Snapshot updates on Willmott Forests, phoenixing and new offers of compromise rules

Willmott Forests

Earlier this month the High Court heard the appeal against the Victorian Court of Appeal’s decision in Re Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

I wrote on the Victorian Court of Appeal’s decision last year here. (My reviews of earlier Willmott Forests decisions are here and 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). The transcript of the High Court hearing of the appeal from that decision may be read here, and the parties’ written summaries of argument are available online here (under the heading for proceeding M99 of 2012).

The Victorian Court of Appeal’s decision has excited some controversy. In their summary of argument for special leave to appeal from that decision, 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 Victorian 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 judgment with interest.

Update on draft legislation targeting phoenix companies

Early last year I wrote about a set of two draft bills that had been released by the Gillard government directed at cracking down on phoenix companies. These were the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). You can read my detailed discussion of those two draft Bills here.

Briefly, the Phoenixing Bill comprised two measures. One was to give ASIC administrative powers to order the winding up of abandoned companies. The primary aim of this measure was said to be the protection of workers’ entitlements, and their ability to access GEERS, with the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct. The second set of measures in that Bill was to facilitate the online publication of corporate insolvency notices. As many of you will know, this Bill was enacted last year and ASIC’s insolvency notices website went live in July 2012.

The draft Similar Names Bill proved to be more controversial. Broadly, it proposed amendments to the Corporations Act which would impose personal joint and individual liability on a director for debts of a company that has a similar name to a pre-liquidation name of a failed company (or its business) of which that person was also director for at least 12 months prior to winding up.  The debts for which a director could were to become personally liable were debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. There was to be scope for directors to obtain exemptions from liability.

My comments on that draft Bill may be read here. There were numerous other fairly significant criticisms made of the draft legislation, set out in submissions lodged by a number of bodies concerned with the proposals, including the Australian Institute of Company Directors and the Law Council of Australia. Their criticisms included that the exposure draft drew no distinction between failed companies, and those abandoned or placed into liquidation for the purpose of engaging in phoenix activity; it did not define “fraudulent phoenix activity” or require a dishonest intention on the part of directors to defraud or deceive creditors before it imposed personal liability; and that it effectively reversed the presumption of honesty or “innocence”, unless the contrary were proven.

It appears that those submissions and the draft reforms were under consideration, as that Bill was not then introduced to Parliament. Indeed it had still not been introduced by the time of the dissolution of Parliament and the onset of the caretaker conventions ahead of the upcoming federal election. Thus the future of the draft Bill, or any other legislative measures to be taken to address phoenix activity, will be a matter for a future federal government to consider.

New Victorian Supreme Court Rules on Offers of Compromise

These are to come into effect on 1 September 2013 and can be read here.

The amendments include a new rule 26.02(4) which requires the issue of costs to be expressly addressed in an offer of compromise. Offers of compromise may be expressed to be inclusive of costs, if preferred by the offeror. New rule 26.02(4) requires that:

“An offer of compromise must state either – 

(a) that the offer is inclusive of costs; or

(b) that costs are to be paid or received, as the case may be, in addition to the offer.”

Note that the minimum time for which an offer of compromise must remain open to be accepted remains 14 days (r 26.03(3)), although there has been an adjustment to the timeframe for payment to be made post acceptance, where the offer does not provide otherwise (increases to 28 days – see the amendment to rule 26.03.01.)

New rule 26.08(4) provides for a defendant whose offer of compromise is unreasonably refused to be awarded standard costs up to the time of the offer and indemnity costs thereafter, unless the Court otherwise orders.

New rule 26.08.01 provides for Courts to take into account pre-litigation offers when making a determination as to costs. Thus offers made even when no litigation is yet on foot ought be given careful consideration. Potentially, the unreasonable refusal of a pre-litigation offer could leave a party exposed to an increased costs order.

Newsflash #2: Phoenixing Bill passed in the Senate

The Corporations Amendment (Phoenixing and Other Measures) Bill 2012 (the Phoenixing Bill) passed the Senate last week, on 9 May 2012. It is currently awaiting Royal Assent. For a more detailed discussion of the Phoenixing Bill as well as the Similar Names Bill, see my earlier post here .

In essence, the key amendments to the Corporations Act 2001 (Cth) introduced by the Phoenixing Bill are twofold –

1.  Conferring upon ASIC administrative power to wind up abandoned companies. This power will be triggered when –

  • it appears to ASIC that the company is no longer carrying on its business, based upon certain failures to lodge documents with ASIC (s 489F(1));
  • the company has not paid its annual review fee within 12 months of the due date (s 489F(2));
  • the company’s registration was reinstated by ASIC under s 601AH(1) (s 489F(3));
  • ASIC is of the view that the company is no longer carrying on business, and has provided notice of its intention to the directors and received no objection (s 489F(4)).

2.  Allowing for publication of insolvency notices on a central, public, ASIC-operated website, rather than in the print media or the ASIC gazette. Note that this is intended to go live as soon as 1 July 2012. See my other post from earlier this evening (link) in relation to the new draft regulations just released in this regard.

In relation to ASIC’s new power under the amendments –

Note that if ASIC orders under s 489F that a company be wound up, the company is deemed to have passed a resolution that it be wound up voluntarily under s 491 of the Corporations Act 2001 (Cth).

The stated aim of the main thrust of the Phoenixing Bill (ASIC’s new power) is the protection of workers’ entitlements in the context of phoenix activity. ASIC’s new power should enable employees of abandoned companies to access payment of some of their unpaid entitlements under GEERS, where before they were unable to do so because the company had not been placed into liquidation. Note that as part of its election commitments to workers package, the Government has indicated that it intends to replace GEERS, an administrative scheme, with a revised, but similar, legislative scheme.

An additional benefit of ASIC’s new power will be to enable a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct.

ASIC is expected to release draft guidance for public comment on how and when it will exercise this new power.