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)].

Merry Christmas & a note for my own amusement

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

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

Let’s look at some stats, shall we? –

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

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

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

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

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

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

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.

Phoenix companies targeted in suite of draft law reforms introduced

Last year right before Christmas, the Gillard government released a set of two draft bills directed at cracking down on phoenix companies – the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). Yesterday was the deadline for submissions on the second of these Bills.

For the uninitiated, a “phoenix company” is a vehicle used by some directors of a failing company, to continue to trade on using a new entity, stepping away from and leaving the unpaid debts of the business in the shell of the old company. In other words, one day a company ceases trading and is left behind with just a pile of debts, and the next day the phoenix company, like the bird from Greek mythology, rises from the ashes, opens its doors and trades on with the same assets and customers. Often, the phoenix company bears a closely similar name to the old company, making it easier to assume the old company’s goodwill. However in some cases, the old company’s reputation is poor, so the phoenix company will trade under an entirely different banner, to avoid the taint of the old name. In either case it is a misuse of the company law concept of limited liability.

In Parliament yesterday, in debate on the second reading of the Phoenixing Bill, Joe Hockey said that Dun and Bradstreet research reveals that of companies that “became insolvent” in 2009-2010, 29% had one or more directors who had previously been involved with a failed, wound-up entity. This compares with 10% during the 2004-05 financial year. It would appear, then, that phoenix activity is on the rise. The ATO has been reported as stating that there are about 6000 phoenix companies in Australia and from 7500 to 9000 directors who will have personal liabilities under this legislation.

It was a curious move, for the government to release the two bills just 5 days before Christmas, and give interested parties tight time-frames to respond, largely running through the Summer break period – 24 January in the case of the Phoenixing Bill and 29 February for the Similar Names Bill. (Note that although the submissions received by Treasury have not been published, the Phoenixing Bill has already been introduced and read in the House of Representatives on 15 February 2012, the second reading debate has taken place yesterday and today.) This haste is especially surprising after last year’s false start as to other draft legislation designed to combat phoenix companies and rogue directors, in particular with regards to company’s taxation liabilities. On 24 November 2011 I posted the news that the government had withdrawn a bill then before Parliament, which was to increase the ATO’s powers to pursue directors personally for certain company tax liabilities – without first issuing a DPN, and broaden the range of taxes for which a director could be made personally liable – you can read my post here.

Earlier today, the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP, issued a press release to the effect that Tony Abbott and the Coalition have announced that they will “say no” to the Phoenixing Bill, which Mr Bradbury described as legislation that would ensure workers are able to access their entitlements where directors have abandoned a company. Unsurprisingly, Mr Bradbury used expressions such as “workers [should not be] dudded out of their entitlements…” and the punchline was “Tony Abbott and the Coalition should stop saying ‘no’ and back this legislation so that workers are not left out in the cold.” However the speeches I read in Hansard do not suggest a blocking of the proposed measures, rather an urge for a more careful and less hasty consideration of aspects of them.

In any event, that’s the political spin. Here is the substance of the proposed new laws.

Phoenixing Bill

This Bill proposes amendments to the Corporations Act 2001 (Cth) (the Act) which would give ASIC certain powers to address phoenixing activity. In particular, the Bill gives ASIC the administrative power to order the winding up of abandoned companies. The power would be triggered when, amongst other grounds, it appears to ASIC that a company is no longer carrying on its business.

The primary aim of this measure is the protection of workers’ entitlements, and indeed is part of the range of reforms included in the government’s Protecting Workers Entitlements Package, a 2010 federal election commitment confirmed by announcement in the 2011-12 Budget.

Already, workers employed by a failed company can seek to recover certain unpaid entitlements through the Government’s General Employee Entitlements and Redundancy Scheme (GEERS). However they can only do so if the company is placed into liquidation, which is of no assistance if the directors have simply walked away from the company without winding it up.

ASIC’s proposed new power to order the winding up of a company will enable employees more swiftly to access GEERS. It will have the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct.

A secondary set of measures in this bill are cost-saving measures aimed at facilitating the publication of corporate insolvency notices on a single publicly available website, rather than in the print media or the ASIC gazette.

Similar Names Bill

The Similar Names Bill proposes amendments to the Act which will 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. You might want to read that sentence again. The debts for which a director could become personally liable are debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. Five years. You might want to read that again too.

The bill is not proposed to have retrospective effect. It will only apply to debts incurred after the legislation comes into force, and where the winding up of the old company commenced after the legislation comes into force. Directors would not be liable for the debts of the new company when the failed company has paid all of its debts in full. There is the incentive for directors not to try to walk away from a failed company leaving unpaid liabilities in its shell. However on one view, it is a surprising approach to take, which has already lead to some confusion (see below).

Innocent directors could avoid liability by obtaining an exemption from liability from the liquidator, or a similar Court-ordered exemption, if they can establish they have acted honestly and, in all the circumstances, ought fairly to be excused from liability. Some of these concepts will be already familiar to corporations lawyers.

The liquidator, or the Court, in considering whether to grant an exemption must take a number of matters into account, including whether there were reasonable grounds to suspect insolvency at the time debts were incurred by the failed company (more familiar concepts). Another matter the liquidator or the court must consider is, in broad terms, how brazen has been the extent of “phoenix activity” in the particular case. Specifically –

  • the extent to which the new company has assumed the assets, employees, premises and contact details of the failed company, and
  • whether any act or omission by the directors was likely to create the misleading impression that the new company was the same company as the failed company.

Of course one can see the clear potential for directors of multiple companies with related names in the same corporate group to get caught by these proposed new laws. The Bill does seek to address this. It provides an exemption for directors of a similarly-named company that was carrying on business in the 12 months before the commencement of the winding up of the failed company. A question will be whether this exemption goes far enough to avoid the imposition of liability on directors with no involvement in phoenix companies or activity , beyond the intended scope and focus of these reforms.

Commentary

I have to confess when I started reading the exposure draft of the Similar Names Bill and its explanatory document, I was expecting to see that the directors of the phoenix company were being made personally liable for the liabilities of the failed company that they had sought to shed, by leaving them behind in the shell of the failed company. However, clause 596AJ of the Bill imposes personal liability upon directors for the debts of the new company, referred to as the “debtor company”, not the debts of the failed company. Unfortunately, the drafters of the explanatory document accompanying the exposure draft of the bill were confused themselves. They explain clause 596AJ accurately as imposing liability for debts of the debtor company. However in the passages explaining Court-ordered exemptions from liability (under clause 596K(1)), they refer to exemptions for liability of “some or all of the debts of the failed company to which the person is otherwise liable under clause 596AJ”. I re-checked the exposure draft again, and this explanation is inaccurate. It is to be hoped that there will be no such confusion in the final version of the Bill and its explanatory memorandum, when those documents are finalised post-submissions.

Effectively, if a phoenix company is formed, directors will want to be confident as to its trading health and adequacy of its working capital, as they may be personally liable for the debts of the new company for the next five years. This is bound to raise concern in the business community, because there may be circumstances were some directors become personally liable for something they were not involved in and were not aware was going on, through no fault or carelessness of their own. Query whether the scope for obtaining exemptions appropriately protects them, when that process could easily turn out to be expensive and drawn out. Even if a director successfully obtains an exemption from the liquidator of the failed company, without having to go to Court, clause 596AL(7) provides that the liquidator is entitled to be paid “reasonable remuneration” for making an exemption determination. Paid, that is, by the director.

Another problem may be that some phoenix companies (with same assets, same employees, same premises, same contact details, same customers) use different names from that of the company whose business they assumed, because the old name is tainted and the new entity has not wish to be affected by it. It would appear that such phoenix companies will not be caught by the proposed new laws.

Another issue is that the Similar Names Bill only addresses situations where the new company uses a similar company name to the old company or business. If the new company uses a similar business name, this would not appear to be caught by the Bill as presently drawn.

Also, the Bill does not seek to define the where the line is drawn in terms of the degree of similarity required before a name is deemed to be so similar as to “suggest an association with the failed company”. It is unknown if this omission was deliberate or not, but it could be said to be asking for trouble to provide no better guidance to the business community, and to the Courts which will be required to apply these laws.

Conclusion

I suggest it may be better if Treasury takes a more measured approach to the finalisation of the Similar Names Bill, including better consultation with the public and interested bodies than it allowed with regards to the Phoenixing Bill, and a more careful consideration of the ramifications and potential gaps or shortcomings of the Bill as presently framed. We can await developments with interest.

On a final note, on 27 January 2012, Treasury also announced the release of an exposure draft of another bill: the Personal Liability for Corporate Fault Reform Bill 2012, for which the closing date for submissions is 30 March 2012.  This is described as the first tranche of proposed amendments to Commonwealth directors’ liability legislation, and covers Treasury (non-taxation) legislation. The stated aim of these reforms is to harmonise the principled approach to the imposition of personal criminal liability for corporate fault already provided for across Australian jurisdictions. Treasury’s announcement may be read here.