment

Three points to make about this case.

First – the Court’s decision demonstrates clearly that, as with other cases such as Accord Pacific Holdings Pty Ltd v Gleeson as liquidator of Accord Pacific Land Pty Ltd (in liq) [2011] NSWSC 1021, the courts do not exercise their discretion in s 503 lightly, even where it is not an actual lack of impartiality or independence that is alleged, but the appearance of it.

Secondly, as was noted in the National Safety Council of Australia decision of the Full Court of the Victorian Supreme Court ([1990] VicRp2; [1990] VR 29), this judgment of the Federal Court was a discretionary judgment. Therefore the limitations upon a court of appeal’s interfering with such a judgment ought be borne in mind. The principles upon which an appellate court interferes in such a judgment were considered by the High Court in Lovell v Lovell [1950] HCA 52; (1950) 81 CLR 513. At 519 Latham CJ quotes from the judgment of Dixon, Evatt and McTiernan JJ in House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504-5 where their Honours said this:

“The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he [or she] allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into acount some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.”

The onus upon ASIC here as a party seeking to have an appellate court interfere with a lower court’s exercise of discretion is a heavy one. As Kitto J observed in Lovell v Lovell at 533, it takes “a clear conclusion that the judge was plainly wrong” to justify the reversal of his or her decision.

Thirdly, it will be interesting to see on appeal whether, if this relates to one of the grounds of appeal, all of the matters listed above which Davies J in this case attributed as matters that would be within the knowledge or awareness of the hypothetical fair minded observer are upheld by the Full Court.

Newsflash: High Court today dismissed Willmott Forests appeal

In a 4:1 judgment the High Court today held that liquidators of landlord companies – not only liquidators of tenant companies – can disclaim leases under s 568(1) of the Corporations Act 2001 (Cth), and that the disclaimer terminates the tenants’ rights arising under the leases. The judgment in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed)(In Liquidation) [2013] HCA 51 is now on Austlii and can be read in full here.

The majority was French CJ, Hayne, Kiefel and Gageler JJ, with his Honour Gageler J delivering his own judgment. The dissenting judgment was that of Keane J.

Their Honours French CJ, Hayne and Kiefel JJ identified the central question of construction of s 568(1) as being whether a lease granted by a landlord company to a tenant is “a contract” within the meaning of s 568(1)(f). It is, according to their Honours, by virtue of s 568(1A) of the Act which provides that “[a] liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court”  (see [4]). The question then became whether the reference to “a lease of land” in s 568(1A) should be read as referring to any lease to which the company is a party, or only to leases of which the company is the tenant? Their Honours concluded the former was correct.

Broadly, the power of disclaimer of liquidators under s 568(1) is expressed as a one to “disclaim property of the company”. What such “property” includes is then set out in sub-paragraphs, (f) of which is “a contract”.

The appellant advanced two principal arguments. The first was that the only relevant property of the landlord company capable of being disclaimed was its unsaleable reversionary interest in the land the subject of the leases; the second, that the tenants’ leasehold estates would survive disclaimer of the lease contracts (see [27]). Their Honours French CJ, Hayne and Kieffel JJ considered and rejected the first of these arguments at [28]-[50] and the second at [51]-[55].

In relation to the second, their Honours held that it follows from the operation of s 568D(1) that, from the effective date of the disclaimer, the company’s liability to provide the tenant with quiet enjoyment of the lease property and the tenant’s rights to quiet enjoyment of the property are terminated. If the tenant suffers loss thereby, the tenant may prove for that loss in the winding up (see [8]). At [57], to make the point clear, their Honours expressly held that from the day on which the disclaimer takes effect, each tenant’s estate or interest in the land would be terminated.

Strikingly, though, their Honours added their own observation, under the sub-heading of “Questions not considered”, demonstrating a consciousness of at least some of the ramifications of their judgment, a matter to which I will later return:

Obviously, a tenant whose lease has been disclaimed by the liquidator of a landlord may consider that being left to proof as an unsecured creditor in the winding up gives little effective compensation for what has been taken away. Whether that is so in this case was not examined in argument and is not considered. Nor has there been any occasion to consider in this case whether the liquidators require the leave of the “Court” before disclaiming the investors’ leases or, if they do require leave, what considerations would inform the decision to grant or refuse leave. It may be noted that the Act does provide expressly, in s 568B(3) that the “Court”, on application, may set aside a disclaimer “only if satisfied that the disclaimer would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors” (emphasis added). Again, however, whather or how that provision would apply in this case was not explored in argument.”

Heads Up – Willmott Forests High Court Appeal – Judgment imminent

The High Court of Australia is to hand down judgment in the Willmott Forests High Court appeal this Wednesday 4 December. I will be interstate for a mediation, but will provide an update as soon as I am able.

To refresh your memories as to developments to this point –

  • February 2012 – The first instance decision of Davies J of the Victorian Supreme Court as to whether the disclaimer of a lease by the liquidator of the landlord’s company extinguishes the tenant’s proprietary interest in the land is handed down. Her Honour held that it did not – see my post here;
  •  September 2012 – The Victorian Court of Appeal overturns the judgment of Davies J and holds that a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) – see my post here;
  • May 2013 – The High Court grants special leave to appeal that decision – see my post here;
  • August 2013 – The High Court hears the appeal – see my post here.

No doubt many of us are awaiting the High Court’s decision with interest.

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

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.

Newflash – Willmott Forests investors mount High Court appeal

In a much anticipated move, Willmott Forests investors have lodged an application for special leave to appeal to the High Court of Australia, from the Victorian Court of Appeal’s recent decision on a question of disclaimer of leases by a liquidator, according to a report in today’s Australian Financial Review.

My review of the Court of Appeal’s decision – from which the Willmott Forests investors seek to appeal – is here. My reviews of earlier Willmott Forests decisions are here and here.

The Australian Financial Review article is here, and credit must go to my friend and colleague Sam Hopper for noting this development; his post is here.

Little is yet known publicly of the detail of the special leave application. I will monitor developments and seek to keep readers informed. In the meantime, I note that the website of one of the two investor groups involved in the litigation – Willmott Action Group Inc – appears to have been dismantled. It is unclear as to what, if anything, this signifies.

The High Court on GST in Qantas – What it may mean for Liquidators and other external administrators

** This article was subsequently republished with my permission in CCH’s online Insolvency and Bankruptcy news service in the week commencing of 5 November 2012 -http://www.cch.com.au/au/News/ShowNews.aspx?PageTitle=The-High-Court-on-GST-in-Qantas-—-What-it-may-mean-for-Liquidators-and-other-external-administrators&ID=38989&Type=F

This morning the High Court handed down what is perhaps the most important Australian judgment yet in the area of GST law, in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41. It addresses a question which is the most fundamental issue in GST law – what is a “taxable supply”, so as to trigger liability to pay GST under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). I will come to the potential significance of this decision for liquidators and other external administrators in a moment.

This was an appeal by the Commissioner from a judgment of the Full Federal Court which had found in favour of Qantas (link). It concerned whether GST was payable by Qantas on airline tickets which it had sold to passengers who, for whatever reason, had not taken their flight – specifically the appeal concerned non-refundable tickets, and tickets where the passengers had a right to claim a refund which they had not pursued. Significant sums of GST were involved – in excess of $34m.

Put simply, the argument before the High Court boiled down to this – what is a “taxable supply”? In the context of airline tickets, is it the air journey, as argued by Qantas (and accepted by Heydon J)? Or is it the entry into obligations under the contract – here the conditional promise by the airline to use its best endeavours to carry the intending passenger and his or her baggage, as argued by the Commissioner? The majority found in favour of the Commissioner.

For liquidators and other external administrators who take appointment, the potential significance of the decision is with respect to contracts that a company has entered into but has not yet completed, at the time of appointment. Today’s judgment in Qantas may mean that the GST liability triggered by those contracts, which had previously been thought to fall upon the liquidator or other external administrator who completes the contract, may now fall upon the company itself. In the case of a liquidation, that would leave the Commissioner to prove in the liquidation for that GST liability, rather than be able to look to the liquidator personally for the GST.

Division 58 of the GST Act makes “representatives” (defined to include inter alia a trustee in bankruptcy, liquidator, administrator and receiver) of “incapacitated entities” liable to pay GST that would be payable by the entity, to the extent that the taxable supply is made in the course of the representative’s responsibility.

However in the wake of Qantas, if the taxable supply (which triggers GST liability) occurs upon the entry into obligations under a contract, rather than upon the actual supply of the goods or service or other obligation which is the core object of the contract (or to use the words of Heydon J, “the bargain”), then it may be open to liquidators and other external administrators to complete contracts entered into prior to their appointment, without incurring personal liability for the GST triggered by the transaction.

I suggest that this is a perhaps unintended consequence of the High Court’s decision. The majority’s judgment does not appear to confine itself, in its conclusions as to what is a “taxable supply”, to particular types of contracts such as those which are not completed.

For completeness, I note that this issue that I now raise, was addressed last year by the AAT in The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 910. In that case a mortgagee in possession had contended that it was not required to pay GST on the sale of real property because the supply occurred at the time of the company’s entry into the contract of sale, rather than at the mortgagee in possession’s completion of the sale.  In finding against the mortgagee in possession, the Tribunal held that the taxable supply occurred at settlement, when the sale was completed, not when the vendor executed the contract of sale. I suggest that, in light of the decision of the majority of the High Court that Qantas made a supply at the time of contract, and subject to other complexities, the Tribunal’s decision may now be doubted.

* I must thank junior counsel for Qantas for drawing this important GST case to my attention.