Annual Review of Insolvency & Restructuring

ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW

2005 ANNUAL REVIEW OF INSOLVENCY &RESTRUCTURING LAW 2005

9423 Insolvency 5 cover.indd 1 7/03/2006, 12:59:59 PM For further information about Insol ven cy & Restructuring Law, please contact:

SYDNEY BRISBANE

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Paul Nicols Sandy Wilson Ph: +61 2 9230 4414 Ph: +61 7 3334 3229 [email protected] [email protected] Michael Quinlan Ph: +61 2 9230 4411 MELBOURNE [email protected] Tania Cini Ian Wallace Ph: +61 3 9613 8574 Ph: +61 2 9230 4712 [email protected] [email protected] Anne Ferguson John Warde Ph: +61 3 9613 8890 Ph: +61 2 9230 4892 [email protected] [email protected] Clint Hinchen HONG KONG Ph: +61 3 9613 8924 [email protected] Simon McConnell Ph: +852 2840 1202 Simon Lynch [email protected] Ph: +61 3 9613 8922 [email protected] PERTH Steven Cole SINGAPORE Ph: +61 8 9488 3743 Steve Pemberton [email protected] Ph: +65 6535 6622 David Martino [email protected] Ph: +61 8 9488 3808 [email protected]

Visit our website at www.aar.com.au/services/insolv/ for: • An electronic version of this Review at http://www.aar.com.au/pubs/arir/ • Electronic versions of past editions of this Review • Papers delivered at our regular forums and newsletters covering new cases and legislative developments

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9423 Insolvency 5 cover.indd 2 7/03/2006, 1:00:03 PM ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW 2005

Also available online at: http://www.aar.com.au/pubs/arir/

9423 Insolvency 1 front section.indd 1 7/03/2006, 1:00:31 PM © Allens Arthur Robinson 2006 Written and published by Allens Arthur Robinson Deutsche Bank Place, 126 Phillip Street, Sydney NSW 2000 www.aar.com.au

The summaries in this review do not seek to express a view on the correctness or otherwise of any court judgment. This publication should not be treated as providing any deﬁ nitive advice on the law. It is rec om mend ed that readers seek speciﬁ c advice in relation to any legal matter they are handling.

9423 Insolvency 1 front section.indd 2 7/03/2006, 1:00:35 PM PREFACE

It gives us great pleasure to introduce the latest edition of Allens Arthur Robinson’s Annual Review of Insolvency & Restructuring Law. The Review reports on court decisions of interest and examines developments in Australia, the Asia Pacifi c Region and globally which occurred during 2005. Now in its seventh year, the publication of the Review has become a well-known fi xture on the insolvency and restructuring industry calendar. We hope that in keeping with previous editions, this year’s edition will prove to be a useful resource for insolvency practitioners, bankers, other fi nanciers, credit managers, corporate counsel and members of the business community who conduct business in Australia and throughout the Asia Pacifi c region. As with our previous Reviews, a full online version of this edition can be found at http://www.aar.com.au/pubs/arir/. The year 2005 produced a number of important insolvency and restructuring decisions, including: • the Sons of Gwalia, Media World, Concept Sports and Johnston decisions relating to claims by shareholders; • the House of Lords decision of Spectrum Plus on security over book debts; • the Motor Group decision on deeming warranty holders as creditors; • the cross-border insolvency decisions in Independent Insurance and Re HIH Casualty and General Insurance Ltd; • the Thiess Infraco decision on proofs of debt for loss of profi ts; and • the IMF/Sons of Gwalia decision on access to registers of members. Australia’s insolvency and restructuring laws were again the focus of attention during 2005, notable developments being: • the publication in May of the Corporations and Markets Advisory Committee (CAMAC) discussion papers on Personal Liability for Corporate Fault and on Corporate Duties Below Board Level; • the release in October of the integrated Insolvency Reform Package by the Federal Government; • the referral to CAMAC by the Parliamentary Secretary to the Treasurer in October of a proposed set of changes to the Corporations Act arising out of the Special Commission of Inquiry into the Medical Research and Compensation Foundation; and • ASIC’s introduction of a new policy on liquidator registration. These developments (and many more) are examined in this Review. The Australian economy has continued to experience growth, a particular feature being the continuing high level of demand in the resources sector. Having said that, there has been a tightening in some sectors, including the retail, wine, automotive, housing construction and mezzanine fi nance industries. Even the mining sector has not been immune from experiencing some challenges. In addition, the generally fl at housing market and rising oil prices may sound a note of caution to business and lenders for the coming year. We thank all of the partners, senior associates, lawyers, research assistants and summer clerks at Allens Arthur Robinson who have contributed to this publication. Special thanks to Della Stanley who selected many of the important decisions for 2005 and for coordinating the Developments section of this Review. Also thanks to Anne Ferguson in Melbourne, Joseph Garas in Perth, Michael Ilott in Brisbane and Ash Tehrani in Sydney for their signifi cant contribution. Thanks also to Marlo Rowarth for helping keep the Review on track for its March 2006 launch. Special thanks also for their hard work, patience and good humour – despite tight deadlines, to the Publications team led by Melinda Woledge and the Design team led by Kelly Royle. We hope that you fi nd the Review an informative and useful reference tool. As always, we welcome your feedback and comment, and we look forward to the opportunity to work with you as clients of our insolvency and restructuring practice in 2006.

John Warde Kim Reid Partner and co-editor Senior Associate and co-editor March 2006

9423 Insolvency 1 front section.indd 3 7/03/2006, 1:00:35 PM EDITORS

John Warde Kim Reid

CONTRIBUTORS

Matthew Barnard Perry Herzfeld Catherine Parr Peter Beacroft Holly van den Heuvel Joshua Pileggi Elizabeth Bennett Sarah Hine Michael Popkin Sarah Bergin Tim Holden Chris Prestwich Hamish Bevan Patrick Holmes Georgia Price Katrina Bobeff Katherine Horne Michael Quinlan Carla Bongiorno Michael Ilott Gavin Rakoczy Laura Brown Damian Jacobs Kim Reid Nico Burmeister Aurelie Jacquet Ian Roberts Lisa Button Peter Jones Sophie Ryan Steven Cheng Simon Keizer David Salter Joanne Chin Robert Kerr Annett Schmiedel Margot Clarkson Margot King Ben Schokman David Clifford Timothy Knowles Robert Speed Gabi Crafti Joanne Little Della Stanley Michael Cresswell Trudi Lodge Christine Swan Meredith Dodds Diccon Loxton Annie Tan Frances Eardley Banjo McLachlan Joe Tan Chris Erfurt Matthew McLennan Kenneth Tang Anne Ferguson Lucy McKernan Ash Tehrani Vanessa Filippin Claudia Mackie Anna Thwaites Steven Fleming David Martino Zane Turner Victoria Foster Edward Moon Christa Walker Joseph Garas Ric Morgan John Warde Dayna Hall Patricia Neurauter Skye Watson Richard Harris Elliot Norton Liam Young Michael Helleman Sonya Oberekar

9423 Insolvency 1 front section.indd 5 7/03/2006, 1:00:37 PM ALLENS ARTHUR ROBINSON INSOLVENCY & RESTRUCTURING

Allens Arthur Robinson (AAR) has been servicing clients in Australia for 180 years and in the Asia Pacifi c region for the past three decades. AAR is one of the largest law fi rms in the Asia Pacifi c region, with 190 partners and more than 600 other legal staff. We provide a full range of commercial legal services to many of the region’s leading corporations and government organisations, including more than half of Australia’s, and a dozen of the world’s, top 100 companies. Banks, corporations, directors, receivers, administrators, creditors and liquidators know our reputation for rapid response and quality work in insolvency and restructuring. If you are dealing with troubled corporations in Australia, the Asia Pacifi c or internationally, our experienced team can work with you to provide the fast, effective solutions you require. Our commitment is to provide a team, on the ground, to manage the critical stages of a matter. Experienced insolvency and restructuring lawyers are backed by the fi rm’s specialists in relevant industries and areas of law. Our expertise extends to every corporate insolvency situation; we have handled some of Australia’s and South East Asia’s most signifi cant insolvencies and restructures in recent years. We have acted in numerous corporate restructurings: our detailed knowledge of corporate and tax law helping our clients to achieve results with certainty and speed. Our dealings with international corporate groups have kept us at the leading edge of global trends in corporate restructuring.

Partner, Brisbane Partner, Sydney Geoffrey Rankin Michael Quinlan National Practice Leader Ph: +61 7 3334 3235 Deputy Practice Leader Ph: +61 2 9230 4411 [email protected] [email protected]

Partner, Sydney Partner, Melbourne Partner, Perth Andrew Boxall Ph: +61 2 9230 4534 Tania Cini Ph: +61 3 9613 8574 Steven Cole Ph: +61 8 9488 3743 [email protected] [email protected] [email protected]

Partner, Sydney Partner, Melbourne Partner, Brisbane Jim Dunstan Ph: +61 2 9230 4571 Anne Ferguson Ph: +61 3 9613 8890 John Gallimore Ph: +61 7 3334 3135 [email protected] [email protected] [email protected]

9423 Insolvency 1 front section.indd 6 7/03/2006, 1:00:39 PM Partner, Melbourne Partner, Sydney Partner, Melbourne Clint Hinchen Ph: +61 3 9613 8924 Diccon Loxton Ph: +61 2 9230 4791 Simon Lynch Ph: +61 3 9613 8922 [email protected] [email protected] [email protected]

Partner, Perth Partner, Hong Kong Partner, Sydney David Martino Ph: +61 8 9488 3808 Simon McConnell Ph: +852 2840 1202 Paul Nicols Ph: +61 2 9230 4414 [email protected] [email protected] [email protected]

Partner, Brisbane Partner, Singapore Partner, Brisbane Alf Pappalardo Ph: +61 7 3334 3269 Steve Pemberton Ph: +65 6535 6622 Adam Thatcher Ph: +61 7 3334 3157 [email protected] [email protected] [email protected]

Partner, Sydney Partner, Sydney Partner, Brisbane Ian Wallace Ph: +61 2 9230 4712 John Warde Ph: +61 2 9230 4892 Sandy Wilson Ph: +61 7 3334 3229 [email protected] [email protected] [email protected]

9423 Insolvency 1 front section.indd 7 7/03/2006, 1:00:42 PM TABLE OF CONTENTS

Deeds of company arrangement and voluntary administration Appointment of administrators by invalidly appointed director not necessarily ineffective 19 Re Colorbus Pty Ltd (in liquidation); Mentha & Anor v Colorbus Pty Ltd (in liquidation) & Anor

DOCAs and the building and construction industry 20 Brodyn Pty Ltd v Dasein Constructions Pty Ltd

Fixing remuneration: beware of the pitfalls 22 Korda, in the matter of Stockford Ltd (subject to DOCA)

Employee entitlements under a DOCA 25 Clark v Korda

Priority for insurer’s costs in conducting litigation for an insolvent company 27 Freakley & Ors v Centre Reinsurance International Co & Anor

Use of ‘magic provision’ to validate DOCA and terminate winding up 29 Re ACN 005 973 688 Pty Ltd (in liquidation); Edward Gem Pty Ltd

Pragmatism beats speed: application to extend date for convening creditors' meeting 30 Re Henry Walker Eltin Group Ltd (administrators appointed)

Liquidators’ fees take priority over administrators’ fees where a company in liquidation was previously in administration 32 Lockwood & Anor v White

Stay of proceedings in external administration 34 Van Blitterswyk v Sons of Gwalia & Ors (in administration)

Fixing administrators’ remuneration 36 Lombe, in the matter of Bosnjak Holdings Pty Ltd (administrators appointed)

The deed of cross-guarantee saves the voluntary administration 38 J Aron Corporation v Newmont Yandal Operations Pty Ltd

Proofs of debt: claim for loss of proﬁ ts 40 Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd

HWE: ﬁ xing administrators’ remuneration 43 In the matter of Henry Walker Eltin Group Ltd (administrators appointed)

What happens if a sole director and shareholder dies before placing the company into administration? 45 In the matter of Pasdonnay Pty Ltd (administrators appointed)

Crystal ball gazing? Grounds for termination of a DOCA 46 University of Sydney v Australian Photonics Pty Ltd & Ors

A party cannot contract out of its obligation for all its assets to be available to all creditors on insolvency 49 In the matter of Ansett Australia Holdings Ltd (subject to DOCA); International Air Transport Association v Ansett Australia Holdings Limited (subject to DOCA) and Mark A Korda and Mark F Mentha

9423 Insolvency 1 front section.indd 8 7/03/2006, 1:00:47 PM Alleged oral arrangement to indemnify administrators for fees not enforceable 51 Albarran v Thin Seam Mining Pty Ltd

Can a company enter into a DOCA to avoid payment of a court-imposed ﬁ ne? 52 Australian Winch & Haulage Co Pty Ltd v State Debt Recovery Ofﬁ ce

Advice on manner in which to distribute funds 54 Shepard & Dean-Willcock v Sports Mondial of Australia Pty Ltd (in liquidation)

Creditors cannot delegate their power to ﬁ x an administrator’s remuneration without court order 56 Clynton Court Pty Ltd (subject to DOCA); Korda and Mentha v The J Aron Corporation and The Goldman Sachs Group, Inc

ASX a contingent creditor for ﬁ nes for breach of market rules 58 McLellan v Australian Stock Exchange Ltd

Administrator ordered to personally pay litigation costs on an indemnity basis 60 Grosvenor Constructions (NSW) Pty Ltd v Hunter

Requesting assistance from a court of another country 62 Federation Group Ltd (ACN 007 532 827), In the matter of Federation Group Ltd (ACN 007 532 827)

Administrator’s entitlement to remuneration where invalid appointment 64 Sherred & Anor v McDonald & Ors

Court terminates DOCA that sought to avoid GEERS reimbursement 66 Re Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (receivers and managers appointed) (subject to a DOCA)

Warranty holders as creditors under a DOCA 68 Re Motor Group Australia Pty Ltd (administrators appointed) (ACN 101 051 101); Marsden & Anor (as voluntary administrators of Motor Group Australia Pty Ltd (administrators appointed))

Can we ﬁ x it? Committee of Inspection ﬁ xing DOCA administrators’ remuneration 71 In the matter of Motor Group Australia Pty Limited (administrators appointed) (No 3)

Committee of Inspection ﬁ xing an administrator’s remuneration 73 Re Carlovers Carwash Ltd & Ors

Deregistered companies Ability of deregistered foreign corporation to recover costs in Australia 75 McIntyre & Ors v Eastern Prosperity Investments Pte Ltd (No 6)

Directors and corporate governance Breach of directors’ duties and the effect of shareholder ratiﬁ cation 76 Angas Law Services Pty Ltd (in liquidation) v Carabelas

Director’s personal liability for company’s unpaid group tax 78 Canty v Deputy Commissioner of Taxation

9423 Insolvency 1 front section.indd 9 7/03/2006, 1:00:47 PM Director held personally liable for legal costs incurred by company 80 Cassegrain & Anor v CTK Engineering Pty Ltd & Anor

Director found to have permitted company to engage in insolvent trading 82 ASIC v Edwards

Directors’ rights of access to documents and ﬁ nancial records of a company in receivership 85 Boulos v Carter; Re TARBS World TV Australia Pty Ltd

Lending and securities Challenge to the effectiveness of security in Hong Kong 88 In the matter of Far East Structural Steelwork Engineering Limited (in liquidation)

Injunction to restrain enforcement of securities based on allegations of unconscionable conduct 90 Glenariff Holdings Pty Ltd v Tah Land Pty Ltd

Court takes commercial approach in assessing what property was secured by mortgage documents 92 Andrew Garret Wine Resorts & Anor v National Australia Bank Ltd (No 2)

Are cost provisions in a mortgage contract still subject to a court’s discretion? 94 Kyabram Property Investments Pty Ltd & Anor v Murray & Anor

A day at the Turf Club: good news for lenders 96 Pico Holdings Inc v Wave Vistas Pty Ltd

Enforcement within six months of charge granted in favour of a company with a common director not void 98 Papua New Guinea Dockyard Ltd v Adams

An all-monies clause meant what it said 100 Chacmol Holdings Pty Ltd v Handberg (as administrator of Australian Risk Analysis Pty Ltd)

Eyes wide shut? The effect of deregistration on a charge 102 John Frederick Lord as liquidator of Silverline Technologies Pty Ltd

Can you have a ﬁ xed charge over book debts? UK book debts decision – implications for Australia 104 National Westminster Bank plc v Spectrum Plus Ltd & Ors

Re-ﬁ nancing a mortgage: ﬁ rst mortgagee with no actual notice of new mortgage gets priority 107 Westpac Banking Corporation v Adelaide Bank Ltd

Liquidation I started it! The costs of a winding-up application when a company enters administration 109 McDonald v Deputy Commissioner of Taxation

Winding up an illegal, managed investment scheme and determining its property 111 Altmann & Ors v FN Management Pty Ltd

Court declines to grant leave to liquidator to disclaim a contract on basis requested 113 Sims & Anor (as liquidators of Enron Australia Pty Ltd) v TXU Electricity Ltd & Anor

9423 Insolvency 1 front section.indd 10 7/03/2006, 1:00:48 PM Slipped up: refusal to extend time in which to determine winding-up proceedings 115 ASIC v Maxwell & Ors

Subcontractor’s claims against principal prevented by contractor’s insolvency 117 Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd (receivers and managers appointed)

Circumstances for denial of a section 482 order to set aside winding up 119 Metledge (trading as Metledge & Associates) v Bambakit Pty Ltd (in liquidation)

The HIH scheme case 122 HIH Casualty & General Insurance Limited & Ors

Ms 40%: the going rate of return for an indemnifying creditor 125 Green Re Oz-US Film Productions Pty Ltd

Jurisdiction to wind-up foreign registered companies who carry on business in Australia 127 Re Application of Campbell & Ors; Gebo Investments (Labuan) Ltd & Ors v Signatory Investments Pty Ltd & Ors

Money to spare? Treatment of surplus funds after payment of admitted debts 128 Re Kershaw (as liquidator of Equiticorp Tasman Ltd)

Adjournment of application for winding-up granted while proceedings to set aside DOCA were pursued 130 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd

Resolution of creditors in a voluntary winding-up binding despite dissenting vote 132 Kassem v Sentinel Properties Ltd (in liquidation) & Ors

Pooling of assets of group of companies in liquidation 134 Tayeh and De Vries re The Black Stump Enterprises Pty Ltd & Ors

All interests considered: winding up unregistered managed investment schemes 136 ASIC v Primelife Corporation Ltd

Issue of letter of request to Canadian court to prevent continuation of Canadian proceedings 137 Federation Group Ltd (ACN 007 532 827) (in liquidation) [2005]

‘Please’ is not enough: letters of request do not displace application of general principles for equitable relief 139 Re Independent Insurance Company Ltd

Winding up in a constitutional and administrative vacuum 142 Phelan v Ambridge Corp Pty Ltd

Who gets the assets? Mandatory injunction to deliver up 145 Inetstore Corporation v Southern Matrix International

Information required by court to ﬁ x liquidators’ remuneration 147 One.Tel in the matter of application by liquidators

9423 Insolvency 1 front section.indd 11 7/03/2006, 1:00:48 PM ‘Not known at this address’: the limitations of letters of request in cross-border insolvencies 149 Re HIH Casualty and General Insurance Ltd

Liquidators Remuneration of provisional liquidator from assets of a trust 153 Grossman v E. Katz Manufacturing Jewellers (ACT) Pty Ltd

Hands not tied: liquidator’s assignment of rights of appeal 155 Krishell Pty Ltd v Nilant & Ors

Extension of time to appeal liquidator’s rejection of proof of debt refused 157 Mine & Quarry Equipment International Ltd v McIntosh

Commercial judgment? Approval of compromise by liquidator 159 In Re Gate Gourmet Pty Ltd (in liquidation)

Refusal to vary liquidator’s decision that does not relate to a proof of debt 161 Knights Insolvency Administration Ltd v Duncan

No easy way out when Committee of Inspection won’t approve liquidators’ fees in creditors’ voluntary winding up 163 Walker & Anor as liquidators of One.Tel Ltd

Creditor clears a low hurdle to conduct public examinations of lawyers 165 Re New Tel Limited (in liquidation)

Access to records of public examinations 166 Re Strarch International Ltd

If justice is to be done, sometimes it cannot be seen to be done 168 McGrath & Anor re HIH Insurance Ltd & Ors

Procedure Claim for rectiﬁ cation not appropriate as part of appeal against rejection of proof of debt 170 Re Jay-O-Bees Pty Ltd (in liquidation); Rosseau Pty Ltd (in liquidation) v Jay-O-Bees Pty Ltd (in liquidation)

Release of money paid into court held not to be void disposition 172 Pilmer v HIH Casualty & General Insurance Ltd (No 2)

Reinstating a deregistered company: when will an applicant be successful? 175 Danich Pty Ltd Re Cenco Holdings Pty Ltd

Time almost slips through a liquidator’s ﬁ ngers 177 Tolcher v Gordon

Court refuses to permit joinder of liquidator to collateral attack on liquidator’s void disposition claim 179 Starmaker (No 51) Pty Ltd v Majda & Ors

Leave to proceed against company in liquidation refused 181 Hall & Anor as liquidators of New Tel Ltd v Ledge Finance Ltd

9423 Insolvency 1 front section.indd 12 7/03/2006, 1:00:50 PM Receivership Duty of care of a receiver 183 Florgale Uniforms Pty Ltd (ACN 004 233 167) (receiver and manager appointed) (in liquidation) & Ors v Orders & Anor

Dealing with industrial action hindering an asset sale 185 ABM Plastic (Aust) Pty Ltd (receivers and managers appointed) v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union

Instruments under which receivers appointed should address remuneration, costs and expenses 186 Ronald John Dean-Willcocks & Anor v Nothintoohard Pty Ltd (in liquidation) & 2 Ors

Assessment of court-appointed receiver’s remuneration 188 ASIC v Australian Foods Co Pty Ltd

Surplus funds and group companies 190 Re TVSN Ltd

Shareholder actions and litigation funding The Media World case: the debate begins 192 Crosbie, in the matter of Media World Communications Ltd (administrator appointed)

Class action fever: application to obtain access to members’ register to enable funder to contact members 194 IMF (Australia) Ltd v Sons of Gwalia Ltd (administrators appointed)

The Concept Sports case: the trial judge decision 196 Cadence Asset Management Pty Ltd v Concept Sports Ltd

Transferee shareholders as creditors? Sons of Gwalia and the appeal grounds 199 Sons of Gwalia Ltd (administrator appointed) v Margaretic

Johnston v McGrath: a Supreme Court judge enters the ‘shareholder as creditor’ debate 202 Johnston v McGrath & Ors

The Concept Sports case: the Full Court decision 204 Cadence Asset Management Pty Ltd v Concept Sports Ltd

Statutory demands Trust me: it’s solvent 206 Rupert Co Ltd v Chameleon Mining NL

Perils of issuing statutory demands: genuine disputes and offsetting claims 208 Di Francesca Holdings Pty Ltd v Hatziplis Holdings Pty Ltd

It all depends on the circumstances 210 Bidjara Aboriginal Housing & Land Co Ltd v Bidjara Motor Corp P/L (in liquidation)

Seek and you shall not ﬁ nd: requirement to identify quantum of offsetting claim 211 Broke Hills Estate Pty Ltd v Oakvale Wines Pty Ltd

9423 Insolvency 1 front section.indd 13 7/03/2006, 1:00:51 PM Uncommercial transactions, preference payments and disclaimer of onerous property Blanket extension of time to bring any voidable transaction claim allowed 213 Tolcher (as liquidator of Lloyd Scott Enterprises Pty Ltd (in liquidation)) & Anor v Capital Finance Australia Ltd & Anor

Can you keep a secret? Obligation of FCT to discover relevant documents despite secrecy provisions 215 Javorsky v Commissioner of Taxation

Relying on unsecured borrowings to pay debts does not mean that a company is insolvent 217 Lewis (as liquidator of Doran Constructions Pty Ltd (in liquidation)) & Anor v Doran & Ors

If I say it’s in liquidation then it is: court’s power to cure irregularity in termination of DOCA 219 Re Centaur Mining & Exploration Ltd (in liquidation); McKern v Roche Mining Pty Ltd

Developments in Australia ACCC and ASIC new draft debt collection guidelines 221

CAMAC’s report on rehabilitating large and complex enterprises in ﬁ nancial difﬁ culties 224

Extent of liability of corporate ofﬁ cers and other individuals under review 228

Insolvency reform package announced 233

Proposed changes to the CA to protect future personal injury claims against an insolvent company 238

Banking and Financial Services Ombudsman’s new guidelines on hardship variation disputes 242

ASIC introduces a new policy on liquidator registration 245

Personal bankruptcy laws to be reformed 251

Developments in Asia China’s central government sets short timetable for bankruptcy law reform 253

Administration of Pilot Projects for Securitisation of Credit Assets Procedures: putting in place a legal framework for securitisation in China 256

New rules of arbitration 259

China: non-performing loans 260

Hong Kong accountants to follow Insolvency Guidance Notes when carrying out windings up 263Singapore: corporate governance in the wake of the China Aviation Oil scandal 264

Singapore: establishment of Insolvency Practitioners Association 266

Developments in New Zealand Possible reform to Subordinate Security legislation 267

9423 Insolvency 1 front section.indd 14 7/03/2006, 1:00:51 PM Developments in Europe The European Union 269

Italy 271

France 273

Developments in the United Kingdom New set-off rules 274

The MG Rover case and European Community Insolvency Regulation (1346/2000) 275

Developments in Canada Canadian Association of Insolvency and Restructuring Professionals puts forward reform proposals 277

Developments in the United States of America Recent amendments to the United States Bankruptcy Code affecting commercial entities 278

Developments in South Africa Government establishes interdepartmental task team to investigate liquidations industry issues 282

Developments in India Government setting up expert committee to review the company and insolvency law 283

Developments in Brazil New insolvency regime 286

9423 Insolvency 1 front section.indd 15 7/03/2006, 1:00:52 PM GLOSSARY

ACCC Australian Competition & Consumer Commission

ASIC Australian Securities & Investments Commission

ASX Australian Stock Exchange

ATO Australian Taxation Ofﬁ ce

CA Corporations Act 2001 (Cth)

CL Corporations Law 1989

DCT Deputy Commissioner of Taxation

FCT Federal Commissioner of Taxation

UNCITRAL United Nations Commission on International Trade Law

9423 Insolvency 1 front section.indd 16 7/03/2006, 1:00:52 PM ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW 2005

Also available online at: http://www.aar.com.au/pubs/arir/

9423 Insolvency 1 front section.indd 17 7/03/2006, 1:00:52 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Appointment of administrators by invalidly appointed director not necessarily ineffective

Case Name: A non-resident sole director appointed administrators to a Re Colorbus Pty Ltd company that was subsequently subject to a winding-up order. (in liquidation); Mentha The administration was terminated, and the plaintiffs sought & Anor v Colorbus Pty Ltd confi rmation of their appointment in order to recover appropriate (in liquidation) & Anor fees and expenses. The appointment was held to be effective. A United States resident, Hans Kintsch, was appointed sole director and shareholder Citation: of Colorbus Pty Ltd. Section 201A(1) CA states that the appointment of a person [2004] VSC 486, Supreme as a director of a proprietary company, if he or she does not ordinarily reside in Court of Victoria, Commercial Australia, is ‘invalid’ if the company does not have a resident director at that time. and Equity Division per Mandie J Mr Kintsch purported to place the company in voluntary administration and to appoint the plaintiffs as administrators. ASIC informed the administrators that it had rejected Date of Judgment: the notifi cation of the appointment of Mr Kintsch as a sole, non-resident director. 30 November 2004 The ATO then brought an application for a winding-up of Colorbus, which was opposed by the administrators. Despite this, the winding-up order was made, and Issues: the administration was terminated. As a result, the administrators sought • Sections 201A, confi rmation that their appointment was effective and that they were entitled to 201M(1), 1322(4)(a), recover fees and expenses incurred. 1322(6)(a)(iii) CA Justice Mandie in the Supreme Court of Victoria held that Mr Kintsch’s appointment, • Sole director not ordinarily although invalid, was not a nullity. Section 201M(1) CA provides that an act done residing in Australia – by a director is effective even if the appointment of the director is invalid. His effect of resolutions Honour held that the administrators’ appointment was therefore effective. • Whether appointment of administrators by invalidly In the alternative, his Honour found that the administrators had proven their case appointed director effective that s1322(4)(a) CA was made out; that is, the administrators had acted in good faith and no substantial injustice had been, or would likely be, caused to any person by the validation of the administrators’ appointment.

Accordingly, the court declared that the appointment of the administrators was effective and that they were therefore entitled to ‘reasonable remuneration and reimbursement of their expenses properly incurred’.

The fact that administrators have been appointed by a director who has not been validly appointed under the CA does not necessarily mean that the administration is ineffective.

9423 Insolvency 2 casenotes.indd 19 7/03/2006, 1:02:27 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

DOCAs and the building and construction industry

Case Name: The Supreme Court of New South Wales has conﬁ rmed that the Brodyn Pty Ltd v Dasein Building and Construction Industry Security of Payment Act Constructions Pty Ltd 1999 (NSW) (the BCISP Act) only protects sub-contractors while they are a going concern. Where a sub-contractor chooses to go Citation: into administration, it cannot also seek the refuge of the BCISP Act scheme. [2004] NSWSC 1230, Supreme Court of New South Wales per Brodyn Pty Ltd (Brodyn) entered into a construction contract with Dasein Young CJ in Eq Constructions Pty Ltd (Dasein) to which the BCISP Act applied. During the contract, Brodyn gave notice purporting to accept an alleged repudiation by Dasein. Date of Judgment: In response, Dasein served Brodyn with a claim for payment under the BCISP Act. 15 December 2004 This claim enables a sub-contractor to have access to actual monies owed to it by its principal while a dispute between it and the principal is being considered.

Issues: An adjudication for $183,000 was made under the BCISP in Dasein’s favour. The • Building and Construction adjudicator’s certifi cate was fi led in the District Court, giving rise to a judgment for Industry Security of that amount in Dasein’s favour. Brodyn issued separate proceedings in the District Payment Act 1999 (NSW) Court against Dasein, claiming $385,000 in relation to defects and breaches. The • Applicability where day after the proceedings began, Dasein went into voluntary administration. It then company in voluntary entered into a DOCA. Brodyn lodged a proof of debt, which was rejected by the administration administrator. • Confl ict between specifi c legislation and the CA In the appeal against the administrator’s decision, Chief Justice Young in Equity • Section 553 CA held that the administrator’s decision should be reversed, fi nding that at least $262,000 was owed by Dasein to Brodyn. Brodyn argued that section 553C CA, which allows the proceeds of mutual dealings to be set off against one another (and was incorporated into Dasein’s DOCA), allowed for the judgment to be set off against the adjudication.

Dasein argued that because the BCISP Act provides a mechanism for setting aside a judgment debt arising from an adjudication certifi cate and the action brought by Brodyn did not accord with that mechanism, the judgment in favour of Brodyn could not be set off against the adjudication for Dasein. Accordingly, the important decision facing Chief Justice Young was whether (in light of the BCISP Act’s operation), s553C applied. The diffi culty arises because of the confl ict between the BCISP Act scheme on the one hand and the CA scheme on the other where a company is subject to a DOCA. Faced with the question of which scheme prevails, his Honour found that the CA scheme prevails over the operation of the BCISP Act for two reasons:

• s109 of the Australian Constitution provides that a Commonwealth Act (the CA in this case) prevails over a state Act (the BCISP Act in this case) to the extent of an inconsistency; and

9423 Insolvency 2 casenotes.indd 20 7/03/2006, 1:02:31 PM • his Honour found that the BCISP Act is intended to assist sub-contractors who depend on cash ﬂ ow for their continued existence by reducing delays in adjudicating claims. The BCISP Act is not, however, intended to operate when the sub-contractor has ceased to be a going concern.

Having removed any trace of the BCISP Act’s operation, his Honour was left with a clear case in which s553C applied. Accordingly, Brodyn was able to set off the damages owing to it by Dasein for breach of contract against the adjudication in favour of Dasein.

This case conﬁ rms that the BCISP Act does not protect sub- contractors who have entered voluntary administration and, should conﬂ ict arise between the BCISP Act and the CA, the CA prevails.

9423 Insolvency 2 casenotes.indd 21 7/03/2006, 1:02:32 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Fixing remuneration: beware of the pitfalls

Case Name: This case considers the obligations of insolvency practitioners Korda, in the matter of relating to the fi xing of their remuneration and identifi es the Stockford Ltd (subject to pitfalls associated with this process. DOCA) Section 449E(1) CA provides that the administrator of a company, or of a DOCA, is entitled to remuneration as fi xed by a resolution of the company’s creditors or such Citation: remuneration as the court fi xes on the application of the administrator. The (2004) 140 FCR 424, creditors are able to fi x an administrators’ remuneration at the second meeting of Federal Court of Australia per creditors and the remuneration of an administrator of a DOCA at a meeting Finkelstein J convened by that administrator.

At the fi rst meeting of creditors, it was resolved that a committee of creditors be Date of Judgment: formed comprising two of the largest creditors – a bank and a representative of the 21 December 2004 employees. The second creditors’ meeting was held in two parts. At the fi rst part, a creditors’ resolution was passed that approved the remuneration of the Issues: administrators in specifi ed amounts for work done up to the date of the meeting. • Section 449E(1) CA That resolution also provided that the creditors approved ‘the administrators’ • Fixing of administrators’ further remuneration on the basis of the hourly rates set out in the creditors’ report remuneration for the remainder of the administration period subject to the Committee of • Whether a committee Creditors reviewing and confi rming the details of the remuneration claim’. of creditors can fi x remuneration of the At the second part of the second creditors’ meeting (held two months later), the administrator creditors considered and approved a DOCA. The DOCA included clauses that the • Extent to which the administrators would be remunerated by receiving all remuneration previously remuneration fi xed must be approved by the creditors and all further remuneration ‘on the basis of the hourly certain rates set out in the report to creditors … subject to the Committee reviewing and • Guidance on how to confi rming the details of the remuneration’. determine reasonable remuneration of Following the meetings, ASIC expressed concerns about the fi xing of the administrators remuneration. Justice Finkelstein held that the administrators’ fees had not been validly fi xed under s449E CA, for two key reasons. First, neither the creditors’ resolution passed at the fi rst part of the second creditors’ meeting, nor the clause relating to the remuneration in the DOCA adopted by creditors, properly ‘fi xed’ the administrators’ remuneration, except for the specifi c monetary amounts that had been approved retrospectively by the creditors. The effect of those resolutions with respect to the prospective remuneration of the administrators was to delegate the power to fi x that remuneration to a committee of creditors. His Honour held that the creditors had no such power under the legislation to delegate in this way.

Secondly, even if it were permissible to fi x remuneration prospectively by reference to a rate or scale of charges, the fi xing of remuneration requires that it be stated as a monetary sum or be based on a formula enabling it to be calculated or ascertained indefi nitely: Fraser Henleins v Cody (1945) 70 CLR 100.

9423 Insolvency 2 casenotes.indd 22 7/03/2006, 1:02:33 PM His Honour also found that the resolutions passed at the creditors’ meeting were not effective because the report that was sent to creditors with the notice of meeting was misleading in several respects: Kaye v Croydon Tramways Co [1898] 1 Ch 358. These included statements to the effect that:

• the position ASIC had taken that the remuneration had not been properly ﬁ xed was wrong in law (his Honour found that ASIC’s position was correct); and • the committee of creditors had reviewed and conﬁ rmed the administrators’ fees (his Honour found they had not done so). This was because the committee was not provided with information that would enable them to determine whether the fees claimed were reasonable. In addition, the members were required to meet to carry out their task, but all they had done was signify their assent to the fees by separately signing and returning to the administrators a copy of their statement of fees without any discussion between them.

Justice Finkelstein noted that, in light of the conclusion that the administrators’ fees had yet to be properly ﬁ xed (despite the additional resolutions), the administrators had three choices:

• the remuneration could be fi xed by the court; • the remuneration could be fi xed by the creditors; or • the administrators could apply for an order under s447A CA that some other tribunal fi x their fees.

His Honour noted that, whatever course was adopted, the administrators would be required to provide suffi cient information to enable the court to properly assess their claim. According to Justice Finkelstein, the ultimate aim is to fi x a ‘reasonable’ fee and there are opposing views in this respect. One view is that the object is to conserve the fund under administration and the other is to simply allow the market to operate in the normal way in determining administrators’ fees. The diffi culty with the conservation approach is that insolvency practitioners may forsake liquidations or administrations if their income is restricted in the interests of conserving the funds under administration. As such, a balance should be struck between the two opposing views.

His Honour concluded that the proper approach with regard to the fi xing of fees is to fi rst establish what in the United States is called the ‘lodestar’ amount, used in cases fi xing the fees of trustees and attorneys under its Bankruptcy Code. This amount is reached by multiplying the number of hours reasonably spent by the insolvency practitioner by a reasonable hourly rate. This amount should then be adjusted (up or down) to refl ect other factors, including the quality of the work performed, the complexity in the administration over and above the normal complexity of such work, the novelty and diffi culty of the issues that confronted the administrator, as well as the ultimate result obtained.

His Honour referred to Re Medforce Healthcare Services Ltd (in liquidation) [2001] 3 NZLR 145, 155 which identiﬁ ed (as a minimum) the following (in addition to the above matters) as information that an administrator ought to make available for the purpose of enabling the remuneration to be ﬁ xed:

9423 Insolvency 2 casenotes.indd 23 7/03/2006, 1:02:33 PM • a statement of the work being undertaken during the course of the administration; • an expenditure account sufﬁ ciently itemised to enable the charges to be made related to the work done; and • the information should contain sufﬁ cient detail to enable the court to determine whether the personnel involved in the administration and their respective charge-out rates were appropriate to the nature of the work undertaken.

Insolvency practitioners stand in a fi duciary relationship with the creditors. To have their remuneration fi xed, the creditors should be provided with suffi cient information to enable them to consider the reasonableness of the amounts claimed. In addition, the creditors do not have the power to delegate that function to a committee of creditors. This means that an administrator or an administrator appointed under a DOCA should apply to the court for orders fi xing their remuneration (or for orders delegating that powers to the committee) if their remuneration is not fi xed at a creditors’ meeting.

9423 Insolvency 2 casenotes.indd 24 7/03/2006, 1:02:34 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Employee entitlements under a DOCA

Case Name: Following the collapse of Ansett, a number of airline pilots who Clark v Korda had been made redundant brought a class action against the administrators, disputing the assessment of their employee Citation: entitlements. The pilots were successful in obtaining a declaration that the administrators re-assess the amounts owed to them. [2005] FCA 56, Federal Court of Australia, Victoria District In 2003, the administrators of Ansett provided to pilots that had been made redundant Registry, per Lander J following the collapse of the airline draft proofs of debt which the pilots could submit to proof pursuant to the terms of the company’s DOCA. The monies to be claimed Date of Judgment: by the pilots under the draft proofs of debt had been calculated by the administrators on the basis of a 1999 industrial instrument. 8 February 2005 Some pilots disputed the administrators’ calculations and submitted proofs of debt Issues: claiming a larger entitlement on the basis of a 1991 industrial instrument. These • Class actions proofs of debt were disallowed by the administrators because: • Employee entitlements • the pilots were not part of a redundancy program in 1991 when the instrument was entered into, nor were they part of the union that had negotiated the instrument; and • a cap in the 1999 agreement applied to the 1991 instrument, such that the entitlements under the earlier instrument were not greater than those under the later one.

The pilots who claimed to have greater entitlements under the 1991 instrument brought representative proceedings (often referred to as a ‘class action’) against the administrators. The court found that they were a class able to bring a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth). The proceedings were an appeal against the administrators’ disallowance of their proofs of debt. The pilots sought a declaration that they were entitled to have their claims calculated under the 1991 industrial instrument.

The court made the declaration sought by the pilots because:

• the 1991 instrument appeared on its face to apply to all Ansett employees, which included the class of pilots bringing the proceedings; • although the 1999 instrument stated that it ‘will speciﬁ cally replace all previous redundancy policies within Ansett’, it also provided that, where a pilot was disadvantaged by it, the 1991 agreement or award entitlements would continue to apply; and • the cap in the 1999 instrument did not apply to the 1991 instrument – they were two separate regimes and the earlier instrument was preserved by the later one.

9423 Insolvency 2 casenotes.indd 25 7/03/2006, 1:02:35 PM Administrators should take particular care to examine the entitlements of employees who are made redundant in circumstances where there are a number of overlapping industrial instruments. In complex matters, it may be appropriate to seek directions from the court.

9423 Insolvency 2 casenotes.indd 26 7/03/2006, 1:02:35 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Priority for insurer’s costs in conducting litigation for an insolvent company

Case Name: Where an insurer has conﬁ rmed indemnity for litigation involving a Freakley & Ors v Centre company that is in administration and is conducting that litigation Reinsurance International in the shoes of the insolvent company, it is unclear whether the Co & Anor insurer’s litigation costs that can be recovered from the insolvent company can be treated as an expense of the administration. The Citation: English Court of Appeal has held that the costs are costs of the [2005] EWCA Civ 115, England administration and should be given priority. and Wales Court of Appeal, This was an appeal from an order made in proceedings in, and arising out of, the Court of Appeal (Civil Division), administration of T&N Limited (T&N), the object of which was to resolve issues that per Chadwick, Latham and had arisen between the administrators and the reinsurers about the handling of Arden LJJ personal injury asbestos claims made, or to be made, against T&N.

Date of Judgment: The administration proceedings in T&N’s case were necessitated by the quantity of personal injury claims arising from exposure to asbestos, both in the UK and the 11 February 2005 US, in products manufactured or distributed by T&N. An asset potentially available to meet the claims against T&N was the asbestos liability policy (the policy), Issues: underwritten by Curzon Insurance Limited (the insurer). The policy was reinsured • Reinsurer entitled to handle and the reinsurer stood in the insurer’s place. The policy stated that the insurer claims of insolvent company would indemnify the policyholder for any and all ultimate net loss (UNL) in excess and entitled to its costs of the retained limit in connection with asbestos claims. The retained limit was • Whether obligation to £690 million and was effectively all sums paid in settlement of asbestos claims, reimburse the relevant costs including actual and consequential damages, costs and expenses allowed or has priority as an expense of awarded and punitive exemplary and multiple damages. Broadly, the insurer’s the administration obligation was to indemnify T&N for all sums or other amounts paid by T&N that • Whether litigation costs fall within the categories of UNL, save that: paid by insurer/reinsurer are part of ‘ultimate net loss’ • the insurer did not become liable to pay under the indemnity until the aggregate of sums or other amounts included within the UNL exceeded £690 million; and • the maximum amount that the insurer can be required to pay, ‘in any circumstances whatsoever’, was limited to £500 million.

At fi rst instance, Justice Blackburne held that, by reason of UK legislation, the administration order, the terms of the asbestos liability policy and the reinsurance agreement, the reinsurers has become entitled to handle the asbestos claims. It was also held that the reinsurers were entitled to reimbursement from T&N for the costs of handling claims and to have costs counted as part of the UNL. The Court of Appeal agreed with these fi ndings but disagreed with Justice Blackburne’s further fi nding that the administrators were not required to treat the obligation to reimburse costs incurred by the reinsurers as an expense of the administration.

It was common ground that any claims-handling expenses incurred and paid by the administrators were to be charged on the property of T&N in priority to the claims

9423 Insolvency 2 casenotes.indd 27 7/03/2006, 1:02:36 PM of the holders of ﬂ oating charges. The issue was whether claims-handling expenses paid by the reinsurers in the exercise of claims-handling rights were expenses of the administration and thus also had priority. Justice Blackburne determined this issue against the reinsurers as the reinsurers’ right of reimbursement by T&N arose under a contract between the insurer and T&N. Even post-administration, the reinsurers’ rights were based on that contact and not on a contract entered into by the administrators.

The Court of Appeal overturned Justice Blackburne on this point with reference to section 19 of the Insolvency Act 1986 (UK). That section provides that, when a person ceases to be an administrator, all sums payable for debts or liabilities incurred under contract entered into by him shall be charged on and paid out of any property of the company in priority to any other charge. Applying this section, the question to be addressed was whether claims-handling expenses were properly treated as liabilities incurred by the administrator in carrying out his function on the basis:

• that liabilities for claims-handling expenses incurred on the instructions of the reinsurer, acting in defence of claims against the insured, are liabilities of the reinsured; and • had those liabilities been incurred on the instructions of the administrators, they would have been properly treated as liabilities incurred under the administrators’ statutory functions.

The court held there was no doubt that the purposes for which the administration order was made could not be achieved unless steps were taken to identify the creditors of T&N, including creditors for asbestos claims. The administrator was granted power to make any payment, as the company’s agent, that is necessary or incidental to the performance of the administrators’ functions. Absent a court order to the contrary, claims-handling expenses were necessary for the carrying out of the purposes for which the administration order was made. The principle, therefore, is that liabilities for claims-handling expenses incurred on the reinsurers’ instructions, acting under the rights conferred by the policy and the reinsurance agreement, following an insolvency event, are properly to be treated as liabilities incurred by the administrators and are to be given priority over other creditors.

Where an insolvent company is required under its insurance policy to reimburse certain costs of litigation to its insurer, it is in the insurer’s (or, as in this case, reinsurer’s) interests to have those monies treated as costs of the administration as this will give the costs priority. This decision is a useful precedent (at least in the UK) for insurers that incur costs for an insolvent company that, absent the indemnity, would be incurred in the administration.

9423 Insolvency 2 casenotes.indd 28 7/03/2006, 1:02:37 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Use of ‘magic provision’ to validate DOCA and terminate winding up

Case Name: The consequence of failing to register a DOCA within the strict Re ACN 005 973 688 Pty Ltd timeframe prescribed by the CA is that a company will be taken (in liquidation); Edward Gem to have passed a special resolution that the company be wound Pty Ltd up. In this case, section 447A was employed to overcome the results of non-compliance with the time limit set by Part 5.3A CA. Citation: Administrators were appointed to ACN 005 973 688 Pty Ltd (the company) on 19 [2005] FCA 74, Federal Court August 2004. On 13 January 2005, creditors of the company resolved to execute a of Australia per Merkel J DOCA. Under s444B(2)(a) CA, the company was required to execute the DOCA within 21 days (3 February 2005). Date of Judgment: The DOCA was executed on 4 February 2005. 16 February 2005 Under the CA, the company was deemed to have passed a special resolution that it Issues: be wound up voluntarily. As such, the company had entered liquidation. Edward Gem Pty Ltd, a creditor, applied for an order under s447A that, in relation to the • Section 447A CA company, the reference to ‘21 days’ in s444B(2)(a) be amended to ‘22 days’. • Extension of time to validate an invalid DOCA As the resolution that the company execute a DOCA had been passed over the and terminate voluntary objection of three creditors, his Honour adjourned the hearing to allow all liquidation creditors to be notiﬁ ed. Subsequently, the application was heard without any opposition from creditors.

His Honour noted that there was no evidence any rights that may have accrued by reason of the liquidation would be affected adversely by making the orders sought. As there were no barriers to making the order, his Honour made the order.

To avoid uncertainty, his Honour also ordered that the liquidation of the company be terminated. His Honour considered that, in all the circumstances, it was not appropriate to make any costs orders.

Courts are more likely to make orders to overcome non- compliance with the strict requirements of Part 5.3A where the rights of third parties are not affected. Of course, it is preferable to comply with all requirements of Part 5.3A in the ﬁ rst instance.

9423 Insolvency 2 casenotes.indd 29 7/03/2006, 1:02:37 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Pragmatism beats speed: application to extend date for convening creditors' meeting

Case Name: The court may extend the usual convening period for a second Re Henry Walker Eltin Group meeting of creditors in the administration of a company and will Ltd (administrators appointed) balance competing interests in deciding whether to do so. Administrators were appointed to 26 companies constituting the Henry Walker Eltin Citation: Group (HWE Group) on 31 January 2005. New administrators were appointed the [2005] FCA 316, Federal Court following day, as a result of the resignation of the original administrators. Under of Australia per Hely J section 439A CA, unless the convening period was extended by the court, the administrators were required to convene a meeting of creditors of each company Date of Judgment: in the HWE Group by 21 February 2005 to resolve to execute a DOCA, end the administration, or wind up the company. This was an application under s439A(6) 16 February 2005 CA to extend the convening deadline to 23 May 2005.

Issues: The ﬁ rst meetings of creditors were held on 8 February 2005 in Darwin, Perth and • Section 439A CA Sydney. The creditors were informed at those meetings of the administrators’ • Extension of convening intention to make the extension application and no opposition to that course was period for second meeting voiced at the meetings or at any later time. No resolutions were passed at the of creditors meetings to remove the administrators. A committee of creditors was appointed to each company in the HWE Group and, on 15 February 2005, the committees were notiﬁ ed of the administrators’ intention to make the extension application.

Justice Hely in the Federal Court recognised that the business of the HWE Group is ‘extensive and multi-faceted’ and carried on by a very complex group of companies throughout Australia and in a number of other countries. His Honour found that the administrators needed more time to review the viability of the various HWE Group businesses to determine the best method of realising its assets and that they would not be in a position to prepare an adequate recommendation to creditors by 21 February 2005.

His Honour adopted the language of Justice Barrett in Re Diamond Press Australia Pty Ltd [2001] NSWSC 313, in which it was held that

The function of the Court on an application such as this is… to strike an appropriate balance between, on the one hand, the expectation that administration will be a relatively speedy and summary matter and, on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders.

Recognising that the extension sought was long, Justice Hely held that it was justiﬁ ed in the circumstances and made orders extending the convening period for the second creditors’ meetings. His Honour reserved liberty to any person demonstrating a sufﬁ cient interest to modify or discharge the orders.

9423 Insolvency 2 casenotes.indd 30 7/03/2006, 1:02:38 PM The court must balance the expectation that administration will be a relatively swift matter with the requirement that undue speed should not ‘prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders’. The complexity and extensiveness of a company’s business and structure will be taken into account in determining the merits of an application to extend the convening period for the second creditors’ meeting.

9423 Insolvency 2 casenotes.indd 31 7/03/2006, 1:02:39 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Liquidators’ fees take priority over administrators’ fees where a company in liquidation was previously in administration

Case Name: This case involved a dispute between a company’s administrator Lockwood & Anor v White and its subsequent liquidator over the priority of payment of their fees and expenses. This case clariﬁ es the law on the equitable Citation: and statutory liens of administrators and liquidators for their fees and expenses, and the prioritising of their claims for payment of [2005] VSCA 30, Victorian their fees. Court of Appeal per Winneke P, Buchanan and Gillard JJA The ‘Lifestyle group’ companies operated an unregistered managed investment scheme. In July 2000, Mr Lockwood and Mr Fitzgerald were appointed Date of Judgment: administrators to certain companies in the Lifestyle group (Lifestyle administration 28 February 2005 companies). ASIC then sought orders for the appointment of a liquidator, Mr White, to all companies in the Lifestyle group, including those under administration. The administrators opposed the application. After Justice Warren indicated in the Issues: Supreme Court of Victoria that she was proposing to make the orders sought by • Section 443F CA ASIC, the parties reached agreement. Under the agreement, the administrators • Whether administrators’ would not oppose the application and the administrators’ fees for the Lifestyle fees have priority over administration companies being paid in order of priority set out in section 556 of liquidators’ fees the CA. Such fees would be treated as costs of the Lifestyle group, as if all of those companies were one entity.

On 7 August 2000, Justice Warren made the following order:

The proper remuneration of the administrators under s449E of the Corporations Law and the proper costs and expenses of the administrators under s443A of the Corporations Law and the administrators and the plaintiff’s proper costs in this application be paid in the priorities set out in s556 of the Corporations Law as costs in the winding up of the companies …

Before the Lifestyle administration companies’ liquidation, the administrators had recovered approximately $4300 in respect of those companies. By June 2002, the administrators had not been paid, although Mr White had paid his own fees. Further, Mr White had conducted the liquidations of the Lifestyle group companies separately, because, he said, he had not understood her Honour’s orders as amounting to a ‘pooling order’. The administrators sought further orders from the court that their fees of $186,795.75 be paid immediately and in priority to all other unsecured priority creditors. Mr White sought an order under s1322(4) CA that all acts done by him to date in the winding up of the Lifestyle group companies were not invalid because they had not been authorised or approved by a combined meeting of creditors of all group companies.

Justice Warren did not make orders for the immediate payment of the administrators’ fees and made the orders sought by the liquidator under s1322(4). The administrators appealed and sought to have the orders made under s1322(4)

9423 Insolvency 2 casenotes.indd 32 7/03/2006, 1:02:39 PM made subject to immediate payment of their fees out of the funds currently held by the liquidator and, if insufﬁ cient, from amounts to be reimbursed by him to the Lifestyle group companies’ pooled funds.

The Court of Appeal upheld Justice Warren’s orders. The court noted that a court should be slow to interfere with discretionary orders of the kind made by Justice Warren, unless there were strong grounds for doing so.

The court said that the ‘pooling order’ took effect only after the administrations were terminated and, therefore, it would be inappropriate for the liquidator to pay the administrators’ fees out of the property of companies to which the administrators were not appointed. Further, the court found that the administrators’ entitlement, conferred by s443F CA, to payment of their fees and expenses in priority to unsecured priority creditors listed in s556 was subject to the liquidator’s equitable lien over the property of the companies in respect of his fees.

The court distinguished the administrators’ statutory and equitable liens in respect of their fees. Administrators have a statutory lien on the company’s property under s443F CA, which secures their right of indemnity under s443D. Administrators also have an equitable lien that attaches to funds realised by them from the companies’ property and gives them priority as a secured creditor over the unsecured priority creditors referred to in s556. Similarly, the liquidator has an equitable lien over the funds he realised from the company’s property for his fees and expenses of realising that property and which gives him priority over unsecured priority creditors and previous administrators. The court stated:

where the liquidator creates a fund by realising the assets of companies which have formerly been under administration, it is the liquidator who has ﬁ rst claim upon the fund for his fees and expenses…

Where a company in administration subsequently goes into liquidation, the administrator’s indemnity for his or her fees and expenses will be secured by the statutory lien in s443F CA and, perhaps, also by an equitable lien, giving the administrator priority over all unsecured priority creditors (listed in s556), except the subsequent liquidator. The subsequent liquidator will have priority for his or her fees, in respect of any fund realised by him or her.

9423 Insolvency 2 casenotes.indd 33 7/03/2006, 1:02:40 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Stay of proceedings in external administration

Case Name: The Mining Warden’s Court was asked to determine whether it is Van Blitterswyk v Sons of a court for the purposes of the moratorium on proceedings Gwalia & Ors (in administration) against companies in administration. Administrators were appointed to Sons of Gwalia on 29 August 2004. Van Citation: Blitterswyk then began proceedings in the Mining Warden’s Court against the [2005] WAMW 06, Mining company. The administrators asserted that section 440D CA prohibited Van Warden’s Court at Kalgoorlie per Blitterswyk from instituting or litigating objections before the mining warden sitting Auty SM in open court. That section provides that, during the administration of a company, a proceeding in a court against the company or in relation to any of its property Date of Judgment: cannot be begun or proceeded with, except with the administrator’s written consent or the leave of the court. 28 February 2005 The administrators asserted that: Issues: • The leave of the Supreme Court had not been sought or obtained by Van • Section 440D CA Blitterswyk. • Stay of proceedings • Is the Mining Warden’s • An administrator needs to be allowed to act ‘efﬁ ciently and effectively in Court a ‘court’ for the discharging statutory duties’ imposed by Part 5.3A CA. purposes of s440D CA • It was the clear intention of s440D that the assets of a company in administration be quarantined: Re Capital General Corporation Limited [2000] VSC 570. • If the Western Australian Parliament had wished to avoid the moratorium imposed by s440D in relation to proceedings in the Mining Warden’s Court, it would have done so expressly in the Mining Act 1978 (WA). That Act excludes the operation of s471B (which stays proceedings in a court when a company is in liquidation) but does not do so with respect to s440D. • The proceedings brought by Van Blitterswyk were ‘proceedings in a court’ within the meaning of s440D. The administrators considered the functions of the Mining Warden’s Court and submitted that they were akin to those of a court, including: the ability of the warden to impose a penalty; the requirement of the warden to act judicially; the warden’s power to take evidence on oath; the warden’s power to make costs awards; a party’s right to be legally represented; and the binding nature of orders and directions of the warden.

Van Blitterswyk submitted that the proceedings were not ‘proceedings in a court’ for the purposes of s440D and so the proceedings should not be stayed.

The mining warden considered a number of authorities including Brian Rochford Limited v Textile Clothing and Footwear Union of New South Wales (1998) 47 NSWLR 47, in which it was held that a tribunal that might have some ‘court like’ functions but lacked others can still be a court for the purposes of s440D. It was

9423 Insolvency 2 casenotes.indd 34 7/03/2006, 1:02:41 PM held that the warden sitting in open court would be understood to be a ‘court’ conducting proceedings.

In any event, it was held that the Warden’s Court (whether sitting in open court or not) would maintain some of the features of a court, including: the obligation to afford natural justice; similar forms and pleadings; the ability of the warden to take evidence on oath; the fact that the tribunal is a court of record; and that the warden is a judicial ofﬁ cer.

Accordingly, it was held that the Mining Warden’s Court was a court for the purposes of s440D(1) CA and the proceedings against Sons of Gwalia in that court should be stayed.

The Mining Warden’s Court is a court for the purpose of s440D CA. Accordingly, proceedings in that court against a company in administration will be stayed, unless leave is obtained or the administrator has given consent to the continuation of the proceedings.1

1 For a more detailed discussion in relation to the stay of proceedings in an external administration context, see ‘Should I stay or should I go’, which can be found on our website at: http://www.aar.com.au/pubs/insol/pap12may05.htm.

9423 Insolvency 2 casenotes.indd 35 7/03/2006, 1:02:41 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Fixing administrators’ remuneration

Case Name: Voluntary administrators applied to the court for orders that their Lombe, in the matter of remuneration be fi xed by a committee of creditors prior to the Bosnjak Holdings Pty Ltd second meeting of creditors. This case considers the factors that (administrators appointed) the court will take into account in making such orders. Voluntary administrators were appointed to the companies comprising the Westbus Citation: group in NSW. The only committee of creditors elected at the fi rst meeting of [2005] FCA 275, Federal Court creditors was a committee for Westbus Pty Limited (the Westbus committee). The of Australia per Gyles J administrators then successfully applied to the court for an order that the convening period for the second meeting of creditors be extended by 60 days. Date of Judgment: The court noted that one of the features of administration is that the CA provides 21 March 2005 for the fi xing of fees of the administrators only at the second meeting of creditors, which is virtually the end of the administration. That means that almost all of the Issues: work of an administrator will be complete at the time fees are fi xed and that the • Section 447A(1) CA fi xing of fees effectively takes place retrospectively. • Fixing administrators’ Justice Gyles held that the scale and complexity of the affairs of the companies remuneration by creditors’ committee under administration, and the length of the administration, required that provision be made for fees to be fi xed before the second creditors’ meeting was held. The court also held that it is not practical for fees to be fi xed at the second meeting of creditors where the resources of a large fi rm of chartered accountants are required to be employed and the expenditure of considerable sums of money is required to fund those resources. Accordingly, the court held that this was a proper case to exercise the general power under section 447A(1) CA to make such order as the court thinks appropriate about how Part 5.3A CA is to operate in relation to a company.

The court also considered whether it was appropriate for remuneration to be ﬁ xed by a committee of creditors rather than the body of creditors, and by a committee of creditors of Westbus rather than of each company separately. The court held that such a proposal was appropriate, based on the following factors:

• the Westbus committee represented 97 per cent of total claims against all creditors; • the companies within the Westbus group were members of a commercial group with cross-guarantees operating (and in respect of which an ASIC class order was in place); • the largest single creditor was a member of the Westbus committee; • the major proportion of external claims were employee claims and the majority of employees were represented on the Westbus committee by the Transport Workers’ Union;

9423 Insolvency 2 casenotes.indd 36 7/03/2006, 1:02:42 PM • the work had effectively been done for the group and had been apportioned as appropriate; • there was no committee of creditors appointed for other companies. To establish such a body for each company would have been time consuming and expensive; • a representative group of creditors was likely to be better able to properly consider the issues than groups of creditors in general meetings; and • the court had the power to intervene retrospectively, at the suit of any appropriate party, in the event of any irregularity in the ﬁ xing of remuneration by the Westbus committee.

The court will take into account a range of factors when determining whether a committee of creditors should be empowered to fi x an administrator’s remuneration. When the affairs of a group of companies under voluntary administration are complex and the convening period has been extended, the court will be more likely to make orders allowing the committee of creditors to fi x the administrator’s remuneration. These matters have now been recognised by the Federal Government, which has proposed that, as part of its insolvency reform package announced on 12 October 2005, the CA will be amended to increase the fl exibility of creditors and creditors’ committees to fi x an administrator’s remuneration.2

2 See the matters identiﬁ ed at page 233 of this Review.

9423 Insolvency 2 casenotes.indd 37 7/03/2006, 1:02:43 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

The deed of cross-guarantee saves the voluntary administration

Case Name: Where a group of companies that effectively comprise a single J Aron Corporation v Newmont economic entity enter into voluntary administration, it is common Yandal Operations Pty Ltd for the administrators to hold concurrent creditors’ meetings for each company in the group. This case considers the conduct of Citation: concurrent meetings and voting procedures. [2005] NSWSC 238, Supreme Voluntary administrators were appointed to a group of 14 companies known as the Court of New South Wales NYOL Group. The NYOL Group companies were subsidiaries of Newmont Mining per Austin J Corporation.

Each of the companies of the NYOL Group executed a deed of cross-guarantee to Date of Judgment: enable them to obtain the beneﬁ t of an ASIC class order permitting the lodgment of 24 March 2005 consolidated ﬁ nancial statements. The deed provided that, in the event of a winding up, each company in the group was liable to each creditor of every other Issues: company in the group for the full amount of the debt. Largely because of the cross- • Corporations Regulations guarantee’s existence, the administrators decided to treat the group as a single 5.6.21 and 5.6.23 commercial and economic entity for the purposes of the administration. • Validity of votes at creditors’ meeting It was accepted in the proceedings by both parties that 14 second creditors’ • Groups of companies and meetings, one for each company in the group, were held concurrently, and that the need for separate votes for creditors voted once on a single resolution (including whether to accept the DOCA). each company On the basis of this vote, each of the companies then executed a DOCA and the administrators became the deed administrators. The plaintiff (one of the creditors that voted against the resolution to enter the DOCA) brought proceedings seeking to impugn the resolutions on a number of bases, including that the majority of creditors for each company had not voted for a DOCA to be executed for each company.

As a preliminary question in the proceedings, Justice Austin was asked to determine whether, at the second creditors’ meeting, a majority of the creditors of each of the NYOL Group companies passed resolutions that each of the companies execute a DOCA. The administrators contended that, because of the provisions of the deeds of cross-guarantee, each creditor was in fact a creditor of each company in the group and so, by voting, every creditor was voting in each of the 14 concurrent meetings. The plaintiff, on the other hand, argued that each creditor was voting only in the meeting for the company that principally owed them the debt and that Mr Korda (the chairman of the meeting and one of the administrators) took it upon himself to treat their votes as votes in respect of all 14 meetings as though he were their proxy, which he was not. If the plaintiff’s argument was correct, then the votes for some of the companies to enter into the DOCA would not have been carried.

Justice Austin acknowledged that the question he was asked to answer was difﬁ cult, partly because the drafting of various documents relevant to the meeting

9423 Insolvency 2 casenotes.indd 38 7/03/2006, 1:02:44 PM and the procedure at the meeting was ambivalent. They did not reﬂ ect any recognition that there were to be 14 concurrent meetings and a decision with respect to a separate DOCA for each of the 14 companies. Moreover, Mr Korda failed expressly to tell the meeting that he would treat a vote in one meeting as a vote in all of the meetings. Justice Austin found the absence of any written record of Mr Korda’s decisions ‘troubling’ and suggestive of sloppiness in the administration, but not fatal.

Ultimately, his Honour weighed up the various factors relevant to the preliminary question, before holding that a majority of creditors of each of the 14 Newmont Group companies voted in each meeting of the Newmont Group companies for a resolution to execute a DOCA. Crucial to this ﬁ nding was Justice Austin’s acceptance of Mr Korda’s evidence that he determined before the meeting that, by reason of the deed of cross-guarantee, each external creditor of any Newmont Group company was a creditor of every Newmont Group company. His Honour also accepted that Mr Korda and his staff prepared the proof of debt forms, proxy forms, voting slips and attendance register on the basis that, where a creditor identiﬁ ed a Newmont Group company as debtor, the form operated only to identify the principal debtor and not the sole debtor.

There were many factors that pointed towards a conclusion that individual creditors were unaware that by voting in one meeting they were being treated as having voted in all of the meetings of the Newmont Group companies. Ultimately, however, the combined effect of the deed of cross-guarantee and the acceptance of Mr Korda’s evidence as to his subjective belief of what happened at the meeting saved the administration. This decision has been appealed.

Administrators should give careful consideration to the nature of creditors’ meetings whenever concurrent meetings for more than one company are held. The basis on which each creditor is voting, and the companies for which they are voting, should be clearly determined and communicated beforehand. Relevant reports, notices, forms and announcements should be consistent so that creditors are not under a misapprehension as to the basis on which they are voting.

9423 Insolvency 2 casenotes.indd 39 7/03/2006, 1:02:44 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Proofs of debt: claim for loss of proﬁ ts

Case name: In this case, the Full Federal Court confi rmed that a creditor can Wallace-Smith v Thiess Infraco claim loss of profi ts in a proof of debt lodged under a DOCA. (Swanston) Pty Ltd Unfortunately, the appeal court did not take the opportunity to clarify the doubts raised by Justice Finkelstein in the fi rst Thiess decision1 about the correctness of Citation: comments made by the Full Federal Court in Lam Soon Australia Pty Ltd (2005) 218 ALR 1, Full (administrator appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 Those Federal Court of Australia per comments concerned whether a creditor can lodge a proof of debt for a damages French, Weinberg and Allsop JJ claim when there has been no breach of the contract before the administrator’s appointment. Date of Judgment: Following privatisation of the public transport system in Victoria by the Kennett 30 March 2005 Government in 1999, the National Express Companies operated part of the Melbourne metropolitan transport system. On 23 December 2002, voluntary Issues: administrators were appointed to the National Express Companies that operated • Section 553(1) CA the tram and train services and ultimately those companies entered into DOCAs. • Claims admissible under Thiess Infraco (Swanston) Pty Ltd (Thiess) claimed to be a creditor and lodged a DOCA proof of debt for unpaid service charges for work done before the administrators’ • Proof of debt for loss of appointment and for loss of profi ts. The deed administrators rejected the proof profi ts insofar as it claimed loss of profi ts. Thiess appealed to the Federal Court from the deed administrators’ decision and Justice Finkelstein held that Thiess was entitled to claim loss of profi ts. The deed administrators appealed that decision to the Full Court.

The Full Court found that, as at the date of the administrators’ appointment, National Express was in breach of its contract with Thiess – it had failed to pay the fee due to Thiess on 17 December 2002. Further, on that date National Express told Thiess that it would no longer be able to pay its debts because its parent company had decided to withdraw ﬁ nancial support. This meant that ordinarily Thiess would have had a right at common law to terminate its contract with National Express and to claim damages for loss of proﬁ ts. However, the contractual arrangements between Thiess and National Express placed a restriction on the rights of Thiess to terminate the agreement and, in effect, it could not do so without the permission of the Director of Public Transport. As Justice Weinberg stated:

The reason for this was plain. It was intended to ensure that there would be continuity in the provision of vital public transport services even if one or other of the private parties to that agreement failed to meet its contractual obligations.

1 Reported at page 49 of the Annual Review of Insolvency and Restructuring Law 2004.

9423 Insolvency 2 casenotes.indd 40 7/03/2006, 1:02:45 PM The deed administrators argued that the contractual framework meant that Thiess had no right to terminate the agreement and it could only be ended by consensual arrangement that did not give rise to a right to claim damages for breach of contract.

The Full Court did not agree. It held that, as at 23 December 2002 (that being the date of the administrators’ appointment and the date by which a ‘claim’ had to have arisen to give a right to prove under the DOCA), Thiess had a contingent right to terminate at common law that would give rise to a claim for damages, although there were constraints upon it as to when it could exercise that right. The court held that, unless the right to terminate had been abandoned, Thiess could lodge its proof of debt for damages (including loss of proﬁ ts).

The court found that, although Thiess continued to provide services to National Express until a new operator was appointed, this did not mean that it had abandoned its right to terminate. Rather, because of the contractual constraints placed on it, its right to terminate was ‘suspended’ until the new operator was in place.

The transfer to the new operator was effected in part by an agreement between parties including the new operator, Thiess, National Express and the Director of Public Transport. Under that agreement, the contract between Thiess and National Express was to be terminated at 3am on 18 April 2004 (which was the time when the new operator was to take over). The transfer agreement contained an acknowledgment that the Thiess contract was to terminate for breaches by National Express that occurred before 22 December 2002. Justices French and Weinberg held that, in those circumstances, Thiess had not abandoned its right to terminate at common law and to claim damages, and that, that right having arisen before 23 December 2002, Thiess was entitled to lodge a proof of debt under the DOCA for loss of proﬁ ts.

On this point, Justice Allsop dissented and held that the termination of the Thiess contract was not as a result of Thiess exercising its common law right to terminate but rather by consensual agreement under the terms of the transfer agreement to the new operator. As consensual termination does not give rise to a right to claim damages, Justice Allsop held that Thiess was not entitled to lodge a claim for loss of proﬁ ts.

As there was a breach of the agreement before the administrators’ appointment, it was not necessary for the Full Court to decide what the position would have been if the breach had occurred after the administrators’ appointment. However, at ﬁ rst instance, Justice Finkelstein did make some observations on this point and the comments on this subject made by the Full Federal Court in Lam Soon Australia Pty Ltd (administrators appointed) v Molit (No 55) Pty Ltd.

In the Lam Soon case, the court held that a lessor’s claim for future rent under a lease was a claim arising before the appointment of the administrator, meaning that the lessor was bound by the deed in respect of its contractual right to receive rent. While the right to receive rent arises, periodically, in the future, it is an existing contractual right on foot at the time of appointment of an administrator. Consequently, it is not necessary for the lease to be brought to an end before the administrator’s appointment for the lessor’s claim for future rent to be caught under a DOCA.

9423 Insolvency 2 casenotes.indd 41 7/03/2006, 1:02:46 PM In Lam Soon, the court also identiﬁ ed that ‘future breaches of covenants’ may be treated differently. The court stated:

A right to sue for damages for a particular future breach of that covenant, however, is we think, looked at before the breach occurs, not even a contingent claim: it is a mere expectancy and could not be the subject of proof.

The court gave as an example the covenant to keep leased premises in a state of good repair. If a breach of this covenant occurred after an administrator’s appointment, a claim would arise at that point, but it would not be covered by a DOCA.

In the Thiess case, Justice Finkelstein referred to the Lam Soon decision and stated that, in his view, a right to sue for damages for a future breach of contract was a provable claim under a DOCA. His Honour stated that the suggestion in Lam Soon that such a claim was not provable was contrary to both the purpose of the CA and to earlier cases. On appeal, Justices French, Weinberg and Allsop did not discuss whether the Lam Soon decision was wrong in any respect. The fact that the contractual arrangements considered in the Thiess case constrained the right of one party to terminate without the agreement of a third party may make the decision of limited application in the future.

This case confi rms that, where there has been a breach of an essential term of an agreement before the appointment of an administrator that would entitle the innocent party to terminate, then, unless that right to terminate has been abandoned, the innocent party will be entitled to lodge a proof of debt claiming loss of profi ts. In respect of the Lam Soon decision, we will have to wait for further cases to see whether the categories of claims for which a proof of debt can be lodged under a DOCA are broader than that decision would suggest. Certainly Justice Finkelstein’s view, expressed in the fi rst Thiess case, about the purpose of the CA is supported by remarks made in some earlier decisions that the company ‘is to be freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind’.

9423 Insolvency 2 casenotes.indd 42 7/03/2006, 1:02:46 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

HWE: ﬁ xing administrators’ remuneration

Case Name: Voluntary administrators applied to the Federal Court for orders In the matter of Henry that their remuneration be fi xed by a committee of creditors Walker Eltin Group Ltd ahead of the second meeting of creditors. (administrators appointed) Voluntary administrators were appointed to the 26 entities comprising the Henry Walker Eltin Group. A fi rst meeting of creditors was held and a successful application Citation: made to extend the convening period for the second meeting of creditors. [2005] FCA 994, Federal Court of Australia per Hely J The administrators applied to the court under section 447A CA (which entitles it to make orders about how Part 5.3A is to operate with respect to a particular administration) to enable the committee of creditors to fi x the administrators’ Date of Judgment: remuneration. The court noted that, without such orders, the administrators’ 31 March 2005 entitlement to remuneration is governed by s449E CA, which entitles them to such remuneration as is fi xed by a resolution passed at the second meeting of creditors. Issues: Justice Hely noted that the court was empowered to make the orders sought, and • Section 447A CA that there were precedents for making orders entitling an administrator to receive • Fixing administrators’ remuneration approved by the committee of creditors after the committee had been remuneration by creditors’ given adequate notice of the administrator’s proposal and the basis for the committee proposal: Re Regis Towers Real Estate Pty Limited 51 ACSR 628.

The orders sought in this case provided for Corporations Regulations 5.6.12- 5.6.36A to apply to the convening and conduct of the meetings of the committee of creditors and, in particular, that regulation 5.6.21 would apply. Accordingly, if a poll were demanded on a resolution to ﬁ x the administrators’ remuneration, a majority of the representatives of the committee of creditors voting on the resolution by number and by value would need to vote in favour of the resolution for it to be carried.

In addition, the court noted that:

• The orders sought would not authorise the committee of creditors to fi x the administrators’ remuneration prospectively by reference to a scale of charges. The committee was able to fi x remuneration for work already undertaken by the administrators, in accordance with detailed information provided by the administrators. • The creditors were notifi ed by a circular of the administrators’ intention to make the application and were invited to contact the administrators if they wished to be heard on the application. No creditor responded to that invitation. • ASIC had been notifi ed and had indicated that it did not oppose the application and did not wish to be heard.

9423 Insolvency 2 casenotes.indd 43 7/03/2006, 1:02:47 PM Justice Hely also noted the complexity and the expected duration of the administrations in question. Accordingly, his Honour found that the orders sought should be made.

This case is part of a developing body of cases relating to applications for committees of creditors to be given the power to ﬁ x administrator remuneration ahead of a second meeting.1 It provides a useful illustration of factors that the court will take into account in determining whether such power should be granted.

1 See, for example, Lombe, in the matter of Bosnjak Holdings Pty Limited (administrators appointed) at page 36 of this Review. See also In the matter of Motor Group Australia Pty Limited (administrators appointed) (No 3), at page 71 of this Review, which deals with the ﬁ xing of remuneration of a deed administrator.

9423 Insolvency 2 casenotes.indd 44 7/03/2006, 1:02:48 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

What happens if a sole director and shareholder dies before placing the company into administration?

Case Name: This case considers the rare situation where the sole director and In the matter of Pasdonnay Pty shareholder of a company dies before he can formally appoint Ltd (administrators appointed) administrators to the company. Pasdonnay Pty Ltd had a single director and shareholder, Mr Rear. Mr Rear decided Citation: that, if a settlement of certain court proceedings had not been reached by Friday, 4 [2005] FCA 335, Federal Court March 2005, he would place the company into voluntary administration. He of Australia per Gyles J informed a consultant to the company, Mr Fitzgerald, of his plans and he also signed the necessary company resolution. By that stage, Mr Rear had been Date of Judgment: admitted to hospital, so he relied on Mr Fitzgerald to carry out his plans. 1 April 2005 No settlement had been reached by 4 March, so Mr Fitzgerald contacted the proposed administrators and arranged to meet with them on Monday, 7 March Issues: 2005. Mr Rear died on 6 March. Nonetheless, Mr Fitzgerald met with the proposed • Section 447A CA administrators on 7 March and handed them their notice of appointment. • Validity of appointment Justice Gyles held that the appointment was invalid. Regardless of Mr Rear’s of administrators after intentions, the fact that he died before the administrators were appointed meant death of sole director and that there could not be a valid appointment. However, his Honour held that he had shareholder • Whether court should power under section 447A to order that the administrators be appointed. Section exercise discretion to 447A allows the court to make any order it sees ﬁ t with respect to the operation of validate appointment of Part 5.3A (the voluntary administration provisions) in relation to a particular administrators company. In this case, Justice Gyles held that, as the administration was well- advanced and it was likely the business would be sold as a going concern, it was in the interests of shareholders and creditors for the administration to continue. As such, he made an order validating the appointment of the administrators.

The court also noted that s447C CA grants the jurisdiction to declare the validity of an appointment of an administrator on the application of the administrators.

It is clear from this case that the intentions of a director or shareholder with respect to placing a company into administration do not, of themselves, survive his or her death. However, the court has a discretion to implement these intentions if it considers them to be in the interests of the company’s creditors and shareholders.

9423 Insolvency 2 casenotes.indd 45 7/03/2006, 1:02:49 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Crystal ball gazing? Grounds for termination of a DOCA

Case Name: In this case, the Supreme Court of New South Wales considered University of Sydney v the bases on which the court may exercise its discretion to Australian Photonics Pty Ltd terminate a DOCA. & Ors At a meeting of creditors of Australian Photonics (the company), the creditors considered two DOCAs. One was proposed by the University of Sydney and the Citation: other was proposed by three entities described as the ‘CVC parties’. A majority of (2005) 53 ACSR 579, creditors (both in number and value) voted in favour of the DOCA proposed by the Supreme Court of New South CVC parties (the deed) and the DOCA was subsequently executed. Wales per Palmer J The University of Sydney brought an application under section 445D(1) CA seeking an order that the court exercise its discretion to terminate the deed. The Date of Judgment: application was brought on the grounds that the DOCA: 8 April 2005 • could not be given effect to without injustice or undue delay (s445D(1)(e)); Issues: • was oppressive or unfairly prejudicial to, or unfairly discriminatory against, • Sections 445D(1), unsecured creditors (s445D(1)(f)(i)); and 445D(2) CA • was contrary to interests of the company’s creditors as a whole (s445D(1)(f)(ii)). • Termination of DOCAs In determining the application, the court considered the following issues.

Inadequate consideration Under the DOCA, all the company assets were assigned to RWC. The University of Sydney claimed that the consideration for this assignment was inadequate and therefore the DOCA was unfair or oppressive within the meaning of s445D(1).

However, after considering the circumstances surrounding the creditors’ decision to enter into the DOCA, the court held that it was not possible for either the court or the creditors to determine what was an adequate consideration to be paid for the assignment of the company’s assets. At the time of entering the DOCA, the company’s creditors were faced with a number of possible outcomes depending on whether the creditors chose to place the company into liquidation or enter into the DOCA. These options were based on a preliminary report by the administrator and were not debated in detail by the parties. Therefore, it was not possible for either the court or the creditors to predict which outcome was the more probable or the more likely, or to determine the appropriate value of any consideration to be paid for the company’s assets. In these circumstances, s445D(1) did not apply.

Potential adverse claims The University of Sydney also claimed that the DOCA was unfairly discriminatory on the ground that clause 6 of the deed potentially entitled Dr Koch (an employee/ creditor), to claim almost $30,000 more than she would otherwise have been

9423 Insolvency 2 casenotes.indd 46 7/03/2006, 1:02:50 PM entitled to at law. The University of Sydney claimed that this entitlement was unfairly prejudicial to the interests of other unsecured creditors and/or was contrary to the interests of the company as a whole.

Although the court acknowledged that the construction of clause 6 was ambiguous, it did not consider that this ambiguity and the mere chance of an adverse claim by an employee (Dr Koch) was sufﬁ ciently ‘unfair’ so as to render the deed prejudicial or discriminatory within the meaning of s445D(1)(f)(i). Nor did the chance of an adverse claim mean that the DOCA could not be given effect to without injustice or undue delay under s445D(1)(e).

Whether liquidation more beneﬁ cial The University of Sydney’s primary argument was that the DOCA was contrary to the interests of the creditors of the company as a whole and could not be given effect without injustice, because the unsecured creditors were likely to be substantially worse off under the DOCA than in a liquidation scenario. In support of its argument, the University of Sydney pointed to the fact that a number of creditors who voted in favour of the DOCA would have faced claims for insolvent trading had the company been put into liquidation. It also noted that a number of unsecured creditors who voted in favour of the DOCA were employees of the company who would receive substantially more under the DOCA than under liquidation.

The University of Sydney asked the court to apply the observations of Justice Santow in JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691, at 715, that the Corporations Law ‘effectively places the onus on those who support the deed to show positively that it results in a better return for the company’s creditors and members than would result from an immediate winding up to the company’.

After comparing the likely return for unsecured creditors and employees both under the DOCA and under liquidation, Justice Palmer was not satisﬁ ed that the DOCA operated prejudicially against the plaintiff. The court made the following important observations about the operation of s445D(1).

• The court will not exercise its power to set aside a DOCA lightly. This is because the creditors who approve the DOCA are taken to be the best judge of what is in their commercial interest. • Justice Santow in Jonco Holdings was not stating a proposition of law to the effect that the proponent of a DOCA bears the onus of satisfying the court that s445D(1) does not apply (that is, that the DOCA is not contrary to the interests of the creditors and should not be terminated). Rather, his Honour was pointing to the commercial realities of the particular circumstances; that is, where it is not clear that the interests of the creditors will be better served under a DOCA as opposed to under liquidation and where there is no hope that the company will continue to trade, the court would want to know why a DOCA is preferable to liquidation. • Those seeking to terminate a DOCA bear the onus of satisfying the court that sufﬁ cient reason for that termination exists under s445D(1), even if that burden is not particularly heavy in circumstances such as those identiﬁ ed by Justice Santow.

9423 Insolvency 2 casenotes.indd 47 7/03/2006, 1:02:50 PM • In determining whether to terminate a DOCA, the court is not limited to considering the characteristics of the deed at the time of its making. It will also consider the operation of the deed at the date of the hearing, as well as in the future. • When considering how the DOCA will operate in the future, the court must be satisﬁ ed that its adverse effect is not a ‘mere possibility or speculation but is, at least, highly likely’.

This case confi rms that the court’s power to terminate a DOCA under s445D(1) will not be exercised lightly. The party seeking to terminate the DOCA must satisfy the court that suffi cient reason exists for terminating the DOCA, having regard to both the circumstances in which the deed was made and the likely effect of the DOCA in the present and future. The mere chance of an adverse effect is not suffi cient to invoke the court’s power.

9423 Insolvency 2 casenotes.indd 48 7/03/2006, 1:02:51 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

A party cannot contract out of its obligation for all its assets to be available to all creditors on insolvency

Case Name: The International Air Transport Association (IATA) sought to In the matter of Ansett challenge the decision of the Ansett deed administrators that it Australia Holdings Ltd (subject was not a creditor of the company. The deed administrators to DOCA); International Air sought a declaration that the IATA regulations ceased to apply to Transport Association v Ansett Ansett by virtue of the DOCA’s execution. This case illustrates Australia Holdings Limited the growing pool of cases distinguishing the decision in British (subject to DOCA) and Mark A Eagle and conﬁ ning it to its speciﬁ c facts. Korda and Mark F Mentha The IATA was incorporated under Canadian law in 1945. It has a clearing house department that is responsible for the clearance of accounts between member Citation: international airline operators and some others. The clearing house’s primary [2005] VSC 113, Supreme function is to effect monthly clearances and to pay or collect from IATA members Court of Victoria per Mandie J and others the balances found to be due by/to the clearing house.

Date of Judgment: The IATA Clearing House Regulations provide that admission to membership in the clearing house creates a contract between each member and every other member 22 April 2005 and IATA, and that liability for payment and rights of action to recover payment accrue between the clearing house and members, but not directly between Issues: members. • Whether the British Eagle principles applied to The British Eagle principle (based on the decision in British Eagle International current IATA clearing house Airlines Ltd v Compagnie Nationale Air France [1975] All ER 390) provides that: arrangements • Whether the IATA clearing • a person may not, by stipulation with a creditor, provide for a different house system meant distribution of the person’s effects in the event of bankruptcy than that which that there were no debts the law provides; between member airlines • in general, there should be an equality of treatment between creditors unless • Whether the British Eagle the contrary is expressly provided (the pari passu principle); and principles applied to a • an insolvent person or company is not allowed to deprive creditors of the company becoming subject beneﬁ ts of its assets (the anti-deprivation principle). to a DOCA In the circumstances of the British Eagle case, the House of Lords considered that the contract created by the clearing house regulations (as they were then) created legal rights between the member airlines and that the legal rights acquired by British Eagle were not, strictly speaking, debts, but ‘innominate choses in action having some, but not all’ of the characteristics of debts. While debts may not have existed at the time of liquidation, there was a species of property. Therefore, the clearing house system deprived creditors of the beneﬁ t of the property and also evaded the pari passu principle and was unenforceable as being contrary to public policy.

Several subsequent decisions have distinguished the British Eagle decision on the facts. The decision has not been received with approval by the courts, but has not been overturned by the House of Lords and, therefore, remains binding authority.

9423 Insolvency 2 casenotes.indd 49 7/03/2006, 1:02:52 PM The Supreme Court of Victoria in this case considered that, as the clearing house regulations applying at the time of Ansett’s insolvency differed in key respects to those that applied in the British Eagle case, this case could be distinguished on its facts and the court was not bound to follow the British Eagle decision.

Changes to the clearing house regulations resulted in an express provision stating that ‘no liability for payment and no right of action to recover payment shall accrue between members of the Clearing house’. The court held that by virtue of this regulation, no debt or chose in action was created between the members of IATA. The only debts that arose were between IATA and the member.

Justice Mandie held, therefore, that there was no relevant Ansett asset of which the non-airline creditors were deprived of by reason of the clearing house arrangement. As his Honour did not consider that the British Eagle decision applied in these circumstances, it was not necessary to determine whether the British Eagle principle applied to a situation where a company becomes subject to a DOCA.

The general principle of the British Eagle decision is that the entire debtor’s estate should be available for distribution to all creditors and no creditor or group of creditors could lawfully contract in such a manner as to defeat other creditors not parties to the contract; such a contract is avoided as a matter of public policy. This principle remains the law, but the courts are willing to consider the individual facts of the case and the terms of the relevant contract, if necessary, to distinguish the British Eagle decision and give effect to the parties’ intentions.

9423 Insolvency 2 casenotes.indd 50 7/03/2006, 1:02:52 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Alleged oral arrangement to indemnify administrators for fees not enforceable

Case Name: The liquidators of a mine-operating company sought a Albarran v Thin Seam Mining declaration that the mine’s owners, GPC, indemnify them for Pty Ltd their costs, disbursements and liabilities as voluntary administrators and indemnify them for the costs incurred by Citation: them in operating the mine. [2005] NSWSC 372, Supreme Thin Seam Mining Limited operated a coal mine in NSW that was owned by GPC. Court of New South Wales per The liquidators of Thin Seam Mining sought a declaration that there existed an oral Barrett J contract between them and GPC providing that GPC would indemnify them for their costs, disbursements and liabilities as voluntary administrators and also indemnify Date of Judgment: them for the costs incurred by them in operating the mine for Thin Seam Mining.

26 April 2005 GPC refuted the existence of such an oral contract and refused to indemnify the liquidators. Issues: Justice Barrett undertook an extensive review of the evidence and concluded from • Whether oral contract the facts that the liquidators failed to make out the necessary case to establish the formed • Whether oral representations existence of a contract or invoke a contractual or equitable remedy against GPC. made One of the pieces of evidence considered by Justice Barrett to be compelling was the fact that the liquidators, from a major ﬁ rm of chartered accountants and insolvency practitioners, did not seek, at any stage, to put the oral agreement into written form, even by way of a short letter.

Insolvency practitioners ought to ensure that any agreements (indemnity or otherwise) are reduced into writing as soon as possible after an agreement is made, as it can be very difﬁ cult to establish, by cogent evidence, proof of a legally enforceable oral agreement.

9423 Insolvency 2 casenotes.indd 51 7/03/2006, 1:02:53 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Can a company enter into a DOCA to avoid payment of a court-imposed ﬁ ne?

Case Name: The administrator in this case sought confi rmation from the court Australian Winch & Haulage Co that a court-imposed fi ne would be available as a provable debt Pty Ltd v State Debt Recovery of the company where the company would become solvent Offi ce following entry into a DOCA. Australian Winch & Haulage Co Pty Ltd (the company) was prosecuted by the Citation: WorkCover Authority of NSW. The matter was heard by the Industrial Relations [2005] NSWSC 423, Supreme Commission (IRC) on August 2001. On 12 November 2002, the company entered Court of New South Wales per into a DOCA. On 31 December 2003, the IRC handed down judgment against the Palmer J company and imposed a fi ne of $150,000.

Section 553B CA provides that, with some exceptions, penalties or fi nes imposed Date of Judgment: by a court for an offence against a law are not admissible to proof against an 29 April 2005 insolvent company. The parties to the proceedings agreed that the fi ne imposed by the IRC was ‘imposed by a court in respect of an offence against a law’. Issues: The State Debt Recovery Offi ce (SDRO) sought payment of that fi ne. The company • Section 553B(1) CA applied to the court for an order to restrain the SDRO from recovering the fi ne except • Whether fi nes imposed by the court are provable under by way of proof and receipt of a dividend under the DOCA. The deed administrator a DOCA wrote to the SDRO and said that the company had paid all that it was required to pay into the deed fund. The deed administrator told the SDRO there was certainty that the debts provable under the DOCA would be extinguished once he had paid the fi rst and fi nal dividend so that the deed would then be ‘wholly effectuated’. The deed administrator also asserted that s553B CA no longer applied because the company was solvent, so that the SDRO was entitled to participate in the DOCA.

The deed administrator argued that:

• the policy of Part 5.3A CA, as expressed in section 435A CA, is that a company should emerge from a DOCA with a clean slate, able to start again; and • all the debts of the company had been paid into the deed fund and that all provable debts would be extinguished when the ﬁ nal dividend was declared and paid.

Justice Palmer rejected those submissions. His Honour noted that the explanatory memorandum to the predecessor to s553B (s82(3) of the Bankruptcy Act 1966) stated that fi nes imposed by a court are not provable in a winding up because it is diffi cult to justify penalising creditors for wrongs committed by the company. The court noted that, if the deed administrator’s submissions were accepted, the rationale behind s553B would be defeated because the fi ne imposed by the IRC would be borne by the company’s creditors. Further, if the deed administrator’s submission was correct, the deterrent effect of a fi ne or penalty imposed upon a company by a court would easily be negated by the company’s entry into a DOCA.

9423 Insolvency 2 casenotes.indd 52 7/03/2006, 1:02:54 PM Finally, the court considered the terms of the DOCA and held that the SDRO was not, and never could have been, a ‘deed creditor’.

Where a company becomes solvent following entry into a DOCA, a court-imposed ﬁ ne will not be able to be treated as a provable debt. Entry into a DOCA is not a means for a company to avoid payment of a court-imposed ﬁ ne by passing the burden to its creditors.

9423 Insolvency 2 casenotes.indd 53 7/03/2006, 1:02:54 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Advice on manner in which to distribute funds

Case Name: Liquidators (previously administrators) of a company applied to Shepard & Dean-Willcock the New South Wales Supreme Court for directions on how the v Sports Mondial of Australia available assets ought be distributed among various creditors of Pty Ltd (in liquidation) the company. The applicants were appointed administrators to a company on 11 April 2003 and Citation: the company executed a DOCA on 29 May 2003. The deed made provision for a [2005] NSWSC 432, Supreme fund to be distributed among the participating creditors. The property of the Court of New South Wales per company was defi ned in the DOCA as all of the assets of the company as at 11 Campbell J April 2003. It also included a term to the effect that the monies paid to the administrators by the company, the directors, or third parties were not refundable if Date of Judgment: the DOCA was terminated. Instead, the monies were to be held on trust for the 2 May 2005 benefi t of the administrators and the participating creditors. At the same time as the DOCA was executed: Issues: • Sports Mondial Plc (a related company) gave a guarantee to the administrators • Sections 447D(2) and that they would be paid all of the ‘Guaranteed Money’, being the money that the 511 CA • Judicial advice company was required to pay to the administrators under the DOCA, which • Priority of payments would then be held on trust for the benefi t of the creditors; and to creditors • the company gave to the administrators a mortgage over its undertaking and • Whether appropriate assets to secure the payment of various amounts that the company was required to make declaration to pay under the DOCA. about manner of distribution of funds The terms of the DOCA were not complied with. The creditors resolved to terminate it and the deed administrators became the liquidators of the company. The liquidators held money that was paid to the company under the DOCA terms. They also held money from the sale of assets after the company went into liquidation. Further, the company had traded while the DOCA was in place and it had creditors whose debts had arisen after the DOCA was executed. In addition, there was a suggestion that the company liquidator could seek to recover some unfair preferences.

The liquidators applied to the court for advice or directions under section 447D(2) CA (in their capacity as former deed administrators) and s511 CA (in their capacity as liquidators). They asked the court to decide how the available assets ought to be distributed among the various creditors of the company. Justice Campbell applied Dean-Willcocks v ACG Engineering [2003] NSWSC 353 and held that the manner of application of the available funds depends upon the terms of the DOCA. Accordingly, the court held that the following amounts were to be applied for the beneﬁ t of the creditors under the DOCA:

• identiﬁ ed amounts that made up the DOCA fund at the time of the supervening liquidation;

9423 Insolvency 2 casenotes.indd 54 7/03/2006, 1:02:55 PM • the amounts recovered from asset sales. This was because the mortgage over the assets of the company was given to the administrators to secure the company’s obligations under the DOCA; and • any amounts that might be recovered under the guarantee given by Sports Mondial Plc. This was because the guarantee was a right that the administrators held on the trusts created by the deed.

The court also found that, because the DOCA did not bar the claims of the creditors in the event that the deed came to an end, each of the creditors who had received some beneﬁ t under the deed retained the power to prove in the liquidation of the company for whatever debt might still be owing to them, after giving credit for amounts they had received under the administration. Finally, the proceeds of any unfair preferences were distributable in the liquidation alone because s588FF(1) CA makes it plain that this is the case.

The court referred to the ACG Engineering case in which the deed creditors and post-deed creditors had been notiﬁ ed of the application. In that case, the court considered it appropriate to make a declaration that would bind the classes of creditors that did not appear. However, in this case, the court found no evidence of such notice being given and that it was appropriate, instead, to make directions to the effect that the liquidators were justiﬁ ed in carrying out their proposed distribution of the funds.

Administrators and liquidators may apply to the court for advice about the manner in which funds within different classes ought to be distributed to creditors.

9423 Insolvency 2 casenotes.indd 55 7/03/2006, 1:02:56 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Creditors cannot delegate their power to ﬁ x an administrator’s remuneration without court order

Case Name: The deed administrators sought to have their remuneration fi xed by Clynton Court Pty Ltd (subject the court, as the resolution passed by the creditors at the second to DOCA); Korda and Mentha creditors’ meeting did not constitute a fi xing of the administrators’ v The J Aron Corporation and remuneration for the purposes of section 449E CA. The Goldman Sachs Group, Inc At the second meeting of creditors of the Newmont Yandel group (the companies), two separate resolutions concerning the administrators’ remuneration were passed. Citation: The fi rst fi xed the remuneration for a specifi ed period and the second fi xed the [2005] FCA 543, Federal Court future remuneration of the administrators and the deed administrators ‘on the basis of Australia, Victorian Registry, of hourly rates and disbursements as set out in the Report to Creditors (exclusive of per Finkelstein J GST), provided that the Administrators and Deed Administrators’ remuneration be subject to majority approval and capping by the committee of creditors who can Date of Judgment: also vary such arrangements’.

3 May 2005 The terms of the resolution and the terms of a DOCA that was subsequently executed meant that both the approval and the ‘capping’ of the remuneration had Issues: been delegated to the committee in a way that is not authorised by s449E CA. This • Creditors’ power to fi x provides, in effect, that the remuneration of the administrator is to be fi xed by the the administrators’ creditors, not a committee comprising some of the creditors. remuneration • Retention of remuneration In order for the power to fi x remuneration to be delegated by the creditors to the by administrators on an committee (or another third party), an application to the court under s447A CA is interim basis required. In this case, the possibility of seeking court approval to delegate the power to fi x the administrators’ remuneration to the committee was not pursued because the four main creditors were considered by the administrators not to be impartial, since they were involved in separate disputes with the administrators. Accordingly, the court gave the power to fi x the administrators’ remuneration to a registrar. Justice Finkelstein indicated that he could have given the task to an independent assessor, but considered that the registrar would perform the task more cheaply than an independent assessor.

As to whether the administrators had to repay the remuneration already received under the DOCA, Justice Finkelstein stated that he considered the administrators had performed work and acted in good faith, and in the belief that their remuneration had been ﬁ xed by the DOCA. Therefore, the administrators were not required to repay the amount already paid to them and were permitted to receive 80 per cent of future amounts claimed as interim remuneration. The administrators were, however, required to give the court an undertaking to repay any amount received in excess of the amount ﬁ xed by the registrar, within 14 days of that occurring.

9423 Insolvency 2 casenotes.indd 56 7/03/2006, 1:02:56 PM This case conﬁ rms that the creditors of a company in administration (or subject to a deed) cannot delegate their power to ﬁ x an administrator’s remuneration to a committee, without a court order under s447A CA.

9423 Insolvency 2 casenotes.indd 57 7/03/2006, 1:02:57 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

ASX a contingent creditor for ﬁ nes for breach of market rules

Case Name: The ASX imposed fi nes on a company for breach of market rules. McLellan v Australian Stock The breaches occurred before the company was placed into Exchange Ltd administration and the fi nes were imposed after the execution of a DOCA by the company. This case considers whether the ASX Citation: was a contingent creditor of the company at the time of the DOCA’s execution. [2005] FCA 585, Federal Court of Australia per Finkelstein J The Australian Stock Exchange (ASX) operates a fi nancial market and prescribes operating rules for the regulation of participants in the market. Under section 793B Date of Judgment: CA, the operating rules (known as the Market Rules) have effect as a contract under 12 May 2005 seal between the ASX and each participant in the market. ACN 008 082 157 Pty Ltd (the company) conducted a stockbroking business and Issues: was a participant in the market. During 2002, the company breached several • Fines imposed by ASX after operating rules, with the consequence that a penalty may have been imposed on it. execution of DOCA The company went into administration on 8 August 2003 and executed a DOCA in • Whether ASX a contingent November 2003. The deed bound ‘Creditors’ of the company other than ‘Excluded creditor Creditors’. The ASX imposed a fi ne on the company on 14 January 2004 and its Adjudicatory Tribunal imposed a fi ne on the company on 29 April 2004, following a hearing of additional charges relating to other contraventions. The court noted that the fi nes were recoverable by the ASX in an action for damages for breach of contract: Australian Stock Exchange Ltd v McLachlan (2002) 43 ASCR 362.

As the ﬁ nes for breach of the rules were imposed on the company after it had been placed into administration, the court was asked to determine whether the ASX was a contingent creditor of the company as at the date of the administrator’s appointment.

Justice Finkelstein noted that in Australia, for there to be a contingent liability, there must be an existing obligation, out of which on the happening of the contingency (an event that may or may not occur) there will be a ﬁ xed obligation to pay a sum of money. This money can be either liquidated or sounding only in damages: The National Bank of Australasia Limited v Mason (1875) 133 CLR 191. Applying this principle, the company’s administrators argued that, from the moment the company became a participant in the market, it was under an obligation to observe the operating rules. That obligation was contractual in nature by reason of s739B CA.

The administrators argued that, before the appointment of the administrators, the company breached the rules and there was a possibility that each breach might be punished by a ﬁ ne. As a result, the ASX became a contingent creditor of the company and remained so until the appointment date.

9423 Insolvency 2 casenotes.indd 58 7/03/2006, 1:02:58 PM Justice Finkelstein considered the discretionary nature of the power to impose the fi ne and whether such a power can be treated as a contingency. After examining a range of English authorities, his Honour concluded that the possibility a costs order may be made was a relevant contingency. Applying this principle, the court held in this case that the possibility that, as at the date of the DOCA’s execution, a fi ne may have been imposed was a relevant contingency as it was a future event that may or may not occur (out of which a legal liability to pay money will arise). The court noted that it was necessary to fi nd an underlying legal liability that was the source of the obligation to pay the fi ne. It held that that underlying liability was to be found in either the statutory contract, with its implied term to pay the fi ne, or in the private contract with the ASX, which would be the source for an obligation to pay damages suffered by the ASX if the fi ne was not paid.

The court held that the ASX was a contingent creditor and, therefore, a creditor of the company as at the date of the administrator’s appointment. Accordingly, the ASX was bound by the DOCA and was entitled to receive a distribution under the DOCA in respect of its claim.

The possibility that the ASX may impose a fi ne for a breach by the company of a contractual obligation that it owes to the ASX is a relevant contingency for the purposes of determining that the ASX is a contingent creditor bound by a DOCA. This is so, even though the power to impose the fi ne is discretionary. In contrast, s553B CA provides that (with some exceptions) penalties or fi nes imposed by a court for an offence against a law are not admissible to proof against an insolvent company.

9423 Insolvency 2 casenotes.indd 59 7/03/2006, 1:02:59 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Administrator ordered to personally pay litigation costs on an indemnity basis

Case name: A court can make administrators personally liable for litigation Grosvenor Constructions (NSW) costs if it decides the costs have been improperly incurred. Pty Ltd v Hunter The Supreme Court of New South Wales has conﬁ rmed that this means costs associated with litigation must be incurred Citation: ‘reasonably as well as honestly’ in order for administrators to avoid personal liability for costs. Unreported, Supreme Court of New South Wales, Equity This case reviews some recent decisions that consider when an administrator will Division, per Einstein J be personally liable for costs incurred during litigation.

The basic principle is that where an administrator acts reasonably in pursuing Date of Judgment: litigation, he or she will be entitled to an order that the company pay any order for 17 May 2005 costs, and an application may be brought under section 447E CA or s76 of the Supreme Court Act 1970 (NSW). However, administrators may be personally liable Issues: where costs have been ‘improperly’ incurred, and this is not only where they have • Section 447E CA been reckless in pursuing litigation. • Section 76 Supreme Court Act 1970 (NSW) As a guideline: • Costs against an • administrators must believe that commencing or pursuing the litigation administrator/liquidator is justiﬁ ed; • Personal liability for costs associated with litigation • this belief must be reasonable as well as honest; unless ‘reasonably and • the belief should be based upon the administrator’s own inquiries into whether honestly’ incurred the litigation is necessary, properly directed, and moderately resourced; • reliance upon the advice of solicitors is insufﬁ cient; and • the overriding principle is that all litigation should be avoided, unless there is such a chance of success that it is in the interests of the company or its creditors to incur the risk associated with the litigation.

In this case, the administrator of a company that was subject to a DOCA commenced proceedings, failed to comply with an agreement to provide to the defendants security for costs, and then discontinued on the day before the hearing. No evidence was put before the court to explain the failure to provide security or the decision to discontinue the proceedings. The defendants sought an order for indemnity costs to be made against the company and the administrator jointly. The court considered that, in the absence of evidence, it was entitled to infer that the administrator had acted unreasonably in the institution and conduct of the proceedings, and to order costs on an indemnity basis. These costs were awarded against the plaintiff and the administrator jointly and severally.

9423 Insolvency 2 casenotes.indd 60 7/03/2006, 1:03:00 PM Administrators have a personal reason to exercise their own judgment as to whether it is prudent and reasonable for an insolvent company under their charge to incur expenses associated with litigation. There is a real risk of being made personally liable for the costs of unsuccessful litigation if the costs of the proceedings were not reasonably incurred. The courts are emphasising that the decision to incur such expenses must be reasonable as well as honest.

9423 Insolvency 2 casenotes.indd 61 7/03/2006, 1:03:00 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Requesting assistance from a court of another country

Case Name: Federation Group Ltd (subject to a DOCA) and the deed Federation Group Ltd administrators obtained declarations and the issue of a letter of (ACN 007 532 827), request under section 581(4) CA to the Supreme Court of British In the matter of Federation Columbia to act in aid, and be auxiliary to, the Federal Court in Group Ltd (ACN 007 532 827) the administration of Federation Group Ltd under a DOCA. Speciﬁ cally, assistance was sought to prevent property of the Citation: company situated in Canada being seized to the detriment of the [2005] FCA 817, Federal Court creditors as a whole. of Australia per Nicholson J Section 581(4) CA provides:

Date of Judgment: The Court may request a court of … a country other than Australia, that has jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external 24 May 2005 administration matter.

Issues: Section 580(c) deﬁ nes ‘external administration matter’ as a matter relating to the insolvency of a body corporate or a Part 5.7 body. • Sections 580 and 581(4) CA Federation Group Ltd (Federation) held ﬁ ve million shares in a Canadian company • Letter of request to court listed on the Toronto Exchange. The shares were subject to various escrow of another country to aid in provisions, which, if not met, would result in the shares being surrendered for DOCA administration cancellation. Also, Federation had been offered money from the president of the Canadian company to facilitate the cancellation of the shares. The Canadian company had instituted an action against Federation in the Supreme Court of Canada to recover a monetary sum.

The declarations sought were that:

• on 23 October 2003, Federation was placed into administration; • on 10 December 2003, Federation executed a DOCA; and • Part 5.3A CA has its objects set out in s435A CA, namely, to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chance of the company, or as much of its business, continuing in existence, or if that is not possible results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

The proposed letter of request invited the Canadian court to make such orders within its jurisdiction that would apply and give effect to sections 444A, 444B, 444C, 444D, 444E and 444F CA, or comparable Canadian provisions. Among other things, those provisions bind creditors under a DOCA and impose a moratorium on proceedings against the company.

9423 Insolvency 2 casenotes.indd 62 7/03/2006, 1:03:01 PM One of the goals sought by the issue of the letter of request was to prevent the Canadian company from gaining a ﬁ nancial beneﬁ t to the detriment of Federation’s unsecured creditors.

Justice Nicholson considered that the circumstances, including that there was comparable Canadian legislation, justiﬁ ed the making of declarations and the issue of a letter of request in the terms sought.

Where an Australian court considers that the court of another country has jurisdiction in external administration matters under comparable legislation in the other country, and the factual circumstances are appropriate, the court will issue a letter of request to the other court. In doing so, the court will make declarations, including declarations as to the purpose of provisions of the CA as expressed by Parliament, in order to make evident the true nature and character of those provisions, so as to enable the other court to determine whether the laws of the other country are comparable.

9423 Insolvency 2 casenotes.indd 63 7/03/2006, 1:03:02 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Administrator’s entitlement to remuneration where invalid appointment

Case Name: This case considers the manner in which the court will approach Sherred & Anor v McDonald the question of liability for an administrator’s remuneration where & Ors the validity of the administrators’ appointment has been impugned. Frank Raymond Sherred and Arthur David Dewis were the two shareholders in Citation: Castle Development Group Pty Limited (Castle). On 10 August 2005, Mr Sherred (2005) QSC 153, Supreme applied to the court for declarations that the appointment of Mr McDonald and Mr Court of Queensland, Trial Albarran as administrators of Castle was void ab initio. On 24 August 2004, the Division, per Moynihan J court ordered that Castle be wound up on the just and equitable ground on the basis that there had been a deadlock in respect of Castle’s affairs. On 23 Date of Judgment: September 2004, the court declared the appointment of the administrators invalid. 3 June 2005 The administrators ﬁ led an application seeking that the costs of the administration be costs in the winding up of Castle. Mr Sherred then ﬁ led an application for an Issues: order seeking that, in the event that the court awarded the administrators any • Administrators’ costs, Mr Dewis indemnify Castle for those costs. In short, the court was asked to remuneration where determine: invalidly appointed • the amount of the administrators’ remuneration; • Obligations of administrator • who bore the liability of paying the administrators’ remuneration; and • who bore the costs of the current application.

The evidence was that Mr Sherred had orally consented to being appointed a director of Castle, but that a document had been lodged with ASIC stating that Mr Sherred had ceased to be a director of the company on 25 June 2004. Mr Dewis said that Mr Sherred had not signed a consent to act as director and that Mr Dewis had notiﬁ ed ASIC that Mr Sherred had ceased to be a director. Mr Dewis then appointed the administrators on 30 June 2004.

The court noted that, the day after their appointment, Mr Sherred’s solicitor told them that there were doubts about the validity of their appointment and that there would be a complaint to ASIC that they had not been validly appointed. The court said that the administrators embarked on their administration task without taking any steps to conﬁ rm the validity of their appointment despite plain warning signs, even though this course was open to them: Sutherland v Take Seven Group Pty Limited [1998] NSWSC 538. The court stated that there was nothing about the position of Castle that justiﬁ ed the administrators ignoring the warning signs (for example, a need to preserve assets that might otherwise be lost). In fact, the court said the evidence did not support a conclusion that the administration was necessary.

The court also noted that Mr Dewis did not inform Mr Sherred that he considered he was the only validly appointed director, was ﬁ ling documents to that effect and that he intended to appoint administrators. Nor did he inform Mr Sherred of the

9423 Insolvency 2 casenotes.indd 64 7/03/2006, 1:03:02 PM administrators’ appointment. The court held that Mr Dewis’s failure to inform Mr Sherred of the above matters and his purported appointment of the administrators caused the situation that led to the current proceeding.

Taking into account the above considerations, the court decided that:

• the administrators should have their costs and outlays ﬁ xed at $8000, which was representative of the work done with an incontrovertible beneﬁ t to Castle; • Mr Dewis indemnify Castle for the costs and outlays paid to the administrators; • Mr Dewis pay Mr Sherred and Castle’s costs of the proceedings; and • the administrators’ legal costs be assessed and paid one half by Mr Dewis and the remainder by the administrators themselves.

Administrators should take steps to conﬁ rm the validity of their appointment and make an application to the court if there is doubt about the position.

9423 Insolvency 2 casenotes.indd 65 7/03/2006, 1:03:03 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Court terminates DOCA that sought to avoid GEERS reimbursement

Case Name: This was an application brought by the Commonwealth to Re Commonwealth of Australia terminate a DOCA that provided that the bulk of the funds v Rocklea Spinning Mills Pty available to creditors under the DOCA would be paid to Ltd (receivers and managers employees and unsecured creditors, to the detriment of the appointed) (subject to a DOCA) Commonwealth, which had paid $2.6 million towards meeting employees’ claims under the General Employment Entitlements Citation: and Redundancy Scheme (GEERS) scheme. [2005] FCA 902, Federal Court The Commonwealth sought termination under section 445D CA of a DOCA entered of Australia per Finkelstein J into by Rocklea, or a declaration that the DOCA was void under s445G CA. The Commonwealth had advanced $2.6 million to the receivers though GEERS. Date of Judgment: By s560 CA, which applies in a winding up but not necessarily in a voluntary 1 July 2005 administration, a person who advances money to an insolvent company to pay employee entitlements has the same right of priority for those payments as the Issues: employee would have had. • Sections 556 and 560 CA • Terminating a DOCA for Under the terms of the DOCA, $400,000 was to be provided by the directors of unfairness Rocklea for distribution among the company’s creditors. The proposed distribution of these funds under the DOCA and the comparable distribution under s556 that would have occurred in a winding up were as follows:

DOCA Winding up Employees ($500 each) $100,000 ($105 each) $21,000 Commonwealth $30,000 $279,000 Unsecured creditors (0.82 cents in the dollar) $170,000 $0

Justice Finkelstein ordered the DOCA be terminated under s445D CA on the grounds that fairness dictated that, in the company’s particular circumstances, the DOCA ought to have provided that the fund be distributed in the same order of priorities as in a winding up.

In that regard, Justice Finkelstein noted there were two distinct objects of DOCAs, namely either to provide a mechanism to enable a business to continue or as an alternative process to winding up a company. Where the aim of the DOCA was to enable a business to continue, disturbing the priority of creditors may be soundly based. In such a case, a judge should not overturn a DOCA accepted by the creditors.

However, Justice Finkelstein considered that the Rocklea DOCA was clearly intended as an alternative to winding up the company. Fairness requires the property to be distributed as in a winding up because the DOCA represented a

9423 Insolvency 2 casenotes.indd 66 7/03/2006, 1:03:04 PM de facto liquidation of the company. In his Honour’s view, the radically different order of priorities set out in the DOCA was not an acceptable alternative to the usual order of priorities that would apply in a winding up.

Justice Finkelstein noted that termination of the DOCA would prejudice former employees, who were to obtain substantial payments under the DOCA. However, his Honour also noted that, if parties are able to get around the Commonwealth’s priority under s560 CA, there would be a real risk that the GEERS scheme would not continue. This risk outweighed the prejudice to the former employees of Rocklea.

A DOCA used as an alternative to winding up may be unjust or unfair where it disturbs the statutory priority of creditors. Disturbing the Commonwealth’s priority to recover advances under GEERS undermines GEERS. Consequently, a DOCA cannot be used to advantage employees to the detriment of GEERS.

9423 Insolvency 2 casenotes.indd 67 7/03/2006, 1:03:04 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Warranty holders as creditors under a DOCA

Case Name: The voluntary administrators in this case sought ex parte Re Motor Group Australia directions under section 447A CA to ensure that, if the proposed Pty Ltd (administrators DOCA were entered into, the ‘warranty creditors’ would be appointed) (ACN 101 051 bound by the DOCA. This decision provides a useful overview 101); Marsden & Anor (as of the current state of the law with respect to claims admissible voluntary administrators of under DOCAs, together with guidance on the manner in which Motor Group Australia Pty Ltd administrators can apply to the court for orders relating to (administrators appointed)) their proposed treatment of particular classes of creditors. Voluntary administrators were appointed to Motor Group Australia Pty Ltd (MGA) Citation: on 26 April 2005. The directors of MGA proposed a DOCA that dealt with claims of (2005) ACSR 389, Federal classes of creditors, including the claims of ‘warranty creditors’. ‘Warranty Court of Australia, New South creditors’ were deﬁ ned as persons who purchased a new motor vehicle imported by Wales District Registry, per MGA, who had a motor vehicle warranty on 26 April 2005 and had not made any Hely J warranty claim arising out of circumstances before that date. The court noted that such persons were contingent or prospective creditors of MGA as at 26 April 2005 Date of Judgment: because MGA’s liability on the warranty is dependent on the occurrence of later 19 July 2005 events.

The administrators estimated that, after realising all of MGA’s assets, payment of Issues: secured creditors, priority creditors and the administrators’ costs and expenses, • Sections 444A(4)(i), there would be no funds to pay claims of unsecured creditors, including any claims 444D(1) and 447A CA of the warranty creditors. • ‘Warranty holders’ as creditors The proposed DOCA relevantly provided: • Section 553(1) CA • Claims caught by DOCA • for the provision of a contribution from external sources of $300 per vehicle towards the purchase of substitute warranty insurance on production of evidence of the purchase of such insurance by a cut-off date. That would be available to each warranty creditor, irrespective of whether other circumstances qualify such a warranty holder as a creditor; and • that compliance with, and payment under, the DOCA would release MGA from the claims of all creditors, including claims of the warranty creditors.

The administrators brought interlocutory ex parte proceedings seeking declarations, directions and orders to ensure that, if the proposed DOCA were entered into, the warranty creditors would be bound by it. The question for the court to answer was whether the warranty holders were creditors whose claims arose on or before 26 April 2005.

Part 5.3A of the CA deals with the execution of DOCAs. Section 444A(4)(i) requires that the DOCA must specify ‘the day (not later than the day when the administration began) on or before which the claims must have arisen if they are to

9423 Insolvency 2 casenotes.indd 68 7/03/2006, 1:03:05 PM be admissible under the deed’. Section 444D(1) provides that a DOCA ‘binds all creditors of the company, so far as concerns claims arising on or before the day speciﬁ ed in the deed under’ s444A(4)(i).

Part 5.3A does not contain a deﬁ nition of the term ‘creditor’. Justice Hely referred to authorities establishing that the concept of a creditor should be the same in relation to a DOCA as in relation to a liquidation: Brash Holdings Ltd v Katile Pty Limited [1996] 1 VR 24; Selim v McGrath (2003) 47 ACSR 537. Accordingly, all claims against a company (whether present or future, certain or contingent, ascertained or sounding only in damages) where the circumstances giving rise to the claims occurred before the commencement of the administration are creditors for the purpose of DOCA (based on the terms of s553 CA).

His Honour then considered the state of the law in relation to claims that are caught by DOCAs. First, it was noted that Professor O’Donovan, in Company Receivers and Administrators, argues against warranty holders being classiﬁ ed as contingent creditors because a DOCA ‘is not intended to wipe the company’s slate clean for all time and to deal with speculative claims’. In that regard, his Honour also referred to Lam Soon Australia Pty Limited (administrator appointed) v Molit (No 55) Pty Limited (1996) 70 FCR 34, where it was held in obiter that a right to sue for damages for a future breach of covenant, when looked at before the breach occurs, is not a contingent claim, but rather a mere expectancy that could not be the subject of proof.

His Honour also considered the contrary position and referred to Community Development Pty Limited v Engwirda Construction Co (1969) 120 CLR 455. In that case, the High Court found that a person was a contingent or prospective creditor who was entitled to prove in a winding up. The company owed an existing obligation to the person and it was found that the company may become subject to a liability to the person on the happening of some future event. In addition, his Honour noted that in Re Theiss Infraco (Swanston) Pty Limited (2004) 209 ALR 694 (at trial) Justice Finkelstein expressly disagreed with Lam Soon. Further, Justice Hely noted that, on appeal, the Full Court in Theiss (Wallace-Smith v Theiss Infraco (Swanston) Pty Limited, which is referred to at page 40 of this Annual Review of Insolvency and Restructuring Law) did not ﬁ nd it necessary to deal with Justice Finkelstein’s comments. Finally, Justice Hely noted that, in The Law of Company Liquidation1, the authors treat a claim for damages for future breach of contract as an example of a contingent claim.

His Honour noted that the application in this case was made ex parte, but that notice of the application was given to warranty creditors by a circular dated 30 June 2005. His Honour could not make a determination as to the legal position in the proceedings to bind those whose interests may be affected by it. He noted that he had been asked to give a direction under s447D CA that the administrators would be justiﬁ ed in treating the warranty holders as contingent creditors whose claims arose no later than 26 April 2005, but considered that no such direction should be given because it would amount to judicial determination of the issue.

1 McPherson, The Law of Company Liquidation, 4th Ed, LBC Information Services, Sydney, 1999, p547.

9423 Insolvency 2 casenotes.indd 69 7/03/2006, 1:03:06 PM Justice Hely referred to s447A under which the court may make such orders as it thinks appropriate on how Part 5.3A CA should operate with respect to a particular company. He noted that the High Court had taken a broad view of the powers under s447A in Australasian Memory Pty Limited v Brien (2000) 200 CLR 270. The court found that, even if it was correct to characterise the claims of warranty creditors as ‘mere expectancies’, s447A empowers the court to make an order that Part 5.3A is to operate in relation to MGA so as to include the warranty creditors as creditors whose claims arose no later than 26 April 2005.

Justice Hely then referred to the statement in s435A(b) CA on the objects of the DOCA process under Part 5.3A, one of which is to seek to achieve a better result for creditors ‘than would result from an immediate winding up of the company’. His Honour considered that the DOCA appeared to achieve that objective and that s447A should be applied to make the directions sought.

In doing so, his Honour granted liberty to apply for any order under s447A(1) to any interested person, including the warranty creditors, should they consider the DOCA prejudicial or unfairly discriminating.

This case illustrates the divergence of views relating to what claims are caught by DOCAs, and shows that the court will be prepared to make orders under s447A relating to the treatment of particular creditors if to do so would assist in the execution of a DOCA that would result in a better return for creditors than would be obtained under a liquidation scenario.

9423 Insolvency 2 casenotes.indd 70 7/03/2006, 1:03:07 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Can we ﬁ x it? Committee of Inspection ﬁ xing DOCA administrators’ remuneration

Case Name: Administrators applied to the court for orders that the In the matter of Motor remuneration of the administrators under a proposed DOCA Group Australia Pty Limited be fi xed by a Committee of Inspection. (administrators appointed) Section 449E CA provides that the administrator of a company under (No 3) administration, or of a DOCA, is entitled to such remuneration as is fi xed by a resolution of the company’s creditors passed at the second creditors’ meeting Citation: (or at a meeting convened by the DOCA administrators under s445F CA). [2005] FCA 1202, Federal Court of Australia per Hely J At the second meeting of the creditors of Motor Group Australia Pty Ltd (the company), it was resolved that the company execute a DOCA; that a committee of inspection be formed consisting of three named persons; and that the committee Date of Judgment: be given the power to fi x the remuneration of the DOCA administrators, subject to 30 August 2005 the court’s approval. The proposed DOCA required the disclosure of the costs claimed, the manner in which they were calculated, the staff members involved Issues: and a description of the tasks completed by each staff member. • Sections 449E and The administrators applied to the court for an order under s447A CA, altering the 447A CA operation of s449E to enable the administrators’ remuneration under the proposed • Fixing remuneration of the administrators of a DOCA to be fi xed by the committee of inspection (in the same manner as the proposed DOCA remuneration of a court-appointed liquidator can be fi xed under s473 CA). • Powers of committee The court noted that, in the absence of a specifi c conferral of power, a committee of inspection of inspection under a DOCA does not have power to fi x the remuneration of the DOCA administrators. This is because the creditors are not able to delegate their powers under s449E to a committee: Re Korda; in the matter of Stockford Ltd (2004) 140 FCR 424.

Justice Hely referred to a number of decisions, including Re Henry Walker Eltin Group Ltd [2005] FCA 994 (see page 30 of this Review), in ﬁ nding that the court had power to make the orders sought. Justice Hely took the following matters into account, in making the orders:

• There was evidence from one of the joint voluntary administrators that it would be a prudent and commercially benefi cial course when one compared the costs involved in convening and holding a meeting (where notice was to be given to 1910 creditors) to the costs associated with a meeting of a committee of three. • The proposed orders gave creditors equivalent rights of review of remuneration fi xed by the committee of inspection as are enjoyed in relation to a liquidator’s remuneration when fi xed by a committee of inspection. • No creditor had voiced any opposition to the proposal that was discussed and endorsed at the second meeting of creditors. • ASIC had been notifi ed and said that it neither consented to, nor opposed, the application.

9423 Insolvency 2 casenotes.indd 71 7/03/2006, 1:03:07 PM While there have been a number of applications for a committee of creditors to be empowered to ﬁ x an administrator’s remuneration prior to a second meeting of creditors, this case shows that the power under s447A CA can be applied to enable the remuneration of the administrators of a proposed DOCA to be ﬁ xed by a committee of inspection formed under that DOCA.

9423 Insolvency 2 casenotes.indd 72 7/03/2006, 1:03:08 PM DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Committee of Inspection ﬁ xing an administrator’s remuneration

Case Name: The Supreme Court of New South Wales considered whether Re Carlovers Carwash Ltd & Ors it could permit a Committee of Inspection to approve the remuneration of a deed administrator when the question had Citation: not ﬁ rst been put to the creditors, and in what circumstances it should exercise this power. [2005] NSWSC 879, Supreme Court of New South Wales per Mr Arif had been appointed as administrator and then deed administrator of a Barrett J group of companies. Each meeting of creditors passed a resolution that the deed administrator’s remuneration be approved ‘by the creditors or a Committee of Date of Judgment: Inspection, if appointed’. Each DOCA made provision for the appointment and conduct of Committees of Inspection and, in all but one case, committees were 2 September 2005 appointed to the companies.

Issues: Mr Arif performed the functions given to the deed administrator. He believed that • Sections 447A and 449E the resolutions passed at the creditors’ meetings were effective to allow CA determination of his remuneration by the committees of inspection and obtained • Committee of Inspection their approval to transfer sums towards the payment of his remuneration. However, ﬁ xing deed administrator’s Mr Arif’s requests for approval of further remuneration had not progressed because remuneration of tensions between himself and the two major creditors. Mr Arif then became aware of the decision in Re Stockford Ltd (subject to deed of company arrangement) [2004] 140 FCR 424, in which it was held that a creditors’ meeting cannot validly delegate to a committee of inspection the function of ﬁ xing the deed administrator’s remuneration.

Accordingly, Mr Arif sought orders from the court:

• retrospectively approving the fi xed sum for his remuneration as deed administrator, which had been ‘approved’ by the Committee of Inspection; • empowering the Committee of Inspection to fi x remuneration; and • that, if the court was required to fi x the remuneration, a referee report be given to the court on whether the additional remuneration that he was seeking was fair and reasonable.

Justice Barrett noted that section 449E(1) CA provides that the administrator of a company under administration, or of a DOCA, is entitled to such remuneration as is fi xed by a resolution of the company’s creditors or, if no such remuneration is fi xed, such remuneration as the court fi xes on the application of the administrator. He considered whether the court could exercise its power if no meeting of creditors had fi rst taken place to consider the proposed remuneration. The Supreme Court (Corporations) Rules 1999 (NSW) suggested that the court’s power was not exercisable unless a creditor’s meeting has already considered the proposed remuneration. However, Justice Barrett noted that there was nothing in s449E CA

9423 Insolvency 2 casenotes.indd 73 7/03/2006, 1:03:09 PM to justify this approach, and the court therefore had the power to ﬁ x the remuneration, even if a creditors’ meeting had not yet taken place.

His Honour went on to consider whether the court should exercise this power. Mr Arif had suggested that:

• there was no practical point in convening a creditors’ meeting, as it would be opposed by the majority creditors; and • convening the meeting and sending out all the relevant information would be unduly expensive.

Justice Barrett commented that considerations of cost were not relevant but noted that the major creditors had indicated that their approval of the ﬁ rst two orders was being sought.

After noting that one of the creditors acted as a contradictor and ASIC had otherwise been notiﬁ ed of the application, Justice Barrett ordered that:

• the remuneration already approved by the Committee of Inspection be validated; and • a Committee of Inspection be empowered to ﬁ x remuneration, subject to a majority of creditors in value and number being represented on the committee.

The third order regarding a referee reporting to the court on the proposed remuneration was rejected as no good reason had been shown why the ordinary processes and procedures entailing a registrar should not operate.

Court approval is required to enable a Committee of Inspection to ﬁ x a deed administrator’s remuneration. This decision was subsequently followed in Lombe, in the matter of Bosnjak Holdings Pty Limited (subject to a deed of company arrangement) [2005] FCA 1366. In turn, that case was handed down subsequent to the decision in Lombe, in the matter of Bosnjak Holdings Pty Ltd (administrators appointed) [2005] FCA 275, relating to the ﬁ xing of administrators’ (as opposed to deed administrators’) remuneration: see page 36 of this Review.

9423 Insolvency 2 casenotes.indd 74 7/03/2006, 1:03:10 PM DEREGISTERED COMPANIES

Ability of deregistered foreign corporation to recover costs in Australia

Case Name: The plaintiff sought to have a costs order against him dismissed McIntyre & Ors v Eastern because the foreign corporation that had been awarded costs Prosperity Investments Pte Ltd had been deregistered under Australian legislation. The court (No 6) refused the plaintiff’s application and conﬁ rmed that registration of a foreign corporation to do business under Australian Citation: legislation is not a prerequisite to taking legal action in Australia. (2005) 52 ACSR 622, Federal The court also held that its power to award costs is not affected Court of Australia per French J by a foreign corporation having been deregistered. In December 2000, the applicant (McIntyre) brought an action against Eastern Date of Judgment: Prosperity Investments Pte Ltd (EPI) and DBS Property Holdings Pty Ltd. On 12 1 March 2005 September 2002, an order was made that the statement of claim be struck out and that the applicant pay the respondents’ costs of the motion. The action was dismissed in March 2003. Issues: • Section 601CD(1) CA McIntyre later became aware that EPI was deregistered as a foreign corporation • Commencing legal action in under the CA on 28 February 2001 and was never validly re-registered. In Australia November 2004, McIntyre brought a motion to have the 12 September 2002 costs • Whether a foreign order set aside because EPI had ceased to exist at law by reason of its corporation must be deregistration as a foreign corporation under Australian legislation. registered • Award of costs to a Section 601CD CA provides that a foreign company must not carry on business in deregistered foreign Australia unless it is registered or has applied to be registered. However, after corporation reviewing the authorities, Justice French concluded that the existence of EPI as a legal entity derives from its incorporation under the laws of Singapore and not the fact of its registration as a foreign corporation under Australian corporations law. His Honour referred to Chaff and Hay Acquisition Committee v JA Hemphill & Sons Pty Limited (1947) 74 CLR 375, in which Chief Justice Latham said that it is a well-established principle with respect to foreign corporations that a legal entity in one jurisdiction is by comity recognised as a legal entity elsewhere.

As a result, EPI could be sued in the court, even though it had been deregistered in Australia. His Honour also held that incidental to the right to defend is the capacity to apply for a costs order. The power of the court to award costs is not affected by the fact that a foreign corporation has been deregistered under Australian law.

This case conﬁ rms that a foreign corporation may sue and be sued in Australia, even if it is not a registered foreign corporation under Australian legislation. Incidental to this ability is the right to recover costs.

9423 Insolvency 2 casenotes.indd 75 7/03/2006, 1:03:11 PM DIRECTORS AND CORPORATE GOVERNANCE

Breach of directors’ duties and the effect of shareholder ratiﬁ cation

Case Name: Although the outcome of this case turned predominantly on Angas Law Services Pty Ltd a fi nding of fact that certain transactions had not occurred, (in liquidation) v Carabelas in the course of its decision, the High Court made a number of comments about improper conduct by directors and offi cers Citation: of a company and the situations in which shareholders may ratify directors’ breaches of duty. [2005] HCA 23, High Court of Australia per Gleeson CJ, Mr and Mrs Carabelas were the directors and sole shareholders of Angas Law Heydon, Gummow, Hayne Services Pty Ltd (ALS). As a result of a series of transactions, Mr Carabelas and Kirby JJ owed a debt to ALS of $474,950. Mr and Mrs Carabelas, as directors of ALS, entered into an agreement to ‘novate’ the debt owed by Mr Carabelas to certain Date of Judgment: other companies, also owned by them, that were insolvent at the time. ‘Novation’ 27 April 2005 in this case involved the procuring of ALS to enter into a contract by which the debt owed to ALS by Mr Carabelas was discharged, and replaced by a series of debts owed to ALS by a number of the insolvent companies. It was held that the Issues: novation of a debt to a related but insolvent company would constitute a breach of • Section 229 of directors’ duties. On the facts of this case, the court did not consider that any such the Companies novation had taken place, but the court did comment on impropriety by directors (South Australia) Code and offi cers of a company and the situations in which shareholders may effectively • Impropriety by directors ratify a breach of directors’ duties. and offi cers of a company • Ability of shareholders Section 229(4) of the Code prohibits directors and offi cers from making improper to ratify directors’ use of their position to gain advantage for themselves or cause detriment to the breaches of duty corporation. The High Court emphasised the necessity of an element of ‘impropriety’, and reaffi rmed that an objective test is to be applied in determining whether the requisite impropriety exists. The test has to be applied with consideration for the overall commercial context within which the relevant director and offi cer operates. Examples of relevant factors include:

• the solvency of the company in question; and • the informed authorisation of the shareholders.

The case upholds the general rule that shareholders, when fully informed, can ratify breaches by directors and ofﬁ cers of the company. The High Court also, however, recognised two fundamental limitations on the effect of shareholder ratiﬁ cation, namely:

• that unanimous shareholder consent cannot effectively ratify the misappropriation of company property; and • when considering whether ratiﬁ cation is possible, a distinction must be drawn between breaches of statutory duties and breaches of equitable and common law duties. Statutory duties are deemed to create standards of conduct that the

9423 Insolvency 2 casenotes.indd 76 7/03/2006, 1:03:11 PM public at large have an interest in upholding, and therefore shareholder ratiﬁ cation may not be sufﬁ cient to cure a breach of a statutory duty.

The High Court determined that, if a novation had taken place in the manner described, then it would have constituted a breach of s229(4). Had this breach occurred, it could not have been ratiﬁ ed by the ‘self-interested’ consent of Mr Carabelas. That is, the case upholds the basic premise that shareholders cannot ratify improper conduct by directors.

This case reaffi rms that directors’ conduct is to be judged according to an objective standard and with consideration of the broader commercial context. As to the effect of shareholder ratifi cation, an important distinction must be drawn between directors’ statutory duties and those that exist under common law or in equity. In the former case, fully informed shareholder ratifi cation of a breach may not be enough to free the director from liability for the breach of a statutory duty.

9423 Insolvency 2 casenotes.indd 77 7/03/2006, 1:03:12 PM DIRECTORS AND CORPORATE GOVERNANCE

Director’s personal liability for company’s unpaid group tax

Case Name: In this case, the New South Wales Court of Appeal upheld a trial Canty v Deputy Commissioner judge’s decision that a former printing business director was of Taxation liable for an amount of the company’s unpaid group tax, plus interest under the relevant Supreme Court Rules. Citation: The appellant (the director) was one of two directors of Quality Images Australia [2005] NSWCA 84, New South Pty Limited (the company), who split management of the company between them. Wales Court of Appeal per The director’s role was to handle production and sales, and his co-director managed Handley, Beazley and Santow accounts and ﬁ nances. He was to later resign this position. JJA In the period before his resignation, the director was aware that tax was outstanding. He had, on previous occasions, made arrangements for outstanding Date of Judgment: tax to be paid. In relation to the tax outstanding before his resignation, he had 3 May 2005 discussed this with his co-director and his evidence was that it had been agreed that certain property of the company would be sold to satisfy the debt. However, Issues: he did not follow up to ensure that this had occurred, which included failing to • Validity of ATO notice after enquire with the company’s external accountant. director resigns • Application of ‘reasonable A short time after the director resigned, the ATO gave him notice required under steps’ defence the Income Tax Assessment Act 1936 (Cth) (the ITAA), without which it could not • Award of interest on penalty commence proceedings. The notice provided that the penalty would be ‘remitted’ (that is, extinguished) if one of four steps was taken within fourteen days.

The director challenged the proceedings on the basis that the notice had to be served while he was in ofﬁ ce. After considering the wording of the ITAA, the court rejected this argument.

The director also sought to establish the defences in section 222AOJ ITAA: that he took all reasonable steps to ensure certain things prescribed by s222AOB(1) had occurred, or that there were no such steps that he could have taken. In effect, the director needed to show that, in the material period, from the time when the tax was due until the expiry of the notice (as he was no longer a director) that he had tried to:

• cause the company to pay the tax; • cause the company to make an agreement with the Tax Commissioner in relation to the tax; • appoint an administrator to the company; or • begin to have the company wound up.

The court noted that it was not enough to make out the defences that there may have been sporadic attempts to take reasonable steps in the relevant period: the attempt needed to be constant.

9423 Insolvency 2 casenotes.indd 78 7/03/2006, 1:03:13 PM To avoid personal liability for a company’s group tax, directors should ensure that, in circumstances of continuing default, they personally take reasonable steps to ensure that the company either: pays the tax, makes an arrangement with the ATO, appoints an administrator, or commences to be wound up.

9423 Insolvency 2 casenotes.indd 79 7/03/2006, 1:03:13 PM DIRECTORS AND CORPORATE GOVERNANCE

Director held personally liable for legal costs incurred by company

Case Name: Company directors: be careful when litigating or you could be Cassegrain & Anor v CTK personally liable for costs that you cause the company to incur. Engineering Pty Ltd & Anor The plaintiffs in a family feud alleged that the director of their company had acted oppressively. The court agreed and ordered Citation: him to personally cover the costs that he had incurred at the company’s expense in defending himself. [2005] NSWSC 495, Supreme Court of New South Wales, The plaintiffs included members of the Cassegrain family, who held B class Equity Division, per White J non-voting shares in CTK Engineering (CTK) (ﬁ rst defendant). Claude Cassegrain (second defendant) was, at the time of proceedings, the sole director and a Date of Judgment: shareholder of CTK.

26 May 2005 The plaintiffs alleged that the second defendant had caused the company to enter into various transactions that indirectly beneﬁ ted him and that he had deliberately Issues: concealed those transactions from the shareholders. These included: • Winding up of company on grounds of oppression • an investment of the proceeds of the sale of CTK’s land in a company • Costs under sections 233(1) associated with him; and 461(1)(k) CA and s76 • a hazardous venture with a tea-tree farming company that he controlled; and Supreme Court Act (NSW) • a loan from the company to his wife. • Whether company funds had been improperly expended The plaintiffs also alleged that the second defendant had brought about • The principles to be amendments to the company’s constitution to remove the need for holding annual applied in determining general meetings and the requirements to have the accounts audited. issues about costs As a result the plaintiffs sought two types of orders:

• that the company be wound up because the company’s affairs were being conducted in a manner that was oppressive to the shareholders. They argued that such an order would be just and equitable under sections 461(e), (f), (g) or (k) CA, or that CTK’s affairs were being conducted oppressively or in a manner unfairly prejudicial to the plaintiffs under s233(1)(a) CA; and • that the second defendant be individually liable for costs incurred by the company in defending the proceedings.

During the dispute, the second defendant consented to the company being wound up. Therefore, Justice White did not need to make the declarations sought by the plaintiffs, while nevertheless noting that, if that consent had not been given, it was practically certain that his Honour would have found an order for winding up on the just and equitable ground to be justiﬁ ed, including on the grounds that the company’s affairs had been conducted in a way that was oppressive to and unfairly prejudicial to the plaintiffs.

9423 Insolvency 2 casenotes.indd 80 7/03/2006, 1:03:14 PM This left the issue of determining costs. Justice White held the second defendant personally liable for costs because he had acted unreasonably in causing the company to defend the litigation. The company funds had been improperly expended by the director and, as a result, the plaintiffs were entitled to costs from the director personally.

While a company director is entitled to spend the company’s money on defending proceedings against the company, the expenditure must be reasonable in the circumstances. If the affairs of the company are conducted in a way that, considered objectively by a commercial bystander, is unfair, oppressive, or prejudicial, an individual director may be required to indemnify the company for costs improperly incurred.

9423 Insolvency 2 casenotes.indd 81 7/03/2006, 1:03:15 PM DIRECTORS AND CORPORATE GOVERNANCE

Director found to have permitted company to engage in insolvent trading

Case Name: In proceedings commenced by ASIC against Malcolm Edwards, the ASIC v Edwards Supreme Court of New South Wales considered whether a director of a company engaged in the construction phase of a project was Citation: liable for insolvent trading conducted by that company. [2005] NSWSC 831, Supreme Malcolm Edwards became a director of Murray River Limited (formerly Murray River Court of New South Wales Pty Limited) (MRL) on 19 July 1998 and remained in ofﬁ ce until 31 March 2000. per Barrett J MRL entered into a joint venture agreement on 22 December 1998 to develop an apartment hotel on the shores of the lake on the Murray River at Mulwala/ Date of Judgment: Yarrawonga (the project). 24 August 2005 ASIC’s case was that during the project, Mr Edwards contravened section 588G CA Issues: by causing the company to incur six separate and distinct debts (together, the debts) in circumstances attracting the operation of the section vis-à-vis Mr Edwards. The • Whether defendant director relevant creditor was a building contractor called Colin Joss & Co Pty Ltd (CJC). aware of grounds of suspecting insolvency ASIC alleged that Mr Edwards contravened s588G CA by failing to prevent MRL • Whether there were from incurring the debts. ASIC relied on s588G(2), which states that the person reasonable grounds for contravenes s588G by failing to prevent the company from incurring the debt if one suspecting insolvency of two conditions is satisﬁ ed: existed • Whether any defences 1. either the person is aware at the time of the incurring that there are grounds for were available suspecting that the company is insolvent or would become insolvent by the incurring of the debt (s588G(2)(a)); or 2. alternatively, that a reasonable person in a like position in a company’s circumstances would be so aware (s588G(2)(b)).

Mr Edwards argued the following points:

• that at all material times relied upon by ASIC, MRL was objectively solvent and was not proved otherwise to the requisite standard; • that, at all material times, Mr Edwards had no reasonable belief that MRL was insolvent or would become insolvent; • that Mr Edwards had reasonable grounds to expect, and did expect, that MRL was solvent and would remain solvent even if MRL incurred the debts as alleged by ASIC and any other debts incurred by MRL at that time; • that Mr Edwards had reasonable grounds to believe, and did believe, that MRL would further be able to rely upon resources and assets outside MRL’s balance sheet to meet its debts and liabilities as and when they were incurred; • that the obtaining of ﬁ nance, transfer of the relevant land and giving of the security for MRL were continually frustrated by one of the joint venture partners; and

9423 Insolvency 2 casenotes.indd 82 7/03/2006, 1:03:15 PM • that the actions of a company that owned the leasehold site where the development was to occur were such as to permit a ﬁ nding by the court that it was a shadow director of the company, which by those actions was squarely responsible for the predicament in which MRL found itself in 1999.

On the question of MRL’s solvency, Justice Barrett held that an assessment of solvency needs to take into account not only ﬁ nancial resources already held, but also those reasonably obtainable in a relatively short time. Justice Barrett went on to hold that MRL was insolvent at the time it incurred each of the debts to CJC, as it had no reasonably accessible source of capital and no developed means of raising capital by prospectus or from the joint venture parties. Nor did it have saleable assets.

His Honour noted that $600,000 was regarded as fairly representing the maximum extent of MRL’s borrowing capacity. The only available loan to MRL was for an extremely short term and on onerous terms. Therefore, its availability did nothing to enhance the availability of cash to meet other debts and by obtaining such a loan – and applying it towards satisfaction of the indebtedness to CJC – MRL merely substituted debt carrying a one-month term for debt that was overdue. In other words, MRL’s ability to borrow did nothing to enhance solvency.

Justice Barrett stated that an enquiry relevant to s588G(1)(c) CA is not an enquiry concerning the particular director whose conduct is under scrutiny, but rather an enquiry into the objectively formed state-of-mind of a person of ordinary competence.

The court approached this by looking at the evidence directly involving Mr Edwards. Mr Edwards’ evidence was that he had been of the opinion that MRL was under no obligation to meet the debts. Nevertheless, his view was that it might (or would) be in MRL’s interests to meet the debts in any event for the purpose of ‘keeping faith’ with the joint venture. Mr Edwards raised no such matter with the board and his failure to do so supports a ﬁ nding that he did not, at the time, hold the views he described in his evidence. As at 13 April 1999, he accepted that MRL was obliged to meet the ﬁ rst progress payment and was engaged in efforts to raise the necessary funds.

Regarding s588G(2) CA, a person contravenes by ‘failing to prevent the company from incurring the debt’. This form of words does not imply that contravention can occur only if the particular director possesses a capacity, acting alone, to deﬂ ect the company from the particular course of action.

The court found that Mr Edwards never warned his co-directors that MRL did not have the funds to undertake the project. The message he communicated, both directly and through other parties, was always that the various elements necessary to secure the necessary funding were within grasp. That is, it was always just a matter of a short time until all would be well. Mr Edwards had, at all material times, ample ability to cause MRL to avoid incurring the relevant debts by ensuring that building work was not undertaken. He did not exercise that ability. He therefore failed to prevent MRL from incurring the quantum meruit debts generated by the performance of the building work.

The remaining issue under s588G(2) was whether paragraph (a) or paragraph (b) was satisﬁ ed – in other words, was the defendant aware, at the time of the

9423 Insolvency 2 casenotes.indd 83 7/03/2006, 1:03:16 PM incurring of each debt, that there were reasonable grounds for suspecting that MRL was insolvent or would a reasonable person in a like position in a company have been so aware? The court held that, on the evidence, at each material time, Mr Edwards knew all the facts contributing inexorably to an objectively based mistrust as to the ability of MRL to pay all its debts as they fell due. As to the view of a reasonable person in a like position, the court held that such a person would have shared the objectively based mistrust that was in the mind of Mr Edwards.

The court concluded that the defendant contravened s588G CA by failing to prevent MRL incurring each of those debts.

The court found that the only aspect of s588H CA that Mr Edwards made any real attempt to advance by way of defence was s588H(2) CA. In relation to s588H(2), Justice Barrett noted that it is the task of Mr Edwards to prove that, at the time of the incurring of each relevant debt, he had reasonable grounds to expect, and did expect, that MRL was solvent at that time and would remain so even if it incurred the debt.

Mr Edwards attempted to discharge this onus by pointing to the observations in Lewis v Doran (2004) 50 ACSR 175 that the company’s ‘own moneys’ do not mark the limits of the resources to which regard may be had in determining solvency, coupled with what he chose to regard as the right of MRL to obtain ﬁ nancial support from the joint venture agreement. The court held that the evidence led by Mr Edwards was inadequate and, to the extent that the defendant may in fact have held any such view, it was not of such a quality as to represent any reasonable ground of expectation of the kind with which s588H(2) is concerned.

This case is a reminder to directors that unrealistic optimism about a company’s ability to meet its debts as they become due and payable, based on an aspiration to raise funds from external sources that may have no real prospect of being raised, is a recipe for disaster. External funding must be reasonably obtainable in a short space of time in order for a company to satisfy the insolvency test.

9423 Insolvency 2 casenotes.indd 84 7/03/2006, 1:03:17 PM DIRECTORS AND CORPORATE GOVERNANCE

Directors’ rights of access to documents and ﬁ nancial records of a company in receivership

Case Name: In this case, the Supreme Court of New South Wales Boulos v Carter; Re TARBS considers the scope of a director’s rights of access (under World TV Australia Pty Ltd the CA) to company documents and fi nancial records of a company in receivership. Citation: Mr and Mrs Boulos were the directors of TARBS World TV Australia Pty Limited [2005] NSWSC 891, Supreme (TARBS), a company in receivership. Mr and Mrs Boulos made an application against Court of New South Wales Mr Carter and Mr Brown (the appointed receivers and managers of TARBS) for an order per Barrett J authorising inspection of the company’s documents. The application was founded on sections 198F, 247A, 290, 420A and 421(2) CA and general law principles. Date of Judgment: The application was the result of a long course of correspondence between the 2 September 2005 parties as to whether Mr and Mrs Boulos were entitled to view company documents, including records other than fi nancial records. Without conceding their entitlement Issues: to the documents, Mr Carter and Mr Brown provided Mr and Mrs Boulos with • Section 198F CA – right of documents that they claimed satisfi ed paragraph 1 of the application. Mr and Mrs access to company books Boulos were not satisfi ed with the documents and proceeded with the application. • Section 290 CA – director access The key issue before the court was whether any one of sections 198F, 247A, 290, • Section 421 CA 420A or 421(2) CA or general law principles entitled Mr and Mrs Boulos to the – controller’s duties in order sought and, if so, whether the court should exercise its discretion (with or relation to bank accounts without the aid of s1303 CA) to make such an order. and fi nancial records • Application under sections 247A and 420A CA • Section 1303 CA – compliance The application founded on s247A CA was quickly dismissed by the court, as neither Mr or Mrs Boulos were ‘members of the company’ and therefore they lacked standing under this section.

Similarly, the application founded on s420A CA was dismissed by the court, as it did not provide Mr and Mrs Boulos with any of the rights they asserted.

• Application under s198F CA

The right of a director to inspect books (other than ﬁ nancial records) under s198F CA arises only for the ‘purpose of a legal proceeding’ to which the director ‘is a party’, or which the director ‘proposes in good faith to bring’, or which the director has ‘reason to believe will be brought against them’.

While Justice Barrett accepted that Mr and Mrs Boulos might become a ‘party to litigation’ if they made an application for leave of the court under s237 CA (having standing under s136(1)(a)), he nevertheless dismissed the application under s198F CA, ﬁ nding that there was insufﬁ cient evidence that Mr and Mrs Boulos actually proposed to make such an application or advance the proposal in good faith.

9423 Insolvency 2 casenotes.indd 85 7/03/2006, 1:03:17 PM • Application under s290 CA

Section 290 CA provides directors with a right of access to fi nancial records. While Mr Carter and Mr Brown did not dispute Mr and Mrs Boulos’ entitlement to fi nancial records, they claimed that a number of the records sought by them went beyond the s9 defi nition of ‘fi nancial records’.

While Justice Barrett found that s290 CA entitles Mr and Mrs Boulos to an order granting them access to the company’s fi nancial records, he agreed that this right does not extend to various contracts and transactions (requested by Mr and Mrs Boulos), even though the effect of those contracts and transactions will inevitably be refl ected in ‘fi nancial records’.

• Application under s421(2) CA

Section 421(2) CA entitles a director of a corporation to inspect the ‘records kept by a controller of property of the corporation’ that record or explain the transactions entered into by the controller.

Justice Barrett held that Mr Clark and Mr Brown (being the receivers and managers of the company) were ‘controllers’ of the company and therefore s421(2) CA imposed a duty on them to keep fi nancial records that record and explain the sale of any of the company’s assets by them. Further, as directors of the company, Mr and Mrs Boulos were entitled to an order granting them access to those documents. However, Justice Barrett emphasised that this right is limited to particular fi nancial records ‘brought into existence in conformity with s421(1)(d) rather than the company’s ‘fi nancial records’ as such’.

• General law

It is well recognised that a director has a general law right to inspect company documents for the purpose of enabling him or her to perform his or her duties as a director. However, Justice Barrett acknowledged that this right is applied in a modiﬁ ed way where the company is in receivership. That is, although the right is not diminished, it is nevertheless ‘subject to the qualiﬁ cation that it may not be exercised in a way that would prejudice the due progress and completion of the receivership’.

In coming to this conclusion, Justice Barrett afﬁ rmed the decision in Re Geneva Finance Ltd; Quigley v Cook (1992) 7 WAR 496, where Justice Owen (at pp 513-4) summarised the general law position applying during receivership. He also afﬁ rmed the decision in Gomba Holdings Ltd v Minories Finance Ltd [1988 1 WLR 1231] where documents created or received by receivers in the course of acting for the company are documents owned by the company, not the receivers.

Having thus concluded that sections 290, 421(2) and general law rules (as modiﬁ ed in the case of receivership) provided Mr and Mrs Boulos with a right to access the documents sought, Justice Barrett then considered whether, in circumstances where they had already been provided with access to various documents, the granting of the order would be of such utility as to be warranted.

9423 Insolvency 2 casenotes.indd 86 7/03/2006, 1:03:19 PM After considering the nature of the documents provided, Justice Barrett held that the documents already provided by Mr Carter and Mr Brown adequately satisﬁ ed the class of documents requested. In these circumstances, the application did not advance the position of Mr and Mrs Boulos and was therefore dismissed with costs.

This case confi rms that, while the CA and general law principles may provide a director of a company in receivership with a right to access the company’s records, the court will carefully consider the scope of that right and in particular whether that right extends only to ‘fi nancial records’ or to ‘books’ (excluding fi nancial records) more generally.

The case also conﬁ rms that the courts are unwilling to make an order granting a director access to the company records of a company in receivership where such an order does not clearly advance the position of the party seeking that order.

9423 Insolvency 2 casenotes.indd 87 7/03/2006, 1:03:19 PM LENDING AND SECURITIES

Challenge to the effectiveness of security in Hong Kong

Case Name: A number of debits were made from a company’s bank account In the matter of Far East by the bank after the commencement of that company’s winding- Structural Steelwork up. Liquidators sought to challenge these debits by questioning Engineering Limited the effectiveness of the security purportedly created in favour of (in liquidation) the bank and characterising the debits as a disposition of property. Section 182 of the Hong Kong Companies Ordinance, Chapter 32 (Chapter 32) Citation: provides that, in a winding up by the court, any disposition of the property of the [2004] HKCFI 963, High Court company made after the commencement of the winding up will, unless the court of the Hong Kong Special otherwise orders, be void. Administrative Region, Court of First Instance, per Kwan J Following the presentation of a petition to wind up Far East Structural Steelwork Engineering Limited (the company), a bank made seven debits from the company’s Date of Judgment: bank account that totalled more than HK$650,000. The bank argued that it made the debits on the basis that they were pursuant to the security created in the form 27 October 2004 of a trust over the goods that were purchased with the funds advanced (advances were made in the issuance of local letters of credit, and the company executed Issues: trust receipts as security for the advances). The trust receipts acknowledged receipt • Section 182 of the Hong of goods upon trust for the bank. Cargo receipts addressed to sellers also certiﬁ ed Kong Companies Ordinance, that goods were received on trust for the bank. Chapter 32 • Consideration of the nature Justice Kwan concluded that the delivery of the trust receipts and cargo receipts of the security indicated there had been an intention to create an equitable charge, which • Whether security valid constitutes the right of the creditor to have a designated asset of the debtor against liquidators appropriated to the discharge of the indebtedness, and the right is satisﬁ ed out of the proceeds of the sale of the asset.

In considering the validity of the security created, Justice Kwan held that the trust receipts and cargo receipts came within the statutory deﬁ nition of a bill of sale. Under sections 80(1) and 80(2)(c) of Chapter 32, where a charge would require registration as a bill of sale, the charge shall be void against the liquidator and any creditor of the company unless the charge is registered within ﬁ ve weeks of its creation. There was no registration of the charges. Justice Kwan further noted that:

• if a charge was created over the money deposited by the company at the bank, it would be a ﬂ oating charge on the undertaking or property of the company and would be void against the liquidator for want of registration by reason of s80(2)(f); and • in so far as proceeds of sale of the goods were charged to the bank, this would constitute a book debt and is void against the liquidator for want of registration by reason of s80(2)(e).

9423 Insolvency 2 casenotes.indd 88 7/03/2006, 1:03:20 PM Therefore, the security created by the company in favour of the bank was void against the liquidators and the bank was not entitled to debit the account of the company.

This case is a good example of the basis on which the validity of a security as against liquidators can be challenged under Hong Kong law.

9423 Insolvency 2 casenotes.indd 89 7/03/2006, 1:03:21 PM LENDING AND SECURITIES

Injunction to restrain enforcement of securities based on allegations of unconscionable conduct

Case Name: The applicant sought an interlocutory injunction restraining the Glenariff Holdings Pty Ltd v Tah respondent from taking any steps as mortgagee in possession to Land Pty Ltd enforce securities granted by the applicant to the respondent. The applicant was a property developer in the process of developing a large Citation: residential subdivision. The respondent provided interim fi nance for the project [2005] FCA 132, Federal Court until 10 January 2005, when Suncorp-Metway made an offer for development of Australia per Nicholson J fi nance. The applicant maintained that, at the time of the loan, the respondent sought an equity interest in the applicant, and when the applicant rejected that Date of Judgment: proposal, the respondent sought to avoid the loan by obfuscation. In particular, the respondent would not provide a payout fi gure for the loan or permit repayment. 23 February 2005 The loan agreement included terms as to payment (clause 3) and early repayment (clause 4). Issues: • Injunction to restrain The applicant’s solicitors wrote a letter to the respondent in November 2004, the exercise of power requesting an early repayment fi gure and proposing to pay interest through to • Whether serious question 14 December rather than the full term of the loan as required in clause 4. to be tried The evidence was that the applicant defaulted in meeting its monthly payment • Section 51AC Trade obligations from October 2004 to February 2005, and that the respondent was Practices Act 1974 (Cth) offered an equity position in January 2005, but refused and instead appointed • Unconscionable conduct agents to act as mortgagee in possession.

The applicant contended that the ﬁ rst serious question to be tried was whether the respondent breached clause 4 of the loan agreement by refusing to provide a payout ﬁ gure. The Federal Court found that there was no obligation arising from the terms of clause 4 to provide advice of a payout amount and, as such, there was no serious question to be tried.

The second serious question that the applicant proposed was that the respondent’s conduct contravened section 51AC of the Trade Practices Act 1974 (Cth). That section provides that a corporation must not, in trade or commerce, in connection with the supply of goods or services, engage in conduct that is unconscionable in all the circumstances.

The court reiterated that s51AC requires conduct that is ‘clearly unfair or unreasonable’, or conduct ‘showing no regard for conscience, irreconcilable with what is right or reasonable’. The court found there were factual circumstances that would give rise to a conﬂ ict about this issue, but the issue was not strongly arguable, so concluded that neither of the questions proposed by the applicant gave rise to an issue of such strength that it should be weighed in the balance of convenience.

9423 Insolvency 2 casenotes.indd 90 7/03/2006, 1:03:21 PM While the ﬁ nancier in this case successfully opposed an application for an injunction to restrain the taking of steps to enforce security, this case indicates that borrowers may seek to rely on the unconscionable conduct provisions of the Trade Practices Act to bolster their bargaining position.

9423 Insolvency 2 casenotes.indd 91 7/03/2006, 1:03:22 PM LENDING AND SECURITIES

Court takes commercial approach in assessing what property was secured by mortgage documents

Case Name: Mrs Garrett sought to set aside an order for possession of real Andrew Garret Wine Resorts & property on the basis that security over the property was not Anor v National Australia Bank obtained by the mortgage documents. In construing ambiguous Ltd (No 2) terms in the mortgage documents, the court considered the factual background, construction of the mortgage documents, the Citation: intention of the parties, and commercial common sense, and held [2005] SASC 105, Supreme that the purpose of the mortgage was to provide security to the Court of South Australia per defendant over the property for money that had been advanced Gray J and to avoid the impost of double stamp duty. The second plaintiff, Averil Gay Garrett, applied to the court seeking an order to set Date of Judgment: aside an earlier order for possession granted by the trial judge. 23 March 2005 In 1994, Mr and Mrs Garrett were the registered owners of a property known as Arranmore, over which they had granted a mortgage to the Bank of South Australia Issues: (Bank SA). In 1996, Mr and Mrs Garrett relocated from Arranmore to another • Construction and property known as Springwood Park. A mortgage over Springwood Park was granted interpretation of mortgage to Bank SA and the mortgage for Arranmore was discharged as to land only. documents • What property is secured by In May 2002, the Garrett interests negotiated with the National Australia Bank Limited mortgage documents (NAB) for the provision of ﬁ nance and reached an agreement with the NAB that: • Stamp duty – what transactions or instruments • Bank SA would be paid all of its outstanding debts; are liable • the Arranmore mortgage would be assigned from Bank SA to the NAB; and • the mortgage held by Bank SA over Springwood Park would be discharged.

The agreement with the NAB involved the bank advancing $1.5 million to interests associated with the Garretts in exchange for a mortgage over Springwood Park. The reason for the assignment of the Arranmore mortgage was to avoid the double impost of stamp duty. To achieve this, the security clauses from the Arranmore mortgage were incorporated to become part of the Springwood Park mortgage. The Arranmore mortgage was subsequently discharged by the NAB both as to land and as to money secured.

Mrs Garrett acknowledged that the purpose of the Springwood Park mortgage was to create rights in favour of the NAB, but said that the legal effect of incorporating terms from the Arranmore mortgage was that security over Springwood Park was not provided or obtained. She claimed that the Arranmore mortgage had been discharged and therefore secured no monies. Thus, the trial judge’s order for possession had been based on a mortgage document that provided no security.

The NAB submitted that the Springwood Park mortgage should be construed as a whole, having regard to its apparent purpose and to the series of documents of

9423 Insolvency 2 casenotes.indd 92 7/03/2006, 1:03:23 PM which it formed a part. It was argued that the intention of the incorporation of the previous terms was to prevent the mortgage from being subject to double stamp duty and that Mr and Mrs Garrett were aware of this at the time.

Justice Gray observed that, when construing the Springwood Park mortgage, it was appropriate to have regard to its purpose and to give effect to the legal obligations that the parties mutually intended to create as expressed by the words of the clause. In addition to the factual matrix surrounding the contract, the court may have regard to the commercial purpose of the contract. Justice Gray acknowledged that the clause incorporating the earlier terms of the Arranmore mortgage was an ambiguous clause and, accordingly, it was appropriate to have regard to extrinsic evidence to resolve this ambiguity.

Having regard to the NAB mortgage as a whole, the context in which the contract was formed and the intention of the parties, Justice Gray found that the apparent and self-evident purpose of the relevant clause was, ﬁ rst, to give security over Springwood Park to the NAB for monies advanced and, second, to be a substitute mortgage to avoid the impost of double stamp duty.

Accordingly, Justice Gray dismissed the second plaintiff’s application that the order for possession be set aside.

Courts will have regard to the contract as a whole, the context in which the contract was formed, commercial reality and the intention of the parties when considering the purpose of ambiguous clauses of a contract.

9423 Insolvency 2 casenotes.indd 93 7/03/2006, 1:03:23 PM LENDING AND SECURITIES

Are cost provisions in a mortgage contract still subject to a court’s discretion?

Case Name: By the terms of their mortgage contract, the mortgagors were Kyabram Property Investments bound to pay to the mortgagee any costs ‘in connection with the Pty Ltd & Anor v Murray & Anor mortgaged premises’. Having succeeded in the litigation, the mortgagee claimed that indemnity costs should be awarded for the Citation: proceedings, as they were sufﬁ ciently connected to the premises. [2005] NSWCA 87, New South Mr and Mrs Murray had mortgaged properties to two investment vehicles – Kyabram Wales Court of Appeal per and Banksia (the mortgagees). Clause 14 of the mortgage contract with Kyabram Beazley, Hodgson and Ipp JJ obliged the Murrays to pay ‘all moneys paid or expenditure incurred by the mortgagee for or in connection with the mortgaged premises or this mortgage…’. Date of Judgment: The mortgagees brought an action by way of a statement of claim for possession of 24 March 2005 the mortgaged properties and an order for costs. The Murrays brought a cross-claim stating that the mortgage with Kyabram had been entered into in circumstances Issues: that were unconscionable or unjust. The costs sought after a successful appeal by • Whether a provision in the mortgagees were on an indemnity basis, although the Murrays argued that the a mortgage to pay the court should not accede to the application for costs on an indemnity basis because mortgagor’s costs extends the mortgagees had sought an order for costs in terms that would conventionally be to the costs of defending interpreted as costs on a party/party basis. The Murrays submitted that the failure a cross-claim of the mortgagees to claim costs, other than as a conventional incident of the • Whether a provision in a litigation, prejudiced the Murrays in any consideration they might give to making an mortgage is subject to the offer of compromise in the proceedings because the full extent of the claim had not court’s discretion as to costs been pleaded.

The court stated that the normal rule was that costs should be awarded on a party/ party basis, unless some alternative basis was shown either on a well-recognised principle or under some contract plainly and unambiguously expressed.

The question that arose in this case was more speciﬁ c. It was whether the existence of a contractual provision entitling a mortgagee to the costs of litigation governs the parties’ entitlements, or whether such a provision is still subject to the general discretion of the court. Justice Beazley (Justices Hodgson and Ipp agreeing) stated that the Murrays’ submission that the statement of claim only ever asked for a conventional claim for costs had considerable force. Her Honour stated that litigation costs are a heavy burden in any event, and the Murrays were entitled to know what claim they were facing so they could make informed decisions about any step they might take in the litigation. For this reason, costs both at the ﬁ rst instance and on the appeal were awarded on a party/party basis only.

The considerations noted above did not have bearing on the claim for indemnity costs of defending the cross-claim. The question that arose there was whether the phrase ‘the mortgagor will upon demand pay to the mortgagee all expenditure

9423 Insolvency 2 casenotes.indd 94 7/03/2006, 1:03:24 PM incurred by the mortgagee for or in connection with this mortgage’ was wide enough to include the costs of the defence to the cross-claim.

Justice Beazley found the mortgage provisions were not wide enough to include the granting of indemnity costs for the defence of a cross-claim. The costs of the defence of the cross-claim were ordered to be paid for on a party/party basis.

The fact that a mortgage contract contains a provision entitling the mortgagee to costs associated with the mortgage will not necessarily mean that indemnity costs will be granted for any facet of litigation relating to the mortgage. It is still a matter of discretion for the court to decide whether indemnity costs will be granted. The drafter of the statement of claim has a duty to ensure that it clearly expresses a claim for indemnity costs if that is what is intended to be claimed under the terms of a contract.

9423 Insolvency 2 casenotes.indd 95 7/03/2006, 1:03:25 PM LENDING AND SECURITIES

A day at the Turf Club: good news for lenders

Case Name: This case provides a valuable lesson for third parties who deal Pico Holdings Inc v Wave Vistas with a person who has authority to act on behalf of multiple Pty Ltd bodies corporate. The High Court’s reasoning in this case suggests that, in some circumstances, a director who purports Citation: to act for one corporation may in fact bind another corporation if a reasonable person could take that view of the transaction [2005] HCA 13, High Court of Australia per Gleeson CJ, on the evidence. McHugh, Gummow, Hayne and Pico Holdings Inc (the lender) was a Californian corporation represented by Mr Heydon JJ Hart. It made a loan of $1.2 million to Dominion Capital Pty Ltd (the borrower), which was an Australian company, represented by Mr Voss. In a telephone Date of Judgment: conversation, Mr Voss requested a further extension of the loan. Mr Hart agreed on 5 April 2005 the basis that Mr Voss would provide ‘substitute’ security in the form of the title deeds to what Mr Voss described as ‘my Turf Club property’. The Turf Club property was owned by Turf Club Australia Pty Ltd (now called Wave Vistas Pty Ltd) (Turf Issues: Club), of which Mr Voss was the sole director and on whose behalf he had authority • Identity of parties to a to act. Mr Voss confi rmed that ‘he’ would provide the security in a letter on the contract borrower’s letterhead signed by Mr Voss as ‘Chairman and Managing Director’. He • Ability of director to act attached a copy of the certifi cate of title to the property, which showed Turf Club as on behalf of multiple the registered proprietor. Although Mr Voss told Mr Hart that the Turf Club property bodies corporate was unencumbered, Mr Voss had offered a fi rst registered mortgage over the • Drawing inferences from property to the National Australia Bank (the bank). The bank later took a fi rst trial judge’s fi ndings of fact registered mortgage over the property. • Sections 128 and 129 CA • Authority to bind The loan was never repaid. When the lender tried to enforce the security, it faced the diffi culty that Turf Club was not clearly identifi ed as a party to the agreement to provide the Turf Club property as security for the extension to the loan.

Both the trial judge and the Queensland Court of Appeal found that Turf Club was not a party to any agreement with the lender or the borrower in relation to the provision of security for the loan. However, the High Court reached a different conclusion on the same facts. The court noted that, at the time of the telephone conversation, Mr Hart was aware that Mr Voss controlled and acted through numerous corporate entities and called them ‘my companies’. As a result, when Mr Voss:

• referred to ‘my Turf Club property’ in the telephone conversation; • stated that ‘he’ would provide the property as security in the letter; and • attached to the letter a copy of the certiﬁ cate of title showing Turf Club as the registered proprietor of the property,

a reasonable person would have assumed that Mr Voss was purporting to act on behalf of Turf Club. The court drew on assumptions that third parties are entitled to make under sections 128 and 129 of the then CL when dealing with corporations

9423 Insolvency 2 casenotes.indd 96 7/03/2006, 1:03:25 PM and directors, namely that a director has authority to act on behalf of the corporation and, when doing so, is acting in good faith and for a proper purpose.

The court found that, as a result of the conversation and the letter, there was a tripartite agreement between the lender, the borrower and Turf Club by which Mr Voss, on behalf of Turf Club, contracted with the lender to hand over Turf Club’s certiﬁ cate of title in consideration of the lender granting an extension of the loan.

The consequence of the court’s fi nding that there was a binding promise for the delivery of the certifi cate of title to the Turf Club property by way of security was that a contract to create an equitable mortgage had been formed. As that contract was specifi cally enforceable (and, hence, created an interest in land) and as a note of the contract existed in the letter, s59 of the Property Law Act 1974 (Qld) was satisfi ed. (Section 59 requires that contracts for the sale or other disposition of land or any interest in land be in writing.)

The court remitted the matter back to the Queensland Court of Appeal to determine the question of priorities as between the lender and the bank.

A notable feature of this case is the court’s willingness to draw different inferences from the factual ﬁ ndings of the trial judge that were not based on an assessment of credit. In so doing, the court has taken a robust approach to the application of the CA and the ability of directors to bind multiple bodies corporate. The decision offers some comfort to lenders who deal with persons known to control multiple bodies corporate, particularly where a loan is made to one corporation but security is provided by another corporation.

9423 Insolvency 2 casenotes.indd 97 7/03/2006, 1:03:26 PM LENDING AND SECURITIES

Enforcement within six months of charge granted in favour of a company with a common director not void

Case Name: PNG Dockyard, an unsecured creditor, sought to rely on section Papua New Guinea Dockyard 267 CA to have the court set aside a charge granted by the Ltd v Adams debtor company, Challenger Charter, on the basis that it was ‘associated with’ the chargee Mortim through a common director Citation: and shareholder. This case indicates that, in determining the validity of a charge created in favour of a related company that (2005) 215 ALR 742, Federal Court of Australia per is enforced within six months of its creation, the evidence relating Finkelstein J to its creation can be crucial. Papua New Guinea Dockyard Limited (PNG Dockyard) obtained judgment against Date of Judgment: Challenge Charter Pty Ltd (Challenge Charter) on 11 February 2004 and, as a 15 April 2005 result, became an unsecured creditor. On 12 March 2004, PNG Dockyard served a statutory demand on Challenge Charter. On 31 March 2004, Challenge Charter granted a ﬂ oating charge to Mortim (Australia) Pty Ltd (Mortim). The charge Issues: secured an existing debt of $125,782 and any subsequent advances. A further • Validity of charge in favour amount of $43,898 was then advanced to Challenge Charter. of related company • Whether a company Challenge Charter and Mortim were connected. A Mr Goldschlager owned all the was ‘associated with’ shares in Mortim and, through other companies, a substantial interest in Challenge another company Charter. He was also a director of both companies and his wife was also a director of Mortim.

On 6 May 2004 (being within six months of the creation of the charge), Mr Goldschlager, acting in his capacity as a director, appointed an administrator to Challenge Charter. On 12 May 2004, Mortim appointed a receiver to Challenge Charter’s assets. Challenge Charter executed a DOCA, under which the claims of unsecured creditors were extinguished, apart from those associated with Mr Goldschlager.

PNG Dockyard applied to:

• have the resolution approving the DOCA set aside (under s600A) or to have the DOCA terminated (under s445D), the effect of which (by regulation 5.3A.07) would be to place Challenge Charter in liquidation; and • have the charge granted to Mortim declared void (under s267).

The orders relating to setting aside the DOCA were not opposed. That being so, Justice Finkelstein set aside the DOCA and Challenge Charter was placed into liquidation. By the operation of s588FJ (which renders void, against a liquidator, a ﬂ oating charge created within six months of the relation-back day, except for advances made after the date of the charge), the charge only secured the amount of $43,898 advanced by Mortim to Challenge Charter after the creation of the charge.

9423 Insolvency 2 casenotes.indd 98 7/03/2006, 1:03:27 PM In relation to the validity of the charge, Justice Finkelstein considered the two conditions under s267 that must be satisﬁ ed. Those conditions are:

• fi rst, the company must create a charge in favour of ‘a relevant person’ (s267(1)(a)). Under s267(7), a ‘relevant person’ is a person who is an offi cer of the company in the six months preceding the creation of the charge, or a person associated, in relation to the creation of the charge, with the offi cer; and • second, within six months after the creation of the charge, the chargee purports to take a step in its enforcement without leave of the court (s267(1)(b)). This condition was satisfi ed when Mortim appointed the receiver.

Whether the fi rst condition was satisfi ed depended upon whether Mortim was ‘a relevant person’ because it was ‘associated with’ Mr Goldschlager. Justice Finkelstein considered the meaning of the expression ‘associated with’ and held that the word ‘associated’ picked up the defi nition of ‘associate’ in s9 that refers to sections 10-17. Those sections set out the tests to determine whether a person or an entity is an associate.

Relying upon s12(2)(c), PNG Dockyard said that there was an association between Mr Goldschlager and Mortim because they were ‘acting in concert’ in relation to the creation of the charge. Citing a decision of Justice Barrett in Bateman v Newhaven Park Stud Ltd (2004) 49 ASCR 597, Justice Finkelstein said that a person (A) will be acting in concert with another person (B) if A engages in conduct in consequence of an agreement or understanding between A and B and that conduct is in pursuance of an objective or purpose which is common to both.

In order to make out its case, PNG Dockyard had to call Mrs Goldschlager. Her evidence was that, rather than Mr Goldschlager being the driving force behind the creation of the charge, she was the one who wanted to secure any further loan by Mortim to Challenge Charter and, to that end, she had sought advice from her solicitor. That is to say, Mortim was acting in its own interests and for its own individual purpose and had no purpose or objective in common with Mr Goldschlager.

His Honour also held that the term ‘associated with’ was not satisﬁ ed simply because Mr Goldschlager was an ofﬁ cer of the company.

As a result, the ﬁ rst condition of s267 was not satisﬁ ed and the challenge to the validity of the charge failed.

Where a challenge is made to the validity of a charge that exists over the assets of one company in favour of a connected company, it will be necessary for the challenger to show on the evidence, a connection between the chargee and the chargor. It may not be enough to show that a director of the chargor is also a director of the chargee, particularly if the chargee has other directors who caused the chargee to obtain the charge.

9423 Insolvency 2 casenotes.indd 99 7/03/2006, 1:03:27 PM LENDING AND SECURITIES

An all-monies clause meant what it said

Case Name: The debtor argued that a charge secured only advances made Chacmol Holdings Pty Ltd before execution of the charge. At ﬁ rst instance, a single judge v Handberg (as administrator accepted that argument. The Full Federal Court disagreed, of Australian Risk Analysis emphasising that the words used in an all-monies clause should Pty Ltd) be given their ordinary and natural meaning. In 1995, the debtor agreed to purchase an insurance business from the creditor for Citation: $5 million. That transaction was recorded in a contract of sale. At about the same [2005] FCAFC 40, Full time, the debtor executed a deed of acknowledgment of debt, which recorded that Federal Court of Australia it owed the creditor another $378,000. per Tamberlin, North and Dowsett JJ The debtor agreed to grant a charge to the creditor to secure its indebtedness. It took a year, however, to obtain bank consent to the charge. When the seed of Date of Judgment: charge was executed, it contained an ‘all monies clause’. That is, a clause that the charge secured ‘all monies now owing or payable … to the [creditor] by the [debtor] 22 April 2005 … on any account whatsoever’.

Issues: After execution of the deed of charge, the creditor made further advances to the • Interpretation of an debtor. The central question before the Full Court was whether the charge secured all-monies clause in a those additional advances. fi xed and fl oating charge The judge at fi rst instance concluded that the deed of charge did not apply to the • Whether the charge additional advances. In reaching that conclusion, he relied on two main arguments. secured advances made First, that the contract of sale, the deed of acknowledgment of debt and the deed after its execution of charge were entered into to give effect to one object and therefore had to be construed as a single instrument and read together. Secondly, that as a matter of construction, the general words used in the ‘all moneys clause’ should be read down and confi ned to the object of the transaction, which was to secure the purchase price and pre-existing debt in connection with the sale of the insurance business.

The second argument was based on the decision of the High Court of Australia in Grant v John Grant & Sons Pty Limited (1954) 91 CLR 112. The Full Court held that the principles set out in that case applied only to releases given in settlement of disputes.

In rejecting the ﬁ rst argument, the Full Court emphasised that the words used in the deed of charge should be given natural meaning and that, if that meaning was clear and unambiguous, it was not appropriate to read the clause down because of its connection with the contract of sale and deed of acknowledgment of debt. Further, the recitals to the deed of charge could not be used to read down the operative provisions of the charge. Justices North and Dowsett, who delivered a joint judgment, emphasised that parties had to live with the contracts they had made and afﬁ rmed the limitations on the use courts can make of extrinsic material.

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9423 Insolvency 2 casenotes.indd 100 7/03/2006, 1:03:29 PM Their Honours acknowledged cases in which all-monies clauses had been read down, but distinguished those cases on their facts.

The court in this case took a relatively strict approach to contractual interpretation. The result demonstrates the care that must be taken when drafting security documents.

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9423 Insolvency 2 casenotes.indd 101 7/03/2006, 1:03:30 PM LENDING AND SECURITIES

Eyes wide shut? The effect of deregistration on a charge

Case Name: The liquidator of Silverline Technologies Pty Limited (Silverline) John Frederick Lord as sought an order under section 274 CA rectifying the Australian liquidator of Silverline Register of Company Charges kept by ASIC. Technologies Pty Ltd The relevant charge was a fi xed and fl oating charge over Silverline’s assets in favour of Braithwaite Richmond Limited (Braithwaite). The liquidator sought rectifi cation Citation: to insert the words ‘charge securing no indebtedness enforceable against the [2005] NSWSC 620, Supreme company’ into the register in support of the contention that there was no longer any Court of New South Wales, indebtedness secured by the charge and that this should be recognised on the face Equity Division, per Barrett J of the register. The liquidator sought this course of action because the chargee, Braithwaite, no longer existed. Date of Judgment: Braithwaite was removed from the Register of Companies, New Zealand in 2000. 29 June 2005 Section 318 of the Companies Act 1993 (NZ) provides that the removal of a company from the register puts an end to the company’s existence as a legal entity Issues: and a body corporate separate from its shareholders. Additionally, under the • Section 479(3) CA Companies Act, property of a company removed from the New Zealand Register • Diffi culties determining that had not been distributed or disclaimed immediately before the removal vests whether debt will be in the Crown. pressed • Orders relating to conduct The liquidator wished to complete the administration of Silverline and took the view of administration that no indebtedness was secured by the charge and that this position should be refl ected in the register so that he may proceed to completion. Silverline’s fi nancial records showed that there was an indebtedness of Silverline of more than $1.2 million in respect of a loan from Braithwaite. However, there was no further information as to Silverline’s indebtedness to Braithwaite as there were no records detailing the indebtedness. The liquidator had contacted the New Zealand Registry, which administers property of defunct companies vested in the Crown. The Treasury of New Zealand said that its practice was not to seek to establish what property may have become vested in the Crown unless and until someone seeks to recover the property. The Treasury also said that it did not wish to be heard in the matter.

The principle submission made by the liquidator was that Braithwaite’s removal from the New Zealand Register caused it to go out of existence, with the consequence that all claims by and against it were thereby extinguished. However, the court held that, while at common law a debt owing to a corporation at the time of its dissolution was extinguished by the dissolution, the better view in this case was that the debt became vested in the Crown as unclaimed property.

The court stated that the reasoning behind this was that Braithwaite was created by statute, the removal of it from the New Zealand Register was a statutory process and, therefore, the consequences of the removal must be ascertained by reference

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9423 Insolvency 2 casenotes.indd 102 7/03/2006, 1:03:31 PM to the statute. Accordingly, the court returned to the provisions of the Companies Act and concluded that the debt vested with the Crown as stated under that statute.

Having concluded that the removal of Braithwaite from the New Zealand Register did not extinguish the debt owed to Braithwaite at the time of its removal from the Register, the court looked at whether the debt could be said to have been discharged. The court found that there was insufﬁ cient evidence to enable it to reach this conclusion. Accordingly, the court considered the liquidator’s alternative claim by which he sought a direction under s479(3) CA that he would be justiﬁ ed in declaring a dividend and otherwise administering Silverline’s affairs without having regard to the charge and as if the charge secured no debt enforceable against Silverline.

The court held that the liquidator was not entitled to shut his or her eyes to known liabilities. Where the liquidator is aware of a debt, he or she must take steps to discover whether a claim will be pressed in the winding up: re Graf Holdings Pty Limited; Larking v ASIC [1999] NSWSC 217. However, the court went on to say that it was satisﬁ ed that the liquidator had fully discharged his responsibilities. He had been diligent in his enquiries with anyone relevantly associated with Braithwaite before its deregistration (or the Crown in right of New Zealand as successor in title to its outstanding property). Neither had any knowledge of any claim about the indebtedness of Silverline to Braithwaite. Accordingly, the court made a direction allowing the plaintiff to proceed to complete Silverline’s winding up without further attention to the possibility of any claim secured by the charge granted to Braithwaite.

Where the liquidator is aware of a debt, he or she must take steps to discover whether a claim will be pressed in the winding up. If diligent enquiries are made by the liquidator but the evidence shows that the debt will not be pressed, the court may make orders enabling the liquidator to proceed with the liquidation on the basis that the debt will not be pressed.

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9423 Insolvency 2 casenotes.indd 103 7/03/2006, 1:03:31 PM LENDING AND SECURITIES

Can you have a ﬁ xed charge over book debts? UK book debts decision – implications for Australia

Case name: This House of Lords decision in relation to ﬁ xed charge over book National Westminster Bank plc debts is an important development that could have implications v Spectrum Plus Ltd & Ors for Australian insolvency practitioners, particularly those who deal with priorities in voluntary administrations and liquidations. Citation: Readers of the Allens Arthur Robinson Annual Review of Insolvency & Restructuring [2005] UKHL41, House Law will recall last year’s decision of the English Court of Appeal in National of Lords Westminster Bank Plc v Spectrum Plus Ltd & Ors. [2004] 1All ER 981 (Chancery).1

That decision was some comfort to fi nanciers as it reversed the decision at fi rst Date of Judgment: instance and affi rmed that a fi xed charge over book debts was indeed possible, at 30 June 2005 least where the charge was in the form analysed in the 1979 decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Reps 142 per Justice Slade. Issues: In an appeal from the English Court of Appeal’s decision, the House of Lords has • Book debts now held that the purported fi xed charge over book debts contained in the typical • Fixed or fl oating charge form of an all-assets charge used in fi nance transactions does not create a fi xed charge, but only a fl oating charge (at least where the chargee does not take control of the proceeds).

The decision may or may not be followed in Australia, but it is a very important development that Australian insolvency practitioners need to be aware of, particularly when dealing with priorities in voluntary administrations and in liquidations. Although many charges contain automatic crystallisation clauses under which a fl oating charge becomes fi xed on defi ned events, if a charge is not fi xed from the beginning it will still rank after preferential claims such as employees and after a voluntary administrator’s lien. Insolvency practitioners, therefore, need to regularly determine whether a charge is fi xed or fl oating. While the decision is not binding in Australia, the unanimous views of the English House of Lords will obviously carry some weight with Australian courts if they are asked to consider the question.

These proceedings were a test case. According to the House of Lords, hundreds of English insolvency administrations were waiting for the outcome. It involved the ranking of claims between a bank claiming a fi xed charge over book debts and preferential creditors. The fi xed and fl oating charge document was in a form that was common in England and in Australia, particularly since the decision of Justice Slade in Siebe Gorman. It provided that there was a ‘specifi c charge’ over book debts, and that the proceeds must be paid into the mortgagor’s account with the bank.

Siebe Gorman had decided that such a charge was a ﬁ xed charge. The general notion has been that in order to have a ﬁ xed charge over book debts, there must be

1 Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law 2004, pages 71-72.

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9423 Insolvency 2 casenotes.indd 104 7/03/2006, 1:03:32 PM some restriction on the use of the proceeds, such as, for example, a payment into a blocked account. Though the judgment on this point is brief, Justice Slade apparently decided that the requirement that it be paid into an account with the bank was a sufﬁ cient block.

The notion arose because of the classic statements of what is a ﬂ oating charge, by Lord Romer in In re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 at 285 and by Lord MacNaghten in Illingworth v Houldsworth [1904] AC 355 at 358, that the nature of a ﬂ oating charge was one where the chargor was left free to deal with the assets.

While a chargee wants a ﬁ xed charge over book debts, a chargor needs to be able to have access to its cash ﬂ ow for its ongoing business. Two mechanisms have been used to achieve this:

1. To identify two distinct assets: the ‘tree’ – the book debt – and the ‘fruit’ – the proceeds.

Charges are often drafted to recognise the distinction: preventing dealing with the book debts, and providing that it is fi xed over the book debts, but fl oating over the proceeds. This approach was supported in an English Court of Appeal case, In re New Bullas Trading Ltd [1994] 1 BCLC 485, but was not followed in a Privy Council case on appeal from New Zealand, Agnew v Commissioner of Income Tax [2001] 2 AC 710 (also known as the Brumark case). In that case, the Privy Council held that if the charge is fl oating over proceeds it is fl oating over book debts. They said the realisation of the book debts by payment was a method of dealing with them; the charge over the book debts is worthless without the proceeds; and because the chargor is free to deal with the proceeds, it is effectively free to deal with the book debts and therefore the charge is fl oating.

2. To require the proceeds of the book debts to be paid into an account with the chargee or another party, which may not necessarily be blocked.

The arguments here were that there was a sufﬁ cient restriction on the chargor dealing of the proceeds. Once the proceeds were in an account with the chargee, their nature changed. If the account was in credit, they were replaced by a debt owing by the bank to the chargor. If the account was in debit, they disappeared entirely. That was consistent with the Siebe Gorman case. It was the reasoning that persuaded the English Court of Appeal in Spectrum Plus to decide that the charge was ﬁ xed.

That approach did not ﬁ nd favour with the House of Lords. Because of the practical importance of the issue, seven Law Lords heard the appeal. Unanimously they decided that the charge was ﬂ oating.

The relevant account was a current account. The Lords pointed out that contractually if the account was in credit the chargor/customer was entitled at any stage to draw the money out. If it was in debit as an overdraft account, contractually the chargor/customer was entitled to redraw funds up to the overdraft limit. The chargor, therefore, was still able to have access to the proceeds.

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9423 Insolvency 2 casenotes.indd 105 7/03/2006, 1:03:33 PM If book debts were dealt with by realising them, the chargor remained free to deal with the proceeds and therefore it was still a ﬂ oating charge.

The Lords were unanimously of the view that there could be a fi xed charge over book debts, but they gave little guidance as to what would achieve it. It appears clear that there would need to be a blocked account with a real block – a restriction on the ability of the chargor to draw money out of the account. Some requirement of consent by the chargee for each payment would be suffi cient, but whether, and to what extent, some lesser control would be suffi cient is not clear. Lord Walker cast doubt on one suggestion in the Court of Appeal judgment that the bank could require the chargor to pay the proceeds into one (blocked) account and then allow it to draw money out of another account that could be set off against the credit account to which the proceeds were paid.

The judgment is marked by an antipathy (particularly from Lord Walker) to a charge (despite statutory changes) being a method by which secured creditors could ‘sweep away’ all assets, including those that were really circulating assets, to the detriment of preferential creditors.

Interestingly, the Law Lords were asked by the bank to rule prospectively; that is, to allow the law up to the date of the judgment to remain as it was understood following Siebe Gorman and only change the law with effect after the date of the judgment. While the House of Lords did not rule out the possibility that there might be a case for a prospective judgment (something that has not been adopted by the High Court of Australia), this was not one.

The issue of whether or not a ﬁ xed charge over book debts is possible is yet to be conclusively decided in Australia. The most germane judgment was only at ﬁ rst instance, but did support the New Bullas approach (Whitton v ACN 003 266 886 P/L (1996) 14 ACLC 1799). There are, as yet, no indications as to whether the Australian courts will adopt the attitude taken by the House of Lords and Privy Council, which ignore the distinction between book debts and their proceeds, and disregard the fact that the proceeds disappear and become some other form of property. It may be that with its more critical and analytical approach the High Court will come to a different conclusion. The analogous distinction between the ‘fruit’ and the ‘trees’ was promoted by the High Court in cases on equitable assignment (see Justice Kitto in Shepherd’s case (1965) 113 CLR 385 at 396).

Unless and until the High Court resolves the question, in response to an insolvency practitioner’s application for directions or otherwise, insolvency practitioners will continue to face the diffi cult task of dealing with the day-to-day challenge of categorising charges over book debts as fi xed or fl oating. Unfortunately, while the position may now be more certain in England, at least in relation to the Siebe Gorman form of charge, that is not yet so in Australia where the question of whether a charge over book debts that purports to be fi xed is in fact fi xed or fl oating remains unclear and an area ripe for disputes.

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9423 Insolvency 2 casenotes.indd 106 7/03/2006, 1:03:33 PM LENDING AND SECURITIES

Re-ﬁ nancing a mortgage: ﬁ rst mortgagee with no actual notice of new mortgage gets priority

Case Name: The question posed in this case was whether a second mortgage Westpac Banking Corporation could take priority over a fi rst mortgage where the second v Adelaide Bank Limited mortgagee had purported to pay out the fi rst mortgage and take the property as security for its mortgage alone. The fi rst Citation: mortgage had not been discharged and further advances were made by the fi rst mortgagee. [2005] NSWSC 517, Supreme Court of New South Wales Westpac Banking Corporation (Westpac) claimed a declaration that its mortgage per White J over a residential property in New South Wales had priority over Adelaide Bank Limited’s (ABL) mortgage to the extent of $233,195 plus interest. It sought an Date of Judgment: order that ABL do all things necessary to enable Westpac to register its mortgage 30 June 2005 over the property as a fi rst mortgage. In the alternative, it claimed a declaration that it was subrogated to ABL’s rights under its mortgage over the subject property.

Issues: ABL had advanced $235,000 to its customers, Mr and Mrs Bryant, on fi rst • Priorities of mortgages mortgage security on the condition that the mortgage would be discharged when and subrogation the loan was repaid. Less then a year later, Westpac, through an agent, re-fi nanced • The operation of rule the loan and the customer signed a mortgage in favour of Westpac, which did not in Hopkinson v Rolt express that it was subject to any prior encumbrance. Westpac took an unregistered mortgage from the customers and paid ABL $233,195 without fi rst obtaining a discharge of ABL’s mortgage or the certifi cate of title. This was described as an ‘unattended refi nance’.

Westpac’s agent wrote to ABL’s agent saying that its customer’s loan had been cleared and provided an ‘irrevocable authority’ signed by its customers asking to have their account with ABL closed, the mortgage discharged and the certiﬁ cate of title provided to Westpac. ABL’s agent had told Westpac’s agent that this authority was insufﬁ cient and that it would send a form to its customers to close the account.

As the account was dealt with by a junior clerk of ABL’s agent in accordance with company policy, the account with ABL was not put on hold and the customer continued to draw down on it for $132,415. This debt and interest was secured by ABL’s registered mortgage. Westpac claimed priority for its advance of $233,195 plus interest.

Westpac argued that, under the rule in Hopkinson v Rolt (the rule), after receiving notice of a second mortgage, a fi rst mortgagee to whom the property is mortgaged for advances cannot have priority over the second mortgagee for further advances on the fi rst mortgage. It also argued that, having paid off ABL’s mortgage, it was to be presumed that Westpac intended the mortgage to be kept alive for its own benefi t (the subrogation argument).

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9423 Insolvency 2 casenotes.indd 107 7/03/2006, 1:03:34 PM As to the subrogation argument, Justice White held that it was not conceptually possible for Westpac to be subrogated to the rights of ABL under ABL’s mortgage, which was in competition with ABL itself. While it was accepted that Westpac intended to keep the mortgage in ABL’s favour alive for its own beneﬁ t ,save insofar as it was replaced by the mortgage to Westpac, Westpac could not take priority over ABL by subrogation of its rights.

As to the rule:

• ABL argued that, if the rule applied, the fi rst mortgagee would only be precluded from taking subsequent advances if it would be equitable fraud for it to assert priority over the second mortgage. This required that it have actual notice of an advance under the second mortgage. Justice White held that the effect of the authorities was that before equity will regard it as fraudulent for a fi rst mortgagee to insist on its priority for subsequent advances, it is necessary that it have had actual notice (not just constructive notice) of an intervening equitable interest. The notice sent to a junior clerk of ABL’s agent was not suffi cient to constitute actual notice to ABL. It was not in the junior clerk’s power to stop further drawings based on the Wespac agent’s letter. Further, a company is not taken to have knowledge of every matter in its records. Thus, ABL did not have notice that the customer had given a mortgage to Westpac to secure Westpac’s advance and the rule did not preclude ABL from taking the subsequent advances to its mortgage until responsible offi cers of ABL’s agent had actual notice of Westpac’s unregistered mortgage. Actual notice was given to ABL on 4 November 2003. • Justice White then dealt with the question of whether it was fair and just that Westpac obtain priority by its agent giving notice of its mortgage to ABL’s agent on 4 November 2003 when it was on notice that ABL’s account would not be closed for internal procedural reasons. His Honour held that banks must adapt their procedures to account for the legal framework. ABL could not avoid the legal framework by saying that its internal procedures had not been satisfi ed. Once suffi cient notice of the second mortgage has been given, fairness and justice dictates that the fi rst mortgagee not have priority in respect of further advances.

Westpac was therefore entitled to priority only in respect of advances made by ABL once it received actual notice of Westpac’s mortgage on 4 November 2003.

This case indicates the care required when re-fi nancing a loan secured by a mortgage. It cannot be assumed that simply receiving signed authority from the customer mortgagor to close its former accounts and to discharge the fi rst mortgage and passing on that information to the fi rst mortgagee will be suffi cient. The fi rst mortgagee needs to be given actual notice of the new mortgage.

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9423 Insolvency 2 casenotes.indd 108 7/03/2006, 1:03:35 PM LIQUIDATION

I started it! The costs of a winding-up application when a company enters administration

Case Name: This case considers who bears the costs of a winding-up McDonald v Deputy application when a company enters into administration before the Commissioner of Taxation application can be heard. The DCT ﬁ led an originating process seeking an order for the winding up of Jay & Citation: Kay Safety Glass Pty Ltd (the debtor). Following this, the debtor entered into [2005] NSWSC 2, Supreme voluntary administration. By the time the DCT’s application for winding up came Court of New South Wales before the court, the debtor’s creditors had resolved that the company be wound per Barrett J up. The DCT’s proceedings were dismissed with orders for costs in favour of the DCT (the costs order). The liquidators of the debtor sought directions from the Date of Judgment: court as to the admissibility of the costs order in the winding up. The questions to be decided by the court were: 1 February 2005 • Should the costs order be properly regarded as expenses incurred by the plaintiffs Issues: as either Part 5.3A administrators or as liquidators in the voluntary winding up, • Winding-up application and which arose on the date of resolution to voluntarily wind up the debtor? subsequent administration • Should the costs order be properly regarded as ‘costs, charges and expenses of • Sections 553 and 556 CA the voluntary winding up’? • Costs of application • Should the costs order be properly regarded as a debt or claim, the circumstances giving rise to which occurred before the date the debtor entered into voluntary administration (the eventual ‘commencement date’ of the liquidation)?

The court decided that the costs order had yet to take effect as a judgment and, at the time of this hearing, was no more than a foundation for resort to the system of quantiﬁ cation. In addition, the person/entity ordered to pay the costs order was not the liquidator of the debtor, but the debtor-company itself.

In relation to the ﬁ rst question, the court held that the liability ﬂ owing from the costs order, even if regarded as one for ‘expenses’, could not be said to have been ‘properly incurred’ by the liquidators as the liquidators did nothing, directly or more remotely, to precipitate the costs order: Standard Chartered Bank of Australia Limited v Antico (1995) 38 NSWLR 290. The liquidators, as individuals, were not parties to the winding-up litigation, nor did the court purport to make a costs order against any non-party. Instead, the costs order was made solely against the debtor- company. The costs order could therefore not be properly regarded as expenses incurred by the liquidators as either Part 5.3A administrators or as liquidators in the voluntary winding up.

In relation to the second question, section 512 CA provides that all proper costs, charges and expenses of, and incidental to, a voluntary winding up are payable out of the company’s property. The court held that the winding up referred to in s512 is conﬁ ned to events that occur under the direction and control of the liquidator and therefore did not extend so far as to include the costs order.

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9423 Insolvency 2 casenotes.indd 109 7/03/2006, 1:03:35 PM In relation to the third question, the court considered a range of authorities, including Expile Pty Limited v Jabb’s Excavations Pty Limited (2004) 22 ACLC 667. In that case, the court held that a costs order for a winding-up application made after the commencement of an administration is not a claim caught by a DOCA because there is no existing obligation on the company to pay at the administration’s commencement. Accordingly, in this case, the court concluded that the liability for the costs order did not reﬂ ect a claim ‘the circumstances giving rise to which occurred’ before the appointment of the administrator. The result was that the costs order was not a provable claim in the creditors’ voluntary winding up, nor was it a priority expense to be paid in the winding up.

Justice Barrett noted that it is common that directors resort to the appointment of a voluntary administrator in the face of an application for a winding-up order by a creditor whose statutory demand has not been satisﬁ ed. Further, it was noted that, from a policy perspective, it may be thought unsatisfactory that the creditor who applies for a winding-up order in these circumstances bears the costs of the dismissed winding-up application, even though the court has ruled that the company must pay those costs. His Honour noted that the legislature should consider whether the CA ought to be amended to give such an applicant a priority position with respect to its costs order.

When an application is made to wind up a debtor but the debtor enters into voluntary administration before the winding-up orders can be obtained, the legal fees of seeking the winding up have no priority and are not admissible to proof in the voluntary administration or liquidation of the company.

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9423 Insolvency 2 casenotes.indd 110 7/03/2006, 1:03:36 PM LIQUIDATION

Winding up an illegal, managed investment scheme and determining its property

Case Name: The applicants were lot-holders in an illegal, managed investment Altmann & Ors v FN scheme. They applied for orders that the scheme be wound up. Management Pty Ltd The manager of the scheme asserted that a property under his control was not ‘property’ of the scheme. Citation: Each of the applicants held at least one lot in the Cairns Village Resort Community [2005] QSC 29, Supreme Court Title Scheme. The ﬁ rst respondent (FN Management) was granted the letting and of Queensland, Trial Division, management rights of the lots under a ‘Letting Appointment Deed’ entered into per Jones J with each applicant. The remaining respondents were the directors of FN Management, and they had effective control (in their own right or through the Date of Judgment: corporate trustee of a family trust) over six lots in the scheme. One of those lots (Lot 99) included the administrative and commercial facilities for the Resort, from 7 February 2005 which management of the scheme was conducted.

Issues: In 2001, the respondent invited the lot-holders to participate in what the court found • Section 601EE CA (in earlier proceedings) to be a managed investment scheme as defi ned in section • Winding up an illegal, 9 CA. The scheme provided for the majority of lot-owners to be able to remove the managed investments manager by forcing a transfer of the management rights. Upon this occurring, the scheme respondents would be required to transfer ‘any real or personal property’ held by • Does ownership and them ‘to facilitate the operation of the letting business’. The evidence was that this occupancy constitute a included Lot 99, as it was integral to the running of the Resort. benefi t that is properly the subject of a winding-up It was held in the earlier proceedings that the scheme was unregistered and, process? therefore, illegal. Accordingly, the applicants applied to wind up the scheme under • Defi nition of ‘property’ s601EE CA, which enables ASIC, the person operating the scheme, or a member of the scheme to make an application in these circumstances. The applicants argued that:

• the creation of the scheme gave rise to a beneﬁ t for the respondent which was properly the subject of a winding-up process, that beneﬁ t being the right of the manager to own and occupy Lot 99; • that right was lost if the management function was no longer being undertaken; and • the fact that a majority of lot-holders could force a sale of Lot 99 illustrated that contractual obligations existed (attaching to the management rights) that could properly be dealt with in the winding-up process.

The respondents argued that the scheme had effectively been brought to an end by the termination of virtually all letting appointments. They asserted that no property was left to be dealt with on any winding up of the scheme, and that the enforcement of the contractual rights was the subject of other proceedings that should be determined after the trial of the issues in those proceedings.

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9423 Insolvency 2 casenotes.indd 111 7/03/2006, 1:03:37 PM Justice Jones noted that s601EE confers a wide jurisdiction on the court and that the factors relevant to its exercise include the protection of investors and the public interest in preventing breaches of the CA: Cumulus Wines v Huntley Management; Reynolds Wines v Huntley Management (2004) NSWSC 609.

Section 9 CA defi nes ‘property’ as any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action’. His Honour held that the scheme’s incidental benefi ts to the respondent (occupation of Lot 99) fell within the defi nition of property for the purposes of the CA. In rejecting the submission that the scheme no longer possessed any assets or liabilities, his Honour held that it was

clear on the material that the rights of ownership and occupancy of Lot 99 were signiﬁ cantly constrained by conditions which the applicants [were] entitled to enforce. The applicant’s rights fall within the deﬁ nition of property.

It was held that winding up the scheme was a necessary step to protect the interests of the lot-holders, and costs were awarded against the respondents.

This case shows that the court will carefully scrutinise contractual relationships relating to illegal, managed investment schemes and that, on the winding up of such schemes, all assets that fall properly within the deﬁ nition of the ‘property’ of the scheme will be subject to the winding-up process.

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9423 Insolvency 2 casenotes.indd 112 7/03/2006, 1:03:37 PM LIQUIDATION

Court declines to grant leave to liquidator to disclaim a contract on basis requested

Case Name: The appellant liquidators of Enron had sought leave of the court Sims & Anor (as liquidators of under section 568(1B)(b) CA, to disclaim an agreement with TXU Enron Australia Pty Ltd) v TXU (the respondent), but only on the basis that the court make orders Electricity Ltd & Anor that TXU be taken as having designated an early termination date under the agreement (which would mean that TXU would be Citation: obliged to make a payment to Enron under that agreement). 53 ACSR 295, New South Justice Austin at fi rst instance had held that the general power under Wales Court of Appeal per s568(1B)(b) CA to make ‘such orders in connection with matters arising Spigelman CJ, Sheller JA and under, or relating to’ the agreement as it considered ‘just and equitable’ was Brownie AJA constrained by the specifi c wording of s568D(1) CA. That section provided that a disclaimer did not affect any other person’s rights or liabilities ‘except so far as Date of Judgment: necessary in order to release the company and its property from liability’. 11 February 2005 Justice Austin considered that, in all of the circumstances of the case, an order designating an early termination date by TXU under the agreement was not necessary in order to release Enron or its property from liability. Accordingly, the Issues: court could not make such an order under the s568(1B)(b) CA general power. • Scope of court’s power to make consequential orders The liquidators appealed. The New South Wales Court of Appeal upheld Justice when permitting disclaimer Austin’s decision and approved his reasons. Chief Justice Spigelman noted that: • Rights of other parties when contract disclaimed • s568(1B)(b) CA, while in broad terms, had to be construed in its context and consistently with its purpose of facilitating the prompt and effi cient liquidation of a company; • an order designating an early termination date by TXU under the agreement was not necessary in order to release Enron or its property from liability; • where two statutory powers apply in a particular situation, but one is subject to qualifi cations or restrictions to which the other is not expressly subject, then Parliament may be presumed to intend that the qualifi cation or restriction should be of practical signifi cance and, accordingly, the general words of the unconfi ned power are read down; and • the foregoing principle of statutory interpretation in the context of the relationship between the s568(1B)(b) CA power of disclaimer and the s568D(1) CA restriction, meant that the former was required to be read down in light of the latter (at ACSR 301).

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9423 Insolvency 2 casenotes.indd 113 7/03/2006, 1:03:38 PM The general power of granting leave to disclaim a contract to which an insolvent company is a party and making such consequential orders as are just and equitable, contained in s568 CA, cannot be used to make orders that infringe upon the speciﬁ c restriction contained in s568D(1) CA that the disclaimer does not affect the rights of other persons, except as it is necessary to release the company from liability.

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9423 Insolvency 2 casenotes.indd 114 7/03/2006, 1:03:39 PM LIQUIDATION

Slipped up: refusal to extend time in which to determine winding-up proceedings

Case Name: In this case, ASIC sought (via the slip rule) to retrieve an expired ASIC v Maxwell & Ors extension of time application for the winding up in insolvency of two defendant companies. Citation: ASIC sought orders for the winding up of Drummoyne Constructions Pty Limited (2005) 52 ACSR 147, and Homebush Project One Pty Limited. It relied on grounds of insolvency and Supreme Court of New South the just and equitable ground. Given that section 459R(1) CA provides that an Wales per Barrett J application for a company to be wound up in insolvency must be determined within six months, ASIC also sought orders under s459R(2) CA to extend the time for Date of Judgment: determination of the winding-up applications. Such orders can be made if the court is satisﬁ ed that special circumstances justify the extension and the order 14 February 2005 is made within the six-month period or within any further period of extension.

Issues: Following a hearing on 8 March 2004, Justice Austin made orders that the time for • Section 459R CA determining the winding-up application be extended to 31 August 2004. Between • Application to extend 8 March 2004 and 13 December 2004, the proceedings came before the court a time for determination of further eight times. ASIC’s time for making an application for winding up in winding-up application insolvency passed without comment. No further extension was available to ASIC • Availability of slip rule given that s459R(2) requires such an order be made during the currency of the where extension of time initial application period of six months or any subsequent extension period. application not made within time ASIC asserted that the application was able to be retrieved using either the slip rule • Whether surrounding in Part 20 Rule 10 of the Supreme Court Rules 1970, or an analogous aspect of circumstances indicate the court’s inherent jurisdiction. In essence, the slip rule allows correction of errors a presumption of error or that arise from an accidental slip or omission by the court or someone else. oversight ASIC pointed to the fact that the series of orders made by the court after • New South Wales Supreme Court Rules 1970 Part 20 31 August 2004, which made provision for defences and evidence to be ﬁ led rule 10 by all defendants including Drummoyne Constructions and Homebush Project, showed an accidentally unexpressed intention that a further s459R(2) extension be granted. However, while Justice Barrett found that the orders indicated an implicit assumption that the proceedings against Drummoyne Constructions and Homebush Project were to be progressed, his Honour held that the fact that ASIC was claiming relief on the just and equitable ground in addition to insolvency meant that the slip rule could not operate.

The existence of the just and equitable ground meant that the post-31 August 2004 orders were capable of ‘sensible and rational operation’ independently of the expired insolvency application. It therefore could not be assumed from the making of orders after the s459R period expired that the court intended to extend the application time.

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9423 Insolvency 2 casenotes.indd 115 7/03/2006, 1:03:40 PM This case conﬁ rms that the ‘slip rule’ is available to rectify the absence of a s459R(2) extension where such an extension is clearly implied by, but not explicitly stated in, the orders actually made. The slip rule will not, however, apply where the orders initially made operate on their own in a rational and intelligible way and therefore do not give rise to a presumption of error or oversight.

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9423 Insolvency 2 casenotes.indd 116 7/03/2006, 1:03:41 PM LIQUIDATION

Subcontractor’s claims against principal prevented by contractor’s insolvency

Case Name: A Victorian subcontractor sought leave to continue proceedings Belmadar Constructions Pty against a contractor that had been placed in administration. Ltd v Environmental Solutions If the proceedings were allowed to continue to judgment, the International Ltd (receivers and subcontractor would be entitled to receive payment of its managers appointed) debt from the contractor’s principal under the Building and Construction Industry Security of Payment Act 2002 (Vic). Citation: However, leave to proceed was refused. [2005] VSC 24, Supreme Court Environmental Solutions International Ltd (ESI) entered into a construction of Victoria, Commercial and contract with the Lower Murray Region Water Authority (the authority), Equity Division, per Byrne J subcontracting Belmadar Constructions Pty Ltd (Belmadar) to carry out earth, structural and building works. When ESI approved only a nominal amount of Date of Judgment: Belmadar’s progress claim, Belmadar commenced an adjudication under the 18 February 2005 Building and Construction Industry Security of Payment Act (the Act) and obtained an adjudicated amount. ESI still did not make payment and Belmadar fi led a motion for judgment in the Supreme Court of Victoria. Issues: • Leave to proceed against an One day prior to Belmadar commencing proceedings, receivers were appointed to insolvent company ESI and the proceedings were stayed. A month later, the creditors of ESI resolved • Judgment sought against to enter into a DOCA. Belmadar sought leave to proceed against ESI in order to contractor to enable obtain judgment and then a debt certifi cate under the Act. Service of the debt recovery from principal certifi cate on the authority would create an obligation on the authority to pay • Effectiveness of Building Belmadar the money it owed ESI under the head contract. and Construction Industry Security of Payment Act Justice Byrne was faced with two apparently confl icting decisions: Re Summit 2002 (Vic) where contractor Design and Construction Pty Ltd (1999) 33 ACSR 301, based on the New South insolvent Wales legislation, and Re Stockport (NQ) Pty Ltd (2003) 44 ACSR 324, which was • Whether proposed based on Queensland legislation. In New South Wales, the combination of the proceeding inconsistent Building and Construction Industry Security of Payment Act 1999 (NSW) and the with scheme of distribution Contractors Debts Act 1997 (NSW) has the same effect as the provisions in the of company assets Victorian Act, which allows a subcontractor to claim payments directly from the principal. Justice Austin in Re Summit emphasised the importance of the rights of the individual creditors to be determined under the CA where a company is to be placed in administration and pointed out that the CA prevails over state legislation under section 109 of the Constitution.

In contrast, the Federal Court of Australia found in a decision under the Subcontractors’ Charges Act 1974 (Qld) (SCA) in Re Stockport that the rights of the subcontractor to claim from the principal were not affected by the contractor’s administration. While the Queensland legislation does not provide a mechanism for a subcontractor to make a direct claim from the principal in the same way that the New South Wales or Victorian legislation does, the SCA does entitle a subcontractor

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9423 Insolvency 2 casenotes.indd 117 7/03/2006, 1:03:41 PM to a charge on money payable by the principal to the contractor to secure payment of money payable by the contractor to the subcontractor. A subcontractor who intends to claim a charge must give notice to the principal for the charge to attach. Even though the subcontractor in Re Stockport did not give the requisite notice until after the commencement of the external administration of the contractor, Justice Mansﬁ eld found the SCA gave the subcontractor a statutory charge arising from the terms of the statute rather than upon the giving of the notice. The giving of the notice was held to be akin to crystallising a pre-existing ﬂ oating charge and thus the subcontractor’s position was not affected by the administration.

Adopting the same approach as Justice Austin in Re Summit, Justice Byrne emphasised the importance of respecting the statutory rights of all concerned in the winding up of a company in ﬁ nancial distress. His Honour held that it would be most undesirable if interim relief available to a particular class of creditor were to intrude upon the administration of a company at a time when all other entitlements are placed in suspension pending decisions as to the fate of the company and the distribution of its assets. His Honour distinguished Re Stockport on the basis that, in the present case, the taking of such steps after the commencement of administration would create a security that did not previously exist and therefore advantage the subcontractor creditor at the expense of the body of creditors.

The Victorian position is now consistent with New South Wales, whereby a subcontractor cannot use the procedures available in the relevant legislation to obtain payment from the principal if a contractor has become insolvent. By contrast in Queensland, the SCA entitles a subcontractor to a charge on the money payable to the contractor, which can be enforced even if the contractor has become insolvent.

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9423 Insolvency 2 casenotes.indd 118 7/03/2006, 1:03:42 PM LIQUIDATION

Circumstances for denial of a section 482 order to set aside winding up

Case Name: A contributory applied to the court for an order under section Metledge (trading as Metledge 482 of the CA, terminating the winding up of a company that he & Associates) v Bambakit Pty effectively controlled. He asserted solvency of the company but Ltd (in liquidation) produced little evidence and had proved unhelpful in assisting the liquidator. The court’s refusal to grant the s482 order demonstrates Citation: the circumstances in which such an order may be made. [2005] NSWSC 160, Supreme The Supreme Court of New South Wales ordered that Bambakit Pty Limited (Bambakit) Court of New South Wales per be wound up in insolvency. This followed failure to satisfy a statutory demand for a Barrett J judgment debt. The sole director of Bambakit was Manuel Koutsourais (MK). The shareholders were MK and an accountant who held the shares in trust for MK’s Date of Judgment: family. Bambakit was a company set up to own premises on which MK conducted a 11 March 2005 smash repairs business. MK, as a contributory, ﬁ led an interlocutory application under s482 of the CA for an order terminating the winding up of Bambakit.

Issues: In his judgment, Justice Barrett referred to Re Warbler Pty Limited (1982) 6 ACLR • Section 482 CA 526, which recounts factors that the court must consider when determining whether • Factors in exercising court to exercise its discretion to terminate a winding up under s482. They can be discretion to make a s482 summarised as follows: order • ‘Commercial morality’ and • the onus is on the applicant to make a positive case for a stay; the ‘public interest’ • notice of the application for a stay must be served on all creditors and contributories; • the nature and extent of the creditors must be shown; • the attitude of creditors, contributories and the liquidator is relevant; • the current trading position and general solvency of the company should be demonstrated; • non-compliance by directors with their statutory duties as to giving information or furnishing a statement of affairs should attract a full explanation of the reasons and circumstances; • the general background and circumstances that led to the winding up order should be explained; • the nature of the business carried out should be demonstrated; and • regard should be made to whether the company’s conduct was contrary to ‘commercial morality’ or ‘the public interest’.

Ms Metledge (who was the applicant for the original winding-up order) opposed the making of the s482 order, on the basis that public interest and commercial morality indicated that Bambakit would be in unsafe hands and subject to genuine jeopardy if left in MK’s control.

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9423 Insolvency 2 casenotes.indd 119 7/03/2006, 1:03:43 PM Justice Barrett considered the events after the making of the winding-up order. The facts demonstrated a history of the liquidator receiving inadequate or evasive responses when seeking information from MK and his solicitors. Ultimately, the evidence showed that MK did not recognise any line of demarcation between the affairs of Bambakit and those of himself. Following a report by the liquidator, ASIC initiated a prosecution of MK due to his failure to comply with the requirements of the liquidator and he was duly convicted of a charge under s530A CA (which requires offi cers of companies to assist the liquidator) and fi ned $400. The liquidator’s continued investigation ultimately displayed uncertainty about the fi nancial position of Bambakit and evidence before the court did not support assertions of solvency.

In any s482 application for an order terminating a winding up, the onus is on the applicant to prove solvency. As a matter of public policy or commercial morality, it was held that the court will not countenance the return of an insolvent company to the mainstream of commercial life. Mere assertions by the company’s controller as to solvency and the state of its assets and liabilities are of no real value to the court, which will not act on unsubstantiated evidence of any person.

Justice Barrett also found against MK on the issue of commercial morality. The evidence was clear that:

• MK made no real attempt to deal conscientiously with the responsibilities imposed by the winding-up order. Insufﬁ cient books and records were provided; • MK attempted to ‘gloss over’ serious derelictions on MK’s part; • MK did not accept the role and legal entitlements of the liquidator; • it was unlikely that Bambakit ever kept adequate books and there was little prospect of MK creating and maintaining appropriate records on termination of the winding up; • MK was unconcerned about the responsibilities that attach to the ofﬁ ce of a company director, even under threat or prosecution; and • there was the possibility that the affairs of a company released from winding up might be conducted ‘in the same sloppy fashion’ as it had been: Re Skay Fashions Pty Ltd (1986) 10 ACLR 743 at p 746.

Despite a late undertaking by MK to resign as director and not take part in the management of Bambakit (instead placing his wife in those roles), Justice Barrett dismissed the application. The court refused to grant a s482 order in circumstances where to do so would restore management directly or remotely to someone who did not appreciate the difference between his affairs and the interests of the company; failed to maintain proper corporate books and records; and refused to face responsibilities owed by him to the liquidator.

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9423 Insolvency 2 casenotes.indd 120 7/03/2006, 1:03:43 PM The conditions under which a s482 order to terminate a winding up will be made are those where a company subjected to a winding-up order can not only be shown to be solvent but also able to be managed and traded in accordance with the CA and the principles of ‘commercial morality’ and ‘public interest’. Mere assertions of solvency by a director, coupled with a poor record of compliance with directors’ duties and liquidator requests, will never be sufﬁ cient to grant a s482 order.

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9423 Insolvency 2 casenotes.indd 121 7/03/2006, 1:03:44 PM LIQUIDATION

The HIH scheme case

Case Name: In the HIH scheme case, Justice Barrett declined to convene HIH Casualty & General creditor meetings to consider a scheme of arrangement (the Insurance Limited & Ors scheme) proposed by the liquidators of certain companies in the HIH Group. The judge rejected the scheme because it did not Citation: comply with the requirements of section 562A CA and s116(3) of the Insurance Act 1973 (Cth) (the Act). [2005] NSWSC 240, Supreme Court of New South Wales per Section 562A CA requires, unless the court orders otherwise, a liquidator to pay Barrett J reinsurance recoveries to certain of the company’s insureds in priority to all other unsecured debts and claims (and in preference to the general priority regime Date of Judgment: established in the Act). Justice Barrett held that an insured with a claim to which 29 March 2005 s562A applied was in a position equivalent to (or, at least, analogous with) that occupied by a creditor, with a debt secured by a charge upon the pool of reinsurance recoveries. Issues: • Approval of a scheme of Section 116(3) of the Act, in the form in which it applies to liquidations, arrangement commenced before 1 July 2002. It provides that, where an insurance company is • Section 562A CA and subject to a winding up, its ‘assets in Australia’ are prohibited from being applied s116(3) of the Insurance to liabilities other than ‘liabilities in Australia’, except where it has no such Act 1973 (Cth) liabilities in Australia.

A critical issue in this case was the interaction between s562A and s116(3). In reconciling those two provisions, Justice Barrett emphasised that s116(3) was concerned exclusively with the application of an insurance company’s Australian assets, not priorities among claims. This was a departure from the views expressed by Justice Windeyer in the test case of New Cap Reinsurance Limited v Faraday Underwriting (2003) 177 FLR 52.1 Justice Barrett preferred the view that s116(3) did not establish a rule of pari passu, or equal ranking, of liabilities in Australia so far as the application of Australian assets was concerned. It followed that the s116(3) prohibition would not be breached if the liabilities in Australia were ﬁ rst ranked according to a priority regime afforded by some other law (such as s562A), so long as the rule that assets in Australia are applied towards the discharge of liabilities in Australia was preserved.

Justice Barrett refused to approve the convening of a creditors’ meeting under s411 CA for the consideration of the scheme proposed by the HIH liquidators for three main reasons:

1. The scheme did not respect the priority conferred by s562A on insurance creditors. In reaching this conclusion, Justice Barrett held that a scheme purporting to modify the effect of s562A was beyond the scope of s411 CA.

1 This case is currently on appeal to the High Court.

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9423 Insolvency 2 casenotes.indd 122 7/03/2006, 1:03:45 PM 2. The scheme would cause assets to be applied in a manner that contravened s116(3). In particular, the scheme contained rules that ﬁ xed in advance the costs to be paid out of ‘assets in Australia’ within the meaning of s116(3). Justice Barrett held that expenses incurred in realising assets in a fund for the purposes of meeting a preferred claim must be borne by that fund. As costs and expenses involved in one collection may be substantially more than those involved in another collection, the liquidators had to allocate costs fairly between the resulting funds. The liquidators could not allocate a disproportionate share of the costs to the fund of Australian assets. 3. The scheme criteria for determining what was an ‘asset in Australia’ or ‘liabilities in Australia’ created the potential for the misclassiﬁ cation of assets and liabilities for the purposes of s116(3).

In order to show how s562A and s116(3) could be reconciled with each other, Justice Barrett described a four-step approach to ensuring that both provisions were observed:

1. Reinsurance recoveries, which are ‘assets in Australia’ for the purposes of s116(3), are applied in accordance with s562A to satisfy amounts payable under ‘relevant contracts of insurance’ (within the meaning of s562A) that are ‘liabilities in Australia’ for the purposes of s116(3). 2. Reinsurance recoveries, which are not ‘assets in Australia’ for the purposes of s116(3), are applied in accordance with s562A to satisfy: (a) those amounts payable under ‘relevant contracts of insurance’ that are not ‘liabilities in Australia’ for the purposes of s116(3); and (b) any amounts payable under ‘relevant contracts of insurance’ that are not ‘liabilities in Australia’, but have not been fully satisﬁ ed in step one. 3. Excluding amounts applied at step one, any other ‘assets in Australia’ for the purposes of s116(3) are applied to satisfy any debts proved in the winding up that are ‘liabilities in Australia’ for the purposes of s116(3) and have not been fully satisﬁ ed after step two. Those debts should ranked according to the CA priority provisions. 4. Remaining assets (namely, any reinsurance recoveries remaining at the end of step two, any ‘assets in Australia’ remaining at the end of step three and all assets not contemplated by steps one to three) are applied to satisfy any debts proved in the winding up that have not been fully met at the end of step three. Those debts should be ranked according to the CA priority provisions.

Justice Barrett considered a number of reﬁ nements to the four steps that would be required in order to comply with s562A and s116(3).

The ﬁ rst reﬁ nement results from the circumstance that, in applying s562A for the purposes of steps one and two, it is necessary to match reinsurance recoveries with claims under ‘relevant contracts of insurance’. There are a number of different ways this matching process could be undertaken. Justice Barrett followed the approach taken by Justice Windeyer in the New Cap Re test case. This was the ‘broad pooling’ approach, in which all insurance creditors are regarded as entitled to priority to the totality of reinsurance recoveries, whether or not claims under their contracts of insurance have played a part in bringing home the reinsurance recoveries.

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9423 Insolvency 2 casenotes.indd 123 7/03/2006, 1:03:45 PM Two further refi nements advised by Justice Barrett concerned the treatment of claims only partially satisfi ed at one step and qualifi ed for participation at subsequent steps (residual claims).

1. Justice Barrett held that as an insured with a claim to which s562A applied was in a position equivalent to (or, at least, analogous with) that of a secured creditor, the insured’s residual claim should be treated proportionately with all other creditors. As a result, once the claims of creditors preferred by s562A had exhausted the company’s reinsurance recoveries (steps one and two), those creditors could participate at steps three and four without having to bring into hotchpot the dividend received at steps one and two.

2. A different result, however, would be obtained where: • an insurance creditor’s claim is not satisfi ed at step one, but the residual claim qualifi es for step two; and • a claim dealt with at step three is not satisfi ed and the residual claim qualifi es for step four. Such residual claims are not in a position equivalent to (or, at least, analogous with) that occupied by a secured creditor because s562A does not create a priority or preference. As a result, dividends must be brought into hotchpot. That is, the distribution out of one fund is to be taken into account in determining the extent of participation in the other so that the receipts of all creditors are in constant proportion regardless of the source of the funds.

This case illustrates how complicated the interpretation of s116(3) and s526A can be and provides guidance on how to address those complications.

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9423 Insolvency 2 casenotes.indd 124 7/03/2006, 1:03:46 PM LIQUIDATION

Ms 40%: the going rate of return for an indemnifying creditor

Case Name: The court may make an order giving advantage to a creditor with Green Re Oz-US Film respect to the distribution of property recovered or protected by Productions Pty Ltd a company. This is because of an indemnity or money provided by the creditor or with respect to expenses in relation to which a Citation: creditor has indemniﬁ ed a liquidator [2005] NSWSC 249, Supreme Oz-US Film Productions Pty Ltd (the company) was wound up and dissolved. Later, Court of New South Wales per the company was reinstated to the register of companies maintained by ASIC when Barrett J steps were taken to assert a cause of action regarded as available to the company. A liquidator was appointed to the reinstated company. Date of Judgment: The proceedings started by the reinstated company were complex and were carried 31 March 2005 on in Australia and the United States. They resulted in a settlement in which the company received $1 million. After receiving the settlement sum, the liquidator Issues: called for proofs of debt. Debts totalling $671,057.27 were admitted and $40,000 • Liquidator seeking was set aside for other expected priority distributions. Following receipt of the advantage for one creditor settlement proceeds, there was an estimated surplus of $283,942.73 (after the in consideration of risk payment of all priority debts in the order prescribed by section 556 CA and all taken by creditor in provable unsecured debts of the company). providing litigation funding to company Ms Elisjones had provided $234,079.50 by way of loan to fund the litigation that • Sections 556, 564 CA resulted in the settlement. She subsequently proved for that loan amount in the winding up and received full payment for it. However, the liquidator sought an order that a high percentage of the surplus be distributed to her in consideration of the risk she took in providing that loan.

The liquidator relied on s556 CA, which provides:

Where in any winding up:

(a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

(b) expenses in relation to which a creditor has indemniﬁ ed a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

Ms Elisjones had indemniﬁ ed the liquidator against costs arising out of the litigation and had provided a loan to fund it. The only chance she had of recouping the loan was if the litigation was successful. The liquidator gave evidence that there had been no formal agreement between him and Ms Elisjones as to the terms on which she provided funding for the litigation, but that there was an unwritten

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9423 Insolvency 2 casenotes.indd 125 7/03/2006, 1:03:47 PM understanding that if she undertook any liability associated with the litigation she would be entitled to ‘a fee of substance’. At a meeting between the liquidator, Ms Elisjones and a commercial litigation funder, the commercial funder had quoted a fee for funding in the range of 35 per cent to 40 per cent of the proceeds of the litigation. The liquidator had told Ms Elisjones that this was ‘within the normal range you expect to pay for this kind of funding’. The liquidator thought that it was likely that he had conﬁ rmed around that time to a lawyer acting for the company that 40 per cent was a reasonable cost of funding the litigation.

Justice Barrett said that the policy behind s564 CA ‘is at least twofold: ﬁ rst, to encourage creditors to indemnify liquidators who wish to pursue claims but are otherwise unable to do so … and, second, to reward creditors who bear the burden and take the risks of litigation’. He found that Ms Elisjones’ funding of the litigation was pivotal to the company’s receipt of $1 million in settlement proceeds and that, without her contribution, the liquidator would not have been able to pursue the claim that resulted in the settlement at all. He noted that, in deciding whether to prefer one creditor in the way that the liquidator sought, it is normally relevant to consider whether other creditors were given the opportunity to render the support that particular creditor provided. However, he did not think it was a consideration here because the only other creditors had relatively small claims.

In the circumstances, the judge made an order giving Ms Elisjones the advantage sought by the liquidator. He ordered that, out of any surplus after payment of priority debts and claims in the order provided by s556 CA and all other provable unsecured debts, Ms Elisjones be paid $400,000 (representing 40 per cent of the litigation settlement sum) or, if the surplus was less than that amount, she be paid all of the surplus.

Section 564 CA allows courts to make orders for the distribution of property and expenses of a company in a winding up in a way that confers an advantage on a creditor who has provided support in the form of money or an indemnity that allowed the property or expenses to be recovered or protected. The purpose of the section is to encourage creditors to indemnify liquidators to pursue claims they would otherwise be unable to pursue and to reward creditors who bear the risk and burden of litigation on behalf of a company.

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9423 Insolvency 2 casenotes.indd 126 7/03/2006, 1:03:47 PM LIQUIDATION

Jurisdiction to wind-up foreign registered companies who carry on business in Australia

Case Name: A Malaysian-registered company that conducted an Internet-based Re Application of Campbell business, but also entered into certain contracts and held meetings & Ors; Gebo Investments in Australia, sought to set aside an order for the appointment (Labuan) Ltd & Ors v Signatory of a provisional liquidator on the grounds of lack of jurisdiction. Investments Pty Ltd & Ors Justice Barrett refused the application, holding that the company had carried on business in Australia. Citation: Lifewealth Labuan was a registered company in the Federation of Malaysia that [2005] NSWSC 544, Supreme operated an Internet share-trading game in Australia and internationally. The company Court of New South Wales, received credit card payments from persons downloading its web page in Australia. Equity Division, per Barrett J A provisional liquidator was appointed to Lifewealth Labuan on 9 December 2004 Date of Judgment: under section 583 CA. The shareholders of Lifewealth Labuan sought to set aside this appointment on the grounds of lack of jurisdiction, arguing that the company 5-6 April 2005; 9 June 2005 never carried on business in Australia or, if it did, ceased to do so before the application for appointment of a provisional liquidator was made and that, therefore, Issues: Lifewealth Labuan was not a Part 5.7 body that could be wound up under s583. • Section 583 CA • Whether a particular foreign Justice Barrett considered and followed 2004 decisions in the Federal Court (ASIC company is a ‘Part 5.7 v International Unity Insurance (General) Ltd) and the Queensland Supreme Court entity’ (ASIC v Edwards), where it was held that, once a foreign company carried on • What constitutes ‘carries on business in Australia, the court’s jurisdiction to wind up the company under s583 business in Australia’ continued even after the company ceased trading in Australia. Thus the Supreme Court had the authority to appoint a provisional liquidator for Lifewealth Labuan if the company was found to have at one time carried on business in Australia and, in Justice Barrett’s view, this should be determined by the court from an examination of the surrounding circumstances of the company.

His Honour examined the documentary and oral evidence at length, ﬁ nding that the mere downloading in Australia of material from the website was not sufﬁ cient to constitute the carrying on of business by Lifewealth Labuan in Australia, nor was the conduct of litigation by the company in Australia or the employment of an agent in Australia. However, the court found that the company had conducted business in Australia when it entered into a consulting contract and negotiated a business contract at meetings in Australia. Lifewealth Labuan was therefore deemed to be a Part 5.7 body and subject to the winding-up provisions of s583.

If a foreign company has carried on business in Australia, and can be deemed to be a Part 5.7 body, s583 and the jurisdiction of Australian courts to order the winding up of the Part 5.7 body continue to be engaged even if the foreign company has ceased its operations in Australia before the making of the winding-up application.

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9423 Insolvency 2 casenotes.indd 127 7/03/2006, 1:03:48 PM LIQUIDATION

Money to spare? Treatment of surplus funds after payment of admitted debts

Case Name: The liquidator sought the court’s guidance as to how to deal with Re Kershaw (as liquidator of a surplus after payment of admitted debts. The case is a helpful Equiticorp Tasman Ltd) guide as to the approach to be taken to the priorities between different classes of claims. Citation: On 27 April 1989, Equiticorp Tasman Limited (Equiticorp) was placed into (2005) 54 ASCR 214, liquidation by an order of the Supreme Court of New South Wales made under the Supreme Court of New South Companies (New South Wales) Code (the Code). After payment of admitted debts Wales per Barrett J (excluding claims for subordinated unsecured convertible notes), there was a surplus of $8.5 million. Proofs of debt were assessed on the basis that Equiticorp Date of Judgment: was insolvent and that section 438(2) of the Code (which deals with winding up of insolvent companies) applied. 13 April 2005 The liquidator sought the court’s guidance by way of directions as to how to apply Issues: the surplus. • How to deal with surplus Even though the Code was superseded by the CL which was, in turn, superseded by funds after paying debts of the CA, the liquidator’s application was assessed on the basis that the winding up an insolvent company • Interest payments continued to be governed by the Code. for periods after the Section 438(2) of the Code provides for the application of the bankruptcy rules in commencement of a the case of a winding up of an insolvent company. In practical terms, this means winding up that demands of unliquidated damages arising other than by reason of contract, • Position of subordinated promise or breach of trust are excluded from proof in the winding up because they unsecured convertible notes are excluded from proof in bankruptcy. (This is not the case under the CA.)

The central question was: if a company is insolvent at the beginning of the winding up so that s438(2) applies but, during the winding up, it is shown that the company is solvent, does s438(2) continue to apply?

Having reviewed the history of the legislation and English case law, Justice Barrett answered the question in the negative. His Honour held that, once a surplus emerges in a winding up that has proceeded according to s438(2) of the Code, claims that were originally precluded by s438(2) but which would otherwise be admissible under s438(1), become cognisable in that winding up.

His Honour then considered whether, upon a surplus emerging, creditors should receive payments for interest for periods after the commencement of the winding up. Justice Barrett recognised this as a second class of claims.

For example, a creditor proves a principal debt of $100, plus accrued interest of $10 at the start of the winding up. Further interest of $20 for the period after the winding up accrues but is excluded from proof by s439. Satisfaction in full of the $110 would not detract from the creditor’s right against the company for the additional $20.

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9423 Insolvency 2 casenotes.indd 128 7/03/2006, 1:03:49 PM Finally, his Honour turned to the position of the unsecured convertible notes. Under a trust deed made in 1986, Equiticorp was able to create and issue notes, including notes convertible into shares. These notes were held subject to the conditions set out in a schedule to the trust deed, the effect of which was to subordinate the notes in the event that Equiticorp went into liquidation.

The issue was whether the subordination provisions of the trust deed and the conditions of issue were effective to vary what would otherwise be the order of the application of assets.

Section 440 of the Code provides that, except as otherwise provided by the Code, all debts proved in a winding up rank equally and, if the property of the company is insufﬁ cient to meet them in full, those debts shall be paid proportionately. Section 440, however, is not a mandatory provision. It confers a private right that a creditor may waive or remove by contract or by other means.

Applying those principles, Justice Barrett held that the claims of the unsecured convertible noteholders were subordinated to all other claims.

In summary, Justice Barrett held that the appropriate course for the liquidator to adopt was as follows:

1. Determine whether claims exist (other than claims for the unsecured convertible notes) that were not previously admitted and are of a kind that are admissible to proof under s438(1), but not s438(2). 2. Those claims should be assessed in the usual way and surplus funds applied according to s440. 3. If, after steps 1 and 2 and admitted claims have been paid in full, there are still funds remaining, then steps should be taken to determine whether there are claims for interest accruing after the commencement of the winding up. 4. Those claims should be assessed and the available funds applied towards satisfaction of that interest pro rata according to the respective amounts of interest. 5. If, after steps 1 to 4 and admitted claims have been paid in full, there are still funds remaining, then the liquidator will need to ascertain and deal with claims represented by the unsecured convertible notes.

In the case of a winding up of an insolvent company, the correct approach under the Code is to make distributions in full in respect of admitted s438(2) claims, before entertaining claims admissible under s438(1) and to make distributions in full in respect of the latter claims before entertaining claims for post-liquidation interest.

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9423 Insolvency 2 casenotes.indd 129 7/03/2006, 1:03:50 PM LIQUIDATION

Adjournment of application for winding-up granted while proceedings to set aside DOCA were pursued

Case Name: A DOCA was executed while winding-up proceedings were on Bidald Consulting Pty Ltd v foot. The court considered whether a plaintiff (a) had standing to Miles Special Builders Pty Ltd pursue the winding-up application where the DOCA stated that creditors must accept their entitlements under the DOCA in full Citation: satisfaction of their debts; and (b) whether the plaintiff was precluded from seeking an adjournment by the operation of [2005] NSWSC 397, Supreme Court of New South Wales per section 444E(2)(b) CA. Barrett J In this case, the plaintiff fi led an originating process seeking an order for winding up, alleging insolvency and relying on non-compliance with a statutory demand. Date of Judgment: Before the case fi rst came to court, the directors of the defendant company had 29 April 2005 resolved to appoint administrators under Part 5.3A CA. Subsequently, the company executed a DOCA containing a term that the creditors must accept their entitlements under the DOCA in full satisfaction and complete discharge of all Issues: debts. A ‘creditor’ was defi ned as ‘any person whose claim against the company • Sections 444D, 444E, would have been a provable debt if the company had been wound up’. 444H CA • Adjournment of winding up The plaintiff foreshadowed an application for the DOCA to be set aside and sought an adjournment of the winding-up application pending the outcome of those proceedings. The defendant argued that, because of the DOCA, the plaintiff no longer had standing to seek a winding-up order and that the court no longer had jurisdiction to make that order. Thus, the defendant argued that the winding-up application had to be dismissed.

On the issue of jurisdiction to order adjournment of the winding-up application, the defendant submitted that, because of the DOCA (ie the clause summarised above) and s444D(1) and s444H CA, the plaintiff was no longer a creditor of the defendant for its original debt. Further, it was contended that the plaintiff was not a contingent or prospective creditor. The defendant also argued that s444E(2)(b) precludes the application for adjournment of the winding up.

As to the second submission, Justice Barrett held that the plaintiff was not precluded from seeking the adjournment. His Honour noted that s444E(1) and s444E(2)(b) say that a person ‘cannot … proceed with’ an application for an order to wind up the company that was made before the DOCA became binding on the person. However, this did not mean that the making of an application for further adjournment of a pre-existing winding-up application is to ‘proceed with’ that application in a manner proscribed to s444E(2)(b). To ‘proceed with’ an application, the person must take some positive step that causes the application to be progressed to adjudication. This concept does not include an application for adjournment of winding up.

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9423 Insolvency 2 casenotes.indd 130 7/03/2006, 1:03:51 PM In relation to the ﬁ rst submission, the defendant submitted that, although the plaintiff was a creditor at the time of ﬁ ling the originating process, the plaintiff had been deprived of its standing by the combined operation of the terms of the DOCA and s444D(1) and s444H of the CA. If accepted, this submission by the defendant would mean that the position of the plaintiff was as if its debt had been paid in full.

The defendant’s submission relied on the proposition that the time for hearing the winding-up application had arrived, since at that time the plaintiff was not a creditor according to the DOCA. His Honour held that, as the DOCA had not terminated, it was not the case that the time for hearing this application had arrived and therefore the plaintiff did not lack standing.

The question of whether a plaintiff is a creditor was not signiﬁ cant in this case, but will be signiﬁ cant when the plaintiff is permitted by the CA to proceed with the existing winding-up application and actually takes steps to do so. Then, his Honour held, all the considerations discussed in the Sun Heating and the Montfort cases would need to be addressed.

The conclusions reached in this case indicates that the interests of creditors will subsist despite attempts to exclude them in DOCAs and that applications for adjournments of winding-up proceedings will be permitted when an application to set aside a DOCA is on foot.

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9423 Insolvency 2 casenotes.indd 131 7/03/2006, 1:03:52 PM LIQUIDATION

Resolution of creditors in a voluntary winding- up binding despite dissenting vote

Case Name: The liquidator in this case applied to the court for a determination Kassem v Sentinel Properties under section 511 CA as to whether the resolution of the creditors Ltd (in liquidation) & Ors of Sentinel Realty was binding on the creditors for the purposes of s510(1), notwithstanding a dissenting vote. Citation: Mr Kassem was appointed liquidator of fi ve companies that were the subject of [2005] NSWSC 403, Supreme creditors’ voluntary windings up. Each of the companies was related and the Court of New South Wales per liquidator considered it appropriate that the realisations, rights and distributions of Barrett J the companies should be pooled into a single fund. The liquidator thought this appropriate in light of the state of the various companies’ accounts and because it Date of Judgment: was the most expeditious and cost-effective way of proceeding. A pooling deed was executed by the liquidator and the fi ve companies in liquidation, under which the 29 April 2005 liquidator agreed to combine, into a single bank account, all monies presently retained by the liquidator in his capacity as liquidator of each of the companies, Issues: together with the proceeds of any further realisations of the assets of the companies. • Section 510 CA • Whether resolution of Meetings of the members and creditors for each of the fi ve companies were creditors is binding on a convened and held for the purposes of sanctioning the arrangement and approving dissenting creditor the compromise constituted in the pooling deed. All resolutions were unanimously • Whether pooling the assets carried, except for the creditors’ resolution in respect of Sentinel Realty Holdings of related companies Pty Ltd, where a single creditor voted against the resolution by proxy. resulted in discrimination against certain creditors Justice Barrett considered whether that resolution was binding on the dissenting creditor in light of previous authority which suggested that any resolution of creditors that is discriminatory against a creditor or class of creditors is not binding on that creditor or class of creditors unless assented to by them (Re Farmer’s Freehold Land Co Ltd (1892) 3 BC (NSW) 39; Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209). His Honour considered that the proposed arrangement would have an impact on the aggregate of assets divisible among the several bodies of creditors, rather than upon the application within the bodies of creditors for each company of the normal order of priorities by way of pari passu entitlement. Therefore, the proposed pooling arrangement did not have a discriminatory characteristic, and would be binding on any dissenting creditor so long as the resolution was validly passed.

The court also considered the nature of the resolution required of creditors under s510. Section 510(1)(b) states that an arrangement entered into between a company and its creditors is ‘binding on the creditors if sanctioned by a resolution of the creditors’. The court considered the deﬁ nition of resolution in s9 CA and noted that no reference was made in that particular subparagraph of s510 to a ‘special resolution’. Because of that, it determined that the resolution would be carried if it was done according to the general law. Under the general law, a resolution is carried if a majority of the votes validly cast on the resolution are in

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9423 Insolvency 2 casenotes.indd 132 7/03/2006, 1:03:52 PM favour of the resolution. In this case, the minutes indicated that the chairman declared that the resolution at the particular meeting was ‘carried on the voices’. The court found no evidence that a poll was demanded and held that the chairman’s declaration, as recorded in the minutes, was conclusive evidence that the resolution under s510(1)(b) was validly passed.

A pooling arrangement among related companies for a winding up will not necessarily be discriminatory upon creditors. A dissenting creditor will be bound by a resolution of creditors, where the pooling arrangement is entered into for bona ﬁ de reasons. Also, the resolution required of creditors under s510(1)(b) is an ordinary resolution requiring a majority of the votes cast on a resolution to be in favour for it to be passed. If no poll is demanded and the chairman of the meeting declares that the resolution was carried, then that is conclusive.

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9423 Insolvency 2 casenotes.indd 133 7/03/2006, 1:03:53 PM LIQUIDATION

Pooling of assets of group of companies in liquidation

Case Name: The liquidators of a group of companies sought orders for the Tayeh and De Vries re companies’ assets to be ‘pooled’ and the creditors of the The Black Stump Enterprises companies to be paid from the pool of assets without regard to Pty Ltd & Ors which group member was indebted to each creditor. The Supreme Court of New South Wales found that it has no power to Citation: make such an order. While the court can reassure a liquidator that [2005] NSWSC 475, Supreme they are justiﬁ ed in consolidating assets, it cannot do so without Court of New South Wales per the unanimous assent of the creditors or without ﬁ rst hearing Barrett J from any objectors. The liquidator of The Black Stump group of companies (the group), sought an order Date of Judgment: enabling him to pool the assets of the nine companies in the group, each of which 20 May 2005 had largely the same directors and shareholders. An order was also sought that the dividends to creditors of the group be paid from the pool of assets, regardless of which group company was indebted to each creditor (the proposal). Issues: • Application that assets The application for both orders (the orders) was based on sections 477(1), 506(1) of group of companies be and 511 CA. Justice Barrett found that s477(1) and s506(1) CA deal with the ‘pooled’ powers and responsibilities of liquidators, and did not confer jurisdiction on the • Sections 477(1), 506(1) court to make the orders. His Honour then considered whether s511 CA allows the and 511 CA court to sanction the departure by the liquidator from the scheme of application of • Unanimous assent by assets and recognition of debts and claims, which is laid down by the CA. That creditors section provides that the court may, on application:

• determine questions arising from a winding up, and • exercise powers that it might exercise if the winding-up were court-ordered.

Justice Barrett found that s511 CA is not a source of jurisdiction for the court to alter the statutory provisions or the rights of creditors or contributories in a winding up. Having concluded that the court had no power to make the orders, his Honour noted that the liquidator of the group would be in a position to rely on s477(1) and s506 to effect the proposal without any approval or other order from the court, provided that the proposal had the active assent of each affected creditor. Accordingly, his Honour considered whether the court should reassure the liquidators that the proposal was justiﬁ ed. To provide a liquidator with such advice, Justice Barrett found that the court must be satisﬁ ed that every creditor agreed with the proposal, or that a proper regime had been put in place to enable rejection of the proposal: Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209. The liquidator led evidence that no creditor had expressed any negative view in relation to the application for orders to effect the proposal. Justice Barrett accepted that, in some instances, silence, together with the surrounding

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9423 Insolvency 2 casenotes.indd 134 7/03/2006, 1:03:54 PM circumstances, may be tantamount to assent. The circumstances surrounding the creditors’ silence were as follows:

• The creditors were introduced to the proposal in a report by the liquidator, which included an invitation to ‘discuss the issue’. No creditor took up this invitation. • The liquidator’s intention to seek the orders was ﬁ rst raised at a creditors’ meeting. A call for further questions in relation to the orders was not taken up by any creditors in attendance. • The proposal was discussed in a letter sent by the liquidator to each creditor. The letter attached a notice to the effect that, subject to any written objection, the liquidator would apply for the orders.

Justice Barrett held that, in these circumstances, the creditors’ silence could not be taken as assent for the proposal. While the liquidator had allowed the creditors a chance to oppose the application, the creditors were never given an opportunity to make a positive expression of their views. Accordingly, there was no evidence of whether the litmus test – whether every creditor favoured the proposal – had been passed.

Central to Justice Barrett’s decision was the inaccuracy of the information provided to the creditors by the liquidator. He had passed on to the creditors the mistaken belief that the orders were required before the proposal could be affected. At no time were the creditors informed that the existence or not of their unanimous assent would play a part in the court’s decision-making process. Having received the information that they did, the creditors were likely to conclude that the court would review the proposal on its own and without regard for their wishes or views. In those circumstances, Justice Barrett declined to make any determination in favour of the proposal.

The court will be concerned to ensure that a proposal to pool the assets of a group of companies in liquidation has the unanimous consent of those affected by the pooling arrangement. This case suggests that liquidators should put such proposals to a vote. The views of any objector should be made known to the court and the objector should be given an opportunity to make submissions relating to the basis on which the pooling arrangement is opposed.

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9423 Insolvency 2 casenotes.indd 135 7/03/2006, 1:03:54 PM LIQUIDATION

All interests considered: winding up unregistered managed investment schemes

Case name: The CA requires the registration of managed investment ASIC v Primelife Corporation schemes in order to protect the interests of investors and others Limited who rely upon the funds. In considering making orders for the winding up of certain unregistered schemes, the Federal Court Citation: declined to make consent orders agreed between ASIC and the operators of those schemes until submissions could be made by [2005] FCA 704, Federal Court of Australia per Goldberg J all interested parties. In this case, ASIC had investigated a series of investment schemes relating to the Date of Judgment: development of aged care facilities. ASIC took the view that these schemes were 25 May 2005 managed investment schemes that were required to be registered under section 601ED CA. After prolonged investigation, the scheme operators agreed on a form of consent orders with ASIC that would declare that each scheme was required to be Issues: registered; that each scheme was in fact unregistered; and that the unregistered • Sections 601ED, 601EE schemes should be wound up. The orders also provided for the appointment of an and 1324 CA independent accountant to investigate and report to the court. • Winding up unregistered managed investment The court was satisfi ed that the schemes were unregistered managed investment schemes schemes for the purposes of the CA, and that it was appropriate that they be investigated and wound up. However, the court was not satisfi ed that the investigations and consent orders were suffi cient to protect all the interests that needed to be protected and preserved, and made orders to preserve and protect the ‘rights and opportunities’ of other interested parties, such as the investors and the residents of the aged care facilities, to address the court on the form of the fi nal orders.

This case shows that there are many interests to protect in relation to managed investment schemes. Despite the form of consent orders agreed between ASIC and the scheme operators, the Federal Court invited submissions from the investors and residents of associated aged care facilities before ﬁ nalising orders for the form of investigation and winding up. This approach reinforces the statutory rationale for the registration of managed investment schemes under the CA.

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9423 Insolvency 2 casenotes.indd 136 7/03/2006, 1:03:55 PM LIQUIDATION

Issue of letter of request to Canadian court to prevent continuation of Canadian proceedings

Case Name: Federation Group Ltd (in liquidation) and its liquidators obtained Federation Group Ltd declarations and the issue of a letter of request under section (ACN 007 532 827) 581(4) of the CA to the Supreme Court of British Columbia to act (in liquidation) [2005] in aid, and be auxiliary to, the Federal Court in the winding up of Federation Group Ltd. Speciﬁ cally, assistance was sought to Citation: prevent Canadian proceedings against the insolvent company [2005] FCA 900, Federal Court from continuing after it had been placed in liquidation. of Australia per Siopis J On 10 December 2003, Federation Group Ltd (Federation), then in administration, entered into a DOCA with its administrators. Date of Judgment: During the time in which Federation was subject to the DOCA, VRB Power Systems 3 June 2005 Inc (VRB) obtained a default judgment against Federation in the Supreme Court of British Columbia for the amount of CA$226,980. Unless the judgment debt was Issues: paid within 30 days, shares belonging to Federation (which were shares in VRB) • Sections 580 and 581(4) would be sold by bailiffs in Canada. The shares comprised a substantial asset of CA Federation, which on one valuation were worth more than A$4 million. • Letter of request to court of another country to aid in On 30 May 2004, Federation was wound up pursuant to a resolution of creditors winding up under s445E CA and, as a result, no proceedings could be brought or continued against Federation in Australia by virtue of s471B CA. The liquidators sought to impose a similar moratorium in Canada by requesting assistance from the Canadian court.

Section 581(4) of the CA provides:

The Court may request a court of … a country other than Australia, that has jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external administration matter.

Section 580(a) deﬁ nes ‘external administration matter’ as a matter relating to winding up a company or a Part 5.7 body.

Justice Siopis, relying on the deﬁ nition of ‘winding up’ approved by the Full Federal Court in Joyce v Beach Petroleum NL (1996) 67 FCR 275, accepted that this was an external administration matter. Justice Siopis also noted the Full Court’s comments in Joyce that:

any step taken by a liquidator in getting in the assets of the corporation is a step taken in winding up; and this is so whether or not the step involves litigation aimed at the recovery of the assets.

In considering the Federal Court’s power to issue a letter of request, Justice Siopis adopted the approach of Justice Barrett in Re AFG Insurances Ltd (administrators appointed) (2002) 43 ACSR 60 to the effect that, once declarations are made by a court, they constitute orders of the court, which, depending on the case’s

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9423 Insolvency 2 casenotes.indd 137 7/03/2006, 1:03:56 PM circumstances, attract a need for the court of another country to act in its jurisdiction in aid of, and to be auxiliary to, the ﬁ rst court in recognising and giving effect to those orders.

Accepting that the Canadian court had jurisdiction in external administration matters, Justice Siopis made declarations to the effect that, on 30 May 2004, and by a resolution of creditors passed under s445E CA:

• Federation was wound up; and • by virtue of s446A(4)(a)(ii) CA, the deed administrators were appointed as liquidators of Federation, with such powers and functions as conferred on them by the CA.

On the basis that those declarations enlivened the operation of s581(4) CA, Justice Siopis then ordered that a letter of request be issued inviting the Canadian Court to make orders (among others):

• recognising and giving effect to the abovementioned declarations; and • such orders as it would be open to the Federal Court of Australia to make within its jurisdiction applying and giving effect to the statutory provisions set out in the CA or orders applying and giving effect to such comparable Canadian statutory provisions for such protections, entitlements, transactions, or dealings as would have had application to Federation had it been made subject to a winding-up order or similar order under Canadian insolvency laws.

This case is authority for the proposition that there does not need to be litigation in an Australian court concerning the recovery assets in a liquidation for the court to issue a letter of request to the court of another country. The making of declarations by the Australian court regarding the existence of the liquidation is sufﬁ cient to enliven the operation of s581(4) CA and the issue of a letter of request.

At the time when Federation was subject to a DOCA, orders were made by Justice Nicholson seeking the assistance of the Supreme Court of British Columbia regarding property of the company situated in Canada. See page 62 of this Review for a report on this decision.

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9423 Insolvency 2 casenotes.indd 138 7/03/2006, 1:03:56 PM LIQUIDATION

‘Please’ is not enough: letters of request do not displace application of general principles for equitable relief

Case Name: This decision considers the court’s auxiliary jurisdiction under Re Independent Insurance section 581 CA. It conﬁ rms that an Australian court will apply the Company Ltd usual general principles in considering letters of request from the courts of overseas countries to award general equitable remedies. Citation: Background [2005] NSWSC 587, Supreme Court of New South Wales, In a cross-border insolvency, a letter of request was directed by the High Court of Equity Division, per Barrett J Justice of England and Wales (English court) to the Supreme Court of New South Wales (NSWSC) on the application by an English company and its provisional liquidators for orders in aid of the English court, invoking the NSWSC’s auxiliary Date of Judgment: jurisdiction under s581 of the CA. 22 June 2005 The NSWSC recognised, by the comity of nations, the English order appointing the Issues: provisional liquidators in England; discussed whether declaratory relief was appropriate where there was no dispute between the parties (lis inter partes); and • Cross-border insolvency considered whether such declaratory relief would be of any utility generally. • Letters of request from English High Court to the Justice Barrett also considered whether ﬁ nal injunctive relief should be granted in NSWSC the absence of the other parties (ex parte) against persons generally; whether • Section 581 of the CA comity requires the making of orders in NSW of a kind made by the English court • Auxiliary jurisdiction of in generally reciprocal circumstances; and whether the auxiliary jurisdiction of court s581 extends to the replication of orders made by courts in the United States and the Republic of Ireland (Ireland).

Scope and effect of s581(2)(a) and s581(3) CA Justice Barrett held that sections 581(2)(a) and 581(3) are different in purpose and effect. Section 581(3) is triggered by the receipt of a letter of request and allows the court to treat the foreign matter, in practice, as if it were a matter that had arisen within the court’s own jurisdiction and to make any order relevant to such a domestic matter.

Section 581(2)(a), on the other hand, requires the court to act. It is not activated by a letter of request, in the sense that the court may act under it in the absence of such a request. However, the absence of a request is likely to mean that the Australian court will not know what action by it is, or might be considered to be, ‘in aid of’ or ‘auxiliary to’ the other court. A letter of request is, therefore, a means of giving content to the s581(2)(a) requirement and, in addition, bringing s581(3) into play.

Recognition of the English liquidation In accordance with the principles of private international law referred to by Justice Gummow in Re Macks; ex parte Saint (2000) 204 CLR 158, Justice Barrett

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9423 Insolvency 2 casenotes.indd 139 7/03/2006, 1:03:57 PM recognised the presentation of the English winding-up petition, the pendency of the winding-up application, and the effect of the order by which the provisional liquidators were appointed. The English law determines who is entitled to act on behalf of corporations incorporated in England.

Claim for declaratory relief The claims for declaratory relief were made beyond the bounds of any demonstrated justiciable controversy. The claim for injunctive relief was also put forward in the absence of any lis inter partes and sought what Justice Barrett described in Re AFG Insurances Ltd (2002) 20 ACLC 1588 at paragraph [20] as ‘an order expressed to be binding on the whole world in the manner of legislation’. The question therefore arose as to whether the court was either bound or empowered to grant the declaratory relief sought on the ex parte application of Independent Insurance and its provisional liquidators.

The application was made in circumstances where no-one questioned the existence or status of the English proceedings or the order appointing the provisional liquidators. Justice Barrett held that the declaration sought was one that would be of no consequence or utility. The only possible recipient of the message contained in the declarations sought would be the court itself. There was clearly no need for the court to make a declaration directed, in effect, to itself.

Claim for injunctive relief The claim for injunctive relief was, in essence, a claim for a permanent injunction by way of fi nal relief. Any order would be a non-specifi c direction to unidentifi ed persons not to instigate or continue any proceeding against Independent Insurance or its property in Australia while the provisional liquidators remain in offi ce or after a winding-up order is made, except with leave granted by the English court under the UK Insolvency Act. Justice Barrett was satisfi ed that such an order would be an order made in aid of the English court in the matter of Independent Insurance’s provisional liquidation.

Order directed to unidentifi ed persons The order in question, however, would be an order expressed to be binding on those persons with claims against Independent Insurance and they were presently unidentifi able. Justice Barrett held that an injunction should not be made in terms that are indefi nite as to the persons to be bound, nor should any relief be granted ex parte, except in urgent circumstances. No circumstances of urgency justifying ex parte relief were suggested in the case.

The fact that the jurisdiction relied upon was the auxiliary jurisdiction created by sections 581(2)(a) and 581(3) did not displace the general principles that apply in respect of granting the particular form of relief sought.

Reciprocity It was submitted that comity warrants reciprocity in light of the English court’s willingness to make restraining orders of the kind in question when asked to do so by the NSWSC. Justice Barrett held that the only special jurisdiction held by the NSWSC is that bestowed by s581 and, to the extent that s581 empowers the court

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9423 Insolvency 2 casenotes.indd 140 7/03/2006, 1:03:58 PM to exercise its general equitable jurisdiction in aid of a UK court in a way that territorial restrictions would otherwise not permit, the jurisdiction must be exercised in accordance with general principles.

Similar auxiliary relief in other countries There were in force, both in the US and Ireland, court orders generally similar in purpose and effect to the injunctive relief order sought. It was submitted that, in a case of cross-border insolvency where Australia is one of several satellite jurisdictions, relief here should, insofar as is possible, be formulated in a compatible and consistent manner with relief already existing in comparable countries. In response, Justice Barrett noted that the statutory approaches and judicial attitudes to auxiliary jurisdiction in cross-border insolvency in the US and Ireland differ from those in Australia.

This case held that the NSWSC will recognise an English order appointing provisional liquidators in the UK. However, declaratory relief will not be given in the absence of a dispute between the parties and if it is directed solely to the court. Further, injunctive relief will not be granted in the absence of the other parties as an indeﬁ nite order against unidentiﬁ ed persons.

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9423 Insolvency 2 casenotes.indd 141 7/03/2006, 1:03:58 PM LIQUIDATION

Winding up in a constitutional and administrative vacuum

Case Name: This case illustrates the approach that may be taken by a court Phelan v Ambridge Corp Pty Ltd in seeking to ensure the proper administration of a ‘rudderless’ company. Citation: Ambridge Corp Pty Ltd (Ambridge) had ceased carrying on business at its registered (2005) 55 ACSR 136, offi ce and its sole director and secretary, Mr Stanley, had been declared bankrupt. Supreme Court of New South The only two shareholders of Ambridge were the bankrupt director and a company, Wales per Brereton J FBN Investments Pty Ltd (FBN), to which a receiver and manager had been appointed. Mr Stanley was also the only director and secretary of FBN. Date of Judgment: Mr Weston was appointed trustee of Mr Stanley’s bankrupt estate. Mr Wiley was 22 August 2005 appointed receiver and manager of FBN. The plaintiff, Mr Phelan, fi led an originating process (with leave granted by Justice McDougall in a prior hearing) Issues: seeking an order for the winding up of Ambridge by the court under sections • Sections 461 and 462 CA 461(1)(a) and (k) CA. The plaintiff also fi led an interlocutory application, seeking • Section 67 Supreme Court the appointment of Mr Levi as provisional liquidator or, alternatively, as interim Act 1970 (NSW) receiver and manager of Ambridge under s67 of the Supreme Court Act 1970 (NSW). • Winding up • Appointment of provisional Appointment of provisional liquidator liquidator or interim receiver Justice Brereton noted that he needed to determine whether there was a seriously • Standing to apply arguable case for the making of a winding-up order and whether a ‘drastic step’ such as the appointment of a provisional liquidator ought to be taken before the winding-up application could be heard.

Section 461(1)(a) CA provides that the court may order the winding up of a company if ‘the company has by special resolution resolved that it be wound up by the Court’. A document titled ‘Special resolution pursuant to s249A(2) Corporations Act 2001’ was signed by Mr Weston as trustee of Mr Stanley’s bankrupt estate and by Mr Wiley as receiver and manager of FBN. It contained statements that Ambridge be wound up under s461(1)(a) CA and that Mr Levi be appointed provisional liquidator and/or offi cial liquidator, or court-appointed receiver or court-appointed receiver and manager. Mr Levi consented to the proposed appointment. Given that Mr Weston and Mr Wiley in their respective roles were the only shareholders in Ambridge and that Justice Barrett in CIC Insurance Ltd (provisional liquidator appointed) v Hannan & Co Pty Ltd (2001) 38 ACSR 245 had accepted that a paper resolution was suffi cient for the passing of a special resolution under s461(1)(a) CA, Justice Brereton was satisfi ed that there was a prima facie case and that it was at least seriously arguable that a winding-up order would be made on that ground.

Section 461(1)(k) CA provides that the court may order the winding up of a company if ‘the Court is of the opinion that it is just and equitable that the company be wound up’. As the only director of Ambridge was bankrupt and therefore disqualiﬁ ed

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9423 Insolvency 2 casenotes.indd 142 7/03/2006, 1:03:59 PM from acting as a director, and the only shareholders, Mr Stanley by his trustee and FBN by its receiver and manager, wished the company to be wound up, there was no one willing or able to be appointed as a director. Justice Brereton was satisfi ed that in these circumstances a ‘constitutional and administrative vacuum’ existed and both benefi cially interested parties desired a winding up. Accordingly, there was a seriously arguable case for a fi nal order that Ambridge be wound up on the just and equitable ground. Justice Brereton stated that, subject to the question of standing, he saw it appropriate to appoint a provisional liquidator.

Standing The plaintiff alleged that he was a creditor of Ambridge. There was an arrangement titled ‘Loan Participation Agreement’ between Ambridge as trustee and Ambridge and the plaintiff as contributors. That document stated that the trustee (Ambridge) had advanced a loan of monies to the borrower (Subway Sauna) and that the plaintiff had requested the trustee to allow him to participate in that loan by a contribution specifi ed in the document. Justice Brereton found that this was not a loan to Ambridge by the plaintiff, but a loan made by the contributors through the vehicle of the trustee to the borrower. The relationship between the plaintiff and Ambridge was not one of lender and borrower but one of benefi ciary and trustee. His Honour noted that the relationship between a trustee and a benefi ciary is not one of debt in circumstances where there is no money in the hands of the trustee: Webb v Stenton (1883) 11 QBD 518.

His Honour also considered whether the plaintiff might be a contingent creditor of Ambridge, the contingency being recovery of the debt from the borrower by Ambridge. His Honour concluded that, because there might never be any obligation in the nature of debt and that such obligation would only arise if Ambridge recovers some or all of the loan and had in its possession trust money, which in certain circumstances Ambridge might be bound to pay to the plaintiff, a contingent creditor/debtor relationship was not established.

Accordingly, the plaintiff was not a creditor of Ambridge and therefore did not have standing to apply for the appointment of a provisional liquidator under s462(2)(b) CA.

Appointment of interim receiver However, Justice Brereton concluded that the relationship of benefi ciary and trustee was suffi cient to confer standing on the plaintiff to apply for the appointment of an interim receiver to Ambridge under s67 Supreme Court Act 1970 (NSW), on the basis that it was ‘just or convenient’ to make such an order. His Honour noted that the same reasoning applied to the appointment of an interim receiver as to the appointment of a provisional liquidator. His Honour was therefore satisfi ed that there was a seriously arguable case for fi nal relief by way of appointment of a receiver, and that the balance of convenience favoured the appointment of an interim receiver.

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9423 Insolvency 2 casenotes.indd 143 7/03/2006, 1:04:00 PM Where the directors and shareholders of a company are either bankrupt or subject to a form of external administration, persons with standing to apply to the court to wind up the company may seek interlocutory orders for the appointment of a provisional liquidator or an interim receiver. This case shows that the court may be prepared to make such orders where the affairs of a company are not being managed and where it is just, equitable or convenient to do so.

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9423 Insolvency 2 casenotes.indd 144 7/03/2006, 1:04:01 PM LIQUIDATION

Who gets the assets? Mandatory injunction to deliver up

Case Name: Although a liquidator and a secured creditor agreed that it would Inetstore Corporation v be desirable to sell the assets of a company, they did not agree Southern Matrix International on who should be in control of the process. The secured creditor sought an order for the liquidator to deliver to it the charged Citation: assets because the funds from the sale of the assets would be placed in a controlled money account, over which the liquidator [2005] NSWSC 883, Supreme Court of New South Wales per would have the same right to a lien for his fees as he would have Campbell J had over the company’s assets. Inetstore Corporation Pty Limited (the company), which was in the business of Date of Judgment: selling software, gave a fi xed and fl oating charge to Southern Matrix International 5 September 2005 Pty Limited (the secured creditor) on 1 January 2000. By mid-2004, following a default under the charge, the directors appointed an administrator, Mr Moodie. Three days later, the secured creditor appointed an authorised agent to take Issues: possession of, and ownership of, all of the charged property. The administrator was • Stalemate between secured subsequently appointed as a liquidator of the company. The company continued to creditor and liquidator trade while in liquidation and its assets remained under the control of the liquidator. • Who should effect the sale of assets of a company in In late 2004, the secured creditor made the fi rst of several demands for the liquidation liquidator to deliver up the company’s assets to it and for the liquidator to specify • Whether liquidator’s lien what assets were held. No response was received from the liquidator. has priority over rights of secured creditor On 17 November 2004, the company and the liquidator commenced proceedings, • Mandatory injunction seeking a determination that the liquidator had power to sell the company’s assets; enabling an immediate sale an order that the secured creditor do all things necessary to effect the sale; and a of a company’s assets declaration that the liquidator was entitled to priority over the secured creditor for • Factors to be taken into payment of his fees. The secured creditor then made an interlocutory application, account in granting which was the subject of this decision, seeking an order that the liquidator deliver injunction the charged assets to the secured creditor so that it could effect a sale of them. It was common ground at the time of the application that the assets should be sold urgently.

The court looked at two settled criteria in deciding whether to grant an injunction:

1. Whether there was a ‘serious question to be tried’. Justice Campbell stated that he accepted the liquidator’s lien for his fees could have priority to the claim of the secured creditor to the assets in some circumstances. His Honour also accepted that section 471C CA preserves a secured creditor’s rights to realise and deal with property that is the subject of a security. However, the question of which of two claimants to a fund has the higher priority is not determinative of which of those two claimants has the power to realise assets for the purpose of creating the fund. The court was not prepared in this case to express a view on the strength of either party’s case without seeing the terms of the security and

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9423 Insolvency 2 casenotes.indd 145 7/03/2006, 1:04:02 PM hearing evidence of the dealings between the liquidator and the secured creditor concerning the sale of the assets. 2. Whether the ‘balance of convenience’ favoured the granting of an injunction. Two factors were accorded weight in reaching the conclusion that the injunction should not be granted. First, the secured creditor had offered no undertaking on damages because it could not assess the extent of the risks it would be running if it tried to sell the computer programs, which were the company assets, as the liquidator had refused to make them available. The court did not regard this as being a reasonable excuse, as it is usual in giving an undertaking as to damages that there will be risks of an indeterminate kind. Second, this was a case in which damages would be an adequate remedy if the liquidator had wrongly withheld assets from the secured creditor and, as a result, the secured creditor had suffered loss.

A mandatory injunction to enable the secured creditor to effect a sale of the secured assets was not granted. In circumstances in which damages would be an appropriate remedy, if it turned out that the liquidator had wrongfully withheld assets from the secured creditor, there was no occasion for the court to intervene.

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9423 Insolvency 2 casenotes.indd 146 7/03/2006, 1:04:02 PM LIQUIDATION

Information required by court to ﬁ x liquidators’ remuneration

Case Name: The liquidators of One.Tel applied to the court for an order fi xing One.Tel in the matter of their remuneration as the Committee of Inspection had failed to application by liquidators pass the necessary resolution. The court considered the nature of information that should be provided to enable the fi xing of the Citation: liquidators’ fees. [2005] NSWSC 1104, Supreme There was a deadlock in the Committee of Inspection of One.Tel and part of the Court of New South Wales per fees claimed by the liquidators could not be agreed on. Windeyer J The liquidators had previously sought an order that, if the Committee of Inspection of the company failed to fi x their remuneration, the creditors could do so, and, Date of Judgment: failing that, the court could do so. Justice Barrett refused to make these orders in 26 September 2005 Walker & Anor as Liquidators of One.Tel Ltd [2005] NSWSC 557 on the grounds that creditors do not have this power in a creditors’ voluntary winding up if there is Issues: a Committee of Inspection in place. Justice Barrett noted that the liquidators might • Section 511(1) CA consider it appropriate to consult with the general body of creditors with a view to • Fixing liquidators’ either determining whether the creditors wished to reconstitute the committee or remuneration otherwise obtaining some indication of the creditors’ attitude to the matters that • Information to be provided had caused the impasse in the Committee of Inspection.

At the subsequent creditors’ annual general meeting, the liquidators provided a report on their fees to the creditors. The report contained a summary of fees by issue, a schedule of time costs showing hourly rates, and a summary of work in relation to major fee categories. Ten creditors with admitted claims of more than $153 million indicated their approval of the liquidators’ fees, and four creditors with admitted claims of more than $8.2 million did not approve. At the meeting of the Committee of Inspection, three members voted in favour of approving the fees and three voted against.

The liquidators applied for an order under section 511(1) CA that the remuneration that they had claimed be ﬁ xed. Two members of the Committee of Inspection submitted that for the court to determine what the liquidators’ remuneration should be, it would require not only a general description of the work done, but also details of the work actually performed by each person, including their charges and hourly rates.

Justice Windeyer held that the plaintiffs had not provided sufﬁ cient information to obtain the orders sought. He directed the plaintiffs to provide details of the items of work done, the persons performing such work, the time taken for such items of work and the rates claimed for such time. Justice Windeyer directed that, upon production of that information, a registrar in equity would determine the reasonable remuneration of the liquidators for the relevant periods.

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9423 Insolvency 2 casenotes.indd 147 7/03/2006, 1:04:03 PM The issue of the fees of external administrators was dealt with in Re Stockford (see page 22 of this Review). Generally speaking, creditors should be provided with sufﬁ cient information to enable them to consider the reasonableness of the amounts claimed. This case shows that, in contested matters, the court may be prepared to order that a liquidator provide a breakdown of the items of work done, the work done by each fee earner, the hours spent by each fee earner and their hourly rate.

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9423 Insolvency 2 casenotes.indd 148 7/03/2006, 1:04:04 PM LIQUIDATION

‘Not known at this address’: the limitations of letters of request in cross-border insolvencies

Case Name: This decision of the English High Court of Justice has serious Re HIH Casualty and General implications for the consideration of letters of request in complex Insurance Ltd cross-border insolvency proceedings and for the efﬁ cacy of section 562A CA where Australian insurers are reinsured in Citation: London. The case involved the insolvency proceedings of HIH Casualty and General Insurance Ltd (HIH) and considers the [2005] EWHC 2125 (Ch), High Court of Justice of England and approach to be followed by an English court that has received a Wales, per Richards J letter of request from an Australian court. In Australia, the CA provides for courts to act in aid of, and be auxiliary to, each Date of Judgment: other in all external administration matters. Section 581 provides that, where a 7 October 2005 letter of request from a court of a country other than Australia requesting aid in an external administration matter is ﬁ led in an Australian court, the court may exercise such powers with respect to the matter as it could exercise if the matter had arisen Issues: in its own jurisdiction. Reciprocally, the Australian court may request a court of a • Cross-border insolvencies foreign country that has jurisdiction in external administration matters to act in aid and letters of requests of, and be auxiliary to, it in an external administration matter. • Section 426 of the UK Insolvency Act 1986 These proceedings followed Re Independent Insurance Company Ltd [2005] • Section 562A CA NSWSC 5871, which considered letters of request from foreign Commonwealth • Right to participate in countries and the principles to be applied in their consideration. reinsurance recoveries An originating process to wind up HIH and three associated companies was presented to the NSW Supreme Court (NSWSC) in March 2001 and liquidators of HIH were appointed in August 2001. Also in March 2001, the NSWSC issued a letter of request to the English court for the appointment in England of provisional liquidators over HIH under s426 of the UK Insolvency Act 1986. The English provisional liquidators were duly appointed to HIH, the liquidation of which in the UK was ancillary to the principal Australian liquidation.

It subsequently became clear in Australia that unless the sums collected by the English provisional liquidators were remitted to Australia for the Australian liquidators to apply in the due course of winding up HIH or in accordance with a scheme of arrangement, insurance creditors of HIH would lose much of the beneﬁ t of s562A CA. At the relevant time, English law contained no equivalent to this statutory provision. In essence, s562A CA gives insurance creditors the right to participate in reinsurance recoveries in priority to other creditors. Like most Australian insurers, much of HIH’s reinsurance was written by London-based reinsurers. If those reinsurance proceeds were not remitted to Australia and English law were applied to their distribution, insurance creditors would lose out.

1 Reported at page 139 of this Review.

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9423 Insolvency 2 casenotes.indd 149 7/03/2006, 1:04:04 PM In June 2005, the Australian liquidators demanded the assets be remitted by the English provisional liquidators to Australia for distribution. The English provisional liquidators resisted, instead seeking directions from the English court as to the appropriate distribution of the assets collected in England. Accordingly, the Australian liquidators applied to the NSWSC for a letter of request to the English court to be issued to this effect.

On the application of the Australian liquidators, Justice Barrett ordered on 4 July 2005 the transmission of a letter of request to the English court. The letter of request did not directly ask the English court to direct the English provisional liquidators to pay over to the Australian liquidators the sums collected in their ofﬁ cial capacity. Instead, it asked the English court to assist, act in aid of and be auxiliary to the NSWSC ‘by hearing and determining an application by the Australian liquidators for directions to the English provisional liquidators’ to pay over the relevant sums collected. It can be inferred that this attenuation of the request was made in the interests of comity between jurisdictions and reﬂ ecting Australian judicial respect for the equivalent court in England.

On the same date that Justice Barrett issued the letter of request in Australia, Justice Hart in the Companies Court in the Chancery Division of the English court ordered that the application for directions and the request application be expedited. Ultimately, Justice Richards heard the matter. His Honour held that, if the companies in question were ordered to be wound up by the English courts, the English liquidators would be directed not to transfer assets to Australia as those assets would not be distributed in Australia according to rules for a pari passu distribution substantially the same as the English rules. The next question was whether, notwithstanding that decision, the English court should direct the English provisional liquidators to make such a transfer because the directions for transfer were sought under a letter of request from the NSWSC.

The answer depended on the court’s interpretation of the effect of s426 of the UK Insolvency Act. That section confers powers and duties on the English court to provide assistance to other courts in insolvency matters. The following provisions are the relevant ones:

(4) The courts having jurisdiction in relation to insolvency law in any part of the UK shall assist the courts having the corresponding jurisdiction in any other part of the UK or any relevant country or territory.

(5) For the purposes of sub-s(4) a request made to a court in any part of the UK by a court in any other part of the UK or in a relevant country or territory is authority for the court to which the request is made to apply, in relation to any matters speciﬁ ed in the request, the insolvency law which is applicable by either court in relation to comparable matters falling within its jurisdiction.

In exercising its discretion under this subsection, a court shall have regard in particular to the rules of private international law. ...

(11) In this section ‘relevant country or territory’ means:

(a) any of the Channel Islands or the Isle of Man, or

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9423 Insolvency 2 casenotes.indd 150 7/03/2006, 1:04:05 PM (b) any country or territory designated for the purposes of this section by the Secretary of State by order made by statutory instrument.

A restricted number of mainly Commonwealth countries, including Australia, were designated to be relevant countries or territories in the Cooperation of Insolvency Courts (Designation of Relevant Countries and Territories) Order 1986. Section 426(10) deﬁ nes ‘insolvency law’ in a manner that allows the English courts to apply either English insolvency law or the insolvency law of the requesting state to the extent that it corresponds to English insolvency law provisions.

The prima facie mandatory language of s426(4) was considered in three English ﬁ rst-instance cases in 1992, 1994 and 1997 respectively and by the Court of Appeal in 1997. In Re Dallhold Estates (UK) Pty Ltd [1992] BCLC 621, Justice Chadwick referred to the court’s discretionary power to make an administration order, and stated that if the statutory prerequisites for its exercise were fulﬁ lled the court should make the order ‘unless there is some compelling reason why that should [not] be done’.’

In Re BCCI (No. 9) [1994] 3 All ER 764, Justice Rattee stated that the court has a discretion as to how it should provide assistance and that it ought to exercise its discretion in favour of providing the particular assistance requested by the foreign court ‘unless there is some good reason for not doing so’. Re Focus Insurance Co Ltd [1997] 1 BCLC 219 at 224 related to an application by the liquidators of a Bermudan company for an order requiring the giving of information by a person who had been bankrupt in England. Sir Richard Scott VC stated:

Section 426(4) ... appears to impose on the courts ... a mandatory obligation. The words used are ‘shall assist’. But ... the subsection is silent as to the manner in which the courts ... ‘shall assist’ and it is easy to conclude that it could not be supposed that the courts ... would have a mandatory obligation to provide assistance in a manner that was contrary to the proper conduct of a bankruptcy in this country.

The objective underlying the originating application and the letter of request was contrary to the scheme for realisation of a debtor’s assets and payment of the debtor’s creditors prescribed by the bankruptcy legislation in force in the UK. Sir Richard Scott VC accepted the guidance of Justice Chadwick and Justice Rattee. He stated that there was:

… plainly some element of discretion vested in me as to whether I should or should not accede to the originating application pursuant to the letter of request, notwithstanding that sub-s(4) of s426 uses the words ‘shall assist’.

In the 1997 judgment of Hughes v Hannover Rückversicherungs-AG [1997] 1 BCLC 497, Lord Justice Morritt broke down the sources of law that the English court may apply into three categories:

(a) its own general jurisdiction and power; (b) English insolvency law, and (c) those provisions of the requesting state’s law that correspond to English insolvency law.

He outlined the English court’s approach to the question of whether to provide assistance as follows:

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9423 Insolvency 2 casenotes.indd 151 7/03/2006, 1:04:06 PM • It would require clear words to justify a conclusion that the English court was not intended by Parliament to perform its normal function of seeking to do justice according to the law. • The function of the court under s426 is to consider whether, according to the three sources of law identiﬁ ed as (a), (b) and (c), the assistance may properly be granted. • If it may, then it should be, thereby discharging the statutory duty under s426. • If it may not be, then it should be withheld, as the duty is qualiﬁ ed by reference to what the English court may properly do as a court. • If the English court cannot do exactly what is sought, then it should consider whether it can properly assist in some other way in accordance with any of the available systems of law. • The reasons for withholding assistance are not limited to reasons of public policy. • Public policy may prevent assistance being given under (c). This will be the case if the relevant insolvency law of the country whose court requested assistance were contrary to the public policy recognised by the English court. • The English court may be expected to accept without further investigation the views of the requesting court as to what was required for the proper conduct of the winding up. • The request is not conclusive as to the manner in which the court’s discretion should be exercised. • The fact of the request for assistance is a weighty factor to be taken into account, but it cannot outweigh all others.

In this HIH case, Justice Richards decided that the substantive rules of distribution under the English statutory insolvency scheme are mandatory and that the English court has no power to make an order that would have the effect of disapplying them. It therefore followed that the English court could not accede to the NSWSC’s request for a transfer of funds to Australia. His Honour held that the power to make such an order does not exist in English law and any power under Australian law could not be exercised by the English court in a way contrary to English law. In the words of Lord Justice Morritt, it would not be assistance that ‘may properly be granted’.

The judgment calls into question the efﬁ cacy of this means of procuring that an English court apply Australian insolvency law where the principal liquidation is in Australia and the English liquidation is only ancillary. The decision of Justice Richards is a conservative view of the letters of request procedure in English insolvency law. It reﬂ ects a leaning towards the territorial side of the spectrum of ways to approach cross-border insolvency matters, as opposed to a more international approach. As so much reinsurance of Australian insurance risks is, and has historically been, written out of London, Justice Richards’ decision effectively denudes s562A CA of its effectiveness, at least whenever an Australian insurer goes into liquidation and an ancillary liquidator is appointed in the UK. On the basis of this decision, reinsurance proceeds recovered in England in those circumstances will not be remitted to Australia for distribution in accordance with Australian law.

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9423 Insolvency 2 casenotes.indd 152 7/03/2006, 1:04:06 PM LIQUIDATORS

Remuneration of provisional liquidator from assets of a trust

Case Name: The provisional liquidator in this case sought a declaration that he Grossman v E. Katz may receive his remuneration from the assets of a trust of which Manufacturing Jewellers (ACT) the company in provisional liquidation was the corporate trustee Pty Ltd Mr Palmer was appointed provisional liquidator of E. Katz Manufacturing Jewellers (ACT) Pty Ltd (the company) by a court order made in November 2004. Citation: He approached the NSW Supreme Court to clarify whether he was entitled to be [2004] NSWSC 1224, Supreme paid his remuneration out of assets of the Ervin Katz Family Trust (the trust). Court of New South Wales per The trust was a trading trust, and the trusteeship of the trust was the company’s Barrett J sole activity. As trustee, the company had carried on business as a jewellery manufacturer and wholesaler. Date of Judgment: Section 473(2) CA provides that a provisional liquidator is to receive such 15 December 2004 remuneration as is determined by the court. As the court noted, the source of that remuneration is the company in question. However, all of the assets of the company Issues: that was in provisional liquidation were held by it upon the trusts of the Ervin Katz • Section 473(2) CA Family Trust. The court referred to Vacuum Oil Pty Limited v Wiltshire (1945) 72 • Remuneration of provisional CLR 319, which was described in Re Suco Gold Pty Limited (1983) 33 SASR as liquidator from assets of the authoritative exposition of the general principles concerning the bankruptcy of trust a trading trustee (so far as concerns the company’s right, as trustee, to be indemniﬁ ed out of trust property): The general principles are:

• A trustee is personally liable for debts contracted by him in his trustee capacity, whether or not that capacity has been made known to the creditor. • He is, however, entitled to resort to trust property for the purpose of meeting liabilities incurred by him in the course of activities which, as trustee, he is authorised to undertake. • That right must be exercised so that payment is made direct to the creditor out of the trust property or by the trustee’s recouping to himself out of trust property an amount he has paid from his own funds. • A creditor of the trustee is entitled to be subrogated to the rights of the trustee against the trust estate and to stand in his shoes in respect of the right to be indemniﬁ ed for the creditor’s debt. • The trustee can establish no claim to indemnity – and a creditor can establish no claim to stand in the trustee’s shoes – where the debt has been incurred otherwise than in the strict line of the trustee’s duty and in proper exercise of his powers.

Justice Barrett noted that the Suco Gold case is authority for the proposition that the liquidator’s costs, expenses and remuneration may, in a case where the company is trustee of a trading trust, be paid out of the trust property. However, that position had not been settled in the case of a provisional liquidator who does

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9423 Insolvency 2 casenotes.indd 153 7/03/2006, 1:04:07 PM not perform the function of ascertaining and paying the debts incurred by the company as trustee. Instead, a provisional liquidator’s role is that of a custodian and protector of assets seen to be in jeopardy pending the court’s decision as to whether winding-up should be ordered and a liquidator appointed. Despite this, Justice Barrett found that the court has power to ensure that a provisional liquidator of a corporate trustee is remunerated out of trust assets.

His Honour noted that the court may give a direction to a provisional liquidator where it considers it expedient to do so in the interests of the due conduct of the provisional liquidation. He then directed that the assets of the trust of which the company was trustee may be applied in meeting any remuneration to which Mr Palmer may be adjudged entitled as provisional liquidator of the company.

A provisional liquidator may be remunerated from trust assets where the company to which he or she has been appointed is a corporate trustee.

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9423 Insolvency 2 casenotes.indd 154 7/03/2006, 1:04:08 PM LIQUIDATORS

Hands not tied: liquidator’s assignment of rights of appeal

Case Name: A liquidator assigned the company’s rights to appeal a decision Krishell Pty Ltd v Nilant & Ors in previous proceedings to a former controller of the company. The plaintiff unsuccessfully brought applications to appeal the Citation: liquidator’s decision and for an extension of time to lodge the application. The court confi rmed that commercial decisions of [2005] WASC 14, Supreme liquidators are to be accorded signifi cant weight and will only Court of Western Australia per Newnes M in Chambers be overturned in limited circumstances. Krishell Pty Ltd (Krishell) was a counter-claimant in previous proceedings Date of Judgment: commenced by Gardner Corporation Pty Ltd (Gardner). Krishell was awarded 22 February 2005 damages that it was entitled to set off against damages awarded to Gardner. Gardner appealed against the fi ndings and sought orders that Krishell’s counterclaim be dismissed. If successful in the appeal, Gardner would be entitled Issues: to a judgment debt of about $98,000. • Sections 1321 and 477(2)(c) CA Subsequent to those proceedings, Gardner was wound up in insolvency. After • Whether a right of appeal is receiving legal advice, the liquidators decided not to pursue the appeal. They a chose in action capable of invited Mr Myers, a director of Krishell, and Mr Gardner, the former managing being assigned director of Gardner, to make offers for the purchase of the company’s right to • Proposed assignment appeal. The liquidators accepted an offer from Mr Gardner to purchase the rights to by liquidator to a former appeal for $5000. controller of company in liquidation Krishell brought an application under section 1321 CA to appeal the decision of • Principles to be applied the liquidators to sell the rights to appeal to Mr Gardner. That section entitles a in determining whether person aggrieved by a liquidator’s decision to appeal against it. Krishell also sought to overturn liquidator’s leave to extend the time in which to make the application. Master Newnes decision dismissed both applications.

On the substantive application, the Master considered that the rights of appeal were capable of being assigned because the appeal, if successful, would enable Gardner to recover the property of the company, that property being the amount of the judgment in its favour. However, the court noted that this proposition was not beyond argument and stated that this issue could be decided on Mr Gardner’s application to proceed with the appeal.

In deciding whether the liquidator’s decision to dispose of the appeal rights to Mr Gardner was an improper exercise of the liquidator’s powers, the Master held that:

• a liquidator’s decision will only be overturned where it is shown that the liquidator did not address the correct question, made errors of law, failed to take into account relevant matters or took into account irrelevant matters, or where the decision in the circumstances appears to be such that no reasonable liquidator could arrive at it; and

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9423 Insolvency 2 casenotes.indd 155 7/03/2006, 1:04:08 PM • commercial decisions of liquidators are to be accorded great weight.

Applying these principles, the court found that the liquidators’ decision to assign the rights of appeal to Mr Gardner was not improper. A chose in action that a company has against a third party falls within the deﬁ nition of ‘property’ under s9 CA and can be sold by the liquidator under s477(2)(c) CA: UTSA Pty Ltd (in liquidation) v Ultra Tune Australia Pty Limited (1996) 14 ACLC 1262 at 1275-1278. Master Newnes rejected a number of arguments made by Krishell, holding that:

• the evidence that Krishell would have paid ‘considerably more’ for the judgment debt was not persuasive. The amount offered by Mr Gardner was insigniﬁ cant; • there was no authority for the proposition that the liquidator should be prevented from assigning property to a former controller of the company on the basis that such a transaction was contrary to CA policy; • the liquidator’s decision to offer the rights of appeal only to Mr Myers and Mr Gardner (as opposed to other creditors) was reasonable.

This decision conﬁ rms the court’s reluctance to interfere in a commercial decision of a liquidator. It appears likely that a court will allow a liquidator to dispose of appeal rights to a former controller of the company without offering those rights to other creditors where the appeal rights have limited interest to other prospective purchasers.

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9423 Insolvency 2 casenotes.indd 156 7/03/2006, 1:04:09 PM LIQUIDATORS

Extension of time to appeal liquidator’s rejection of proof of debt refused

Case Name: The Supreme Court of Queensland was asked to provide Mine & Quarry Equipment extensions of time in order for the applicant to belatedly International Ltd v McIntosh challenge decisions by a liquidator about proofs of debt. Justice McMurdo looked at the length and reason for delay, Citation: the resulting prejudice and the strength of the proposed appeal before dismissing the application. [2005] QSC 059, Supreme Court of Queensland per The insolvent company was put into administration in 2003. Since that time, McMurdo J the assets of the subject company had been realised and only the various claims by the applicant were delaying the completion of the winding up. The applicant Date of Judgment: tried to belatedly appeal the liquidator’s decisions in respect of three proofs of 24 March 2005 debt (2000, 2001 and 2003). The court looked at cases discussing rule 14.1(2) of the Corporations Law Rules Issues: and regulation 5.6.54(2) of the Corporations Regulations – the latter provides • Appeal from liquidator’s that the time limit for an appeal against a decision to reject a proof of debt is decision to reject proof 14 days or any further time allowed by the court. The court accepted that the of debt three principal factors from Derwinto Pty Ltd (in liquidation) v Lewis (2002) • Whether court ought to 42 ACSR 645 were relevant in an application to extend time. They were: grant extensions of time for appeal 1. delay – including the length and nature, the responsibility and reasons for it; 2. prejudice to the respective parties; and 3. whether the claim is arguable.

Justice McMurdo found that the delay in all three cases was extensive. The applicant sought to explain the delay in each case by an absence of funds with which to mount a challenge by an appeal. In particular, it said that its funds were held up by an injunction granted in the Family Court until August 2004. However, Justice McMurdo stated that the unavailability of funds provided no explanation for why the present application was not ﬁ led at least four months earlier.

In regards to prejudice, the liquidator submitted that there were three kinds. First, the delay in the fi nalisation of the liquidation. Second, the further delay and attendance by the liquidator to the proposed appeals would result in costs to the winding up that could have been avoided and, fi nally, that delay in fi nalisation of the liquidation would delay the fi nalisation of the liquidation of a related company.

In regards to whether the claim was arguable, the court stated that there was no evidence demonstrating any particular merit of any of the proposed appeals, although it could not be conclusively stated that any of the appeals were hopeless.

Justice McMurdo was unpersuaded that time should be extended for any of the proposed appeals and the application was dismissed.

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9423 Insolvency 2 casenotes.indd 157 7/03/2006, 1:04:10 PM This case illustrates that the time period for appealing a liquidator’s decision will not be extended lightly. Even where there are clear and genuine reasons, unless the application is made at the ﬁ rst opportunity, it will be difﬁ cult to obtain an extension.

158

9423 Insolvency 2 casenotes.indd 158 7/03/2006, 1:04:11 PM LIQUIDATORS

Commercial judgment? Approval of compromise by liquidator

Case Name: The liquidator in this case sought leave under sections 477(2)A In Re Gate Gourmet Pty Ltd and 477(2)B CA to enter into a compromise of proceedings, and (in liquidation) further sought a s479(3) CA direction to this effect. This case provides a good overview of the approach the court will take Citation: when deciding whether to grant approval to a liquidator on a s477(2)A or s477(2)B application. [2005] NSWSC 392, Supreme Court of New South Wales, The liquidator of Gate Gourmet Pty Ltd sought to compromise claims against Equity Division, per Einstein J defendants that were the subject of proceedings and requested approval of the court to do so under s477(2)A and s477(2)B CA. Date of Judgment: Justice Einstein held that the proper approach to be taken by the court when 1 April 2005 deciding whether or not to grant approval of a s477(2)A application is to rely on the liquidator’s commercial judgment. When settling a claim, liquidators are Issues: expected to obtain the advice of legal practitioners; preferably an experienced • Sections 477(2)A and counsel with at least seven years’ experience where large sums are involved. 477(2)B CA • Court’s role upon The court’s primary consideration in making its determination is whether the application by liquidator to compromise is for the beneﬁ t of the insolvent company’s creditors. enter into a compromise of Justice Einstein further held that, where an application is made under s477(2)B, proceedings the court’s role is simply to review the liquidator’s proposal rather than to hear the matter de novo. Due regard is to be given to the liquidator’s commercial judgment and knowledge of all the circumstances of the liquidation, and the court will only intervene where there is:

• an error of law; • grounds for suspecting bad faith or impropriety; or • a good reason to intervene in terms of the ‘expeditious and beneﬁ cial administration’ of the winding up.

Justice Einstein was satisﬁ ed in all the circumstances presented by the liquidator in a deed of settlement that a good and sensible commercial approach had been taken to the relevant claims. Leave was therefore granted under s477(2)A and s477(2)B and a direction given under s479(3) for the liquidator to enter into a compromise of proceedings in the terms set out in the deed of settlement.

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9423 Insolvency 2 casenotes.indd 159 7/03/2006, 1:04:12 PM This case illustrates the approach taken by the courts in applications by liquidators seeking approval to enter into a compromise of proceedings. The court’s role is simply to review the proposal rather than to question the liquidator’s commercial judgment, and leave will generally only be refused where the liquidator has acted improperly or in a manner detrimental to the creditors’ interests.

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9423 Insolvency 2 casenotes.indd 160 7/03/2006, 1:04:12 PM LIQUIDATORS

Refusal to vary liquidator’s decision that does not relate to a proof of debt

Case Name: A liquidator was the executive director of a company carrying Knights Insolvency on an insolvency administration business. The liquidator’s Administration Ltd v Duncan employment was terminated. The former employee, as liquidator of various companies, used his statutory powers to seek the Citation: possession of the books of those companies. [2005] NSWSC 457, Supreme The plaintiff (Knights) was listed on the ASX and traded in the fi eld of insolvency Court of New South Wales accounting. The company employed qualifi ed insolvency practitioners for that per Barrett J purpose. Each individual held appointments as liquidators, administrators and receivers in their individual capacity. Date of Judgment: Knights commenced proceedings against Mr Duncan who had, in 2003, entered 9 May 2005 into an executive services contract with Knights. Mr Duncan was an insolvency practitioner and was a director and employee of Knights. On 22 April 2005, Issues: Knights sent a letter to Mr Duncan purporting to terminate the executive services • Sections 530B and agreement with immediate effect. 1321 CA • Appeal against liquidators’ In the proceedings, Knights sought declaratory relief and an order for specifi c decision performance so that Mr Duncan would cooperate in actions that were directed • Appropriate test for appeal towards having another employee of Knights become liquidator, administrator or receiver in place of the defendant in relation to particular external administrations being conducted by Mr Duncan.

Section 530B CA gives a liquidator the power to access books of the company to which he is appointed. Knights sought an order under s1321 CA extending the time for compliance by Knights with notices Mr Duncan had delivered under s530B CA. In short, Mr Duncan required Knights to produce books to him as liquidator of certain companies. Knights contended that the decision of Mr Duncan to issue those notices should be reviewed by the court and that orders should be modiﬁ ed so that the time for production of the relevant books be extended up until the determination of the substantive proceedings between Knights and Mr Duncan. Knights argued that it should have possession of the books in question until the substantive proceedings were determined. Mr Duncan relied upon the reality that each of his appointments was a personal appointment.

The court referred to the decision of Chief Justice Bowen in Equity in Re Equity Funds of Australia Ltd (1976) 2 ACLR 238 at p239, which recognised that different approaches are appropriate according to whether the challenge to the liquidator’s decision relates to a rejection of a proof of debt (on the one hand) or a challenge to some other act, omission or decision of a liquidator (on the other hand). In cases not relating to the rejection of a proof of debt, a court will

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9423 Insolvency 2 casenotes.indd 161 7/03/2006, 1:04:13 PM recognise that the discretion has been vested by the statute in the liquidator and will not interfere unless it is shown that the liquidator:

• did not address himself to the correct question; • made errors of law; • failed to take into account relevant matters; • took into account irrelevant matters; or • arrived at a decision that no reasonable person could arrive at.

The court noted that other formulations refer to whether a liquidator exercised his discretion bona ﬁ de or is shown to have acted in a way that no reasonable liquidator could have acted: Re Mineral Securities Australia Ltd (1973) 2 NSWLR 230.

On balance, Justice Barrett held that no sufﬁ cient basis had been shown to modify the decision of the former employer as liquidator to take formal steps to seek and obtain possession of the documents that the legislation intended that a liquidator should have.

This case highlights the matters that a court will take into account in determining whether to allow an appeal against a liquidator’s decision that does not relate to a proof of debt. In these cases, the court will consider the usual administrative law grounds in determining whether to reverse or modify a liquidator’s decision.

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9423 Insolvency 2 casenotes.indd 162 7/03/2006, 1:04:14 PM LIQUIDATORS

No easy way out when Committee of Inspection won’t approve liquidators’ fees in creditors’ voluntary winding up

Case Name: The liquidators, facing a situation in which the Committee of Walker & Anor as liquidators of Inspection had declined to approve the payment of their fees, One.Tel Ltd approached the court to obtain orders that would permit the general body of creditors, or the court itself, to fi x their Citation: remuneration. The case provides guidance on the factors the court will consider in making such an order under section 511 CA. [2005] NSWSC 557, Supreme Court of New South Wales per It also contains a useful summary of the case law concerning the Barrett J court’s power to make orders fi xing the liquidator’s remuneration. The liquidators of One.Tel Pty Ltd had made attempts to have their remuneration Date of Judgment: fi xed for work performed in periods since 30 September 2004. At a Committee of 10 June 2005 Inspection meeting on 13 May 2005, there had been an impasse: two committee members supported the claims made by the liquidators and two committee members did not. Issues: • Sections 511(1)(a) and The liquidators approached the court seeking an order under s511(1)(a) CA that, if 511(1)(b) CA the Committee of Inspection failed to fi x their remuneration, the creditors, as a • Committee of Inspection whole, may determine the amount of remuneration. An order was also sought under declines to fi x the s511(1)(b) CA that, in the absence of the creditors passing a resolution, the court liquidator’s remuneration may determine the remuneration. • Creditors’ voluntary winding up In deciding whether there was jurisdiction to make the orders sought, Justice • Power of court to fi x Barrett reviewed the sections of the CA that provided methods for determining a liquidator’s remuneration liquidator’s remuneration. Section 499(3), which applies to a creditors’ winding up, specifi es that the Committee of Inspection or, if there if no such committee, the creditors may fi x the remuneration. Accordingly, the general body of creditors could fi x the remuneration only if there was no Committee of Inspection, but could not do so if there was such a committee merely because the committee was dysfunctional. In contrast, s473(3), which applies to a court-ordered winding up, provides for the creditors or, in default, the court to fi x remuneration where the Committee of Inspection fails to fi x the remuneration or where there is no Committee of Inspection.

Section 511(1)(b) empowers a court to exercise all or any of the powers the court might exercise if the company was being wound up by the court. The liquidators invited the court to use this section to permit the creditors as a whole to ﬁ x their remuneration. Justice Barrett found that this section did not allow the court to confer functions and powers on decision-making bodies. Where the explicit power to ﬁ x remuneration in a creditors’ winding up proves incapable of being exercised, the court’s power in s511(1)(a) to ‘determine any question arising from a winding up’ is available to ensure that what would otherwise be a situation of paralysis is resolved.

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9423 Insolvency 2 casenotes.indd 163 7/03/2006, 1:04:14 PM The orders sought in this case were not appropriate, as they envisaged unauthorised action by the court to empower a meeting of creditors. An appropriate application under s511(1)(a) would be an application for the court to determine the question of quantum of remuneration.

Accordingly, the liquidators’ application was declined.

Although Justice Barrett did not have to make a ﬁ nding on whether the statutory mechanisms had failed in this case such that the court should exercise its power under s511, he did suggest to the liquidators that they consult with the general body of creditors about the possible reconstitution of the committee or to obtain some indication of the creditors’ attitude to the matters causing the impasse.

The ﬁ ndings in this case support the conclusion that, in a voluntary creditors’ winding up, the court has the power to itself determine the quantum of remuneration under s511(1)(a) CA. The court is only likely to exercise this power, however, if it can be shown that the statutory means of ﬁ xing the liquidators’ remuneration as prescribed by s499(3) CA is unworkable in the circumstances of the case.

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9423 Insolvency 2 casenotes.indd 164 7/03/2006, 1:04:15 PM LIQUIDATORS

Creditor clears a low hurdle to conduct public examinations of lawyers

Case Name: In this case, a creditor – not the liquidator – sought a public Re New Tel Limited (in examination. The examinees challenged the creditor’s ability to do so. liquidation) Wainter Pty Limited was a creditor of Cable and Telecom Limited. New Tel Limited proposed to take over Cable and Telecom. Wainter alleged that, on the eve of the Citation: takeover, a director of, and a lawyer acting for, New Tel induced it to forgo a debt [2005] FCAFC 114, Full owed to it by Cable and Telecom in exchange for shares in New Tel. The director Federal Court of Australia per was a partner in the fi rm that employed the lawyer. Ryan, Lander and Crennan JJ New Tel subsequently went into liquidation. Wainter threatened proceedings against New Tel and the law fi rm. Wainter asked the liquidator of New Tel to Date of Judgment: conduct an examination into the facts relevant to the claim that it had threatened 15 June 2005 against the law fi rm. The liquidator declined to assist. Wainter then asked ASIC for approval to examine the director/partner and lawyer (who had since become Issues: a partner) about the examinable affairs of New Tel under sections 596A and • Sections 596A and 596B 596B CA. ASIC provided the necessary authorisation. CA The lawyers applied to have the examinations summonses set aside. • Where examination sought The application was unsuccessful. They appealed. by a creditor rather than a liquidator Justice Lander, with whom the other judges agreed, conducted an extensive review of the history of the legislation and the key cases that had construed it. His Honour concluded, relevantly, that an order for an examination summons should only be made for the benefi t of the corporation, its creditors or its contributories. It was suffi cient in this case that Wainter’s claim against the law fi rm would, if successful, reduce the amount Wainter would seek to recover from New Tel, thereby benefi ting New Tel and its creditors. His Honour acknowledged that Wainter would obtain a signifi cant forensic advantage, but that fact alone did not mean that its application for an examination summons was an abuse of process. It was enough that the application was made for a proper purpose.

The Full Court has afﬁ rmed the principles that limit the scope of an examination under Part 5.9 CA, but the facts of this case demonstrate how easily the relevant test can be satisﬁ ed.

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9423 Insolvency 2 casenotes.indd 165 7/03/2006, 1:04:16 PM LIQUIDATORS

Access to records of public examinations

Case Name: A liquidator sought to restrict access to the records of a public Re Strarch International Ltd examination. In rejecting the application, the court closed one door to the liquidator but opened another. Citation: The liquidator had examined some of the ofﬁ cers of the company but was yet to [2005] NSWSC 583, Supreme examine a number of its foreign directors. To prevent the foreign directors from Court of New South Wales per obtaining advance notice of the matters being investigated, the liquidator sought Barrett J orders denying them access to the records of the public examinations.

Section 596F(1)(e) CA provides that, subject to s597, the court may give Date of Judgment: directions about access to the records of a public examination, including a written 22 June 2005 record of an examination that the court has ordered the examinee to sign (the s597(13) record). Section 597(14A) provides that certain persons may inspect the Issues: s597(13) record. These include an ofﬁ cer or creditor of a corporation and anyone • Sections 596F(1) and else ‘on paying the prescribed fee’. 597 CA The issue before the court was whether its power under s596(F)(1) enabled it to • Restriction of access deny the foreign directors access to the s597(13) record. Justice Barrett held that, to records of a public based on the plain words of the statute, it had no such power. The words ‘subject examination to s597’ at the beginning of s596F(1) made it clear that, where there was a clash between the two sections, s597 should prevail. Section 597(14A) created a right of access to the records of an examination that could not be denied by the court.

The right of access was limited, however, to access to the s597(13) record. It did not extend to all the records of a public examination. For example, there was no right of access to the ordinary transcript of a public examination. A person wishing to inspect such a transcript had to obtain leave to do so under the Supreme Court Rules. Given this leave requirement, it was not necessary to make an order denying access in this particular case. Justice Barrett indicated, however, that he was willing to require those seeking access to give the liquidator seven days’ prior notice.

Afterword: this case was litigated again in Strarch International Limited (in liquidation) v Loh [2005] NSWSC 769 (2 August 2005). That decision arose from the liquidator’s attempt to deny access to the record of the public examination on a new ground: namely, that as the court did not expressly order that a record be kept of the examination, the transcript was not a proper s597(13) record. Justice Barrett rejected that argument, holding that, in all the circumstances, there had been an implied order that a record of the examination be kept and signed.

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9423 Insolvency 2 casenotes.indd 166 7/03/2006, 1:04:16 PM A liquidator cannot deny potential examinees access to the s597(13) record of a public examination. Provided that the liquidator does not need the s597(13) record for use in evidence in future proceedings, however, the liquidator can circumvent this problem by creating only an ordinary transcript of the examination.

167

9423 Insolvency 2 casenotes.indd 167 7/03/2006, 1:04:17 PM LIQUIDATORS

If justice is to be done, sometimes it cannot be seen to be done

Case Name: This case considers the circumstances in which the court will McGrath & Anor re HIH hear in closed court an application by a liquidator for approval to Insurance Ltd & Ors enter into an agreement. Mr McGrath and Mr Honey, liquidators of 41 ‘HIH companies’, applied to the Citation: Supreme Court of New South Wales for approval to enter certain agreements on [2005] NSWSC 731, Supreme behalf of each of those companies under section 477(2B) CA. That section requires Court of New South Wales per liquidators to obtain the court’s approval to enter agreements that will not be fully Barrett J performed within three months after being made. The agreements related to proposed legal action by the HIH companies. Date of Judgment: The liquidators applied for orders under s80 of the Supreme Court Act 1970 (NSW) 20 July 2005 that the applications be heard in the absence of the public, on the grounds that the hearing would require the liquidators to reveal steps they intended to take in Issues: preparation for the litigation: information that a plaintiff would ordinarily keep • Section 80 Supreme Court strictly conﬁ dential and not reveal to a defendant. Act 1970 (NSW) Justice Barrett weighed the ‘strong and clear’ public interest in open justice against • Section 477(2B) CA two other competing public interests, namely: • Whether liquidators’ application for approval to • the public interest in the due and beneﬁ cial administration of the estates of enter agreements relevant to insolvent companies, which Justice Barrett said was particularly pronounced in separate legal proceedings the case of the HIH companies where there were ‘many thousands of creditors should be heard in closed from all walks of life’; and court • the public interest in the due administration of justice in the litigation to which the agreements related.

Justice Barrett held that these two interests outweighed the public interest in open justice.

His Honour found that, if the applications were heard in open court, there was a likelihood of a ‘real and negative impact upon the due conduct of the several windings up by the court in the interests of the creditors of the respective companies’. In relation to the second interest, his Honour noted that, if the applications were heard in public, the defendants to the proposed litigation ‘would have access to information that, in the ordinary course, a plaintiff is entitled to keep conﬁ dential’: access that he considered would produce ‘an undue distorting effect in relation to the due conduct of those proceedings’.

Justice Barrett concluded that the paramount object of securing that justice be done, both in respect of the liquidation and the subsequent litigation, would be rendered doubtful if the applications were heard in public. That object would be best served by allowing the liquidators to lay all relevant matters before the court

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9423 Insolvency 2 casenotes.indd 168 7/03/2006, 1:04:18 PM without fear of prejudice to the interests they were bound to serve. His Honour therefore ordered that the applications be heard in the absence of the public.

When applying to the court for approval to enter agreements, liquidators must be aware that they may be required to reveal information with the potential to prejudice the outcome of both the proposed transaction and the liquidation itself. This case demonstrates that the court may be prepared, in such circumstances, to order that the application be heard in the absence of the public to avoid the potential prejudice.

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9423 Insolvency 2 casenotes.indd 169 7/03/2006, 1:04:18 PM PROCEDURE

Claim for rectiﬁ cation not appropriate as part of appeal against rejection of proof of debt

Case Name: This was a hearing for the purpose of determining whether Re Jay-O-Bees Pty Ltd (in rectifi cation of a contract can be brought by way of interlocutory liquidation); Rosseau Pty Ltd process, fi led in winding-up proceedings and whether leave (in liquidation) v Jay-O-Bees should be granted under s471B CA to allow the applicant to Pty Ltd (in liquidation) proceed against a company subject to winding up. Nodcad Pty Limited owed debts of differing amounts to three companies named Citation: Inteq, Athcad and Rodlow. Three separate deeds of assignment were entered into [2004] NSWSC 818, New whereby Inteq, Athcad and Rodlow assigned the debts owed to them by Nodcad to South Wales Supreme Court, another company named Rosseau. By three further separate deeds, Rosseau Equity Division, per Campbell J purportedly assigned the benefi t of these debts to Jay-O-Bees (JOB) for consideration equivalent to the face value of the debts. However, one of the deeds Date of Judgment: (the disputed deed) contained an error in clause 1, pursuant to which it imposed 28 September 2004 an obligation on Rosseau to pay consideration of $49,750 to Rodlow, instead of imposing an obligation on JOB to pay that amount to Rosseau in return for receiving the benefi t of the debt owed by Nodcad. Issues: • Sections 471B and 553 CA Rosseau later served a statutory demand on JOB for the total amount payable under • Whether rectifi cation of a the three deeds. Some time later, an order was made (under an application by contract can be made by Rosseau) to wind up JOB. The court held that the amount of the disputed deed did interlocutory process not constitute a component in the indebtedness of JOB to Rosseau and ordered • Whether leave should be that the statutory demand be amended to exclude the $49,750. granted to proceed against company subject to a Rosseau lodged a proof of debt for the full amount of the three debts with the winding-up order liquidator of JOB. The liquidator rejected part of the proof of the debt. Rosseau then fi led a notice of motion in the proceedings for the winding up of JOB, seeking orders including:

• a declaration that JOB owed Rosseau $49,750; • an order under s471B CA that leave be granted to allow Rosseau to proceed against JOB; and • an order that the disputed deed be rectiﬁ ed to impose an obligation on JOB to pay to Rosseau the amount of $49,750.

JOB sought an order that these paragraphs of Rosseau’s notice of motion be struck out. This judgment relates to JOB’s strike-out motion.

The court found in JOB’s favour, striking out these paragraphs in the notice of motion. In its judgment, the court examined what effect should be given, in the admission of proofs of debt in a company liquidation, to a claim that the contract on which the proof of debt is based should be rectiﬁ ed, and by what procedure this claim should be made.

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9423 Insolvency 2 casenotes.indd 170 7/03/2006, 1:04:19 PM The court noted that relief sought in an interlocutory application must be sought for the objective purpose of advancing the claims made in the principal proceedings. In the context of this principle, the court held:

• An appeal against rejection of a proof of debt is brought as an interlocutory proceeding because that appeal is for the purpose of advancing the process of the winding up of the company. Seeking an order for rectifi cation of a contract is not seeking an order the objective purpose of which is to advance that process. Accordingly, the court held that paragraph 4 of the notice of motion be struck out. • Seeking a declaration between JOB and Rosseau concerning the true nature of clause 1 of the disputed deed, by interlocutory process in the winding up proceedings, is seeking relief that does not have the necessary objective tendency to advance the winding up of the company. If the declaration were to end all questions about who had entitlement to be paid, Rodlow would also need to be joined in the proceedings. Accordingly, the court held that paragraph 2A of the notice of motion be struck out. • The court held that an application for leave to proceed against a company in liquidation is one which can properly be brought by an interlocutory proceeding in a winding up. However, the court found that all questions that may be raised in a rectifi cation suit about Rosseau’s entitlement to rectifi cation of the dispute deed could have been raised in the context of the appeal proceedings. Further, the question of the construction of clause 1 of the disputed deed could also be decided in the appeal proceedings. Accordingly, the court held that there was no reason why leave to proceed should be granted and held that paragraph 3 of the notice of motion be struck out.

The court also noted that s553 CA does not have the effect that all and only claims which are provable are those that existed at the relevant date. While the disputed deed was entered into before the relevant date, it is arguable that the claim to rectiﬁ cation is itself a claim within the meaning of s553(1) and hence a claim that should be given effect to by the liquidator in deciding whether to admit a proof of debt.

A claim for the rectifi cation of a contract, fi led in winding up proceedings, cannot be brought as an interlocutory proceeding because it is not for the purpose of advancing the process of the winding up of the company. Further, if the issues raised in a claim for rectifi cation can be dealt with in an appeal proceedings against the liquidator, a court is less likely to grant leave to proceed against the company in liquidation.

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9423 Insolvency 2 casenotes.indd 171 7/03/2006, 1:04:20 PM PROCEDURE

Release of money paid into court held not to be void disposition

Case Name: Under a court order, insurance company HIH paid money into court Pilmer v HIH Casualty & before being wound up. Accounting ﬁ rm Nelson Wheeler, the insured General Insurance Ltd (No 2) under a policy with HIH, sought an order for payment out of the money paid by HIH into court. HIH’s liquidators argued that HIH Citation: had a beneﬁ cial interest in the money and the payment to Nelson Wheeler would be a void disposition under section 468(1) CA. (2004) 212 ALR 636, Supreme Court of South In 1992, Duke Group Ltd (in liquidation) (Duke) brought a professional negligence Australia per Mullighan J claim against Nelson Wheeler in the Supreme Court of South Australia.

Nelson Wheeler’s professional indemnity insurance cover was arranged in layers. Date of Judgment: The primary layer of $10 million was underwritten by HIH Casualty & General 26 November 2004 Insurance Ltd (HIH). The ﬁ rst excess layer of $10 million was underwritten by GIO Insurance Ltd (GIO). The second excess layer of $30 million was underwritten by Issues: London Insurers as to 76 per cent and HIH as to 24 per cent (or $7.2 million). • Ownership of money paid into court Duke succeeded in its claim against Nelson Wheeler and, on 30 January 1998, • Whether section 468 CA judgment was entered against Nelson Wheeler for more than $93 million. On applies to money paid into appeal, the Full Court increased the judgment to more than $117 million. court Nelson Wheeler then appealed to the High Court on only part of the judgment. • Discretion to validate void disposition under s468(1) GIO and the London insurers met their obligations under Nelson Wheeler’s insurance. HIH met its obligations under the primary layer of Nelson Wheeler’s insurance, but denied that it was on risk in respect of any part of the second excess layer. Nelson Wheeler brought a separate proceeding against HIH to enforce HIH’s obligations under the second excess layer.

Execution on the judgment was stayed pending the High Court appeal and the action against HIH.

On 6 September 2000, Nelson Wheeler obtained judgment against HIH to the effect that HIH was on risk as to 24 per cent of the second excess layer of Nelson Wheeler’s insurance.

On 12 December 2000, HIH was ordered to pay $7.2 million into court (being the maximum amount of HIH’s liability under the second excess layer), to, effectively, secure any unsatisﬁ ed part of Nelson Wheeler’s liability to Duke. HIH paid that amount into court.

On 15 March 2001, provisional liquidators were appointed to HIH.

On 31 May 2001, the High Court gave judgment allowing Nelson Wheeler’s appeal. The amount that remained due by Nelson Wheeler to Duke under the judgment,

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9423 Insolvency 2 casenotes.indd 172 7/03/2006, 1:04:21 PM and in respect of which the money paid into court by HIH would apply, was about $3.6 million.

On 27 August 2001, HIH was ordered to be wound up.

Nelson Wheeler applied for directions that the registrar pay $3.6 million of the money paid into court by HIH to Nelson Wheeler.

It was common ground that the money in court was not amenable to the making of an order under s588FF CA as a voidable transaction. The primary issue for the court was whether or not the money in court was the property of HIH. If so, the payment of the money out of court to Nelson Wheeler would be a void disposition under s468(1).

Section 468(1) CA relevantly provides:

Any disposition of property of the company … made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.

It was common ground that the money in court vested in the registrar as the legal owner of the money, but the HIH liquidators argued that HIH retained beneﬁ cial ownership of the money.

Justice Mullighan held that:

• A party who pays money into court, in circumstances like this case, does not retain any legal or equitable interest in the money. The money is vested in the registrar and is to be disbursed according to the court’s decision. • Section 468(1) only operates in respect of property in which the company has a benefi cial interest in the sense of property, which would be available in the winding up and only to the extent of that interest, and also in the sense that the company is free to deal with the property. • In circumstances like this case, money paid into court provides security to the party who is to benefi t according to the court’s decision as to payment out and that party is in the nature of a secured creditor. For that reason, the company is not free to deal with the money. It could not deal with any of the money unless the court so decided when making an order for payment out. • There is no disposition of property of a company unless the company has a benefi cial interest in the money at the time of the payment out.

Accordingly, the money in court was not property of HIH for the purposes of s468(1) and payment out of court to Nelson Wheeler would not constitute a disposition of the property of HIH within the meaning of s468(1).

In any event, Justice Mullighan stated that the words ‘unless the court otherwise orders’ in s468(1) gives the court a wide discretion to validate any disposition of property caught by that subsection and, in this case, he would have exercised his discretion to validate the disposition.

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9423 Insolvency 2 casenotes.indd 173 7/03/2006, 1:04:22 PM Money paid into court is no longer the legal or equitable property of the party that made the payment. Accordingly, where such a payment is made by a company, a payment out to another party, by order of the court, will not usually be a void disposition of property of the company under s468(1). As such, a party suing a company can, by obtaining an order that the company pay money into court, gain protection similar to that enjoyed by a secured creditor in a subsequent winding up of the company.

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9423 Insolvency 2 casenotes.indd 174 7/03/2006, 1:04:23 PM PROCEDURE

Reinstating a deregistered company: when will an applicant be successful?

Case Name: Trust benefi ciaries seeking a section 601AH order for Danich Pty Ltd Re Cenco reinstatement of registration by ASIC of a deregistered trustee Holdings Pty Ltd company must show that they are ‘a person aggrieved by’ the deregistration. The Supreme Court of New South Wales has Citation: confi rmed that an applicant will not be aggrieved where deregistration has not deprived them of the ability to fully assert [2005] NSWSC 293, Supreme Court of New South Wales, or satisfy their rights. Equity Division, per Barrett J Danich Pty Ltd (Danich) was the only extant holder of units of a unit trust for which Cenco Holdings Pty Ltd (Cenco) was the trustee. Cenco was deregistered Date of Judgment: on 4 March 1996. Danich sought an order under s601AH CA directing ASIC to 8 April 2005 reinstate Cenco’s registration. Justice Barrett held that the transitional regime for deregistration of companies Issues: allowed the court to make a s601AH order in relation to a company deregistered • Section 601AH CA before 1998. Justice Barrett further found that the statutory regime vested all • Whether applicant ‘a person trust property in ASIC on and from 1 July 1998 without defeating or dismissing aggrieved’ the rights of interest-holders, including those of benefi ciaries under the trust.

For the court to order reinstatement under s601AH, an applicant must show that they are ‘a person aggrieved by’ the deregistration and further satisfy the court that reinstatement is just. Justice Barrett noted that, in order to determine if an applicant is ‘a person aggrieved by’ a deregistration, their interests must have been affected by being deprived of something, legally injured or damaged, or legally entitled to regard the deregistration as a cause of dissatisfaction.

Justice Barrett held that Danich was not ‘a person aggrieved by’ Cenco’s deregistration, because its beneﬁ cial interest in the trust fund continued to subsist upon vesting of the trust property in ASIC. The deregistration, therefore, did not deprive Danich of anything, nor did it render it unable to assert or obtain satisfaction of its rights in full.

There was a further issue relating to the stated intention of the liquidator of another company to pay dividends from a possible winding up only to Cenco. Justice Barrett held that this statement was merely a reﬂ ection of the fact that the liquidator had not been presented with evidence of any rights or duties owing to ASIC or any new trustee of the unit trust. The existence of Cenco was, therefore, not essential to the pursuit and fulﬁ lment of Danich’s rights.

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9423 Insolvency 2 casenotes.indd 175 7/03/2006, 1:04:23 PM An applicant seeking reinstatement of the registration of a company by ASIC under s601AH CA must show that the deregistration has deprived them of the ability to assert or satisfy their rights in full. The New South Wales Supreme Court has conﬁ rmed that the rights of a beneﬁ ciary under a trust will generally not be diminished where the company that acted as trustee is deregistered.

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9423 Insolvency 2 casenotes.indd 176 7/03/2006, 1:04:24 PM PROCEDURE

Time almost slips through a liquidator’s ﬁ ngers

Case Name: The liquidator’s voidable transaction case was struck out for Tolcher v Gordon want of prosecution. The liquidator managed to obtain an extension of time in which to bring proceedings. The outcome, Citation: however, was a close-run thing. [2005] NSWCA 135, New The key to this case is in the timing: South Wales Court of Appeal per Hodgson, Ipp and Tobias 5 May 2000 The relation-back day JJA March/April 2001 Liquidator conducts public examinations, which alert him to the possibility of a voidable transaction claim Date of Judgment: 3 May 2005 8 April 2003 Creditor funding for the voidable transaction claim falls away

Issues: 10 April 2003 The liquidator seeks external litigation funding • Section 588FF CA 2 May 2003 The voidable transaction claim is ﬁ led • Liquidator fails to commence proceedings in 5 May 2003 The three-year period for commencing voidable time transaction proceedings expires 21 July 2003 The liquidator secures litigation funding August 2003 Several unsuccessful attempts at serving process on the intended defendant occur 9 September 2003 The process server reports to the liquidator’s solicitor that he had been unable to serve the claim 1 December 2003 The voidable transaction claim is automatically dismissed under Part 18 Rule 9 of the District Court Rules (NSW) for want of prosecution 13 January 2004 The liquidator’s solicitor learns that the proceedings had been dismissed 19 January 2004 The liquidator’s solicitor applies for an extension of time to serve the voidable transaction claim

At ﬁ rst instance, a District Court judge refused to extend time for the liquidator to serve the voidable transaction claim. The Court of Appeal allowed an appeal from that decision.

The Court of Appeal had to weigh the interests of the liquidator and the potential defendant in deciding whether or not to grant an extension of time for service of the claim. In performing that balancing exercise, the court held that, as the proceedings were ﬁ led before the limitation period expired, it was irrelevant that

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9423 Insolvency 2 casenotes.indd 177 7/03/2006, 1:04:25 PM the liquidator had not ﬁ led the claim until only three days before the expiry of the relevant period. Once proceedings were ﬁ led, the Court of Appeal considered that it was appropriate for the liquidator to refrain from serving the claim until it had secured litigation funding.

The critical delay was between 9 September 2003 and 13 January 2004, during which period the liquidator’s solicitor was aware that the claim had not been served but failed to apply for an extension of time. The court considered, however, that this delay was that of the solicitor alone and could not be attributed to the liquidator. Signiﬁ cantly, the court held that, had the liquidator been wholly responsible for this particular delay, the balance may have tilted in favour of refusing the extension of time sought.

Even though the liquidator obtained an extension of time in this case, the result was very close. The liquidator was lucky that, despite the delay in effecting service, he had ﬁ led the claim within time.

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9423 Insolvency 2 casenotes.indd 178 7/03/2006, 1:04:25 PM PROCEDURE

Court refuses to permit joinder of liquidator to collateral attack on liquidator’s void disposition claim

Case Name: A creditor of a company in liquidation brought an action against Starmaker (No 51) Pty Ltd v other potential creditors, seeking declarations that the potential Majda & Ors creditors were not in fact creditors of the company. The creditor sought orders joining the liquidator to the proceedings. It also Citation: sought a declaration that the liquidator was bound by previously obtained consent orders that certain of the potential creditors [2005] SASC 234, Supreme Court of South Australia per were not, in fact, creditors. The application was refused. Debelle J On 4 November 1997, Mawson KLM Holdings Pty Ltd (Mawson) was wound up by order of the Supreme Court of South Australia and a liquidator appointed. Among Date of Judgment: the potential creditors of Mawson was Starmaker (No 51) Pty Ltd (Starmaker). In 29 June 2005 2000, the liquidator took action against Starmaker seeking, inter alia, declarations that Mawson was insolvent at the time it entered into certain transactions with Starmaker and that, consequently, the transactions were voidable under section Issues: 588FE of the CL (the liquidator’s action). Starmaker argued that six of the other • Joinder of liquidator and potential creditors of Mawson (the potential creditors) were not in fact creditors of company in liquidation to Mawson and that consequently Mawson was not insolvent. action between potential creditors of company Before the liquidator’s action had been set down for trial on 19 August 2004, • Leave to proceed against Starmaker took action against the potential creditors seeking declarations that they company in liquidation were not in fact creditors of Mawson (the Starmaker action). On 13 October 2004, • Whether consent orders the court ordered by consent that three of the potential creditors were not, and had binding on liquidator not a never been, creditors of Mawson. party to the action Starmaker then made applications seeking, among other orders:

• joinder of Mawson and the liquidator as parties to the Starmaker action; and • a declaration that Mawson and the liquidator were bound by the order that three of the potential creditors were not and had never been creditors of Mawson.

In seeking joinder of Mawson and the liquidator, Starmaker made three principal arguments. First, it pointed to the fact that the liquidator had failed to deal with Starmaker’s proof of debt within the 28-day period prescribed by regulation 5.6.53 of the Corporations Regulations. However, the court held that this was irrelevant to the application for joinder. Starmaker had already appealed to the court against the manner in which the liquidator had dealt with its proof of debt. That appeal was to be heard at a later date.

Second, Starmaker pointed to the fact that the liquidator had refused to permit the three potential creditors that were the subject of the consent orders in the Starmaker action to withdraw their proofs of debt. The court held that this too was irrelevant to the application for joinder. The liquidator was entitled by regulation 5.6.56 of the Corporations Regulations to refuse to permit withdrawal. He had

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9423 Insolvency 2 casenotes.indd 179 7/03/2006, 1:04:26 PM indicated that he would decide whether to accept withdrawal once the liquidator’s action had been determined, as it was in issue in that case whether the potential creditors were in fact creditors of Mawson.

Finally, Starmaker contended that if Mawson and the liquidator were not joined, Starmaker would be required to undertake costly litigation to determine whether the potential creditors were, in fact, creditors of Mawson. However, the court noted that this issue would have to be determined in the liquidator’s action and that there was no advantage in litigating it in the Starmaker action. Indeed, the court queried whether the Starmaker action was an abuse of process, in that it compelled the liquidator to contest an issue already raised in the liquidator’s action. However, it was unnecessary to determine this issue.

The court concluded that Starmaker had not demonstrated any justiﬁ able ground on which to join Mawson or the liquidator.

In addition, the court concluded that Starmaker had not demonstrated why leave should be granted to proceed against Mawson and the liquidator, as required by s471B CA. That provision was designed to prevent the precise circumstance of the case, namely where a party to an action by a liquidator seeks to sue the company in liquidation in another set of proceedings in order to litigate the same issue.

On the issue of whether the liquidator was bound by the consent orders in the Starmaker action concerning three of the potential creditors, the court concluded that the liquidator was not so bound. It was clear that since neither the liquidator nor Mawson was a party to the Starmaker action, the liquidator was not bound by consent orders made in that proceeding.

This case illustrates a concern by courts to protect the legislative procedure dealing with insolvencies from undue interference. Here Justice Debelle refused to permit a liquidator to be drawn into litigation that was effectively a collateral attack on that legislative procedure.

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9423 Insolvency 2 casenotes.indd 180 7/03/2006, 1:04:27 PM PROCEDURE

Leave to proceed against company in liquidation refused

Case Name: Ledge Finance was sued by New Tel Limited (in liquidation) and Hall & Anor as liquidators its liquidator, which claimed that $1.25 million received by Ledge of New Tel Ltd v Ledge Finance was part of a transaction constituting an unfair loan Finance Ltd under section 588FD(1) CA. Ledge Finance sought leave to commence a cross-claim against New Tel, claiming that the loan Citation: was void. The application was refused. [2005] NSWSC 645, Division 2 of Part 5.7B CA enables a liquidator to apply to the court for Supreme Court of New South compensatory orders where a transaction entered into by an insolvent company Wales per Barrett J before it was wound up is voidable. In this case, two loans had been made to New Tel for very short periods at extremely high rates of interest. The liquidator sought a Date of Judgment: declaration that the loans were unfair loans under s588FD(1) and were thus 4 July 2005 voidable under s588FE(2). He also sought consequential orders under s588FF(1)(a) that sums totalling $1,125,000 Issues: received by the lender Ledge Finance (ostensibly by way of repayment of principal • Leave to bring cross-claim and payment of interest in respect of the two loans) be paid by it to the liquidator. under section 471B Section 588FF empowers the court to make orders about voidable transactions where two conditions are satisﬁ ed:

1. Application is made by ‘a company’s liquidator’. 2. The court ‘is satisﬁ ed that a transaction of the company is voidable because of s588FE’, which sets out the reasons that a transaction can be voidable.

By interlocutory process, Ledge Finance sought leave to proceed with a cross-claim under s471B CA. The cross-claim sought orders declaring the two loan agreements void as if they had never occurred (void ab initio). It alleged that each agreement was procured by misrepresentation made by New Tel and that this misrepresentation involved misleading and deceptive conduct. There were also allegations of implied terms of good faith performance and mutual cooperation, and that New Tel had breached these terms.

The court agreed with the liquidator’s submission that the cross-claim served no useful purpose in determining the rights and liabilities between the parties because this could be fully achieved under s588FF. The test for the statutory cause of action under s588FF has nothing to do with the validity or otherwise of the loan agreements, and the cause of action was available to the liquidator whether or not the loan agreements were, in due course, shown to be void as if they never occurred.

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9423 Insolvency 2 casenotes.indd 181 7/03/2006, 1:04:27 PM The statutory provisions in Division 2 of Part 5.7B are not concerned with undoing transactions or re-arranging the ﬁ nancial relationships of parties to transactions. They do not involve reliance on contractual rights or the contractual consequences of events. On this basis, leave to proceed with the cross-claim under s471B was refused, particularly because part of the rationale for the statutory stay is ‘to ensure that efforts of a liquidator are not needlessly side-tracked’.

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9423 Insolvency 2 casenotes.indd 182 7/03/2006, 1:04:28 PM RECEIVERSHIP

Duty of care of a receiver

Case Name: This case considered the scope of a receiver’s duties in Florgale Uniforms Pty Ltd connection with the exercise of a power of sale. (ACN 004 233 167) (receiver Florgale Uniforms Pty Ltd (Florgale) conducted a business manufacturing industry and manager appointed) (in uniforms. Florgale had voluntary administrators appointed to it and, under the deed liquidation) & Ors v Orders & of charge to National Australia Bank (NAB), a receiver was appointed. Anor The receiver disposed of the clothing by auction, despite the advice of the former Citation: management of Florgale who contended that the best manner of sale for the [2004] VSC 65, Supreme Court clothing, being special-purpose stock, was to approach the existing customer base of Victoria, per Dodds-Streeton J and sell the clothing at a discount. This was not feasible to the receiver, as it would have required Florgale to continue trading for a longer period of time and to incur associated costs. Date of Judgment: 27 October 2004 The auction did not meet anticipated goals or raise sufﬁ cient funds to avoid the enforcement of guarantees. A number of parties who secured or guaranteed the Issues: payment of liabilities to the NAB sought relief against the bank and the receiver. The central issue before the court was whether the sale by auction of the clothing • Section 420A of the CA was a breach of the receiver’s duty of care. Section 420A(1) CA provides that, in • Receiver’s duty of care in exercising a power of sale in respect of property of a corporation, a controller must exercising power of sale take all reasonable care to sell the property for:

• not less than market value (if it has a market value when sold); or • otherwise, the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

In considering the ambit of a receiver’s duty in exercising a power of sale, the court considered the general law position and held as follows:

• good faith: to ascertain whether a breach of the general law duty of a receiver has been breached, one must determine whether there has been a breach of good faith, that is, whether the receiver was wilful and reckless in dealing with the property in such a way as to sacriﬁ ce the interests of the mortgagor; • general law duty: the general law duties of a receiver in exercising a power of sale are analogous to those of a mortgagee, that is, a mortgagee exercising a power of sale is liable for the defaults of its agents and for the negligent performance of bona ﬁ de acts; and • statutory duty: a breach of s420A is not established merely because market value or the best price reasonably obtainable is not achieved, but requires proof of a failure to take all reasonable care to sell the property for not less than market value, or for the best price that is reasonably obtainable, having regard to the circumstances of the case. These considerations permit matters such as associated costs and risks to be taken into account.

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9423 Insolvency 2 casenotes.indd 183 7/03/2006, 1:04:29 PM It was also necessary for the court to consider what remedy applied in such an application. The court decided that, while s420A does not expressly confer a right to damages or any other remedy, there is a legislative intention that the mortgagor is to retain its existing available remedies by reference to the duty in s420A(1). In addition, s423 allows the court to impose a remedy, including an order for damages occasioned by a breach of duty under s420A.

The court ultimately decided that the receiver had not breached his duty in exercising his power of sale. This was largely due to the fact that Florgale could not afford to sell the clothing otherwise than by auction. The plaintiffs failed to establish that the receiver did not use all reasonable care to obtain market value or the best price reasonably obtainable in the circumstances.

In exercising a power of sale over a property of a corporation, a controller must take all reasonable care to sell it for not less than its market value. Alternatively, the controller’s duty is to sell for the best price that is reasonably obtainable, having regard to the circumstances existing when the property was sold. Circumstances that the court will take into account include the relative costs, risks and timing issues associated with particular means of sale.

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9423 Insolvency 2 casenotes.indd 184 7/03/2006, 1:04:29 PM RECEIVERSHIP

Dealing with industrial action hindering an asset sale

Case Name: Unions and former employees established a picket line to ABM Plastic (Aust) Pty Ltd prevent customers and debtors of a company in receivership (receivers and managers from collecting their goods. The receivers feared this could result appointed) v Automotive, Food, in an agreed asset sale falling through, as well as reducing the Metals, Engineering, Printing assets available for distribution. The question before the court and Kindred Industries Union was whether to grant an injunction preventing the picket line. The respondents were unions and former employees of a packaging company in Citation: receivership who established a picket line outside the company factory after it [2005] FCA 111, Federal Court became obvious that a sale of the company’s assets would not raise sufﬁ cient of Australia per Ryan J funds to pay out employee entitlements. The picket was designed to prevent the company’s customers, who owed debts to the company, from collecting assets Date of Judgment: owned by them from the company’s premises. 17 February 2005 The company’s receivers successfully obtained an injunction to prevent the industrial action because it created the following risks: Issues: • Injunctive relief against • the purchaser of the company’s assets would use the industrial action as a industrial action reason to avoid the sale; • customers who had been unable to collect their assets would allege they had suffered losses that should be offset against their debts to the company; and • ﬁ nished goods would not be collected and those customers would not become indebted to the company, thereby diminishing the assets available for distribution to creditors.

Justice Ryan found that the union’s behaviour was likely to diminish the assets of the company available for distribution and granted injunctive relief restraining breaches of s170MN of the Workplace Relations Act 1996 (Cth) relating to the conduct of industrial action. The court also noted that there was a serious question to be tried as to whether those involved in the picket had engaged in common law torts.

This case demonstrates an approach that may be taken by insolvency practitioners faced with industrial action likely to adversely affect the conduct of a receivership or external administration of a company.

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9423 Insolvency 2 casenotes.indd 185 7/03/2006, 1:04:30 PM RECEIVERSHIP

Instruments under which receivers appointed should address remuneration, costs and expenses

Case Name: Privately appointed receivers sought to assert an equitable lien Ronald John Dean-Willcocks & over property that was subject to a registered fi rst mortgage. The Anor v Nothintoohard Pty Ltd court indicated that out-of-court receivers may not always be (in liquidation) & 2 Ors granted an equitable lien and that such a right will not often take priority over an existing legal interest. This case highlights the Citation: importance of ensuring that instruments appointing receivers [2005] NSWSC 357, Supreme make separate provision for their reasonable remuneration, costs Court of New South Wales, and expenses from the company’s assets. If those assets are, or Equity Division, per Barrett J may be insuffi cient, separate arrangements need to be made so that the receiver is remunerated by his or her appointor. Date of Judgment: The plaintiffs (the receivers) were appointed out of court under a mortgage 13 April 2005 debenture that the third defendant held over certain assets of the fi rst defendant, which included a property in Mascot, New South Wales. The second defendant was Issues: the registered fi rst mortgagee of the Mascot property. The case raised three issues: • Whether receivers appointed • Did the receivers have the same right as a court-appointed receiver to an out of court can assert equitable lien over the Mascot property with respect to their reasonable an equitable lien to remuneration, costs and expenses? recover their reasonable • Would this equitable lien take priority over the second defendant’s fi rst remuneration, costs and registered mortgage? expenses • Even if it did not, was it unconscionable in the circumstances for the second • Whether an equitable lien has priority over a registered defendant to exercise the power of sale under the fi rst registered mortgage? fi rst mortgage The court began with the principle that receivers may assert an equitable lien to • Whether unconscionable recover their reasonable remuneration, costs and expenses: Moodemere Pty Ltd v for the fi rst mortgagee to Waters [1988] VR 215 at 229. For court-appointed receivers, this right is limited exercise the power of sale to the extent of the interests of the benefi ciaries. For receivers appointed out of court, it is limited to the extent of the interest of the appointing creditor. In both cases, the receiver takes priority over the creditors.

The court noted that most of the cases in this area deal with court-appointed receivers, which have as their underlying premise the protection of court ofﬁ cers. It cautioned that, in future, receivers appointed under contract by individual creditors in order to realise that creditor’s interests may not be granted an equitable lien. However, in this case, the court accepted the proposition that a receiver appointed out of court can assert an equitable lien.

The contest between the receivers and the second defendant was, therefore, between a prior legal interest and a subsequent equitable interest. It is well-settled that a legal interest will take priority over a subsequent equitable interest unless it

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9423 Insolvency 2 casenotes.indd 186 7/03/2006, 1:04:31 PM can be shown that the legal interest should be postponed, which is to be determined upon the facts of each case: Choudri v Palta [1994] 1 BCLC 184.

In this case, the court held that it was not unconscionable for the second defendant to sell the Mascot property because:

• it would not beneﬁ t from the receivers’ outlays upon sale; • it had not established the receivers’ equitable lien by any agreement; and • no other basis for the lien to take priority over the ﬁ rst registered mortgage had been demonstrated.

Accordingly, the court dismissed the receivers’ originating process, which meant the receivers were unable to recover their remuneration and expenses from the sale of the Mascot property.

Receivers appointed out of court may be able to assert an equitable lien in order to recover their reasonable remuneration, costs and expenses. However, this principle is not as well established as with court-appointed receivers and, in either case, as an equitable interest it is taken subject to prior legal interests. It may be that, notwithstanding the existence of an equitable lien, receivers are unable to recover their costs. It is therefore prudent for receivers appointed out of court to ensure that they are appointed on a basis that makes adequate provision for their remuneration, costs and expenses.

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9423 Insolvency 2 casenotes.indd 187 7/03/2006, 1:04:32 PM RECEIVERSHIP

Assessment of court-appointed receiver’s remuneration

Case Name: The sole director of Australian Foods Co opposed an application ASIC v Australian Foods Co by the court-appointed receiver of the company for approval of Pty Ltd his fees and expenses, on the basis that the material provided by the receiver was insuffi cient. Master Sanderson was satisfi ed, on Citation: a prima facie basis, that the receiver had provided suffi cient material to the court to enable a determination to be made as to [2005] WASC 110, Supreme Court of Western Australia per whether the amount of the claim was fair and reasonable. Sanderson M in Chambers By order of the court in October 2004, Mr Barry Honey was appointed the receiver and manager (the receiver) of Australian Foods Co Pty Ltd. In February 2005, Mr Date of Judgment: Honey applied for an order that his remuneration and expenses and legal fees be 2 June 2005 approved and fi xed by the court. The sole director opposed the approval of the receiver’s remuneration on the basis that the receiver had provided insuffi cient material to justify the amount claimed. Issues: • Suffi cient information The parties agreed that the principles to be applied in assessing a receiver’s provided to assess if claim remuneration are the same as those that apply to provisional liquidators and reasonable liquidators. Master Sanderson adopted the principles set out by the Full Court in Venetian Nominees Pty Ltd and Ors v Conway (1998) 20 WAR 96, in which the Full Court stated that:

• the onus is on the liquidator to establish the remuneration claim is fair and reasonable by providing suffi cient information to the court; • the fact that there is no person who objects to the claim does not detract from the court’s duty to assess if the claim is fair and reasonable; • the liquidator should provide the court with a statement of account (in an appropriately itemised form), of details of the work done, the identity of the person who did the work, the time taken, and the remuneration claimed; • the statement of account should also refl ect, in an appropriately itemised form, the expenses incurred by the liquidator accompanied, where necessary, by voucher proof; and • the statement of account should be verifi ed by affi davit.

Master Sanderson further noted that, in doing the above, the receiver should include evidence before the court that allows a proper assessment to be made as to whether the work undertaken was appropriate and necessary. The level of detail required will depend upon the circumstances of the case.

After reviewing the material before him, Master Sanderson concluded that the way in which the receiver and its staff had recorded its time properly accorded with standard commercial practice and that the level of detail provided by the receiver was suffi cient to make a fi nding that suffi cient information had been provided to

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9423 Insolvency 2 casenotes.indd 188 7/03/2006, 1:04:33 PM allow a determination as to whether the amount claimed by the receiver was fair and reasonable. A further directions hearing was ordered to allow a full assessment of the receiver’s claim for remuneration to be made.

This case conﬁ rms that a receiver must provide the court with sufﬁ cient information to satisfy the court on a prima facie basis that it can determine on the material provided as to whether the claim is fair and reasonable. The level of detail required will depend upon each case’s individual circumstances.

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9423 Insolvency 2 casenotes.indd 189 7/03/2006, 1:04:34 PM RECEIVERSHIP

Surplus funds and group companies

Case Name: The Supreme Court of New South Wales heard an application by Re TVSN Ltd receivers for directions regarding how to distribute a surplus among a consolidated group. Citation: Receivers were appointed to 12 companies within the TVSN Group. The [2005] NSWSC 692, Supreme receivership resulted in the generation of more funds than were required to satisfy Court of New South Wales per the secured debt. Young CJ in Eq The TVSN Group had operated on a consolidated basis and the separate legal personality of each company tended to be disregarded. Instead, the group was Date of Judgment: treated as comprising four ‘business units’. In addition, TVSN Limited had a 12 July 2005 practice of drawing down on its banking facilities either for its own beneﬁ t or (if it considered it desirable) for the beneﬁ t of other members of the TVSN Group. Issues: When the receivers came to sell the businesses, they were sold by ‘business unit’. • Section 424 CA While the receivers could accurately identify the amount realised for the assets of a • Surplus funds in group of companies comprising a particular business unit, it was not a simple receivership matter to apportion that amount between those constituent companies. • Receivers seeking directions Accordingly, the receivers had apportioned the amounts they had received in on how to distribute surplus accordance with various assumptions that they considered provided a fair and rational basis for the allocation.

The receivers applied to the court for directions on how they should deal with the surplus. The application was made under section 424 CA, which provides that a controller of property of a corporation may apply to the court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller’s functions and powers.

Chief Justice Young in Equity noted that:

• there are considerable intricacies in the law of guarantees and in ascertaining the rights of subsidiaries that have contributed to pay part of their holding company’s indebtedness: AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481; • the court is reluctant to give authority to a liquidator or other administrator to consolidate the assets and liabilities of a group of companies rather than deal with each company individually: Kassem v Sentintel Properties Ltd [2005] NSWSC 403; and • however, there are circumstances where the court can see that it is to no-one’s advantage that time and cost be spent in working out what entitlements or liabilities each company in a group may have where there is mostly speculative material on which to work. In such a case, a consolidated distribution may be approved.

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9423 Insolvency 2 casenotes.indd 190 7/03/2006, 1:04:34 PM The court approved the receiver’s apportionment of the amounts according to various assumptions that were identiﬁ ed in afﬁ davit evidence that was relied upon by the receivers.

While a receiver has a duty to account for surplus funds generated in the course of a receivership, he or she may apply to the court for directions as to the manner in which those funds should be applied. An application of this kind should be made when the affairs of companies within a corporate group are so intertwined as to render it difﬁ cult or impossible to identify to which companies a surplus should be allocated.

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9423 Insolvency 2 casenotes.indd 191 7/03/2006, 1:04:35 PM SHAREHOLDER ACTIONS AND LITIGATION FUNDING

The Media World case: the debate begins

Case Name: This case considered whether subscriber shareholders with Crosbie, in the matter of Media misleading and deceptive conduct claims against the company World Communications Ltd were creditors of the company for the purposes of its (administrator appointed) administration. Subscriber shareholders (subscribers) claimed damages against Media World Citation: Communications Ltd (MWC) for alleged misleading conduct by MWC in its [2005] FCA 51, Federal Court prospectus for the issue of the subscribers’ shares. MWC was in voluntary of Australia per Finkelstein J administration.

Media World followed the reasoning in Houldsworth v City of Glasgow Bank and Date of Judgment: Liquidators (1880) 5 App Cas 317, which held that subscribers cannot, while 31 January 2005 retaining their shares, recover damages against a company on the basis of inducement to subscribe by fraud or misrepresentation. A member of a company Issues: may only bring such an action against a company after rescission of the contract of • Sections 437F and 563A subscription and such rescission is impossible after the commencement of the CA winding-up of a company: Oakes v Turquand (1867) LR 2 HL 325. On those • Claims admissible in authorities, a subscriber may bring an action against a company as a creditor, but administration only before winding-up proceedings have commenced and after it has rescinded its contract of subscription.

In Media World, the court decided that a subscriber with such a claim who has not rescinded his or her contract of subscription before the administration commences is barred from claiming as a creditor during an administration. The decision was based on section 437F CA, which provides that an alteration to the status of members of a company made during its administration is void unless the court deems otherwise. The relevance for the MWC administrators was that, if the shareholders were to be treated as creditors in the administration, they could vote in creditors’ meetings and have views taken into account when determining whether the company should enter into a DOCA or be wound up.

The court’s decision was very speciﬁ c: a subscribing shareholder with a claim against the company for damages arising from a misleading prospectus that induced the shareholder to subscribe for shares does not have status as a creditor of the company for the purpose of a voluntary administration. The court followed the High Court’s decision in Webb Distributors (Aust) Pty Limited v State Bank of Victoria (1993) 179 CLR 15, in which subscribers were precluded from rescinding their contracts of subscription and so were unable to claim as creditors. In any event, their claims for damages for misleading conduct related directly to their membership of the company and were therefore liable to be postponed to the claims of creditors in accordance with the predecessor to s563A CA.

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9423 Insolvency 2 casenotes.indd 192 7/03/2006, 1:04:35 PM Comment in the press and in the market on the Media World case suggested that it could prejudice the ability of Australian companies to raise debt ﬁ nance. That commentary arose in relation to the judge’s (then) non-binding comments that suggested a transferee shareholder with a claim for damages arising from a misleading prospectus that induced the shareholder to purchase the shares on the open market may be a creditor for voting purposes in an administration.

Update This distinction made by Justice Finkelstein between a transferee shareholder and a subscription shareholder was again reiterated in his Honour’s judgment in Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCA 1280 (see page 196 of this Review) and, more recently, by Justice Emmett in the case of Sons of Gwalia Ltd v Margaretic [2005] FCA 1305 (see page 199 of this Review). Further consideration was given to these issues in Johnston v McGrath & Ors [2005] NSWSC 1183 (see page 202 of this Review).

This case held that a subscribing shareholder with a claim against the company for damages arising from a misleading prospectus that induced the shareholder to subscribe for shares does not have status as a company creditor for the purpose of a voluntary administration. The position with respect to an ‘on- market’ acquirer of shares was dealt with in the Sons of Gwalia case, in which it was held by Justice Emmett that that such persons are creditors for the purpose of an administration.

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9423 Insolvency 2 casenotes.indd 193 7/03/2006, 1:04:36 PM SHAREHOLDER ACTIONS AND LITIGATION FUNDING

Class action fever: application to obtain access to members’ register to enable funder to contact members

Case Name: Litigation funders sought access to the register of a company in IMF (Australia) Ltd v Sons of administration. The court considered the scope of the restriction Gwalia Ltd (administrators on a person’s ability to use information obtained from the register. appointed) The appellant, IMF (Australia) Ltd (IMF), provides funding for litigation and investigations to assess the viability of litigation. The respondent, Sons of Gwalia Citation: Limited (Sons of Gwalia), operated a gold mining business that went into administration [2005] FCAFC 75, Full Federal on 30 August 2004. A group of shareholders approached IMF to enquire about the Court per Moore, North and possibility of pursuing a claim against Sons of Gwalia for failure to disclose details Emmett JJ of its level of gold reserves at the time they bought shares in the company. IMF investigated the potential for a claim and concluded that some shareholders may [2005] HCATrans 891, High have bought shares without being provided with full or correct disclosure. Court of Australia per Gummow and Heydon JJ Because of the small individual amounts of potential compensation, IMF considered that it would only be possible for it to fund a class action if a signiﬁ cant number of shareholders were involved in the claim. To increase the number of shareholders Date of Judgment: taking part in the action, IMF wanted to use information contained in the Register 12 May 2005 of Members of Sons of Gwalia (the register) and contacted the administrators to seek their consent to use the information for this purpose. The administrators Issues: granted IMF access to the register, but drew IMF’s attention to section 177(1)(a) • Section 177(1A) CA CA. That section provides that a person cannot use information about a person • Access to register of obtained from a register to contact or send material to that person. Section members 177(1)(b) CA prohibits the disclosure of information (obtained in that way) knowing • Purpose of person seeking that the information is likely to be used to contact or send material to the person. access • Policy considerations and The exceptions to this prohibition are when the use or disclosure of the information is: shareholders’ right to • relevant to the holding of the interests recorded in the register or the exercise of privacy the rights attaching to them (s177(1A)(a) CA; or • when approved by the company.

IMF wrote to the administrators, asking for approval to write to the shareholders with information regarding a potential claim against the company and to invite the shareholders to join in a potential representative action against Sons of Gwalia. The administrators withheld consent and informed IMF that it would not be appropriate for them to provide the approval sought.

At ﬁ rst instance, the trial judge considered whether the use of the information in the register was ‘relevant to the holding of shares’. His Honour construed s177 narrowly and considered that the section’s purpose was to promote the privacy of shareholders and to restrict third parties from using information gleaned from the register to very limited circumstances.

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9423 Insolvency 2 casenotes.indd 194 7/03/2006, 1:04:37 PM On appeal, Justice Moore noted that IMF’s conduct would be lawful under s177(1A) if the use of information from the register was ‘relevant to the holding of shares’ or related to ‘the exercise of the rights attaching to them’. His Honour found that the proposed litigation had no bearing on whether the shareholders would or would not hold shares in Sons of Gwalia. He found that, while participation in the proposed litigation may depend on a person being a shareholder in Sons of Gwalia and involved the exercise of right in a broad sense (because the shares are held), they were not rights attaching to the shares. Accordingly, there was not a necessary and direct connection between the right and the shareholding.

Justice Emmett considered that one objective of the CA (and therefore the section) was to create rights for shareholders to be compensated if they suffered damage as a result of a contravention of the Act. With reference to IMF’s anticipated mailout to shareholders for the purpose of inviting them to pursue claims against Sons of Gwalia and its directors, his Honour found that it was incorrect to say that ‘a communication about the circumstances in which a person agreed to acquire shares in (or to become a member of) a company can be characterised as being connected with the fact that a person holds the shares, in respect of which the person is registered, or with the exercise of rights attaching to such shares’.

In his dissenting judgment, Justice North considered that the use of the words ‘relevant to the holding of shares’ in the statute made the provision ﬂ exible and required judgment about the closeness of the relationship between the holding of shares and the use of information. His Honour gave an example:

For instance, there would be no debate that the use of shareholder information to send dividend cheques to shareholders was a use relevant to the holding of shares. Similarly, there would be no debate that the use of such information to send shareholders material advertising cars for sale would not be a use relevant to the holding of shares.

Justice North considered that this particular case fell into a ‘grey area’. His Honour accepted the submissions by IMF that s177(1) and the exceptions in s177(1A) sought to achieve a balance between two policies: on the one hand, the public’s right to use information on the register and, on the other hand, the policy that shareholders should not be disturbed by unsolicited information. After a consideration of the authorities, his Honour concluded that IMF had a commercial interest in using the information, but that the information IMF wished to send to shareholders was likely to be of real interest to them as shareholders. He considered that shareholders would not see IMF using the register for its proposed purpose as an invasion of privacy.

The Full Court dismissed IMF’s application in a 2 to 1 decision. IMF applied to the High Court for special leave to appeal the decision of the Full Federal Court. That application was rejected by the High Court on 26 October 2005.

Litigation funders and those propounding class actions are not able to obtain access to a company’s register of members to enable them to solicit the members to join a class action against the company in relation to their shareholding.

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9423 Insolvency 2 casenotes.indd 195 7/03/2006, 1:04:38 PM SHAREHOLDER ACTIONS AND LITIGATION FUNDING

The Concept Sports case: the trial judge decision

Case name: In this case, Justice Finkelstein of the Federal Court was asked Cadence Asset Management Pty to decide whether shareholders who had acquired shares by Ltd v Concept Sports Ltd subscription could claim damages against the company based on allegations that the prospectus contravened the CA. While his Citation: Honour’s decision was overturned on appeal (see the case note which is at page 204 of this Review) we have included this case [2005] FCA 1280, Federal Court of Australia note of the trial decision. His Honour’s ﬁ ndings are worthy of per Finkelstein J debate and indicate the extent to which this area is in a state of ﬂ ux. Date of Judgment: In a bid to raise $12 million, Concept Sports Limited (the company) issued a 14 September 2005 prospectus offering 24 million ordinary shares at an issue price of 50 cents each. The prospectus contained the following information:

Issues: • ﬁ nancial information about the company, including forecast sales revenue and • Section 728 CA forecast earnings before interest and tax; • Misleading and deceptive • statements about the company’s activities, the strength of its business and its prospectus future prospects; and • Whether subscribers with • several implicit representations, such as that all material information had been claims against a company disclosed and that all reasonable investigations had been undertaken to ensure are creditors that the information in the prospectus was accurate.

Cadence Asset Management and members of the group that it represented (the shareholder) subscribed for shares on the strength of the prospectus. The shareholder was claiming damages because, it was alleged, the prospectus was defective in the following respects:

• the prospectus did not contain information that, by section 710 CA, it was required to contain; • the forecasts for sales revenue and earnings, and the statements about the company’s outlook were misleading and deceptive; and • the implied representations were false.

Section 728 CA provides in effect that, if a prospectus omits information that is required by s710 CA, or contains misleading or deceptive statements that are materially adverse from the point of view of an investor, the person making the offer will have committed an offence. Under s729 CA, any person who suffers loss or damage as a result may, subject to certain defences, recover that loss or damage from a number of persons, including the company making the offer. The loss that the shareholder sought to recover in this case was the difference between the subscription price and the proceeds of its shares sale.

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9423 Insolvency 2 casenotes.indd 196 7/03/2006, 1:04:38 PM The company questioned whether the rule in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317, was a bar to the claim made by the shareholder under s729 CA. Houldsworth stated that a shareholder cannot sue for damages for a fraud or misrepresentation inducing his or her subscription for shares unless he or she ﬁ rst rescinds the contract for the purchase of the shares. In this case, rather than rescind the contract, the shareholder sold the shares, thereby making rescission impossible. The basis for the rule in Houldsworth is that investors who subscribe for shares in a company are agreeing to provide capital that can be used to meet the claims of the company’s creditors. Allowing shareholders to make claims for the price of their shares would subvert this basic principle of company law.

The shareholder argued that Houldsworth only applies to common law claims for damages and not to statutory causes of action (a claim under s729 CA). This required the court to consider the history of s729 and to determine whether it would overturn the rule in Houldsworth.

The decision In this case, the key issue was whether Houldsworth was a bar to the claim for those shares acquired by subscription in an action under s729 and whether this applied to those shares acquired by subscription as opposed to ‘on market’. In relation to the shares acquired by the shareholder by subscription, the court decided the rule in Houldsworth should be applied to statutory causes of action in addition to common law claims, noting the following reasons:

• Parliament could have, but did not, overturn Houldsworth (that is there were no provisions enacted in Australia similar to s111A of the Companies Act 1985 (UK); • there is no such clear language under s729 CA to infer that it overturns Houldsworth; • there was a similar argument made in relation to the operation of s52 of the Trade Practices Act 1974 (Cth), which was rejected by the Full Court of the Supreme Court of Victoria in State of Victoria v Hodgson [1992] 2 VR 613 ; and • it would otherwise produce an anomalous situation, as the rule in Houldsworth has been given statutory effect when a company is in liquidation (see s563A CA).

As a consequence, the court dismissed the shareholder’s action made under s729 in relation to those shares acquired by subscription. However, Justice Finkelstein held that Soden v British & Commonwealth Holdings plc [1998] AC 298 (Soden’s case) was authority for the view that Houldsworth would not prevent claims being brought in relation to those shares acquired by the shareholder ‘on market’ (transferee shareholder).

Update The distinction made by Justice Finkelstein between a transferee shareholder and a subscription shareholder in the application of Houldsworth carries on the interpretation made by the Federal Court in a line of case law starting with in the matter of Media World Communications Ltd (administrator appointed) [2005] FCA 51 (see page 192 of this Review) and, more recently, in Sons of Gwalia Ltd v Margaretic [2005] FCA 1305 (see page 199 of this Review). Also see Johnston

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9423 Insolvency 2 casenotes.indd 197 7/03/2006, 1:04:39 PM v McGrath & Ors [2005] NSWSC 1183 (which is referred to at page 202 of this Review).

As with the Media World case, Justice Finkelstein held in this case (the trial) that a subscribing shareholder with a claim against the company for damages arising from a misleading prospectus that induced the shareholder to subscribe for shares does not have status as a company creditor for the purpose of a voluntary administration. However, Justice Finkelstein’s decision was overturned by the Full Court of the Federal Court on 16 December 2005 (see the case note at page 204 of this Review).

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9423 Insolvency 2 casenotes.indd 198 7/03/2006, 1:04:40 PM SHAREHOLDER ACTIONS AND LITIGATION FUNDING

Transferee shareholders as creditors? Sons of Gwalia and the appeal grounds

Case Name: The Federal Court has held that a transferee shareholder with a Sons of Gwalia Ltd misleading conduct claim against a company (and related claims) (administrator appointed) is a creditor who is entitled to vote and to receive information v Margaretic about the administration in his capacity as a creditor. Section 553(1) CA provides that ‘all debts payable by, and all claims against, the Citation: company (present or future, certain or contingent, ascertained or sounding only in [2005] FCA 1305, Federal damages), being debts or claims the circumstances giving rise to which occurred Court of Australia per Emmett J before the relevant date, are admissible to proof against the company’.

Section 563A CA provides that the payment of a debt owed by a company to a Date of Judgment: person in their capacity as a member of the company is to be postponed until all 15 September 2005 debts owed to, or claims made by, persons otherwise than as members of the company have been satisﬁ ed. Issues: In this case, Mr Margaretic had bought shares in Sons of Gwalia by participating in • Section 553(1) CA the market conducted by the Australian Stock Exchange. Administrators were • Claims admissible under appointed to the company within two weeks of that purchase. The administrators DOCA • Section 563A CA provided the creditors with a proposed DOCA, and an opinion that it would be in • Postponement of claims by the interests of the company to execute it. The DOCA included provisions that were persons in their capacity as based on sections 553(1) and 563A CA. shareholders Mr Margaretic said that his shares had become worthless and claimed that, at the time he bought the shares, Sons of Gwalia was in breach of its continuous disclosure obligations under s674 CA. He also asserted that Sons of Gwalia had engaged in misleading and deceptive conduct, including by failing to disclose matters concerning the company’s level of gold reserves.

The administrators, and one of the company’s creditors whose status was not in dispute, ING Investment Management LLC (ING), began proceedings in the Federal Court of Australia. They sought a declaration that Mr Margaretic’s claim would not be provable under the proposed DOCA. In the alternative, they sought a declaration that the effect of s563A was that payment of his claim under the proposed DOCA would be postponed until all debts owed to, or claims made by, persons otherwise than in their capacity as members of the company, have been satisﬁ ed.

Mr Margaretic ﬁ led a cross-claim, seeking declarations that he was a creditor of Sons of Gwalia and that he was entitled to all of the rights of a creditor under Part 5.3A of the Act. He argued that his claim should not be treated as a debt or a claim owing to him in his capacity as a shareholder.

Among other things, the administrators and ING relied on the High Court’s decision in Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15. In that case, subscribers for shares in a building society were precluded from rescinding

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9423 Insolvency 2 casenotes.indd 199 7/03/2006, 1:04:40 PM their subscription contracts for the shares. It was held that their claims for damages for misleading conduct under s52 of the Trade Practices Act 1974 (Cth) related to the subscribers’ membership of the society and that those claims were therefore liable to be postponed in accordance with the predecessor of s563A. The administrators also submitted, in effect, that Mr Margaretic’s position did not accord with the fundamental proposition that a shareholder’s liability is limited to the amount of capital that it contributes to the company, and that the creditors of that company should (in an insolvency situation) have access to that capital in accordance with the priorities that are now prescribed by the Act.

In contrast, Mr Margaretic argued that the Webb case could be distinguished because that case was not concerned with principles applicable to a claim by a member based on misleading and deceptive conduct leading to the acquisition of already issued shares from a third party with no connection to the company that issued the shares. The administrators and ING disputed this and asserted that Webb also concerned the position of shareholders who had, in fact, become shareholders by transfer.

The court was not asked to decide whether Sons of Gwalia had engaged in misleading and deceptive conduct (or other contraventions) or whether Mr Margaretic had relied on any conduct of the company. The parties had agreed a set of facts and the proceedings were conducted on the basis that those questions were to be dealt with by the usual process of the lodgment of a proof of debt and the admission or rejection of that proof by the administrators.

Justice Emmett agreed with Mr Margaretic. His Honour held that the majority of the High Court in Webb had addressed the principle of whether a shareholder could claim damages against a building society as a consequence of breach of a contract of subscription between the shareholder and the building society. That was not the case here. His Honour found that:

• Mr Margaretic’s claim was not a debt owed by the company to him in his capacity as a shareholder of the company. He was a creditor (as that term was deﬁ ned in the proposed DOCA) for such amount as the deed administrators may admit or be ordered to admit as proof; • Mr Margaretic was entitled to exercise his rights as a creditor of the company under the proposed DOCA such as attending and voting at meetings and to receive circulars sent by the company to its creditors; and • section 563A (and the adoption of that wording in the DOCA) did not require postponement of Mr Margaretic’s claim until debts owed to, or claims made by, persons otherwise than as members had been satisﬁ ed.

The administrators and ING have appealed against Justice Emmett’s decision. Their grounds of appeal include that his Honour:

• should have found that Webb in fact concerned the position of shareholders who had become shareholders by transfer. His Honour was bound by Webb as authority for the principle that a claim for damages by a person who, in reliance upon the misleading and deceptive conduct of a company, acts to the person’s detriment by buying shares in the company from a third party, is a claim by that person in his or her capacity as a shareholder of the company;

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9423 Insolvency 2 casenotes.indd 200 7/03/2006, 1:04:41 PM • erred in construing s563A of the Act as having no application to Mr Margaretic’s claims for damages based on the misleading and deceptive conduct of the company. His Honour should have held (in conformity with Webb) that the claims fell within the area that s563A seeks to regulate, being the protection of creditors by maintaining the capital of the company; and • erred in failing to ﬁ nd that Mr Margaretic was not entitled to prove his claims in the DOCA. His Honour should have held that, when a company becomes insolvent and ceases to pay its debts, it is too late for its shareholders to rescind the statutory contract between them and the company or to claim and be paid compensation for the company’s wrongful conduct that induced the purchase of the shares.

The appeal hearing before the Full Federal Court took place on 1 December 2005. A decision is expected in 2006. Possible ramiﬁ cations of the case are:

• The decision could prejudice the ability of Australian listed companies to raise unsecured debt fi nance, because such fi nanciers may be reluctant to extend fi nance to a company if there were a risk that claims by transferee shareholders may ultimately have equal ranking to all other unsecured debt claims. Such claims could not be the subject of an adequate due diligence exercise by a fi nancier. • The admission of proofs of debt lodged by numerous transferee shareholders could signifi cantly reduce the return under a DOCA to external unsecured creditors. • Recent experience has shown that litigation funders are willing to promote and fund class actions in Australia against companies in connection with their continuous disclosure obligations. To date, the ability of shareholders to make claims arising out of the loss of the value of their shares in a corporate collapse scenario has been constrained by the operation of s563A of the Act, because those claims were liable to be postponed until the claims made by other creditors have been satisfi ed. The decision in Sons of Gwalia might encourage plaintiffs and litigation funders in connection with such claims. • The receipt of numerous proofs of debt from shareholders has the potential to require signifi cant further time and expense to be incurred by administrators in connection with the determination of the merits of those proofs and may inevitably cause delays in making distributions to creditors. • There could well be moves for legislative reform if Mr Margaretic ultimately succeeds on appeal in establishing his position as a creditor.

Until all rights of appeal in Sons of Gwalia are ﬁ nally determined, unsecured creditors, unsecured debt ﬁ nanciers, litigation funders and insolvency practitioners will debate the position with great vigour.

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Johnston v McGrath: a Supreme Court judge enters the ‘shareholder as creditor’ debate

Case Name: The Supreme Court of New South Wales was asked to consider Johnston v McGrath & Ors whether the liquidators of HIH had been entitled to reject a proof of debt lodged by a shareholder claiming a loss in value of his Citation: shares as a result of misleading and deceptive conduct by the company. The court also considered whether the shareholder’s [2005] NSWSC 1183, Supreme claim should be postponed to the claims of external creditors Court of New South Wales per Gzell J under section 563A CA. HIH went into liquidation in 2001, after which shareholder Mr Johnston lodged a Date of Judgment: proof of debt for the loss in value of his shares. He claimed that he had been 23 November 2005 induced into buying the shares by statements in a media release and ﬁ nancial report, and press coverage of those items. The liquidators admitted that some of the statements made in the media release and the ﬁ nancial report were misleading Issues: and deceptive. For the purposes of the proceeding only, they also conceded that the • Whether misleading and shares in HIH were worthless from the date of the appointment of provisional deceptive conduct by a liquidators. Nonetheless, they rejected Mr Johnston’s proof of debt. He appealed company caused a loss in that decision. value of a shareholder’s shares Justice Gzell held that Mr Johnston was unable to recover damages in relation to • Section 563A CA his misleading conduct claim on the basis that he had failed to demonstrate that • Postponement of HIH’s misrepresentations caused his loss (ie that they were a materially shareholders’ claims to contributing cause of his purchase of the shares). Accordingly, the liquidators had claim of other creditors been entitled to reject his proof of debt. Justice Gzell also noted that, if any of the • Treatment as a creditor misrepresentations caused Mr Johnston’s loss, they had been overtaken by subsequent repeated warnings in the press about HIH’s poor performance, which had been read by Mr Johnston and had contradicted the representations.

Having held that Mr Johnston had not made out his misleading conduct claim, it was not necessary for Justice Gzell to decide whether Mr Johnston’s claim, as a claim made by an ‘on-market’ or ‘transferee shareholder’, should be postponed to the claims made by external creditors under s563A CA. However, his Honour provided detailed views on the matter.

Section 563A postpones to the claims of external creditors the payment of a ‘debt owed by the company to a person in the person’s capacity as a member of the company, whether by way of dividends, proﬁ ts or otherwise’. In Sons of Gwalia Limited (administrator appointed) v Margaretic [2005] FCA 1305, Justice Emmett of the Federal Court found that a damages claim against a company arising from a claim of misleading and deceptive conduct by the company brought by a shareholder who had purchased shares ‘on market’ was not a claim ‘as a member’ and so was not subordinated under s563A CA (see page 199 of this Review). Justice Gzell disagreed with this conclusion and found that:

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9423 Insolvency 2 casenotes.indd 202 7/03/2006, 1:04:43 PM • he was bound by the High Court decision in Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15, which, in his view, established that damages payable by a company to a shareholder with a successful misleading conduct claim are owed to the shareholder in his or her capacity as a member of the company; • postponement of shareholders’ misleading conduct claims under s563A applies to both subscribing shareholders and transferee shareholders (contrary to what Justice Emmett found in Sons of Gwalia); and • accordingly, Mr Johnston’s claim, if it had been made out, would have been postponed under s563A CA until all debts of other creditors had been satisﬁ ed.

Justice Gzell agreed with one aspect of the decision of Justice Emmett in the Sons of Gwalia case. He found that quite apart from the issue of postponement, a shareholder with a misleading conduct claim may prove in the winding up of the company and be treated as a creditor.

The current state of the law for an ‘on-market’ acquirer of shares (referred to as a ‘transferee shareholder’) with a claim based on misleading and deceptive conduct is that such a person is a creditor for the purpose of an administration. Justice Gzell’s ﬁ ndings of fact on the claim of misleading and deceptive conduct based on representations made by the company to shareholders may provide liquidators and administrators with some guidance as they adjudicate proofs of debt lodged by shareholders making similar types of claims. Given the non- binding nature of Justice Gzell’s comments on the postponement issue, the current position under the Sons of Gwalia decision is that a claim made by a transferee shareholder will not be postponed to the claims of other external creditors.

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The Concept Sports case: the Full Court decision

Case Name: In this case, the Full Federal Court overturned Justice Finkelstein’s Cadence Asset Management Pty decision at trial. The Full Court held that if a company issues a Ltd v Concept Sports Ltd misleading prospectus, a subscribing shareholder could make a claim under section section 729(1) CA for the loss suffered by Citation: reason of the misleading conduct. Such a claim could be made by the shareholder without fi rst rescinding its subscription contract. [2005] FCAFC 265, Full Court of Federal Court of Australia per However, by reason of s563A CA, if the company was in Merkel, Weinberg and Kenny JJ liquidation, the subscriber’s right to be paid the loss was postponed until the claims of creditors had been satisfi ed. Date of Judgment: Section 729(1) CA provides that a person who suffers loss because the disclosure 16 December 2005 documents (for example, a prospectus) that accompany an offer of securities contain a misleading or deceptive statement can recoup that loss from the company that made the offer, or from the company’s directors. Issues: • Sections 563A, 728 and In this case, the shareholders had purchased their shares from the prospectus, and 729(1) CA subsequently sold their shares to third parties. Accordingly, they could not rescind • Misleading and deceptive their subscription contracts. The question before the Full Court was whether the prospectus subscriber shareholders were entitled to recoup their losses under s729(1) CA or • Whether rule in Houldsworth whether the subsection was qualifi ed by the rule in Houldsworth v City of Glasgow bars subscriber shareholders Bank (1880) 5 App Cas 317. from bringing their claims against company The rule in Houldsworth prevents a shareholder from receiving back any part of their contribution to the capital of the company. The objective of this rule is to protect creditors by preserving the capital of the company. In the court below, Justice Finkelstein had held that the subscriber shareholders were barred from bringing their claims as they were suing for the recovery of their loss in circumstances where they had not rescinded their subscription contracts: see Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCA 1280 (which is referred to at page 196 of this Review).

The Full Court disagreed, holding that a shareholder’s right to recoup losses provided for in s729(1) CA is not qualiﬁ ed by the rule in Houldsworth. Accordingly, under s729 CA, shareholders who have subscribed for shares relying on a misleading prospectus are afforded a right to recover their losses from the company that issued the prospectus, or from its directors. The Full Court held that this right is not qualiﬁ ed (as would be the case if the rule in Houldsworth applied) by the requirement that a shareholder rescind the subscription contract.

The Full Court reasoned that there was no need to qualify any entitlement under s729(1) CA by the rule in Houldsworth as it was already enshrined in s563A CA in the context of liquidation. Under s563A CA, subscribing shareholders are entitled to prove in a liquidation, without having to rescind their contracts of acquisition,

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9423 Insolvency 2 casenotes.indd 204 7/03/2006, 1:04:44 PM though their claims are postponed to those of persons claiming other than in their capacity as a shareholder.

In effect, s563A CA protects unsecured creditors by maintaining the capital of a company, while also affording aggrieved shareholders rights in respect of the residual assets of a company once other debts are settled. The Full Court did not comment on the position of transferee shareholders under s563A CA, a matter that will be decided when another Full Court of the Federal Court (Justices Finkelstein, Gyles and Jacobson) hands down its decision in Sons of Gwalia Limited v Margaretic.

This case conﬁ rms the priority afforded to secured and unsecured creditors of a company over subscription shareholders in a winding up. In addition, it conﬁ rms the broad right afforded to aggrieved shareholders to recoup losses incurred because of the issue of a misleading prospectus from the issuing company or its directors, and establishes that, in a winding up, those shareholders’ claims are postponed to those of creditors.

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9423 Insolvency 2 casenotes.indd 205 7/03/2006, 1:04:45 PM STATUTORY DEMANDS

Trust me: it’s solvent

Case Name: A creditor issued a statutory demand and then made an Rupert Co Ltd v Chameleon application to wind up a company. The company maintained that Mining NL it was solvent and able to pay its debts as they became due. The court was not satisfi ed that the company had presented its full Citation: fi nancial state of affairs and found that, on the information provided, it was insolvent. [2004] NSWSC 1261, Supreme Court of New South Wales per In 2003, Rupert served a statutory demand upon Chameleon for the payment of Smart AJ $200,000. In 2004, the Federal Court of Australia dismissed Chameleon’s application to set aside the statutory demand. The amount demanded was not paid Date of Judgment: and Rupert applied to the court for orders that Chameleon be wound up. 22 December 2004 Chameleon opposed the application on the grounds that it could pay its debts as and when they fell due and that it was therefore solvent. It was agreed that Chameleon had the onus of proving that the company was solvent. Issues: • Section 459 CA Chameleon was a public company fl oated for the purpose of raising money to • Whether defendant promote gold mining. It had a number of exploration areas in Fiji and Western company insolvent Australia and was interested in purchasing a copper mine in Chile. A chartered accountant with extensive experience in insolvency administrations was engaged by Chameleon to make an assessment of its fi nancial position. The accountant reported that:

• Chameleon was not trading and had no employees, nor was it carrying out any mining operations; • various creditors had agreed to postpone their entitlement to be paid (these were directors and associated companies); • Chameleon had not had a signifi cant income and its strategy over the previous two years when it needed money to meet its external obligations had been to sell assets or allot further shares; • Chameleon was hopeful that the copper mine in Chile would, within a relatively short period, produce suffi cient profi ts to meet its various debts; and • if the information given by Chameleon was accurate and complete then, with the arrangements in place for payments to be deferred, it was solvent.

The court noted that section 459A CA provides that, on an application under s459P (that the company be wound up in insolvency), the court may make a winding-up order. Chameleon relied on the fact that, even if the court concluded that the company was insolvent, it had a discretion as to whether to wind up the company: Hamilhall Pty Limited v AT Phillips Pty Ltd 91994) 54 FCR 173.

The court, however, became aware that the accountant had not been told of additional debts that Chameleon was liable for and stated that it was ‘a little

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9423 Insolvency 2 casenotes.indd 206 7/03/2006, 1:04:46 PM surprising that the ofﬁ cers of [Chameleon] did not supply fuller instructions to [the accountant] when they retained him to prepare his report on [Chameleon’s] insolvency’.’

The court noted that the question of solvency is to be determined as at the date of the hearing and that the focus of Chameleon’s activities was on the acquisition of the copper mine in Chile and the anticipated large proﬁ ts. His Honour said that ‘if the anticipated proﬁ ts do not materialise the defendant will have greater debts by being allowed to continue with no offsetting income of any consequence from the other assets of the defendant’.

The court concluded that, on the evidence available, Chameleon was insolvent and that it was not satisﬁ ed that it had been fully appraised of the true extent of Chameleon’s liabilities.

While not having an appreciable income is not fatal when attempting to prove solvency, there must at least be sufﬁ cient funds to meet debts as they fall due. Cogent, admissible evidence should be adduced by any company that seeks to oppose a winding-up order because it is solvent.

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9423 Insolvency 2 casenotes.indd 207 7/03/2006, 1:04:46 PM STATUTORY DEMANDS

Perils of issuing statutory demands: genuine disputes and offsetting claims

Case Name: The plaintiff company applied to set aside a statutory demand Di Francesca Holdings Pty Ltd v without disputing the amounts the defendant claimed for unpaid Hatziplis Holdings Pty Ltd rent and interest. The plaintiff relied on both grounds available under section 459H CA: a ‘genuine dispute’ as to its liability for Citation: the debt, and the existence of an ‘offsetting claim’. The court presented a concise discussion of the well-settled principles that [2005] NSWSC 169, Supreme Court of New South Wales, will apply in relation to both of these grounds. Equity Division, per White J Di Francesca Holdings Pty Ltd (the plaintiff) leased premises from Hatziplis Holdings Pty Ltd (the defendant). The plaintiff vacated those premises prematurely Date of Judgment: because the lack of airconditioning made the shop unbearable during summer. 25 February 2005 There was evidence that an agent for the defendant had assured one of the plaintiff’s directors, during the initial inspection, that keeping the back door of the shop open would cause air circulation. Issues: • Section 459G CA The defendant landlord issued a statutory demand for unpaid rent and interest, and • Application to set aside a the plaintiff applied under s459G CA for it to be set aside on both of the grounds statutory demand set out in s459H: a ‘genuine dispute’ regarding its liability for the debt claimed, • Whether ‘genuine dispute’ and the availability of a genuine ‘offsetting claim’. as to liability for debt • Whether ‘offsetting claim’ The court noted that the relevant principles were not in doubt. To determine available whether there is a ‘genuine dispute’ as to liability, the court:

• only needs to consider whether the plaintiff has a plausible contention that requires further investigation; and • does not need to investigate or resolve the actual dispute.

It is only when the dispute appears completely implausible that the court will need to investigate the supporting evidence – and then only to determine whether there is a genuine dispute, rather than to resolve it.

To determine whether there is an ‘offsetting claim’, the court will consider:

• whether the plaintiff has a genuine counter-claim/set-off/cross demand – even if it does not arise from the same transaction; • whether it is advanced in good faith for an amount that is claimed in good faith; • whether there is suffi cient evidence to show a plausible and coherent basis for the loss; • how the loss is to be quantifi ed in monetary terms, even if there is some uncertainty; and • if the amount claimed might be greater than the debt specifi ed in the statutory demand.

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9423 Insolvency 2 casenotes.indd 208 7/03/2006, 1:04:47 PM In applying these principles, the court noted that the plaintiff had plausible claims in relation to the agent’s alleged representation, which may have impliedly conveyed to the plaintiff that keeping the back door open would ventilate the shop so that it would be suitable for retail operation.

Further, the court considered that there was a genuine counter-claim for damages in amounts that were capable of being calculated in monetary terms. Accordingly, the court was satisﬁ ed that the plaintiff had an offsetting claim. There was, therefore, a genuine dispute as to liability. The statutory demand was set aside on both grounds.

When an application is made to set aside a statutory demand on s459H CA grounds, a court need only be satisfi ed that it is plausible that there is a ‘genuine dispute’ between the parties as to liability, and/or that it is possible that the plaintiff has an ‘offsetting claim’ against the defendant which, made in good faith, is capable of being calculated with suffi cient precision for the court to be able to determine that it is for an amount at least equal to the debt specifi ed in the statutory demand.

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9423 Insolvency 2 casenotes.indd 209 7/03/2006, 1:04:48 PM STATUTORY DEMANDS

It all depends on the circumstances

Case Name: At fi rst instance, the court refused to set aside a statutory demand Bidjara Aboriginal Housing & served by the respondent. The Queensland Court of Appeal set Land Co Ltd v Bidjara Motor aside the decision on the grounds that the debt was very unusual Corp P/L (in liquidation) in nature that, combined with the evidence put forward by the applicant, constituted a genuine dispute as to the debt. Citation: This was an appeal from a decision refusing to set aside a statutory demand served [2005] QCA 196, Queensland under section 459G CA. The statutory demand was issued by Bidjara Motor (in Court of Appeal, per McMurdo liquidation), alleging that Bidjara Housing owed over $576,000 under a P, Williams JA and Mullins J shareholders’ agreement. The agreement was between Bidjara Housing and a third party, called Badman Motor Group, and had the following essential terms: Date of Judgment: • the shareholding of Bidjara Motor is 60 per cent to Bidjara Housing and 40 10 June 2005 per cent to Badman; • the distribution of profi ts will be 60 per cent of profi ts generated by Bidjara Issues: Motor to Bidjara Housing and 40 per cent to Badman; and • Section 459G CA • the liability for losses incurred by the trading of Bidjara Motor be apportioned • Section 55 of the Property on the basis of Bidjara Housing accepting responsibility for 60 per cent of any Law Act 1974 (Qld) fi nancial losses relating to all trading of Bidjara Motor and 40 per cent to • Whether statutory demand Badman. should be set aside As Bidjara Motor was not a party to the agreement, it sought to rely on s55 of the Property Law Act 1974 (Qld) and enforce the agreement as a benefi ciary. The court noted that, to rely upon s55 PLA, Bidjara Motor would need to fulfi l the necessary preconditions prescribed by the PLA. Also, the agreement’s wording was ambiguous and could support various interpretations. The court found that there were issues raised by the application to set aside the statutory demand that could not be simply answered and gave rise to a suffi ciently genuine dispute about the debt’s existence. The appeal was therefore allowed and costs were ordered against the respondent.

The fact that a company does not have strong evidence to dispute a debt does not mean a statutory demand will not be set aside. The court will look at all the circumstances and, if there is any substantive issue of contractual interpretation or compliance with a statutory requirement, a demand may well be set aside.

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9423 Insolvency 2 casenotes.indd 210 7/03/2006, 1:04:48 PM STATUTORY DEMANDS

Seek and you shall not ﬁ nd: requirement to identify quantum of offsetting claim

Case Name: This case considers the impact of the failure to identify the Broke Hills Estate Pty Ltd v quantum of an offsetting claim. It also identifi es examples of Oakvale Wines Pty Ltd technical issues that may be raised in opposition to an application to set aside a statutory demand. Citation: Broke Hills Estate was the owner of a vineyard and entered into a contract with [2005] NSWSC 638, Supreme Oakvale Wines by which Oakvale would act as a winemaker. Oakvale’s invoice was Court of New South Wales per partly paid and the balance of $88,000 became the subject of a statutory demand. Gzell J Broke Hills applied to the court for an order setting aside the statutory demand. The originating process had a page attached to it with the heading ‘Affi davit in support’. Date of Judgment: The attachment was a document in the form of an affi davit by the solicitor for 24 June 2005 Broke Hills stating that Oakvale had made a large quantity of wine that was defective in quality because of Oakvale’s winemaking process. It also stated that Issues: the wine could not be sold (or was sold at signifi cantly reduced prices) and that, as • Section 459H(1)(b) CA a result, Broke Hills suffered loss and had a claim against Oakvale. The document • No evidence of quantum of also attached a facsimile from Broke Hills’ solicitor to the solicitors for Oakvale offsetting claim asserting that Broke Hills disputed the amount of the debt and that it had an offsetting claim.

Oakvale opposed the application to set aside the statutory demand. First, it noted that the affi davit was not in a form that complied with Supreme Court (Corporations) Rules rule 2.6(a). Rule 2.1 requires the title of the document to be in Form 1. His Honour dismissed this submission and said that the irregularity could be excused by the court. Secondly, Oakvale asserted that the supporting affi davit had to be a separate document to the originating process because section 459G(3) CA speaks of an application and a supporting affi davit. His Honour found that this requirement was not infringed simply because the affi davit was incorporated into the application.

The third argument stemmed from s75 of the Evidence Act 1995 (NSW), which provides that the hearsay rule does not apply in interlocutory matters if the source of the information is set out in the affi davit. Oakvale alleged that the affi davit was defi cient in this respect. His Honour noted that the source need not be stated in the affi davit itself and that it may be established otherwise: Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 222. The court was able to infer from the affi davit what the source of the information was.

The main area of dispute was whether the supporting afﬁ davit raised sufﬁ cient matters to enable the court to act under s459H(2) CA. That section provides that the court must calculate the substantiated amount of the demand by deducting the offsetting total by the admitted total of the debt. Oakvale submitted that there was no evidence that enabled the court to calculate the total amount of the offsetting claim. To calculate the amount of demand under s459H(2), the court must be able

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9423 Insolvency 2 casenotes.indd 211 7/03/2006, 1:04:49 PM to determine the amount of the offsetting claim: National Telecoms Group Ltd v Bulldogs Rugby League Club [2003] NSWSC 654.

As nothing in the afﬁ davit of support gave any indication of the quantum of the offsetting claim, his Honour dismissed the application to set aside the statutory demand.

It is essential that an afﬁ davit given in support of an application to set aside a statutory demand by way of offsetting claim contains material to allow the court to establish the quantum of an offsetting claim.

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9423 Insolvency 2 casenotes.indd 212 7/03/2006, 1:04:50 PM UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Blanket extension of time to bring any voidable transaction claim allowed

Case Name: The liquidator in this case applied for an extension of time in Tolcher (as liquidator of Lloyd which to apply to the court for certain orders in relation to Scott Enterprises Pty Ltd (in voidable transactions. This case considers whether the liquidation)) & Anor v Capital application for extension must specify a particular voidable Finance Australia Ltd & Anor transaction for which a section 588FF(1) application may be made to the court and the effect of granting the extension. Citation: Section 588FF(1) CA provides that, on the liquidator’s application, a court may [2005] FCA 108, Federal Court make certain orders, including an order that a person pay a company a sum of of Australia per Tamberlin J money, if it is satisﬁ ed that a transaction is voidable. Section 588FF(3) provides that an application under s588FF(1) may be made by the liquidator within three Date of Judgment: years of the relation-back day (s588FF(3)(a)) or within such longer period as the 18 February 2005 court orders on application by the liquidator (s588FF(3)(b)). Lloyd Scott Enterprises Pty Ltd (in liquidation) (the company) was a dealer in Issues: photocopiers. The company entered into leasing transactions as agent for Capital • Section 588FF CA Finance Australia Ltd (Capital Finance) and Capital Corporate Finance Ltd (Capital • Application for extension Corporate). The liquidator of the company formed the view that the preference of time limit under payments were voidable as insolvent transactions and ﬁ led an application under s588FF(3)(b) CA s588FF(1) seeking an order that Capital Finance pay the company an amount equal to those payments.

In its defence, Capital Finance alleged that certain relevant payments were made to Capital Corporate, its subsidiary. At that time, Capital Corporate had been deregistered. The liquidator applied for reinstatement of Capital Corporate and its joinder to the proceeding. Under s588FF(3)(b), the liquidator also sought an extension of time in which to join Capital Corporate.

The application for an extension of time and joinder was resisted by Capital Finance on two grounds. First, Capital Finance argued that the court did not have power to grant an extension of time because the application for extension was made in a general form in relation to a class of transaction and therefore lacked sufﬁ cient speciﬁ city. Second, Capital Finance argued that, at the date of the commencement of proceedings, so far as Capital Corporate was concerned, the joinder would fall outside the three-year limitation period and, since no proceedings against Capital Corporate had been commenced within the three-year period, any extension of time would be futile.

In relation to the form of the application, the application was for extension of time within which ‘any application in respect of any voidable transaction’ can be made. The court held that, although s588FF(1) refers to an order to be made on the application of the liquidator in circumstances where the court is satisﬁ ed that a transaction is voidable, there is nothing in the language of s588FF(3)(b) that

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9423 Insolvency 2 casenotes.indd 213 7/03/2006, 1:04:50 PM requires any application for an extension of time to specify a particular transaction, as opposed to a class or category of transactions. After reviewing the authorities, the court concluded that an application under s588FF(3)(b) seeking a general order for extension of time to make an application under s588FF(1) is a valid application. The power to extend the time limit for commencing proceedings is intended to provide for the circumstances in which a liquidator is not in a position to commence proceedings within the time limit, so the power should be broad enough to allow for an order granting an extension of time in general terms.

In relation to whether it would be futile to join Capital Corporate as the three-year limitation in s588FF(3) to commence a proceeding had expired, the court held that the effect of an order made under s588FF(3) that extends time is that the proceedings may be commenced by making the application under s588FF(1). An application had already been commenced against Capital Finance. The provision limits the time for the bringing of a new claim, not amending an existing claim. Therefore, it is inappropriate to contend that any application for joinder of Capital Corporate would be futile as outside the three-year limitation period.

The court considered the history and timing of events and held that it would be in the interests of justice to exercise its discretion to grant the liquidator’s application for an extension of time.

An application by a liquidator for extension of time under s588FF(3)(b) CA is not required to be framed in a way that relates to a particular transaction. The application may be in a general form relating to a class of transactions. An application made more than three years after the relation-back day to amend a voidable transaction claim that was commenced within the three-year time limit, by adding a new party, is permissible and is not out of time.

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9423 Insolvency 2 casenotes.indd 214 7/03/2006, 1:04:51 PM UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Can you keep a secret? Obligation of FCT to discover relevant documents despite secrecy provisions

Case Name: The FCT failed in its attempt to resist an application for Javorsky v Commissioner of discovery by relying on the ‘secrecy provisions’ of the tax Taxation legislation, which prohibited the disclosure of information obtained by an ATO offi cer in the course of his or her duties. Citation: The liquidator of PLM Formwork Pty Limited (the company) fi led a motion seeking [2005] NSWSC 167, orders for discovery by the FCT. Supreme Court of New South Wales per White J The FCT entered into an agreement, dated 23 July 1999, with certain individuals and companies for the repayment of their taxation debts by instalments. Subsequently, some of these payments were paid by the company on behalf of the Date of Judgment: debtors. The liquidator commenced an action against the FCT to recover the 31 March 2005 payments, claiming they were made when the company was insolvent and owed taxation debts of its own, and therefore constituted voidable transactions under Issues: section 588FE(1) and (3) CA. • Section 588FE CA The FCT pleaded s588FG(2) in its defence. That section provides that a person has • Voidable transactions a defence to a voidable transaction claim if the person entered into the relevant • Section 16(2) of the Income Tax Assessment Act 1936 transaction in good faith and, in effect, had no reasonable grounds to suspect that (Cth) the company was insolvent at the time of the transaction or would become • Offi cers of the ATO to insolvent as a result of the transaction. The liquidator sought discovery of observe secrecy documents relevant to that defence. • Section 3C(2) of the The FCT resisted discovering documents sought by the liquidator because of ‘secrecy Taxation Administration Act provisions’ contained in s16(2) of the Income Tax Assessment Act 1936 (Cth) (ITAA) 1953 (Cth) and s3C(2) of the Taxation Administration Act 1953 (Cth) (TAA), which effectively prohibits ATO offi cers from making a record of, or divulging or communicating, any information about another person’s affairs acquired during the course of their duties. Section 16(3) ITAA sets out the limits of the prohibition on disclosure by ATO offi cers. Under that section, the FCT is only exempt from disclosing:

• taxation returns, assessments and notices of assessment; or • information acquired by an ofﬁ cer ‘under the provisions of [the ITAA]’.

The scope of s3C(2) TAA is broader: the FCT is exempt from producing not only information acquired under the TAA, but also ‘for the purposes’ of the TAA.

The collection of taxation liabilities, including the making of arrangements for payment by instalment, was a function of the administration of the ITAA that was transferred to TAA effective 1 July 2000. In this instance, Justice White held that, assuming the agreement dated 23 July 1999 had not been amended, the FCT was exercising his functions and powers under the ITAA even though payments were made by the company after 1 July 2000.

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9423 Insolvency 2 casenotes.indd 215 7/03/2006, 1:04:52 PM As a result, the FCT was ordered to give discovery without prejudice to his right to claim non-production of particular documents by reason of s16(3) ITAA or s3C(3) TAA (namely, exemptions of taxation returns, assessments and notices of assessments of the debtors, or documents containing information disclosed or obtained under the provisions under the ITAA or TAA). However, if non-production of any document was to be asserted, full grounds of that contention, including the factual basis, would need to be speciﬁ ed in the list of documents and afﬁ davit of discovery, not merely the terms of the secrecy provisions of the tax legislation.

The overarching obligations to discover relevant documents in court proceedings are not presumed to be overridden by the secrecy provisions of the tax legislation. For the FCT to obtain the beneﬁ t of the secrecy provisions and be excused from the courts’ discovery regime, the onus is on the FCT to demonstrate fully that the information or documents disclosed to, or obtained by, the ATO were done so under the authority of particular provisions of the tax legislation.

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9423 Insolvency 2 casenotes.indd 216 7/03/2006, 1:04:54 PM UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Relying on unsecured borrowings to pay debts does not mean that a company is insolvent

Case Name: The NSW Court of Appeal has confi rmed that a company is not Lewis (as liquidator of Doran necessarily insolvent if the only way it can pay its debts is by Constructions Pty Ltd relying on unsecured borrowings from a third party. This decision (in liquidation)) emphasises that regard must be had to the commercial reality of & Anor v Doran & Ors a company’s relationships with related companies when considering the merit of that company’s actions. Citation: The liquidator of Doran Constructions Pty Ltd (Constructions) claimed that a prior (2005) 219 ALR 555, debt reconstruction within the Doran group of companies was either: New South Wales Court of Appeal per Giles, Hodgson • an insolvent transaction, and therefore voidable; or and McColl JJA • a breach of the statutory and fi duciary duties of Constructions’ directors, in which case the directors were liable to damages. Date of Judgment: Section 588FE(4) CL provided that the restructure would be voidable if it was an 18 August 2005 insolvent transaction. Section 588FC CL relevantly provided that a transaction was an insolvent transaction if it was an ‘uncommercial transaction’ and: Issues: • it was entered into, or given effect to, when the company was insolvent; or • Section 95A CL • Solvency • the company became insolvent because of, or because of matters including, • Sections 588FB, 588FC entering or giving effect to the transaction. and 588FE CL The debt reconstruction had involved the substitution of one debt to Constructions • Whether debt restructuring from its parent company (Holdings), which was payable on demand, with a debt within a corporate group from another related company (DCA), which was payable in six years. DCA was an insolvent transaction subsequently went into liquidation. • Whether debt restructuring was a breach of the At the time of the restructure, Constructions was only able to pay its debts by directors’ statutory or relying on funds made available to it voluntarily by Holdings. However, the Court of fi duciary duties to the Appeal found no compelling reason to exclude unsecured borrowings from the company funds available to a company to pay its debts, particularly since the Corporate Law Reform Act 1992 (Cth) removed from the defi nition of solvency in s95A CL the requirement that a debtor be able to pay debts ‘from his own monies’. Constructions was solvent because it was able to pay its debts as and when due, irrespective of where it obtained the money to do so.

The court did accept that the restructure was a cause of Constructions’ subsequent insolvency. Whereas the original debt from Holdings was payable on demand, the restructure meant that Holdings could withhold payment to Constructions and, when it eventually did so, Constructions no longer had funds available to pay its debts.

However, the court found that the restructure was not an uncommercial transaction and therefore not voidable. Section 588FB CL provided that a transaction was uncommercial only if ‘a reasonable person in the company’s circumstances’ would

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9423 Insolvency 2 casenotes.indd 217 7/03/2006, 1:04:54 PM not have entered it having regard to, relevantly, the benefi ts and detriments to the company of entering that transaction. The restructure did benefi t Constructions, notwithstanding that the primary benefi t was to Holdings, because it would provide Holdings with enhanced access to fi nance, such that Holdings could make extra funds available to Constructions. Furthermore, the detriment to Constructions of replacing a debt payable on demand with one payable in six years was not unreasonable, given the company’s expectation that Holdings would provide funds until the DCA debt became due. It could not be said, therefore, that a reasonable person would not have entered the transaction.

The court applied similar reasoning to ﬁ nd that Constructions’ directors had not breached their statutory and/or ﬁ duciary duties to the company. The directors had acted in the interests of Constructions as a separate legal entity and it was irrelevant that the directors also acted in the interests of Holdings.

A company that can pay its debts as and when due is solvent, notwithstanding that it must borrow money to do so. The commercial reality among many corporate groups is that one member acts as a ‘banker’ to the others, making funds available to other members as needed. This decision confi rms that companies are entitled to rely on such arrangements to maintain their solvency. The decision also recognises that transactions which primarily benefi t one member of a group may have ‘derivative’ benefi ts for other members. Directors are entitled to consider such benefi ts when acting in the interests of their companies.

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9423 Insolvency 2 casenotes.indd 218 7/03/2006, 1:04:55 PM UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

If I say it’s in liquidation then it is: court’s power to cure irregularity in termination of DOCA

Case Name: The deed administrators in this case had not terminated two Re Centaur Mining & companies’ DOCAs in accordance with the DOCAs’ terms. Exploration Ltd (in liquidation); Accordingly, there was a question as to whether the companies McKern v Roche Mining Pty Ltd were actually in liquidation. The Supreme Court of Victoria exercised its power, in the circumstances of this case, to vary Citation: the DOCAs to give effect to the intended termination date, [2005] VSC 367, Supreme and therefore to the commencement of the winding up. Court of Victoria per Mandie J Administrators were appointed to Centaur Mining & Exploration Ltd and its subsidiary, Centaur Nickel Pty Ltd, (the companies). Creditors’ meetings were Date of Judgment: conducted, and it was resolved that the companies execute DOCAs. 20 September 2005 The DOCAs provided for:

Issues: • imposing a moratorium on creditors’ claims during the ‘arrangement period’; • Section 447A CA • extending the arrangement period; and • Whether DOCAs had • terminating the DOCAs upon the happening of certain events. terminated • Whether s447A can be used At subsequent creditors’ meetings, it was resolved to extend the arrangement to terminate DOCAs period. It was also resolved to vary the DOCAs to allow the deed administrators, with the approval of the creditors’ committee, to terminate the DOCAs, at which time the companies would be wound up.

The deed administrators later advised the creditors’ committee that the DOCAs would expire on 2 August 2002 and the companies would be placed automatically into liquidation. From that date, the deed administrators conducted the affairs of the companies as if they were in liquidation.

Justice Mandie held that, by their conduct, the deed administrators had not validly terminated the DOCAs. They had failed to comply with the requirement of the DOCAs, as varied, by not asking the creditors’ committee to approve the termination of the DOCAs. However, his Honour held that s447A CA empowered the court to make an order varying the terms of the DOCAs to the effect that the DOCAs terminated on 2 August 2002. His reasons for that conclusion were:

• by 2 August 2002, the objects of Part 5.3A CA would no longer have been served by extending the DOCAs; and • since 2 August 2002, transactions entered into – on the assumption that the companies were in liquidation – required protection.

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9423 Insolvency 2 casenotes.indd 219 7/03/2006, 1:04:56 PM Having held that the court had the power to make the orders sought under s447A CA, Justice Mandie then considered that there was a ‘strong case for granting that relief’ because:

• the companies had no assets and ‘were hopelessly insolvent’; • it was ‘wholly improbable’ that the creditors’ committee would have voted for a further extension of the DOCAs; and • it was ‘inconceivable’ that the companies should be returned to the control of their directors.

Justice Mandie said that it was ‘just, convenient and in the interests of unsecured creditors’ to order that the DOCAs be varied so as to provide that they automatically terminated on 2 August 2002, and that the winding up of the companies commenced on that date.

The court has power to make an order under s447A CA to terminate a DOCA in circumstances where the deed administrators have failed to effect its termination in accordance with its terms, and where transactions and acts have taken place on the assumption that the company was validly in liquidation. Particular weight will be given to considerations such as whether, at the date of assumed termination, the purposes of the DOCA had failed and whether its continuation would have been futile.

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9423 Insolvency 2 casenotes.indd 220 7/03/2006, 1:04:57 PM DEVELOPMENTS IN AUSTRALIA

ACCC and ASIC new draft debt collection guidelines

The ACCC and ASIC jointly issued a draft debt collection guideline in February 2005. Once ﬁ nalised, it will replace the ACCC’s guideline, Debt Collection and the Trade Practices Act, published in 1999.

The draft guideline gives practical guidance to debt collectors, creditors and debtors on what are appropriate and inappropriate debt collection activities. Although it does not have legal force, the draft guideline is nevertheless important in setting out the views of the ACCC and ASIC on how the relevant provisions of the Trade Practices Act 1974 (Cth) (TPA) and the ASIC Act 2001 (Cth) apply to debt collection activities.

Details of the Commonwealth consumer protection laws that are relevant to debt collection activities are included in the draft guidelines, notably:

• the prohibition of the use of physical force, undue harassment and coercion (section 60 TPA and s12DJ ASIC Act); • the prohibition of misleading and deceptive conduct (s52(1) TPA and s12DA(1) ASIC Act); and • the prohibition of unconscionable conduct (Part IVA TPA and Part 2 Division 2 Subdivision C ASIC Act).

The draft guideline also deals with enforcement and remedies under the Commonwealth consumer protection laws. It also sets out details of other statutory and common law obligations and remedies, for example, under state and territory fair trading laws and under the Uniform Consumer Credit Code.

Comparison with 1999 ACCC guideline The draft guideline differs from the 1999 ACCC guideline in a number of respects. In particular, the draft guideline reﬂ ects the fact that ASIC is now responsible for consumer protection in ﬁ nancial services under the ASIC Act, and that the ACCC and ASIC now share responsibility at the federal level for the administration of debt collection.

The draft guideline also takes account of recent cases interpreting the laws governing debt collection, signiﬁ cant changes to debt collection industry practice since the 1999 ACCC guideline was published and stakeholder feedback.

The draft guideline expands upon topics raised in the 1999 ACCC guideline, as well as introducing new topics. Some of the topics covered in the draft guideline are discussed below.

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9423 Insolvency 3 legislative.indd 221 7/03/2006, 1:05:39 PM The purpose of communications between collectors and debtors Communications with debtors should always be for a reasonable purpose. For example, it is not reasonable or acceptable to contact a debtor for the purpose of frightening or intimidating, to make the debtor feel ‘under siege’ or to tire or exhaust the debtor.

Manner of communication Collectors must treat debtors with courtesy and avoid using abusive, offensive or discriminatory language, using an aggressive manner, or threatening to use violence or physical force against the debtor, a third party or property.

Collectors are also required to consider any relevant circumstances that put the debtor at a ‘special disadvantage’, such as language difﬁ culties, illness or age, which might affect the debtor’s ability to protect their own interests.

Also, collectors must not exploit a debtor’s lack of knowledge of the law or the debt recovery process, for example, by misrepresenting the consequences of non- payment of a debt.

Providing adequate information about the collector and the debt The draft guideline sets out what information the collector should provide on ﬁ rst contact with the debtor, and emphasises the importance of the collector’s representative identifying him or herself and explaining his or her role, as well as providing basic information about the alleged debt.

Collectors are also required to provide clear information about the debt within 14 days, if the debtor requests it.

The collector must not escalate collection activity while information is being supplied to the debtor.

Maintaining accurate records The draft guideline emphasises the need for accurate record-keeping by collectors, creditors and debtors in order to resolve disputes promptly.

The ACCC and ASIC note that creditors are responsible for assisting in the collection process by ensuring that accurate and full information is provided to collectors and by ensuring that any assigned or contracted debts are not already settled.

Contacting the debtor Collectors should contact the debtor at reasonable times. Generally, it is reasonable to contact a debtor by telephone between 8am (compared with 7.30am under the 1999 ACCC guideline) and 9pm. However, the collector should have regard to the debtor’s speciﬁ c circumstances – for instance, if the debtor is a shift worker and is asleep during normal hours.

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9423 Insolvency 3 legislative.indd 222 7/03/2006, 1:05:44 PM Collectors should avoid excessive and unnecessary communications with debtors. Generally, collectors should not contact a debtor more than three times per week or 10 times per month. Unduly frequent contact that has, or is likely to have, the effect of wearing down or exhausting a debtor may constitute undue harassment or coercion.

Unless the debtor agrees otherwise, personal visits should only be made to a debtor if reasonable efforts to contact the debtor by other means have been unsuccessful. Collectors should only make one personal visit per month.

Collectors should avoid visiting the debtor in person at inappropriate locations. Generally, the workplace is not a suitable location. If the collector does visit the debtor’s workplace, the collector should be discreet and ensure that the debtor’s co-workers are not made aware of the debtor’s ﬁ nancial affairs.

Generally, collectors should avoid creating the impression that the debtor is under constant surveillance.

If a debtor has appointed a ﬁ nancial counsellor or similar person to represent them, the collector should not contact the debtor directly or refuse to deal with the debtor’s representative.

The collector should not contact a debtor who has denied liability or who intends to defend legal proceedings. Further, where a debtor is bankrupt, any communications with the debtor should be made only in accordance with the Bankruptcy Act.

Who will beneﬁ t from the new guidelines? As stated above, the draft guideline is intended to assist not only collectors (including collection agencies, debt buy-out companies, collection departments and solicitors) and debtors and their advisers, but also creditors using external collection agencies. In that regard, the ACCC and ASIC note that creditors, as principal, may be liable for their agents’ breaches of the TPA and ASIC Act, and, further, should be concerned about reputational consequences if they are associated with the misconduct of their agents.

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9423 Insolvency 3 legislative.indd 223 7/03/2006, 1:05:44 PM DEVELOPMENTS IN AUSTRALIA

CAMAC’s report on rehabilitating large and complex enterprises in ﬁ nancial difﬁ culties

The Corporations and Markets Advisory Committee’s report, Rehabilitating large and complex enterprises in ﬁ nancial difﬁ culties, addressed the voluntary administration procedure in Australia. A number of CAMAC’s recommendations were incorporated into the Insolvency Reform Package – see page 233 of this Review.

In September 2002, the Parliamentary Secretary to the Treasurer asked the Corporations and Markets Advisory Committee (CAMAC) to consider whether there were particular diffi culties in applying the voluntary administration (VA) provisions in Part 5.3A of the CA to large and complex enterprises and, if so, to recommend the most appropriate course of action to deal with those diffi culties. CAMAC has released its report (the Report), which recommends some legislative changes to Part 5.3A but concludes that there are no fundamental diffi culties in applying Part 5.3A to large and complex enterprises.

Should additional or substitute corporate rehabilitation procedures be introduced? CAMAC was asked to consider whether a ‘debtor in possession’ procedure based on Chapter 11 of the United States Bankruptcy Code should be introduced into the CA as an additional, or substitute, corporate rehabilitation procedure. Both Chapter 11 and VA are directed to providing ﬁ nancially troubled corporations with an opportunity to reorganise and continue in business. The key difference between the two procedures is that in a VA, an external administrator controls the corporation while, under Chapter 11, corporate management retains control subject to the supervision of the bankruptcy courts.

CAMAC concluded that Part 5.3A has been a successful measure to deregulate external administrations. Creditors are protected by the appointment of an external administrator and court involvement is limited. CAMAC noted that Australian courts are reluctant to become involved in the commercial decision-making process and that Australia’s judicial infrastructure is not presently well-adapted to perform the functions required of courts under a Chapter 11-style regime. Accordingly, CAMAC recommended against a US-style Chapter 11 procedure and that the VA procedure should be retained.

CAMAC was also asked to consider whether a ‘business turnaround model’ should be introduced. This model would entail the creation of a Turnaround Panel (similar to the Takeovers Panel) to monitor and supervise the ‘turnaround’ process. CAMAC rejected the adoption of a ‘business turnaround’ regime, citing funding issues and concerns about removing the capacity of corporations’ creditors or shareholders to make important decisions about rehabilitation.

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9423 Insolvency 3 legislative.indd 224 7/03/2006, 1:05:45 PM What changes should be made to Part 5.3A to better accommodate large and complex corporation rehabilitation cases? CAMAC concluded that the VA provisions were fundamentally sound and that there are no particular difﬁ culties in applying them to large and complex enterprises. In particular, it recommended making no changes to the current description of the Part 5.3A process, the prerequisites for entering into VA, the court’s discretionary powers in relation to VAs, the ability of creditors to exercise set-off rights, the position of creditors that have the beneﬁ t of Romalpa clauses or the enforceability of ipso facto clauses (contractual clauses that have the effect of rendering the company in default of the contract if it is placed into administration).

However, it recommended some changes to Part 5.3A to enhance the ‘workability’ of VA for such enterprises, although it noted that these proposed changes would also beneﬁ t other enterprises in addition to large and complex ones. The signiﬁ cant recommendations are summarised as follows.

Provision of information to creditors CAMAC considered whether administrators should be permitted to use methods other than hard copy to distribute information to creditors. Recommendation 6 of the Report is that administrators should be obliged to send an initial written notice to creditors that the company has entered into administration (together with details relating to statutory timeframes and where information regarding meetings and associated documents can be found). In recognising the utility of modern methods of communication, CAMAC found that administrators should not be required to send creditors any further written information unless the creditors request it. This recommendation recognises the signiﬁ cant costs that can be associated with distributing the notice of the second meeting of creditors and the accompanying documentation such as the section 439A report (which recommends the course of action that the creditors should adopt). The Report notes that the administrators of Ansett estimated that to do so would have cost $28 million. However, CAMAC noted that, at a minimum, administrators ought to have a designated website and a toll-free telephone number to disseminate information.

Time periods In Recommendation 7, CAMAC recommended that the time periods for holding the ﬁ rst and major meetings of creditors be increased so that they are required to be held within eight and 25 business days respectively, following the administrator’s appointment.

CAMAC also recommended giving the administrator specifi c power to adjourn creditors’ meetings for a specifi ed statutory period and to apply to the court for orders overriding the statutory timetable and substituting a specifi c timetable for the particular administration.

These recommendations were based on CAMAC’s view that timetables should have sufﬁ cient ﬂ exibility to accommodate the special requirements of large and complex enterprises.

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9423 Insolvency 3 legislative.indd 225 7/03/2006, 1:05:46 PM Administrator’s exercise of casting vote CAMAC recommended that an administrator be required to publish their reasons for the exercise of a casting vote (Recommendation 10), expressing the view that this requirement would reinforce the need for administrators to consider the exercise of their casting vote carefully and would also provide a basis for any appeal against the decision.

Eligibility for appointment as an administrator Recommendation 15 states that persons with ‘adequate expertise in corporate rehabilitation’ should be permitted to be administrators, irrespective of their experience in liquidations. CAMAC also recommended that the court have the power to appoint, as administrator, a person with speciﬁ c skills and experience relevant to the activities of a particular corporation, even if that person does not satisfy the criteria for appointment as an administrator.

Administrator’s remuneration Recommendation 18 concerned the power to approve an administrator’s remuneration. It concludes that, to avoid the delays that may arise in administrations of large and complex enterprises, administrator’s remuneration should be capable of being approved by the court, by resolution of creditors generally, or by agreement between the administrator and a simple majority (by value) of the committee of creditors. However, it also recommended that approval by the committee of creditors ought be effective only until a major meeting or other general meeting of creditors.

Appointment of receiver CAMAC recommended (Recommendation 24) that substantial chargees be allowed a period of 15 business days after receiving notice of the administrator’s appointment to decide whether to appoint a receiver.

CAMAC also recommended that, within the 15-day decision period, administrators should be permitted, if authorised by the committee of creditors, to enter into agreements with substantial chargees concerning the appointment of a receiver at any time during the administration.

Priorities The Report recommended that a post-administration lender may be given priority over unsecured pre-administration creditors, provided that the priority is approved by three quarters by value, and a simple majority by number, of the unsecured pre- administration creditors who vote on the resolution (Recommendation 31).

Recommendation 39 proposed that Part 5.3A should be amended to clarify that DOCAs are not invalid merely because they depart from the statutory winding-up priorities.

Equity for debt Recommendations 35 and 37 addressed the making of equity-for-debt offers and swaps. CAMAC proposes that, when making such an offer, an administrator should

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9423 Insolvency 3 legislative.indd 226 7/03/2006, 1:05:47 PM only be required to provide a statement setting out all relevant information that the administrator knows, or ought reasonably to know, in circumstances where the offer does not require accepting creditors to contribute any further consideration under that offer (as opposed to being obliged to undertake a full due diligence exercise as required for a full prospectus).

CAMAC also suggested that the VA provisions expressly provide that all affected creditors are bound by an equity-for-debt swap in a DOCA, in order to minimise the risk of having rehabilitation strategies unravel if the decision was left to individual creditors.

Pooling The Report contained a number of recommendations relating to ‘pooling’, or the ability of corporate group companies in VA to adopt a uniﬁ ed administration and enter into a single DOCA.

Recommendation 40 is that ‘pooling’ be permitted where corporations share a common ownership structure, have a common exposure to liabilities or own assets in a common scheme or undertaking. Recommendation 41 states that solvent group corporations should be allowed to enter into an administration with other group corporations where at least one of the corporations satisfi es the prerequisites for VA. In Recommendation 42, CAMAC suggested that the directors of any solvent group corporations and the administrator of any other group corporation should decide whether to enter into a proposed ‘pool’. A procedure for approving the creation of a pool, and for joining an existing pool, was also described in Recommendation 42. The basis for these recommendations was the need to strike a balance between fi nding mechanisms for managing groups with closely intertwined fi nancial affairs, against the interests of creditors, who may be substantially affected by pooling arrangements.

What changes, if any, should be made to Part 5.1 of the CA? CAMAC was also asked to consider whether any changes should be made to the provisions regulating creditors’ schemes of arrangement contained in Part 5.1 of the CA. CAMAC, however, made no recommendations in relation to Part 5.1, as it did not receive any submissions supporting a change in response to its September 2003 discussion paper.

Conclusions The Report is a clear endorsement of the VA system. The recommended changes to Part 5.3A do not substantially alter the structure of the present system, and CAMAC concluded decisively that additional or alternative corporate rehabilitation regimes – in particular, one based on the US Chapter 11 – are neither necessary, nor desirable, in an Australian context.

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Extent of liability of corporate ofﬁ cers and other individuals under review

Introduction The Corporations and Markets Advisory Committee (CAMAC) released two discussion papers during May 2005, which consider the extent to which corporate ofﬁ cers and other individuals may be held personally liable, albeit in different contexts.

In short, the discussion paper entitled:

• Personal liability for corporate fault looks at the circumstances in which, where a corporation has contravened a statutory requirement, a director or manager of the corporation may be personally liable for that contravening conduct simply as a consequence of the position they hold, or the function they perform, within that corporation (and not as a consequence of their actual acts or omissions) (derivative liability), and proposes a number of model templates for the imposition of individual derivative liability both within and across each jurisdiction of Australia. • Corporate duties below board level reviews the extent to which corporate ofﬁ cers (excluding directors), employees and other individuals are subject to personal duties and liabilities under the CA and considers whether those classes of persons should be extended and whether a general dishonesty provision should be introduced into the CA.

An overview of the key issues raised, and the proposals made, in each of these two discussion papers is set out below.

Personal liability for corporate fault Review of existing derivative liability provisions

In preparing its discussion paper on Personal liability for corporate fault, CAMAC reviewed the means by which Commonwealth, state and territory environmental protection, occupational health and safety, hazardous goods and fair trading legislation impose derivative liability on directors and managers of corporations.

In essence, CAMAC found that the approach taken both within and between the Commonwealth, state and territory jurisdictions for imposing individual derivative liability is inconsistent. Broadly, however, the derivative liability provisions reviewed by CAMAC used one of four approaches to determine whether an individual may be held criminally liable as a result of a contravention by a corporation, namely, whether the individual:

• held formal positions within the corporation (positional liability); • was concerned with, or involved in the management of, the corporation (managerial liability);

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9423 Insolvency 3 legislative.indd 228 7/03/2006, 1:05:49 PM • had operational or organisational responsibility for the contravening conduct (responsible ofﬁ cer liability); or • promoted, authorised or acquiesced in a contravention by the corporation (participatory liability).

CAMAC’s concern is that this inconsistency may increase compliance costs and detract from good corporate governance by making it more diffi cult for directors and other individuals to fully comprehend their legal responsibilities. Accordingly, CAMAC has specifi cally invited comment on whether any companies have encountered diffi culty as a result of the differences between statutes that impose individual derivative liability.

Public interest considerations vs individual rights

CAMAC notes that the individual rights of directors and other individuals must be balanced with the public interest of ensuring corporations (and their directors and ofﬁ cers) are duly accountable for corporate misconduct.

One justiﬁ cation for the imposition of individual derivative liability is that it may provide a greater incentive for those involved in the management of a corporation to monitor corporate compliance. Although CAMAC queries whether accessorial liability might be sufﬁ cient, it notes that one argument for going beyond accessorial liability to derivative liability is to impose an obligation on at least some individuals in key positions within a corporation to inform themselves and assist in the prevention of any misconduct by the corporation.

Arguably, the balance between the individual rights of corporate ofﬁ cers and the public interest of ensuring corporate compliance lies in the availability of fair and reasonable defences for corporate ofﬁ cers against any claim of individual derivative liability for corporate misconduct.

General derivative liability template

CAMAC is of the view that one way to address the inconsistency in individual derivative liability provisions is to develop a standard legislative template for imposing such liability. It sees the beneﬁ ts of a more standardised approach as including greater legal certainty and the ability for cost-effective compliance measures to be implemented.

Accordingly, CAMAC has put forward the following alternatives as possible templates for a general derivative liability provision, which could be incorporated into the CA. Each alternative for general derivative liability is based on the concept of managerial liability (referred to above).

Approach proposed by the Australian Law Reform Commission

Under the approach proposed by the Australian Law Reform Commission (ALRC), if a corporation has contravened a statutory requirement, then to subject an individual associated with that corporation to personal liability under a derivative liability provision, the prosecution would need to establish beyond a reasonable doubt that the individual:

• is concerned or takes part in the management of the corporation;

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9423 Insolvency 3 legislative.indd 229 7/03/2006, 1:05:49 PM • was in a position to inﬂ uence the corporation’s conduct in relation to the relevant conduct; • knew, or was reckless or negligent as to whether the contravening conduct would occur; and • failed to take reasonable steps to prevent that conduct.

Approach predominantly reﬂ ected in state and territory legislation

One alternative to the ALRC proposal is the approach primarily reﬂ ected in existing state and territory legislation. Under that approach, if a corporation has contravened a statutory requirement, then any director or other person who is concerned in, or takes part in, the management of that corporation is also liable unless the person proves, on the balance of probabilities, that he or she:

• was not in a position to inﬂ uence the relevant conduct; or • exercised all due diligence, or took all reasonable steps, to prevent the relevant conduct.

Approach in the Occupational Health and Safety Act 2004 (Vic)

Another alternative is the approach currently contained in Victoria’s Occupational Health and Safety Act. Under this approach, where an offence committed by a corporation is attributable to an ofﬁ cer of the body corporate failing to take reasonable care, that ofﬁ cer is also guilty of an offence.

In determining whether the offi cer took reasonable care, regard must be had to, among other things, the offi cer’s knowledge and the extent of the offi cer’s ability to make, or participate in the making of, decisions that affect the body corporate in relation to the matter concerned.

Responsible ofﬁ cer derivative liability template

CAMAC also proposes an individual derivative liability template based on the concept of responsible ofﬁ cer liability (referred to above). In essence, where it is appropriate to identify one or more persons as being responsible for certain conduct, the particular legislation will provide that:

• a corporation must appoint an individual within the corporation to be a responsible offi cer for that conduct or, alternatively, each director will be deemed to be a responsible offi cer; and • a responsible offi cer is liable for the corporation’s non-compliance with that conduct unless they can prove all reasonable steps were taken to ensure compliance.

Corporate duties below board level The discussion paper Corporate duties below board level gives consideration to some of the recommendations made by Justice Neville Owen in the HIH Royal Commission Final Report, The Failure of HIH Insurance (the HIH Report) and, having regard to those recommendations, puts forward some possible amendments to the CA.

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9423 Insolvency 3 legislative.indd 230 7/03/2006, 1:05:50 PM Extension of corporate duties imposed below board level: background

The HIH Report raised a series of questions about whether the CA adequately reﬂ ects the commercial practicalities of running a modern corporate enterprise. Traditionally, directors were the decision-makers of a corporation but, in today’s corporation, operational decision-making may devolve to managers and other individuals below board level, including consultants and contractors. In the HIH Report, Justice Owen made the observation that many of the practices found to be undesirable within HIH were undertaken by middle managers, but that the law on the liability of middle managers is unclear. He also noted that, in today’s corporate groups, many operational and management decisions are made by centralised executive committees or those employed by another corporation within the same corporate group.

The HIH Report recommended that, among other things, the defi nitions of ‘offi cer’ and other personnel upon whom duties are imposed under the CA be repealed and replaced with clear, simple and certain provisions (Recommendation 2) and that the focus be on the function performed by relevant personnel (rather than on their legal classifi cation).

Discussion paper

Having regard to the recommendations made in the HIH Report, in its discussion paper on Corporate duties below board level, CAMAC:

• reviews existing personal duties and liabilities under the CA of corporate ofﬁ cers, employees and other individuals below board level; and • asks whether the classes of persons subject to sections 180(1) (the duty of care and diligence), 180(2) (the business judgment rule), 181 and 184(1) (the duties of good faith and proper purpose) should be extended to ‘any person who takes part, or is concerned, in the management of that corporation’ (Proposal 1, 2 and 3) (the executive ofﬁ cer test).

This proposed extension closely refl ects the ‘executive offi cer’ test, which was repealed from the CA in 2004, and includes a broader range of persons than the term ‘offi cer’ as it is currently defi ned in s9 of the CA (for example, consultants, contractors and those outside the corporation but employed within the corporate group). CAMAC notes that there may be some benefi t in clarifying the activities that fall within ‘management’ in the context of the proposed executive offi cer test and, accordingly, queries whether ‘the management of a corporation’ should be defi ned (Proposal 1).

CAMAC also considers whether the application of the executive offi cer test is suffi cient for the purposes of sections 182 and 184(2) (improper use of corporate position) and sections 183 and 184(3) (improper use of corporate information). Concerned that it may not be, CAMAC queries whether the duties imposed by these sections should be extended to ‘any other person who performs functions, or otherwise acts, for or on behalf of the corporation’ (the functions test) (Proposal 4 and 5). Like the executive offi cer test discussed above, this test is also intended to capture consultants, contractors and those outside the corporation but employed within the corporate group.

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9423 Insolvency 3 legislative.indd 231 7/03/2006, 1:05:51 PM The functions test is also proposed for sections 1309(1) (knowingly providing false or misleading information), 1307(1) (misconduct concerning corporate books) and 1309(2) (ensuring the veracity of information) (Proposal 6, 7 and 8). CAMAC notes, however, that the extension of the duty in s1309(1) may inappropriately extend its application (for example, to competitors) and that to extend the application of s1309(2) may be overly burdensome.

General dishonesty provision

Following a recommendation made in the HIH Report, CAMAC separately considers whether there should be a general dishonesty provision contained in the CA (ie a provision prohibiting individuals from acting dishonestly in connection with the performance or satisfaction of any obligation imposed on a corporation by any statute). It notes that the general dishonesty provision recommended in the HIH Report, which is referable to the obligations imposed on a company by ‘any statute’, is extremely broad and may capture obligations under overseas laws.

In addition, CAMAC highlights several possible difﬁ culties with introducing a general dishonesty prohibition, including:

• statutory duplication resulting in forum shopping; • the need to determine the responsibility for enforcement; • enforceability (to the extent that it applies to obligations under overseas laws); and • constitutional issues associated with including such a provision in the CA.

Accordingly, in seeking comment on this issue, CAMAC speciﬁ cally asks whether any general dishonesty provision should be restricted to obligations only under the CA, or to obligations under Commonwealth, state and territory statutes applicable to corporations.

Conclusion The Parliamentary Secretary to the Federal Treasurer, Chris Pearce, recently made a reference to CAMAC regarding the extent to which directors’ duties under the CA should ‘include corporate social responsibilities or explicit obligations to take account of the interests of certain classes of stakeholders other than shareholders’.1 This reference, together with the two discussion papers referred to above, indicate that the duties and obligations of directors and other corporate ofﬁ cers will be the subject of scrutiny for some time to come.

1 Letter from the Hon. Chris Pearce MP to the Corporations and Markets Advisory Committee, dated 23 March 2005.

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Insolvency reform package announced

The Federal Government announced a package of insolvency reforms on 12 October 2005.

The insolvency law reforms have been developed with regard to the recommendations made in various inquiries and reports over the past decade. The main areas addressed are:

• the strengthening of creditor protections, including the protection of employee entitlements; • the establishment of an ‘Assetless Administration Fund’ and enforcement program; • increased regulation of insolvency practitioners in relation to disclosure requirements, independence and remuneration; and • technical amendments designed to ‘ﬁ ne tune’ the voluntary administration process.

Background Over the past decade, there have been a number of reviews and inquiries into various aspects of Australia’s insolvency laws, including:

• a 1997 report by a working party established by the Attorney-General, entitled The Review of the Regulation of Corporate Insolvency Practitioners; • the following Corporations and Markets Advisory Committee (CAMAC) reports: Corporate Voluntary Administration (1998); Corporate Groups (2000); and Rehabilitation of Large and Complex Enterprises (2004); • the 2004 Parliamentary Joint Committee on Corporations and Financial Services Report, Corporate Insolvency Laws: A Stocktake; and • the 2004 report of the James Hardie Special Commission of Inquiry.

The Federal Government’s proposed reforms have been put forward having regard to recommendations made in these reports and inquiries. Four main areas are covered by the paper announcing the reforms. We look at each of these in turn, focusing on particular proposals that we see as being the most signiﬁ cant and of most interest.

Reforms aimed at strengthening creditor protections Since January 2000, more than 54,000 Australian workers have received more than $661 million through the General Employment Entitlements and Redundancy Scheme (GEERS) in assistance for entitlements lost because of insolvency. The scheme’s success is a key factor in the Government’s decision to allocate an additional $62 million over four years to enhance employee entitlements under GEERS for insolvencies that occur on or after 1 November 2005. Eligibility criteria have been widened to include:

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9423 Insolvency 3 legislative.indd 233 7/03/2006, 1:05:52 PM • workers who have been underpaid in a three-month period preceding insolvency; • employees who resigned or whose employment was terminated during a six- month period before the date of insolvency; and • some previously ineligible claimants, as a result of the bringing of the deﬁ nition of ‘excluded employees’ into line with the deﬁ nition contained in section 556 of the CA.

In addition to expanding eligibility for GEERS, the CA will be amended to ensure the priority of employee entitlements is preserved in voluntary administrations. In a voluntary administration, it will become mandatory for a DOCA to preserve the priorities available to creditors under s556, unless an employee has waived their priority or the deed has been approved by a court.

Other creditor protections that are proposed include:

• a new compensatory mechanism to protect creditors who suffer a loss as a result of a breach of a condition imposed by a court when it approves a scheme or compromise; • the granting of a new discretion to the court to adjust approval thresholds for schemes of arrangement meetings; and • amendments to existing rules to make it clear that a company may not cancel partially paid shares, as this would materially prejudice its ability to pay its creditors, including when no consideration is paid for the cancellation.

Changes aimed at improving the external administration of corporate groups, thereby beneﬁ ting creditors, include:

• the introduction of a statutory ‘pooling’ mechanism that will permit creditors to agree, or the court to order, that the assets of two or more companies in liquidation may be combined and the liquidation of the companies proceed together as if they were one company; • formal recognition of an administrator’s ability to pool the administration of several companies, either where no creditor who attends the creditors’ meetings votes against the proposal or the court otherwise approves. There will be a prescribed period within which a creditor may object. Pooling may be confi rmed by the court on application of the company in circumstances in which an objection is received; and • granting a specifi c power to the courts to make pooling orders where the affairs of any related companies in liquidation have been intermingled and other specifi c criteria are met.

Importantly, the recommendations state that it is not proposed that pooling orders would affect the rights of secured creditors.

Flagged for further analysis is the issue of protection for personal injury claimants to provide some recourse for possible future claimants in tort who have not yet suffered an injury and do not have a provable claim at the date of the commencement of the liquidation or administration. Although the Government states that existing external administration mechanisms do not adequately recognise the existence of ‘long-tail’ personal injury liabilities, this is balanced with the consideration that allowing mass future claims in insolvency administrations creates risks that must be carefully addressed. The issue has been referred to CAMAC for further consideration.

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9423 Insolvency 3 legislative.indd 234 7/03/2006, 1:05:53 PM Assetless Administration Fund The Government has recognised that, because the remuneration and expenses of liquidators are funded from the assets of the company in liquidation, liquidators are less likely to perform investigations where a company is left with little or no assets. At a total cost of $23 million over four years, the Government has announced the establishment of:

• an Assetless Administration Fund that will become operational from early 2006. Liquidators will be able to apply for funding to fi nance investigations in cases where it appears to ASIC that further investigation and reporting may lead to enforcement actions. The success of this program will depend on insolvency practitioners providing ASIC with adequate information to identify and pursue misconduct by company offi cers that has taken place in the period preceding insolvency; and • an enforcement program that will be aimed at ensuring that directors of assetless companies who are involved in repeat phoenix activity are disqualifi ed.

Finally on this issue, one proposal that will require closer consideration is a proposal designed to support the program that will see privilege against exposure to a penalty being expressly abrogated in proceedings where ASIC is seeking disqualiﬁ cation or banning orders and no other penalty.1

Regulation of insolvency practitioners Although there is recognition that the regime for the regulation of insolvency practitioners is fundamentally sound, the reforms address some anomalies and areas where the regime is said to have become out of date and include:

• introducing a requirement that administrators provide creditors with a statement of independence before the fi rst meeting. We note that this practice has already been endorsed by the Insolvency Practitioners Association of Australia as best practice;2 • introducing the ability for creditors to appoint a new person as liquidator if the company proceeds to liquidation; • introducing a requirement that additional information about the basis of a remuneration proposal be provided such that the approving party (creditors or the court) is able to assess the remuneration as being reasonable; • removing certain practical obstacles so that administrators will be able to seek approval from the court for remuneration if creditors have not met. Insolvency practitioners will be able to vote special proxies in favour of a resolution to fi x remuneration. Creditors, creditors’ committees and the court will have increased fl exibility to approve remuneration; • introducing a clarifi cation that a deed administrator’s remuneration must be fi xed in a separate resolution, which will mean that a vote in favour of a deed should not automatically be taken as approval of remuneration;

1 The legislative amendments would be designed to negate the effect of the High Court’s ﬁ ndings in Rich v The Australian Securities and Investments Commission (2004) 209 ALR 271271.

2 IPAA Statements of Best Practice – Independence on the Appointment of an Administrator (1 July 2003) and Calling and Conducting Creditors’ Meetings (1 July 2005).

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9423 Insolvency 3 legislative.indd 235 7/03/2006, 1:05:54 PM • introducing the ability for a ﬁ xed amount of fees to be drawn down (up to a limit of $5000) where an administrator has called a meeting but failed to obtain approval to draw remuneration because of a lack of a quorum; and • updating the experience criteria needed to become a registered liquidator, which will refer to experience in all types of external administration.

Of interest to insolvency practitioners will be the new, detailed annual reporting requirement that will replace the existing triennial reporting requirement. It is envisaged that the new annual statement will include certiﬁ cation of professional development courses undertaken, a summary of insolvency work undertaken and details of professional indemnity insurance.

Changes aimed at providing the Companies Auditors and Liquidators Disciplinary Board (CALDB) with greater ﬂ exibility will be introduced, including an ability to publish reasons for its decision and admonish or reprimand a person for failing to comply with orders made during a pre-hearing period. ASIC’s exercise of its compulsive powers for the purpose of inquiries into liquidators’ conduct generally will also be recognised.

Fine tuning of voluntary administration procedure The reforms proposed for voluntary administrations are in response to certain technical issues that have been identiﬁ ed since the procedure was established. The proposals include:

• extending the period for holding the fi rst meeting of creditors to eight business days after the beginning of the administration, with fi ve business days’ notice being given to creditors; • extending the period for holding the second meeting of creditors to 25 business days, with a new convening period of 20 business days; • introducing more fl exibility for the court to extend convening periods, in particular where an application is made after the convening period has ended; and • confi rming an administrator’s power to adjourn a meeting for up to 60 days, or to a date that is notifi ed within the 60-day period.

Electronic communication as a means for external administrators to communicate with creditors has been recognised as an inexpensive and efﬁ cient means for providing information and conducting meetings and this will be reﬂ ected in new laws.

Other reforms designed to resolve technical difﬁ culties include:

• clarifying the law with respect to the effect of an administrator’s appointment on the rights of persons who hold property of a company under administration as security under a lien or pledge to retain possession of that property. Bankers’ liens and shares lodged as collateral with any recognised clearing house will be exempted from the general moratorium; • providing that the court’s power to bind secured creditors and owners or lessors of real or personal property to the terms of a DOCA will be exercisable only after the creditors have resolved that a DOCA be executed; • providing for companies to apply to a court for an order that the company need not include the words ‘subject to a DOCA’ on its public documents;

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9423 Insolvency 3 legislative.indd 236 7/03/2006, 1:05:55 PM • recognising that debts that have been extinguished by entry into a DOCA will be deemed not to have been extinguished for the purpose of enforcing a related guarantee or indemnity; and • stipulating that it will be possible to terminate a DOCA by creditors’ resolution only following a material breach of the DOCA that has not been rectiﬁ ed in circumstances that are contemplated by the DOCA or by court order. ASIC will be included as a party that can make an application to terminate a DOCA.

Where an administrator considers that it is in the best interest of the company’s creditors, he or she will be given power to consent to a transfer of shares in the company or an alteration in the status of the company’s members. This change has been introduced to enable administrators to reorganise the share capital base of a company in administration. The administrator’s powers in this regard will be similar to a liquidator’s powers in a voluntary winding up. The court’s role would be to consider appeals of the decision of an administrator.

To increase transparency and assist with creditor monitoring, administrators and deed administrators will be required to lodge with ASIC accounts of receipts and payments in a similar way to that which is required by liquidators.

Other amendments aimed at streamlining the transition to liquidation from administration include:

• the limiting of the exemption for voidable transaction provisions for transactions during an administration to transactions authorised by an administrator or authorised under the DOCA. In order to allow a liquidator a reasonable period to commence action, the timeframe for a liquidator to undo voidable transactions will be extended. It will be either three years from the date of commencement of the relation-back period, or one year from the termination of the DOCA, whichever is the later; and • the law will speciﬁ cally state that post-DOCA creditors have no priority except where the administrator is personally liable for the debt. Creditors will have the ability to include in a DOCA any other form of priority for post-deed creditors. This type of proposal will need approval by three-quarters by value and a simple majority by number of those pre-administration unsecured creditors who vote on the resolution.

Cross-border insolvency Finally, the paper introducing the reforms also states that the UNCITRAL Model Law on cross-border insolvency will be adopted.

When will the reforms commence? The expansion of eligibility for GEERS will apply for all insolvencies that occur after 1 November 2005. It is anticipated that it will be possible for liquidators to apply for funding from the Assetless Administration Fund from early in 2006. Apart from these changes, which will occur in the near future, the progress of other reforms will depend on the passage of legislation through Parliament. Exposure draft legislation will be prepared in consultation with industry groups and circulated for public comment in early 2006. The Government’s aim is to introduce a Bill sometime in 2006.

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Proposed changes to the CA to protect future personal injury claims against an insolvent company

As part of the package of insolvency reforms announced by the Federal Government on 12 October 2005, the Parliamentary Secretary to the Treasurer, Chris Pearce, has referred a set of proposed changes to the CA to the Corporations and Markets Advisory Committee (CAMAC) for expert consideration.

In the wake of the Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation (the Inquiry), released on 21 September 2004, the Government considers that new protections for personal injury claimants are needed to allow for circumstances where a company expects a large number of successful personal injury claims to be made against it in the future. The Inquiry commented that ‘current laws do not make adequate provisions for commercial insolvency where there are substantial long-tail liabilities’1. That is, because some injuries may not manifest themselves for many years, by the time a claim is made, the company responsible may have been liquidated or otherwise have insufﬁ cient resources to cover its liability to injured claimants.

However, the Government also recognises that, because it will often be difﬁ cult for a company to assess the likelihood or magnitude of future claims against it, such protections have the potential to introduce signiﬁ cant business uncertainty. For this reason, the Government has asked CAMAC to consider whether its proposed changes achieve the goal of protecting future, as yet unascertained, creditors without unduly compromising current corporate law and insolvency principles.

Threshold test As a means of limiting the potential business uncertainty that could be introduced by the changes, the Government proposes that any new provisions would only apply where:

• the company has been subject to an unusually high number of claims for payment arising from particular acts or omissions leading to personal injury; or • more than one company of a similar industry, or other companies with similar business operations to the company in question, have been subject to such claims, and • there is a strong likelihood of numerous future claims of this type.

The proposal refers to such circumstances as a ‘mass future claim’. However, despite the existence of a ‘mass future claim’, the proposed protections would not apply if it is not reasonably possible for the company in question to either:

• identify the circumstances giving rise to the future personal injury claims and the class of persons who bring the claims; or

1 DF Jackson QC, Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation, September 2040 at 572-3.

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9423 Insolvency 3 legislative.indd 238 7/03/2006, 1:05:56 PM • reasonably estimate the extent of the company’s liability under such claims. Proposed protections If a company is subject to a mass future claim that satisﬁ es the threshold test set out above, the Government proposes that the following provisions would apply to that company:

• existing creditor protections would apply to any future unascertained personal injury claimants; • conduct intended to avoid or reduce payments to personal injury claimants would be prohibited; and • if the company is put into administration, the administrators would be required to admit and make provision for future unascertained personal injury creditors.

Extension of general creditor protections These provisions would restrict the ability of companies subject to a mass future claim to enter certain transactions that would have the effect of reducing the pool of assets (or share capital) available to cover the company’s liability to future personal injury claimants.

Speciﬁ cally, the existing creditor protections in the CA would be extended to those future unascertained creditors in order to:

• restrict company transactions that adversely affect share capital, including reductions of share capital (section 256B) and share buy-backs (s257A); and • defer payment of membership-type debts owed by the company to its members in their capacity as members when the company goes into liquidation until the future personal injury claimants are paid in full (s563A).

Prohibition on intentional avoidance The Government proposes to introduce a new offence provision, punishable by up to 10 years’ imprisonment and ﬁ nes of up to $110,000, and associated compensation provisions for the deliberate avoidance of payments to future personal injury claimants. These provisions would be modelled on the existing Part 5.8A of the CA, which protects employee entitlements.

The offence provision would provide that, where a company is subject to a mass future claim and has the requisite state of knowledge as set out in the threshold test, it would be an offence to enter into a relevant agreement or a transaction with the intention of preventing the recovery of all, or a signiﬁ cant part, of the amounts owing for that claim. The offence would apply not only to the company’s directors, but to any person ‘knowingly involved’ in such a contravention, which could presumably include other parties to the transaction or the company’s advisers.

The proposal does not discuss what would amount to a ‘relevant agreement or transaction’ (nor does Part 5.8A) but, given the objects of the proposal, it seems likely that any agreement or transaction that has the effect of reducing the assets available to meet future claims would be covered.

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9423 Insolvency 3 legislative.indd 239 7/03/2006, 1:05:57 PM The compensation provisions would provide a mechanism for personal injury claimants to obtain compensation from company directors, other companies in a group or any person who is party to a relevant transaction, where it is shown that an agreement or transaction was entered with the intention of avoiding payment. Claimants would only be required to prove the requisite intention to the civil standard of proof, that is, on the balance of probabilities, and it would not be necessary that the proscribed intent be the person’s sole or dominant intent. As such, it would not be fatal to a claim that the main aim of the transaction in question was to provide a beneﬁ t to the company other than that of avoiding payment, so long as avoiding payment was one of the reasons for entering it.

The Government also suggests that amounts awarded as compensation could have special priority in liquidation, but rank below employee entitlements.

External administration The Government suggests that external administrators of companies subject to mass future claims be required to inform known creditors at the earliest opportunity and make provision for the payment of such claims in the future.

The provision for mass future personal injury claims would be calculated by reference to:

• estimates of the number of acts or omissions that may give rise to liability; • industry analyses; • academic studies; • independent actuarial analyses; • the level of damages awarded for similar claims in courts or administrative review bodies of Australia or other common law jurisdictions; or • such other matters as the external administrator thinks relevant.

Future creditors would then be able to make claims against the funds set aside for future claimants. A person could be appointed to represent the class of personal injury claimants in any proceedings.

In the case of a liquidation, asset distributions would proceed as normal, except that an amount could be set aside for future creditors. If insufﬁ cient assets were available to both provide for future creditors and repay existing creditors, available assets could be divided proportionately.

In the case of a DOCA, funds could be set aside immediately to provide for future claims, with further amounts contributed as the company continues to trade. If funds remained after all claims had been met, a distribution could be made to ordinary creditors. Courts would be able to appoint a representative of the class of future claimants, who would have standing to make submissions to the court before it approves a proposed compromise or arrangement.

Similar provisions would apply in the case of schemes of arrangement and voluntary administrations.

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9423 Insolvency 3 legislative.indd 240 7/03/2006, 1:05:59 PM What next? CAMAC has called for submissions on the Government’s proposals to be made by 17 February 2006. While there is no reporting date for the proposed changes, the Government has indicated to CAMAC that its advice should be ‘expedited to the extent possible’,2 suggesting that the Government is keen to introduce protections for future creditors as soon as possible. It remains to be seen whether, following the submissions process and its own deliberations, CAMAC will advise the Government to alter its rather detailed proposal to strike a different balance between the competing interests of personal injury claimants and business conﬁ dence.

2 Hon Chris Pearce MP, ‘Reference in relation to the treatment of future unascertained personal injury claims’, 12 October 2005.

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9423 Insolvency 3 legislative.indd 241 7/03/2006, 1:06:00 PM DEVELOPMENTS IN AUSTRALIA

Banking and Financial Services Ombudsman’s new guidelines on hardship variation disputes

All credit providers should consider complying with the Banking and Financial Services Ombudsman’s new guidelines dealing with hardship variation disputes, regardless of whether they have subscribed to the new Code of Banking of Practice.

The Banking and Financial Services Ombudsman (BFSO) issued Bulletin 46 in June 2005, which considers, among other things, hardship variations and the role that the BFSO should play when contacted by customers in ﬁ nancial difﬁ culty where the credit provider has refused to agree to a proposed repayment plan.

The bulletin focuses on circumstances where there is no maladministration or other breach in relation to the original lending by the credit provider, but where there has been a subsequent change in the customer’s circumstances.

Previously, the BFSO considered that the credit provider’s response to a customer’s request for reduced repayments in the face of fi nancial diffi culty was a commercial issue and therefore fell outside the BFSO’s terms of reference. Now, however, the BFSO states that it is a positive contractual obligation of credit providers under clause 25.2 of the new Code of Banking Practice (the Code) to try to help customers to overcome fi nancial diffi culties, and that the BFSO can therefore consider disputes in which a bank has not done what it has promised to do in that regard.

The Code Clause 25.2 of the Code requires a subscribing bank to:

• try to help a customer overcome its ﬁ nancial difﬁ culties with any credit facility it has with the bank, for example, by working with the customer to develop a repayment plan; and • if the hardship variation principles in section 66 of the Uniform Consumer Credit Code (UCCC) could apply to the customer’s circumstances, inform the customer of those principles.

The Code, and therefore clause 25.2, applies only to subscribing banks. However, the BFSO considers that the Code refl ects good industry practice and that non- subscribing banks and other credit providers should consider implementing the BFSO’s new guidelines on dealing with customers in fi nancial diffi culty.

Helping customers overcome ﬁ nancial difﬁ culties Under clause 2.2 of the Code, banks must act fairly and reasonably and in a consistent and ethical manner, taking into account the conduct of the parties and the contract. The BFSO comments that this is a key commitment and is relevant to compliance with clause 25.2 of the Code.

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9423 Insolvency 3 legislative.indd 242 7/03/2006, 1:06:00 PM Acting fairly and reasonably In the context of hardship variation, the BFSO considers that acting ‘fairly and reasonably’ requires credit providers to:

• give genuine consideration to a repayment proposal, hardship variation application and other reasonable alternatives to help the customer overcome fi nancial diffi culties; • give reasons (ideally, written) for rejection of a proposal; • ensure that the reasons refl ect legitimate considerations and the particular customer’s circumstances; • not start or conclude enforcement action before making (and communicating) a decision to the debtor; and • deal with any adviser appointed by the customer.

Acting consistently and ethically The BFSO considers that acting ‘consistently and ethically’ in relation to hardship variation requires credit providers to:

• have clear, reasonable internal assessment processes for hardship variation, enforcement postponement requests and other repayment proposals; • be able to demonstrate that staff have followed those processes; • record and keep to any promises made or agreements reached, for example, about suspending enforcement action. Specifi cally, the BFSO considers that if an agreement provides for review of arrangements on a specifi ed date, the credit provider must not review the arrangements any earlier, provided that the customer is complying. Further, any review should be based on a genuine consideration of the customer’s position at that time; • ensure that any collection-related correspondence is consistent with those promises and/or agreements; and • confi rm, in writing, any agreement reached, and provide collection agents and their assignees with a copy.

The BFSO recognises that ﬁ nancial difﬁ culties may be short-term or long-term. Any repayment proposal must not simply postpone the inevitable default, but must be realistic. For example, reduced repayments that do not adequately cover interest should be used as a short-term measure only, unless the credit provider agrees to forego the interest.

Informing customers of the UCCC hardship principles Section 66 of the UCCC gives debtors with a loan of not more than $305,910 ($125,000 in Tasmania) the right to seek a variation to their credit contract where:

• they are unable to meet their contractual obligations because of illness, unemployment or other reasonable cause; and • there is a reasonable expectation of being able to repay the debt if the contract is varied.

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9423 Insolvency 3 legislative.indd 243 7/03/2006, 1:06:01 PM A debtor may seek one of the following variations:

• an extension of the term of the contract and a corresponding reduction of payments; • an extension of the term of the contract and postponement of payments during a speciﬁ ed period; or • postponement of payments during a speciﬁ ed period with no extension of term (which would mean higher repayments after the postponement period).

There is no obligation on the credit provider to agree to the variation. However, if a credit provider does not, a debtor can apply to a relevant court or tribunal for an order varying the contract in one of these three ways.

The BFSO observes that, in contrast to the UCCC provisions, the hardship variation provisions under the Code are not limited to speciﬁ c circumstances or outcomes. Neither are they limited to consumer lending, nor by reference to loan amount.

Clause 25.2 of the Code provides that a subscribing bank must inform a customer of the UCCC variation provisions if the provisions could apply to the customer’s circumstances. In the BFSO’s view, informing a customer of the UCCC provisions includes telling the customer at the time of rejecting a hardship variation application that they can apply to a relevant court or tribunal under s68 of the UCCC for an order changing the contract. This information should be relayed to the customer, irrespective of whether or not the credit provider considers that such an application would succeed.

Decisions by the BFSO Bulletin 46 provides that if the BFSO is required to deal with a hardship dispute then, under clause 25.2 of the Code and the BFSO’s terms of reference, the BFSO may:

• consider and make a decision on whether a credit provider has complied with clause 25.2 (including giving consideration, where applicable, to a hardship variation application under s66 of the UCCC); • seek to facilitate a negotiated agreement and, if necessary, ask the credit provider to reconsider where there appears to be a reasonable repayment proposal; • where appropriate, decide that the credit provider has not complied with clause 25.2 and award compensation for loss (whether ﬁ nancial or non-ﬁ nancial); and • inform the Code Compliance Monitoring Committee if the BFSO considers that there has been a breach but no loss.

The BFSO indicates that fi nancial loss might include unnecessary default charges or enforcement costs. Non-fi nancial loss might include added, or unnecessary, stress or inconvenience (as distinct from the general stress of being in fi nancial diffi culty).

Even where the BFSO is of the view that the credit provider has complied with clause 25.2, the customer should still be informed of the possibility of applying to the relevant court or tribunal under s68 of the UCCC for a variation.

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9423 Insolvency 3 legislative.indd 244 7/03/2006, 1:06:02 PM DEVELOPMENTS IN AUSTRALIA

ASIC introduces a new policy on liquidator registration

ASIC released its new policy statement on the registration of registered liquidators and ofﬁ cial liquidators on 30 September 2005. Policy Statement 186 External administration – Liquidation registration (PS 186) replaces the following ASIC policies that were introduced in 1992 (and minimally updated in 1997):

• Policy Statement 40 Registration of liquidators – experience criteria (PS 40); and • Policy Statement 24 Registration of ofﬁ cial liquidators (PS 24).

The new policy statement is the outcome of a policy proposal paper released by ASIC in October 2004 (Policy Proposal), which was followed by a consultation process in the second half of 2004.

PS 186 details the application process to become a registered liquidator or offi cial liquidator and is a signifi cant ASIC policy update, as it is the result of the fi rst substantive review of liquidator registration since the introduction of Part 5.3A of the CA in 1993. Importantly, the new policy statement also explains the ongoing obligations of registered liquidators and ASIC’s expectations of liquidators.

Changes to registration criteria ASIC is required by Part 9.2 of the CA to register as liquidators those applicants who satisfy the criteria contained in section 1282(2) of the CA and are not disqualiﬁ ed from managing corporations under Part 2D.6 of the CA.

PS 186 updates ASIC’s guidelines on the operation of s1282(2) of the CA. Under this section, ASIC must satisfy itself that an applicant for registration as a liquidator meets the following criteria:

• has the appropriate qualiﬁ cations; • has winding-up experience; • is capable of performing the duties of a liquidator; and • is ‘ﬁ t and proper’ to be a registered liquidator.

Qualifi cations The new criteria in PS 186 regarding the base qualifi cations set out in s1282(2)(a) are principally concerned with defi ning what is an ‘equivalent’ qualifi cation for applicants who have not graduated from an Australian university course with standing certifi cation. These new criteria are likely to be of interest principally to applicants whose qualifi cations were not gained in Australia.

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9423 Insolvency 3 legislative.indd 245 7/03/2006, 1:06:03 PM Experience The changes to the level of experience required for liquidator registration are the most signifi cant aspect of PS 186. Section 1282(2)(b) prescribes that ASIC must be satisfi ed as to the experience of an applicant for registration in connection with corporate winding up, and previously PS 40 defi ned the relevant experience as:

• fi ve years in public practice; • a wide range of experience in external corporate administration under the direction of an offi cial liquidator for a continuous period of at least three years; and • full-time supervision of external corporate administration for at least two consecutive years during the fi ve years before the application.

The new criteria in PS 186 address experience somewhat differently. In relation to s1282(2)(b), the new criteria simply state that ASIC will assess the applicant’s winding-up experience as part of the broader ‘personal’ capacities in relation to s1282(2)(c).

Capability The ﬁ rst part of s1282(2)(c) requires that the applicant is ‘capable’ of performing the duties of a liquidator. The basis ASIC used for this criteria in PS 186 follows the decision of Re Lofthouse and ASIC [2004] AATA 327, where the Administrative Appeals Tribunal held that capacity ‘refers not simply to a person’s technical abilities but also to the more ephemeral quality of judgment’ (paragraph 74). ASIC now interprets this requirement as referring to the ‘overall capacities that enable a person to perform adequately and properly the duties and functions’ of a registered liquidator. PS 186 now deﬁ nes ‘capability’ as including two main areas:

• ‘personal’ capacities; and

• ‘practice’ capacities.

Personal capacities

When looking at an applicant’s personal capacities, ASIC will require the applicant to demonstrate the following ‘adequate corporate insolvency experience’, as outlined in PS 186:

• have worked on external administrations under the supervision of a registered liquidator in Australia for the full-time equivalent of at least ﬁ ve years over the 10 years prior to applying;

• have experience that includes a broad range of external administrations, of which two must be court windings up or creditors’ voluntary windings up under Chapter 5 of the CA and external administrations under Part 5.3A;

• have experience that has been gained at a very senior level for the full-time equivalent of at least three years over the past ﬁ ve years. PS 186 provides a non-exhaustive list of examples of experience at a ‘very senior level’. An applicant will be found to have worked at a very senior level if the applicant:

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9423 Insolvency 3 legislative.indd 246 7/03/2006, 1:06:03 PM • was a partner of their practice or immediately below the level of partner; • reported directly to the relevant external administrator; • formed opinions and made recommendations to the external administration about the ﬁ nancial and potential legal position of the body corporate; • was directly involved in planning and managing the conduct of the external administration on behalf of the administrator; • instructed solicitors and evaluated legal advice, as directed by the administrator; and • supervised staff reporting through the applicant to the administrator; • have experience that includes dealing with a range of complex matters that typically arise in external administrations. Examples of complex matters include the trading-on of a business with a view to selling it as a going concern; investigations into insolvent trading; voidable transactions and breaches of directors’ duties; large litigation, public examinations and external administrations involving listed companies; and

• have demonstrated skill and diligence over the course of gaining their experience and have demonstrated sound judgment while working at a very senior level.

Other criteria also include completion of a course in Australian corporate insolvency law and practice, any non-insolvency corporate management experience, and any other factors that the ASIC may consider relevant.

Where an applicant has previously worked in overseas jurisdictions, ASIC requires that applicant to demonstrate equivalent experience and at least one year full-time experience under the supervision of a registered liquidator over the preceding two years.

Practice capacities

In addition to the ‘personal capacity’ criteria described above, PS 186 includes criteria for applicants’ practice capacity, requiring applicants to show that their practices have (as and when required):

• adequate human and technological resources to accept appointments; • appropriate processes for monitoring and ensuring the continuing adequacy of those resources; • appropriate processes for ongoing training and supervision of staff; • appropriate operational procedures and manuals for the conduct of external administration; and • adequate risk-management systems.

PS 186, however, notes that the nature and sophistication of those resources in each case will depend on the type of assignments that the applicant is likely to take on.

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9423 Insolvency 3 legislative.indd 247 7/03/2006, 1:06:04 PM ‘Fit and proper’ person The last part of s1282(2)(c) requires that applicants for registration as a liquidator be a ‘ﬁ t and proper’ person. ASIC interprets a ‘ﬁ t and proper’ person as having:

• overall capability of performing the duties and functions of a liquidator; and • overall honesty, integrity, good reputation and personal solvency.

PS 186 notes that ASIC’s approach is consistent with current case law, including Davies v Australia Securities Commission (1995) 131 ALR 295 and Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321.

ASIC does not regard a person who is disqualifi ed from managing corporations to be a ‘fi t and proper person’ to be registered as a liquidator, regardless of any specifi c permissions to manage corporations granted to that person.

Security Under s1284 of the Act, the applicant must lodge their application for registration as a liquidator and a form of security with ASIC to ensure the performance of the applicant’s duty. ASIC Policy Statement 33 (PS 33) deals with these security deposits and this has not been affected with the introduction of PS 186.

Transitional arrangements ASIC introduced its new policy for liquidator registration without any transitional arrangements. Applications lodged but not ﬁ nalised before the introduction of the new policy will be assessed according to the new criteria.

Ongoing obligations for maintaining liquidator registration A signiﬁ cant aspect of PS 186 is that it sets out criteria for maintaining liquidator registration. To remain registered as a liquidator under PS 186, the liquidator must (on an ongoing basis):

• perform adequately and properly the duties and functions of a registered liquidator, that is comply with all relevant general laws, including any legal and equitable duties under the CA; • remain a ‘ﬁ t and proper’ person; • remain ‘capable’ of performing the duties of a liquidator; • not become disqualiﬁ ed from managing corporations under Part 2D.6; • remain an Australian resident; that is, must not live outside Australia for a continuous period of more than 12 months; • maintain the security under PS 33; and • lodge triennial statements as required under s1288 of the CA.

ASIC expects registered liquidators to maintain the currency of their knowledge, skills and experience and also the adequacy of their practice capacities. Registered liquidators can demonstrate this by undertaking insolvent Chapter 5 appointments, other corporate insolvency work and continuing professional development.

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9423 Insolvency 3 legislative.indd 248 7/03/2006, 1:06:06 PM Extended leave of absence Under the new policy, registered liquidators who intend to take an extended absence from their practice must make arrangements with ASIC to ensure that this extended absence does not give rise to a suggestion that they have failed to maintain the requirements for registration. ASIC requires two months’ notice of the extended absence and some details, including the reason, duration and contact details. ASIC’s ‘no-action’ approach is stated as being limited to 12 months from the start of the absence and will not exceed three years.

Offi cial liquidators The previous criteria by which ASIC assessed applications to become an offi cial liquidator under s1283 of the CA were set out in a separate criteria in PS 24. However, ASIC considered that there is no signifi cant policy reason to continue to distinguish between the experience and resources required of registered liquidators and offi cial liquidators. Accordingly, under the new policy in PS 186, ASIC will now accept written applications from registered liquidators to become an offi cial liquidator. These must include:

• a brief statement of the reasons for the applicant seeking to be registered as an offi cial liquidator; • a written undertaking to ASIC that the applicant, if registered, will not refuse to act as a liquidator in a court-ordered winding up solely because the company has no assets, or insuffi cient funds to cover the anticipated professional costs of the liquidation; • a written acknowledgement to ASIC that the applicant, if registered, is an offi cer of the court and, as a result, has responsibilities to the court in connection with any court-ordered winding up; and • the prescribed fee.

ASIC must also be satisﬁ ed that there is no reason based on ‘ﬁ tness and propriety’ as to why the applicant should be rejected. This additional requirement ties in with the continuing assessment of the applicant’s conduct as a registered liquidator.

ASIC introduced this new policy regarding registration of ofﬁ cial liquidators without any transitional arrangements. It was considered that the new policy would ‘not impose any undue additional costs or other burdens’ on applicants. It is envisaged that existing ofﬁ cial liquidators will simply replace their previous declaration of consent with an undertaking of the kind described in the new criteria.

Summary PS 186 represents a comprehensive and signiﬁ cant change in ASIC’s approach to liquidator registration. In particular, applicants for liquidator registration will now have to show greater levels of experience than under the previous policies, with the experience criteria increasing from three years of corporate insolvency, including two working at a very senior level, to ﬁ ve years’ total experience, including three working at a very senior level. In addition, applicants for registration will now have to satisfy ASIC that they have access to certain resources and procedures that are considered necessary for the conduct of external administrations.

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9423 Insolvency 3 legislative.indd 249 7/03/2006, 1:06:07 PM Another key consequence of these changes is that the practical difference between registered and ofﬁ cial liquidators has now effectively been eliminated. The requirements for experience and practice capability under PS 186 also affect liquidators’ maintenance of their registration, with new ongoing obligations of being a registered liquidator.

These changes should not surprise anyone, as they largely follow the Policy Proposal that was released by ASIC in 2004. However, one emphasis that ASIC has made since that time is that it will be monitoring the continuing experience and levels of practice resources closely.

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9423 Insolvency 3 legislative.indd 250 7/03/2006, 1:06:07 PM DEVELOPMENTS IN AUSTRALIA

Personal bankruptcy laws to be reformed

Australia has a colourful history when it comes to the fallen rich and inﬂ uential avoiding the payment of debts and taxes. The Federal Government’s attempt to reform the Bankruptcy Act 1966 (the Act) with respect to bankrupt individuals seeking to keep assets away from creditors seeks to put an end to some of the colourful escapes of the past. To that end, the Bankruptcy Legislation Amendment (Anti-Avoidance) Bill 2005 (the Bill) was introduced into Parliament on 7 December 2005.

Converting assets into superannuation In Cook v Benson,1 the High Court held that debtors could shield their assets from creditors by making payments to a superannuation fund before they became bankrupt. The practical result was that, where an individual was contemplating bankruptcy, they could ofﬂ oad assets into superannuation, secure in the knowledge that creditors could not get to them.

On 6 September 2005, the Government released a consultation paper on the recovery of assets shielded from creditors in such a way. This ‘anomaly’ is one of the targets of the Federal Government’s reform package.2 The proposed changes will provide a clawback period of four years where creditors will be able to recover excessive personal contributions.

Other reforms The Bill will:

• increase the clawback period in section 120 of the Act from two years to four years;3 • introduce a rebuttable presumption of insolvency with respect to sections 120 and 121 where a person has not kept proper books, accounts and records;4 • make a transfer void against a bankruptcy transfer under s121 where the bankrupt person’s main purpose was to shield assets from creditors;5 • broaden the material a court can examine, including transcripts and notes from examinations;6 and

1 (2003) 214 CLR 370.

2 Joint Media Release by Attorney-General Philip Ruddock and Minister for Revenue and Assistant Treasurer Mal Brough, Reforms Target Bankruptcy – Super Contributions, 6 September 2005.

3 Commonwealth Of Australia, House Of Representatives, Votes And Proceedings, Hansard, Wednesday, 7 December 2005, p 4.

4 ibid.

5 ibid.

6 ibid.

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9423 Insolvency 3 legislative.indd 251 7/03/2006, 1:06:09 PM • allow the court to make orders concerning property up to ﬁ ve years before bankruptcy was declared where: • the person has an interest in property and that interest has increased in value because of contributions from the person or;7 • the person has received a beneﬁ t from the property.8

The Bill’s prospects Given the Government’s control of the Senate, it appears that the Bill will be passed in its present form, or very close to it, and become law. Individuals who suspect that they may become bankrupt will need to be aware that creditors will now be able to reach back further and into more assets to recover their losses.

7 ibid.

8 ibid.

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9423 Insolvency 3 legislative.indd 252 7/03/2006, 1:06:10 PM DEVELOPMENTS IN ASIA

China’s central government sets short timetable for bankruptcy law reform

In June 2004, a draft of proposed bankruptcy legislation was put before the Standing Committee of the National People’s Congress. Early indications were that the law would be passed in early 2005, but this has not yet occurred.

The law will apply to both state-owned and privately held companies with legal status. Certain state-owned enterprises may be exempt from the laws, if found exempt by the State Council.

The key features of the proposed legislation are set out below.

Commencement of proceedings The three possible procedures for bankruptcy – liquidation, reorganisation and conciliation – are commenced by the court accepting the applicant’s petition. Once accepted, it acts as a bar to litigation and enforcement proceedings against the company.

Either the debtor or its creditors can petition the court for a liquidation or reorganisation, but only a debtor can apply for conciliation. Reorganisation and conciliation can be applied for at any time before the granting of a court order for liquidation.

Test of insolvency Insolvent entities are those that (a) are unable to pay off debts when due and do not have assets to cover liabilities; or (b) are unable to pay off debts when due and obviously are not able to discharge liabilities.

A company can apply for reorganisation if it is likely to be incapable of paying its debts when they fall due.

The administrator After the court accepts the bankruptcy petition, it appoints an administrator and determines the administrator’s fees.

The administrator’s role is to:

• replace management and realise the assets of the company for the beneﬁ t of creditors; or • manage or supervise a debtor in reorganisation.

The administrator’s fees rank ﬁ rst in the bankruptcy, subject to the fulﬁ lment of the duties owed by the administrator to creditors and the debtor, which carry possible civil and criminal penalties for a breach.

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9423 Insolvency 3 legislative.indd 253 7/03/2006, 1:06:10 PM Reorganisation Reorganisation is similar to voluntary administration in England and Australia and Chapter 11 procedures in the US.

It is a three-stage procedure, supervised by the court:

• creditors or shareholders (with at least one-third registered capital) petition the court for reorganisation; • if granted, the reorganisation commences; and • within six months of the reorganisation beginning, the administrator prepares a plan to improve the ﬁ nances and performance of the business, including repayment and debt restructure plans, to be voted on by creditors.

Conciliation The debtor company may petition the court for an order for conciliation, enabling the debtor to propose a settlement of its debts with creditors.

The settlement must be accepted by a simple majority of creditors who hold at least two-thirds of the value of the unsecured debts.

A liquidation order will be issued by the court if the settlement is not agreed.

Liability of directors Directors may be found liable for trading while insolvent and be subject to disqualiﬁ cation orders.

Debtors, directors and ofﬁ cers who breach their duties of loyalty and diligence:

• may be liable for civil or criminal penalties; and • may be prohibited from directorial or management positions in a company for ﬁ ve years from the date of the bankruptcy.

Priority of labour-related claims Employees’ wages and social insurance premiums are treated preferentially in a liquidation.

Anti-avoidance provisions Certain transactions entered into by the company before winding up may be voidable by the administrator or simply void. These include granting securities while insolvent, sale of assets under value and unfair preferences.

Cross-border insolvency The proposed law attempts to extend its procedures to apply to debtor’s assets in foreign countries.

Conversely, foreign bankruptcy proceedings will be binding in China on the Chinese assets of a debtor, except where:

• there is no reciprocity of recognition of bankruptcy proceedings;

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9423 Insolvency 3 legislative.indd 254 7/03/2006, 1:06:11 PM • the proceedings are contrary to the public interest; or • the proceedings adversely affect the interests of a Chinese creditor.

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9423 Insolvency 3 legislative.indd 255 7/03/2006, 1:06:12 PM DEVELOPMENTS IN ASIA

Administration of Pilot Projects for Securitisation of Credit Assets Procedures: putting in place a legal framework for securitisation in China

The Administration of Pilot Projects for Securitisation of Credit Assets Procedures (the APPS), promulgated by the People’s Bank of China (the PBOC) and China Banking Regulatory Commission (the CBRC), became effective on 20 April 2005.

The legislative change introduced by the PBOC and the CBRC, the regulator of the PRC banking industry, is generally welcomed by market participants, as it seeks to put in place a legal framework for securitisation and clariﬁ es the long-awaited question on feasibility of securitisation in the PRC.

The APPS is intended to facilitate securitisation by fi nancial institutions to deal with non-performing loans and home loans and improve their balance sheets as part of their pre-listing plans. Although only fi nancial institutions can rely and benefi t from the APPS, it is nevertheless a major initiative.

Overview of the APPS Under the APPS, the PBOC and CBRC permit ﬁ nancial institutions to securitise their credit assets in accordance with the law. The APPS identiﬁ es, among other things, the rights and interests of relevant parties, the application procedure, offering process and trading of the asset-backed securities (ABS), and disclosure requirements.

The structure of securitisation under the APPS is similar to a standard, asset- backed securitisation and involves the following steps:

• the ﬁ nancial institution, acting as a sponsor (sponsor), transfers its credit assets to a special-purpose trust (the trustee); • the trustee appoints a loan-servicing institution and fund custodian to manage and administer the credit assets; • the trustee and underwriter can offer ABS to institutional investors on the national inter-bank bond market; and • the cash stream generated by the credit assets is used to pay returns on the ABS.

What constitutes ‘credit assets’ is not clearly deﬁ ned. It is uncertain whether the term covers only simple loan facilities (in which case it would be a mortgage- backed security), or includes other receivables such as credit card and lease receivables.

Some of the major initiatives of the APPS are highlighted below.

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9423 Insolvency 3 legislative.indd 256 7/03/2006, 1:06:12 PM Special-purpose trust and true sale An important feature of the APPS is that it recognises that credit assets transferred to the trustee and the cash stream generated from those credit assets are trust property and are not assets (including in the case of insolvency) of the sponsor, trustee, loan-servicing institution, fund custodian or any other institutions involved in the transaction. Recognition of the insolvency-remote nature of the special- purpose trust (SPT) and ‘true sale’ to the SPT is fundamental in any form of securitisation. The APPS conﬁ rms these concepts and removes uncertainty on the insolvency-remote status of the SPT, and the true sale of trust property.

A PRC domestic trust and investment corporation, or any other institution approved by the CBRC, may become the trustee. The sponsor and the trustee must enter into a trust contract in accordance with the requirements set out in the APPS. An unusual feature in the APPS is a buyback provision. If the trust property transferred to the trustee does not comply with the scope, type, standards or state as agreed in the trust contract, instead of the usual contractual remedy, the APPS requires the sponsor to buy back or replace the relevant credit assets.

Duties and function of relevant parties The trustee is required to perform duties according to the trust contract, including:

• offering the ABS; • managing the trust property; • ongoing disclosure on the trust property and the ABS to relevant authorities; and • distributing the trust beneﬁ ts according to the trust contract.

The trustee must appoint a commercial bank or other professional institution to serve as the custodian of the trust property and appoint other qualiﬁ ed institutions to provide loan servicing, transaction management and other trust duties.

A loan-servicing institution is appointed by the trustee to manage the loans. The duties of the servicer, which can be the sponsor, include:

• managing the loans and their recovery; • ensuring the legal documents relating to the trust property are kept separate from other assets; and • regularly reporting to the trustee on the trust property.

A fund custodian appointed by the trustee is responsible for managing the revenue generated by the trust assets. Neither the sponsor nor the servicer can act as the fund custodian on a transaction. A fund custodian may only invest the revenue generated by the trust property in highly tradeable and liquid sovereign bonds, policy ﬁ nancial bonds and other ﬁ nancial products permitted by the PBOC.

Application process, offering and trading of ABS The PBOC will oversee the offering and trading of the ABS on the PRC national inter-bank bond market. A trustee must apply to the PBOC for permission to offer ABS. The APPS speciﬁ es the documents required for an application and timetables for the PBOC’s approval process.

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9423 Insolvency 3 legislative.indd 257 7/03/2006, 1:06:13 PM An underwriter consortium must underwrite the issue of ABS. The offer of ABS may be made in a single offer, in instalments, or privately placed with particular investors.

In the case of a private placement with particular investors, a credit rating report is not required, but the private placement is a kind of ‘club deal’ in that the ABS may only be transferred between subscribers.

If it is a public placement on the national inter-bank bond market, the trustee may, after two months after the conclusion of the offer, apply for the trading of the ABS on the national inter-bank bond market according to the veriﬁ cation of the trading and circulation of bonds in the national inter-bank bond market rules. Any trading of the ABS must comply with relevant provisions such as the administration of bond transactions in the national inter-bank bond market procedures.

Information disclosure During the term of the ABS, the trustee must produce regular reports on the trust property, revenue generated from trust property, earnings on the securities, and other information as speciﬁ ed by the PBOC and CBRC. The trustee must submit the disclosure documents to the National Inter-banking Funding Center and China Government Securities Depository Trust & Clearing Company for announcement to the public through mass media designated by the PBOC.

Further developments While the APPS is limited in scope, as it is restricted to fi nancial institutions securitising their credit assets, it has targeted a problematic area that requires attention in the PRC fi nancial markets. As most PRC fi nancial institutions are challenged by low credit ratings on their loan portfolios and non-performing loans, the APPS provides PRC fi nancial institutions with an option to adopt securitisation as a fi nancial management tool to improve their balance sheets as part of the overall reform in the banking industry in PRC and preparation for stock exchange listing.

Among the ﬁ rst PRC ﬁ nancial institutions authorised to securitise their credit assets are the State Development Bank and China Construction Bank.

In line with the common approach to introduction of new legislation in the PRC, the APPS may serve as a testing ground for a general broad reform to PRC securitisation legislation.

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9423 Insolvency 3 legislative.indd 258 7/03/2006, 1:06:14 PM DEVELOPMENTS IN ASIA

New rules of arbitration

The China International Economic and Trade Arbitration Commission (CIETAC) has made signiﬁ cant amendments to its arbitration rules that came into effect on 1 May 2005. Key features of the new rules include:

• freedom to appoint arbitrators of any nationality outside the CIETAC Panel of Arbitrators (but still subject to the CIETAC chairman’s confi rmation); • freedom to select both the place (or seat) of arbitration and the place of hearing (previously not distinguished under the old rules, resulting in China being the seat of all arbitrations and Chinese procedural law applying to all CIETAC arbitrations). Arbitration hearings may now take place more easily at a venue outside China; • freedom to conduct proceedings of arbitrations administered by CIETAC under rules other than CIETAC arbitration rules, except where any agreement is incapable of performance or in confl ict with the mandatory law of the place of arbitration; • more stringent disclosure obligations on arbitrators to inform CIETAC and parties of potential confl icts of interest, whether they arise before or during the arbitral proceeding; • tighter timetables for the arbitration process. Respondents must also fi le their counterclaims at the same time as any defence, which is due 45 days after receipt of the Notice of Arbitration. Additionally, the time limit to render an award has been reduced to six months (from nine months); • freedom by arbitrators to award costs against the losing side at their discretion (previously, under the old rules, this was limited to 10 per cent of the award); • the ability of CIETAC to delegate the power to determine jurisdictional matters to the arbitral tribunal (the Arbitration Law confers this power on CIETAC, not the tribunal); • the mechanism for a greater role for parties to resolve a failure to agree on a presiding arbitrator (under the old rules, this was solely at the discretion of the CIETAC chairman). The new ‘list’ procedure involves the parties submitting a list of their preferred suitable candidates to CIETAC. A presiding arbitrator is chosen from among any common candidates. Where only one candidate is listed, he or she is the presiding arbitrator. Where more than one candidate is listed, CIETAC would choose the most suitable candidate according to the case’s circumstances. CIETAC will only impose an individual if no common candidate is listed; and • express confi rmation that the tribunal has the power to make rules and issue orders for procedural matters, including the freedom to adopt an inquisitorial or adversarial process for hearings.

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9423 Insolvency 3 legislative.indd 259 7/03/2006, 1:06:15 PM DEVELOPMENTS IN ASIA

China: non-performing loans

The issue of non-performing loans (NPLs) in the Chinese state-run banking sector has been the major cause of concern in the Chinese economy for the better part of the past decade. Just a few years ago, economists were predicting a banking collapse in the near future if the problem of the NPLs was not substantially confronted. It was predicted that NPLs could account from anywhere between 18 per cent and 40 per cent of the total loans still outstanding at the end of 2003. Reform of the big four banks – Bank of China (BoC), Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and the Agricultural Bank of China (ABC) – remain the most signiﬁ cant issue for the modern Chinese economy. It seems that the Chinese Government has recognised this fact and made signiﬁ cant moves towards establishing a healthy and viable banking sector.

Factors driving the reforms The moves towards reform of the banking sector are largely made against the backdrop of emerging competition from overseas banks. Under the terms of China’s entry into the World Trade Organization (WTO), the country must open up its economy to competition from foreign banks in 2007. Although China’s big four banks are all within the largest 40 banks in the world in terms of size, they are overburdened by NPLs to such an extent as to make them uncompetitive against foreign banks. To maintain their market position, especially in terms of loans for foreign currency transactions, the banks are seeking to bring their practice up to international standards.

Another factor in the drive to reduce the NPL burden on the large state-owned banks is to make them a more attractive option for foreign investors. Recently the state-owned banks have been allowed to make moves towards foreign ownership, with investment being allowed from foreigners. Although this has been capped and does not allow for a controlling share, the moves to reduce NPLs can be seen within the context of the Chinese Government trying to increase the success of sales to foreign investors. Foreign institutions such as Bank of America, Royal Bank of Scotland and Merrill Lynch, among others, have all become investors in the Chinese banking sector. That these large well-known institutions are prepared to make signiﬁ cant investments in China’s banks shows conﬁ dence in the reforms of the banking sector currently underway in China.

The other factor at play is the plan by some of the big four to ﬂ oat on overseas stock exchanges. (Recently CCB undertook a successful ﬂ oat in Hong Kong that raised US$8 billion.) This brings about a requirement to undertake international best practice methods within the banks. This has contributed to the reduction in NPLs and also to the introduction of better corporate governance practices. The state is slowly but surely being eradicated from business decisions as the banks

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9423 Insolvency 3 legislative.indd 260 7/03/2006, 1:06:15 PM adopt better corporate practices. This adoption of good corporate governance practices should help the banks maintain a low percentage of NPLs into the future.

New laws The Chinese Government’s steps to restructure the banking sector continue through the introduction of new laws to ensure the continued health of the sector. Recent initiatives, such as the Measures for the Administration of Debt Provisioning by Financial Institutions, are examples of efforts by the state administration to continue banking reforms and to ensure that NPLs do not remain a continuing problem in the Chinese economy. Continuing reforms are still necessary, despite falling percentages of NPLs in the economy. Standard and Poor’s found that BoC’s NPLs fell from 16.29 per cent to 5.46 per cent between the start of the year and June. Similarly, CCB had reduced its NPL ratio from 9.12 per cent to 3.08 per cent. However, it remains unclear how much of this reduction can be attributed to the efforts undertaken by the bank or simply an increase in loan volumes. To maintain a low percentage, it is vital that there are regulatory processes in place that encourage best banking practices in the industry.

Banking practices There are also other problems affecting NPLs in the Chinese banking sector. The independence of provisional branches from head ofﬁ ce remains a problem in reforming the sector. While head ofﬁ ce may be doing its best to implement best practice, there are problems associated with implementing these practices at the local level. Traditionally, the banks had encouraged a localised system of lending that drove local branch managers in their lending practices. This is in the process of reform among several banks and is an important factor in keeping the level of NPLs down.

Investment opportunities The NPLs of the Chinese economy present both a potential threat to the future health of the Chinese economy, but also a signiﬁ cant opportunity for investment. As China seeks to rectify the problem of NPLs, a market is becoming increasingly viable in the purchase of these assets in several forms. We have recently seen a move in the Chinese market to the securitisation of these assets, with Australia at the forefront of a deal from a Macquarie Bank subsidiary being currently negotiated. Though several deals are in early stages at the moment, another being with Credit Suisse First Boston, we are yet to see a ﬁ nished deal emerge in the market. The securitisation market has yet to be fully tested and there are still some concerns for investors looking to become part of the securitisation market in China.

Most of the disposal of NPLs by the respective Asset Management Companies (AMCs) has been through direct sale of the portfolios to institutions. Although there have been signiﬁ cant sales of these sets by the AMCs, there are still some problems with the process. One problem emerged in early 2005 when Cinda, one of the AMCs, announced plans to conduct an international auction for some of its NPL assets. The problem emerged when Great Wall, another of the government AMCs, announced plans to participate in the process. Allowing other government-owned AMCs to participate in the process reduced the competitiveness of foreign institutions in the bid process and, as such, foreign institutions withdrew from the

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9423 Insolvency 3 legislative.indd 261 7/03/2006, 1:06:16 PM sale. Undoubtedly this is an issue that must be resolved in the Chinese market if there is to be effective participation from foreign investors in the auction process.

It seems that the reduction in NPLs is the result of both effectively ofﬂ oading the burden of these from the books of the big state-owned banks to the AMCs and other institutions, and a corresponding increase in new loans. China’s NPL level remains a problem for its banking sector in the immediate future, but the degree of concern has signiﬁ cantly reduced in the past few years as the percentage of NPLs held by the big four banks has been reduced. Although there remains concerns with the sector, the NPLs are a potential investment source for foreign companies looking to increase revenues in the Chinese market. It must be said, though, that the potential risk that NPLs pose to the Chinese economy seems to have reduced in the past few years because of well-implemented reforms and better corporate governance structures.

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Hong Kong accountants to follow Insolvency Guidance Notes when carrying out windings up

On 14 September 2005, the Hong Kong Institute of Certiﬁ ed Public Accountants (HKCPA) announced at a press conference the launch of the Insolvency Guidance Notes (IGNs). The aim of the IGNs is to reﬂ ect the ‘best practice guidance’ to be adopted by HKCPA’s accountants when carrying out insolvency work under the Company Ordinance.

Although not mandatory, HKCPA clearly states at the outset of the notes that:

failure to follow the IGNs may put a member of the institute at risk of having to justify his or her actions in answer to a complaint against him or her.

Until 1996, the Offi cial Receiver’s Offi ce (ORO) of the HKSAR Government handled the administration of court-ordered winding up and bankruptcies, but, following the Asian economic crisis in the late 1990s, the Government faced an increasing number of corporate insolvencies and personal bankruptcies and started contracting out the insolvency work to private accounting fi rms. (Bankruptcy orders made by the court increased from 639 in 1997 to more than 25,000 by 2002.) To assist private accounting fi rms and set up a high-quality standard insolvency practice, the Council of the HKCPA proceeded to issue the IGNs.

The IGNs have been adapted from the United Kingdom Statements of Insolvency Practice, issued by the UK-recognised professional bodies, and are as follows:

• Insolvency Guidance Note (1): This note explains the scope and authority of the IGNs, and underlines the fact that, even if the IGNs are only guidelines, if they are not followed accountants may have to justify why they did not follow them. • Insolvency Guidance Note (2): This note concentrates on the duty of the liquidator of an insolvent company to investigate the company’s affairs and sets out a minimum standard procedure when carrying out this investigation. • Insolvency Guidance Note (3): This note sets out the best practice to be followed with regard to the presentation of fi nancial information to creditors and other interested parties. • Insolvency Guidance Note (4): This note sets out the duty of the receiver or liquidator of a company to submit a report, or a return, to the Offi cial Receiver concerning the directors of the company, within six months of appointment (as there is an ongoing duty to report to the ORO matters concerning the conduct of directors in order to enable the ORO to consider whether or not an application for a disqualifi cation order should be made).

The IGNs provide a clearer outline of the duties and responsibilities of the liquidator, and are applicable to any cases that commenced on or after 1 October 2005.

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9423 Insolvency 3 legislative.indd 263 7/03/2006, 1:06:18 PM DEVELOPMENTS IN ASIA

Singapore: corporate governance in the wake of the China Aviation Oil scandal

The near collapse of Singapore-listed China Aviation Oil (Singapore) Corporation Ltd in late 2004 and early 2005 was hailed by some as Singapore’s Enron: a high- proﬁ le story of corporate concealment, failure of internal controls and insider trading. While the company was ultimately saved under a scheme of arrangement, the scandal, along with other recent instances of proﬁ t and revenue overstatements by Singapore companies, has paved the way for a number of developments in the area of corporate governance, with more to come. Examples of recent regulatory and industry governance developments have included:

New Code of Corporate Governance 2005: In July 2005, the Ministry of Finance issued a new Code of Corporate Governance 2005, which replaces the March 2001 code. Listed companies will need to disclose their corporate governance practices and explain deviations from the new Code in their annual reports for AGMs held from 1 January 2007 onwards. Key features of the new Code include:

• a requirement that the chairman of the company’s nominating committee be independent of management and business relationships, as well as independent of substantial shareholders; • a requirement that the company’s remuneration committee be comprised entirely of non-executive directors and that the majority of the remuneration committee, including the chairman, should be independent of management and business relationships (but not necessarily of substantial shareholders); • expansion of the duties of the company’s audit committee to include reviewing signifi cant fi nancial reporting issues and judgments, so as to ensure the integrity of the fi nancial statements of the company and related announcements; reviewing the effectiveness of the company’s internal audit function; and making recommendations to the board on the external auditor’s engagement; and • the inclusion of a recommendation that companies amend their Articles of Association to avoid imposing a limit on the number of proxies for nominee companies so that shareholders who hold shares through nominees can attend AGMs as proxies (in order to enhance communication with shareholders). Proposed changes to the SGX listing rules: In May 2005, the Singapore Exchange issued a Public Consultation Paper to seek public feedback on proposals to make a number of changes to the Listing Rules to raise corporate governance standards, including:

• by requiring the provision of two independent directors on the board of a public company on a continuous basis, and not just at listing;

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9423 Insolvency 3 legislative.indd 264 7/03/2006, 1:06:19 PM • increase the participation of resident directors in foreign-listed companies. Specifi cally, the company must have at least two independent resident directors on a continuing basis and one of the following: • a qualifi ed person in Singapore to advise the issuer on Singapore laws and assist directors with company information; or • an additional resident director or an offi cer in executive capacity resident in Singapore; • requiring, in relation to interim results, a ‘negative assurance’ from the board that, to the best of their knowledge, nothing has come to their attention that may render fi nancial results false or misleading; • requiring certain annual confi rmations from the board and CEO in relation to the state and staffi ng of internal controls; • requiring listing applicants to confi rm their compliance with all material licensing requirements, laws and regulations; and • requiring issue managers to disclose their sponsorship of newly listed companies for two years instead of one year after the company lists. The enhancement of corporate governance requirements for banks and insurers: In September 2005, the Monetary Authority of Singapore issued:

• Corporate Governance Regulations, which establish mandatory minimum corporate governance standards for banks, fi nancial holding companies and signifi cant insurers incorporated in Singapore; and • Guidelines on Corporate Governance, based on the Code of Corporate Governance issued by the Council of Corporate Disclosure and Governance, which are best practice guidelines applicable to banks, fi nancial holding companies and direct insurers. Legal protection for whistle-blowers: While Singapore has not yet enacted legislation specifi cally aimed at protecting whistle-blowers (such as that now entrenched in countries including Australia, the US and the UK), awareness of the need for whistle-blower protection is growing and some progress has been made. For instance, The Association of Banks in Singapore has said that a policy on whistle-blowing will be incorporated into a proposed new code of conduct for industry participants.

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Singapore

Establishment of Insolvency Practitioners Association Under the recommendations of the Company Legislation and Regulatory Framework Committee, the Insolvency Practitioners Association of Singapore Limited (IPAS) was incorporated in April 2005 with the support of the Institute of Certifi ed Public Accountants of Singapore, the Law Society of Singapore and the Offi cial Receiver and Offi cial Assignee. IPAS aims to be the premier professional body for the insolvency profession in Singapore.

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9423 Insolvency 3 legislative.indd 266 7/03/2006, 1:06:20 PM DEVELOPMENTS IN NEW ZEALAND

Possible reform to Subordinate Security legislation

A recent New Zealand High Court case1 conﬁ rmed that subordinate security holders cannot be assured that their security interest will be effective if a receiver sells the debtor’s assets.2 By virtue of section 30A of the Receiverships Act 1993 (NZ) (RA), subordinate security interests are extinguished in some circumstances and this potentially creates difﬁ culties for senior security holders where an asset is sold by a receiver. Such problems may be resolved by legislative reform if the draft Bill is passed.

Section 30A: extinguishment of subordinate security interests • Once property is disposed of by a receiver, under s30A all subordinate interests in the property are extinguished on disposition of the property. This has the effect of extinguishing a subordinate security holder’s security interest, including any interest in surplus that results from such disposition. • Section 115 of the Personal Property Securities Act 1999 (NZ) (PPSA) has the same effect as s30A. However, s117(1) provides that secured interests are satisﬁ ed in priority, leaving unsecured interests to share in any surplus on a pro rata basis. Section 30A of the RA has no such equivalent provision regarding distribution of a surplus.

Re The Building Depot Limited (in receivership & liquidation)

The facts of the High Court case that illustrates the operation of s30A RA are as follows:

• ANZ Bank and Fletcher Distribution Limited both held general security interests over property of The Building Depot Limited. Under the deed of subordination and priority, entered into by both creditors, ANZ was to have ﬁ rst priority. • Following defaults by The Building Depot Limited, both creditors appointed receivers and The Building Depot was put into liquidation. The ANZ receivers sold The Building Depot’s assets and were left with surplus funds exceeding the amount owed to Fletcher. • The ANZ receivers sought directions from the High Court as to whether they should: (a) pay the surplus to Fletcher, then apply remaining funds to other secured creditors and then, if funds remained, to the liquidator for the unsecured creditors; or (b) pay total surplus funds to the liquidator for the unsecured creditors.3

1 Re The Building Depot Limited (in receivership & liquidation), Pardington & Anor v Fletcher Distribution Ltd & Ors (Williams J, High Court, Auckland, CIV 2005 404 1347, 19 & 31 May 2005.

2 M. Arthur, M. Harper and J. Blunt, ‘Counsel’ p.5.

3 ibid, p.2.

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9423 Insolvency 3 legislative.indd 267 7/03/2006, 1:06:21 PM Justice Williams issued an interim judgement, which held that the words in s30A were clear and unambiguous. The Court afﬁ rmed that, on the sale of property by a receiver appointed by a senior security holder, subordinate interests in both the collateral and the proceeds of sale are extinguished.

In response to the arguments raised by both Fletcher and ANZ regarding the problematic application of s30A, Justice Williams proposed two alternatives: • First, it may be argued that the word ‘receiver’ in s30A could be read as ‘receivers’4 This interpretation would allow s30A to refer to both the ANZ and Fletcher receivers; or • alternatively, Williams J suggested a reading of the section (clause 15 of the deed of priority) that incorporated the senior security holder’s contractual obligations. This would allow s30A to be read as referring to the ANZ receivers as bound by the deed of priority.

Fletcher gave notice of intention to appeal and the interim judgement was conﬁ rmed as the ﬁ nal order of the court by Justice Williams.

Possible legislative reform The Statutes Amendment Bill (No.5) 2005, which purports to amend the RA was tabled for debate in Parliament on 5 December 2005. The proposed sections 30A(2), 30B and 30C will require a receiver to account to subsequent security holders where there is a surplus. If the draft Bill is enacted, several groups will be affected.

• Potential implications for senior security holders The sale of assets by a receiver appointed by a senior security holder may place that senior security holder in breach of s30A if they have priority agreements with other secured parties for distribution of surplus funds. Where a senior security holder appoints a receiver who sells collateral and creates a surplus, the statute will require that surplus go to the unsecured creditors rendering any priority agreement unenforceable.

• Potential implications for subordinate security holders A second or subsequent ranking security interest could be worthless where a receiver for a prior ranking secured creditor sells collateral that was, prior to sale, subject to the subordinate security interest. In such a case, the subordinate security holder would need to negotiate with other secured creditors so that debtor assets are sold by the lowest secured creditor to avoid extinguishment of other security interests. • Alternatively, the subordinate security holder could buy out the debt and acquire the senior security holder; or • seek the agreement of the senior security holder that each receiver will only enforce against speciﬁ ed property. • Potential implications for receivers This decision means that, where the receiver is appointed by the security holder, there exists the possibility that a sale of collateral with a surplus may lead to the subordinate interests being extinguished, and a potential dispute over whether a priority agreement has been breached.

4 Section 33 of the Interpretation Act 1999 states that words in the singular may include the plural.

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The European Union

Interpretation of the European Community Regulation on insolvency proceedings In 2002, the European Community Regulation on Insolvency Proceedings (the Regulation) came into force across the European Union (EU). The Regulation attempts to address the issues of conﬂ icting laws that courts face when a company with operations and assets in multiple European jurisdictions becomes insolvent, by allowing for insolvency proceedings to be brought in one jurisdiction only, at the debtor’s ‘centre of main interest’ (COMI).

On 27 September 2005, Advocate-General Jacobs of the European Court of Justice gave his opinion on the Regulation and COMI in the Eurofood IFSC Limited case currently before the European Court of Justice (ECJ) (Case C-341/04). While the Advocate-General’s opinion is not binding, it will be persuasive and is typically followed by the ECJ. Judgment from the ECJ is anticipated shortly.

The background to the Eurofood case is set out in our Annual Review of Insolvency & Restructuring Law 2004 (p 224). The Advocate-General concluded as follows:

• A winding-up petition combined with the appointment of a provisional liquidator constitutes a judgment opening insolvency proceedings for the purposes of Article 16 of the Regulation. • Where insolvency proceedings are fi rst opened by a court in the member state in which a company’s registered offi ce is situated and in which the company conducts administration of its interests on a regular basis in a manner ascertainable by third parties, the courts of other member states do not have jurisdiction to open main insolvency proceedings. • Where the registered offi ces of a parent company and its subsidiary are in two different member states and the subsidiary conducts the administration of its interests on a regular basis in a manner ascertainable by third parties and in complete and regular respect for its own corporate identity in the member state in which its registered offi ce is situated, the presumption that the COMI is in the member state of its registered offi ce is not rebutted merely because the parent company is in a position, by virtue of its shareholding and power to appoint directors, to control, and does in fact control, the policy of the subsidiary. • A member state is not bound to recognise a decision of the courts of another member state purporting to open insolvency proceedings where, manifestly contrary to its public policy, the other member state’s decision was reached in relation to persons or bodies whose right to fair procedures and a fair hearing had not been respected.

269

9423 Insolvency 3 legislative.indd 269 7/03/2006, 1:06:23 PM Unfortunately, the opinion gives no practical guidance on what factors should be considered in determining where a company administers its interests on a regular basis. The Advocate-General concluded that, in determining the debtor’s COMI, ‘each case manifestly falls to be decided on its speciﬁ c circumstances’. Subject to an informative ruling on the interpretation of the COMI by the ECJ, further inconsistent interpretation of the concept can be expected.

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9423 Insolvency 3 legislative.indd 270 7/03/2006, 1:06:24 PM DEVELOPMENTS IN EUROPE

Italy

Amendments to Italian Insolvency Act Italian Bankruptcy Law, largely static since 1942, has recently been amended with the ratifi cation of Law No 80/2005 on 14 May 2005. That law marks the fi rst in a series of predicted changes aimed at reforming what has been characterised as a ‘draconian’ system underpinned by a punitive approach to debtors and quick resort to liquidation. It aims to enhance the effi ciency of the system by minimising costs and delays, and promoting a more cooperative and proactive approach to the recovery of business in fi nancial distress. It comprises a set of rules directed at reforming three key areas, those being ‘claw-back’ provisions, judicial arrangements with creditors, and debt restructuring agreements.

Claw-back action

Under the new provisions, the comparatively long ‘claw-back’ period in which bankruptcy trustees were able to void certain pre-declaration payments and transactions has been halved. Several exemptions have also been introduced, ostensibly to foster the recovery, rather than the liquidation, of businesses approaching insolvency. Those transactions now exempt from claw-back include payments for goods and services made in the ordinary course of business in line with commercial custom, and transactions, payments and security under certiﬁ ed, court-supervised, or ratiﬁ ed restructuring plans.

More stringent criteria for determining when transactions will be considered outside the ordinary course of business for the purposes of claw-back action have also been implemented.

Judicial arrangements with creditors

Law No 80/2005 has also broadened the availability and ﬂ exibility of arrangements with creditors (concordato preventivo). Such arrangements are now accessible to companies of all sizes and may be entered into before actual insolvency, when ﬁ nancial crisis is being experienced.

A debtor company is now able to propose the division of creditors into different classes, with each class being subject to different treatment. It may also advance a range of debt restructuring proposals, including debt-equity swaps, assumption of creditor liabilities, and transfer of assets to an assignor.

All proposed arrangements require the approval of those unsecured creditors holding a majority by value of all claims (or where the creditors are divided into classes, the approval of the majority by value of claim-holders in each class).

271

9423 Insolvency 3 legislative.indd 271 7/03/2006, 1:06:24 PM Once the arrangement is ratiﬁ ed by the court, the arrangement becomes binding on all creditors. Court ratiﬁ cation may be available despite a rejection of the proposed arrangement by one or more classes of creditors (not constituting a majority) where the court determines there would be no more favourable restructuring arrangement for the dissenting creditors.

Upon ratiﬁ cation, the arrangement becomes binding on all creditors.

Debt restructuring agreements

Under the new rules, a debtor company may obtain court ratifi cation of certain out- of-court restructuring agreements. Such ratifi cation is contingent upon a minimum of 60 per cent of creditors by value being parties to the agreement, as well as expert certifi cation as to the agreement’s feasibility generally and the debtor’s ability to satisfy non-party creditors in particular. If the agreement is not challenged by any creditors or interested parties within 30 day of fi ling, it attracts court ratifi cation. As noted above, transactions subsequently undertaken under the agreement are protected from claw-back action.

Further reform

Further and more general reform of Italian insolvency law is imminent, with the Parliament’s recent delegation of legislative power to the Italian Government. The reforms are expected to focus on the streamlining of bankruptcy procedures (in part by rewarding cooperative debtors), as well as the development of a more prominent role for creditors.

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9423 Insolvency 3 legislative.indd 272 7/03/2006, 1:06:25 PM DEVELOPMENTS IN EUROPE

France

Bankruptcy law reforms include rejuvenation of security law and treatment of companies in difﬁ culty France has recently passed legislation to reform its bankruptcy laws. Titled Law for Corporate Protection, the Bill is designed to discourage insolvency proceedings and instigate negotiations with creditors by way of introducing and modifying pre- insolvency and insolvency proceedings.

Procedure de conciliation

The procedure de conciliation will extend the mandat ad hoc procedure that provides for a court-appointed trustee to negotiate a plan with creditors. Speciﬁ cally, the procedure de concilliation aims to improve such negotiations by eliminating the ability to petition a court for a stay of proceedings and claims.

Procedure de sauvegarde

The new procedure de sauvegarde will allow companies facing insolvency to establish a court-supervised restructuring plan. Once established, the court will appoint two committees of creditors, consisting of credit institutions and the trade creditors, to negotiate a reorganisation plan. If the committees are unable to agree, the court will retain the ability to approve a reorganisation plan. Importantly, only a debtor can request the commencement of the procedure de sauvegarde.

Redressement judicaire

Once insolvent, the redressement judicaire procedure remains the only available option for a company. The Bill will modify this procedure by extending the post- insolvency period to 45 days (previously 15 days) wherein a debtor must request the commencement of reorganisation proceedings.

It is anticipated that the Bill will be enacted early in 2006.

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9423 Insolvency 3 legislative.indd 273 7/03/2006, 1:06:26 PM DEVELOPMENTS IN THE UNITED KINGDOM

New set-off rules

In the UK, mandatory and self-executing set-off rules have long been a part of insolvency law. The amounts to be set-off must be provable, due and mutual and the set-off rules override any inconsistent contractual provisions. The law was similar for administrations and applied when an administrator gave notice of a proposal to make a distribution to creditors.

The Insolvency (Amendment) Rules 2005 (the Rules) came into force on 1 April 2005 and (among other things) introduced new rules relating to set-off. The aim of the Rules is to clarify the existing rules and provide consistency between liquidation and administration set-off rules.

The key changes to the insolvency set-off rules are:

• Debts owing both to and by the company are excluded from set-off where the company was already in administration or liquidation, or the counterparty had notice of the administration or liquidation, at the time the debt was incurred. • Contingent and future debts owing both to and by the company are to be set off, provided they arise out of obligations incurred before the date of insolvency. The value of the debts is to be determined by the insolvency practitioner, subject to a right to appeal the valuation to the court. • If the balance of the claim after set-off is a sum owing to the company, all or some of which results from a contingent or prospective debt owed by a solvent counterparty, then the balance (or the relevant part of it) only becomes payable by that counterparty when the debt actually becomes due and payable. • Debts acquired by way of assignment (or otherwise) under an agreement after the date of insolvency cannot be taken into account for set-off purposes.

274

9423 Insolvency 3 legislative.indd 274 7/03/2006, 1:06:26 PM DEVELOPMENTS IN THE UNITED KINGDOM

The MG Rover case and European Community Insolvency Regulation (1346/2000)

The EC Insolvency Regulation (1346/2000) (the Regulation) came into force in May 2002. It aims to address the problems that arise when an insolvent company has assets in several European jurisdictions and the insolvency laws in those jurisdictions conﬂ ict. The Regulation allows insolvency proceedings to be opened in the country in which the company’s ‘centre of main interest’ is located.

The English High Court (Birmingham District Registry, Chancery Division), recently applied the Regulation to the collapse of the MG Rover group of companies in MG Rover Ireland Ltd and other subsidiaries, unreported, 18 April 2005, [2005] EWHC 874 (CHAN) and 11 May 2005.

After the group collapsed, applications were made to the English courts to place the company, including its European subsidiaries, into administration in England. The English court found that the presumption in the Regulation that a company’s centre of main interest is where its registered ofﬁ ce is located was rebutted. The reasons for this ﬁ nding included:

• management decisions for all companies in the group were taken in England; • each of the European subsidiaries had at least one UK resident director and half of all board meetings took place in England; • none of the European subsidiaries had autonomy in the group’s ﬁ nancial or trading structure; • the main creditor was an English-based company; and • the creditors will demand repayment of debts from the English parent company.

In making its decision, the court focused on the management and control exercised by the English parent rather than the location of the European subsidiaries, although this was also taken into account.

Despite not being required to do so, the court also made supplemental orders setting out the relevant responsibilities and powers of the joint administrators and the material effects of the making of the administration orders, with reference to Schedule B1 and 1 to the Insolvency Act 1986 (UK). The purpose of the orders was to assist European insolvency practitioners, creditors and counterparties in understanding the purpose and function of an English administration.

In order to discourage employees beginning secondary proceedings in other European countries to secure their entitlements, whose proceedings may interfere with the English administration, the supplemental order also allowed for the administrators to make payments to the employees. This was to ensure that the employees receive the same amount they would have received if secondary proceedings were begun in the employees’ home countries under the Regulation.

275

9423 Insolvency 3 legislative.indd 275 7/03/2006, 1:06:27 PM As well as the English court allowing the administration to be conducted in England, the French courts recognised the jurisdiction of the English court in relation to the administration of a French subsidiary of the English company in Rover France SAS, unreported, 4 May 2005 and 20 May 2005. The French court agreed that, on the evidence placed before the English court regarding the management of the company and the company’s creditors, the presumption that the location of the company’s registered ofﬁ ce determines its centre of main interests was rebutted.

276

9423 Insolvency 3 legislative.indd 276 7/03/2006, 1:06:28 PM DEVELOPMENTS IN CANADA

Canadian Association of Insolvency and Restructuring Professionals puts forward reform proposals

Two pieces of insolvency legislation have recently survived a second reading in the Canadian House of Commons.

Bill C-281 Introduced as a private member’s Bill in November 2004, Bill C-281 aims to give employees ﬁ rst call on a company’s assets in the case of bankruptcy. Currently, priority is attributed to tax collectors, banks and other secured creditors, often at the expense of workers’ wages, long-service leave, pensions and other beneﬁ ts.

If enacted, the Bill will amend the Bankruptcy and Insolvency Act 1985, the Canada Business Corporations Act 1985, the Employment Insurance Act 1996, and the Employment Insurance Regulations, and aims at providing:

• protection for employees where a company has under-funded their pension plan; • protection against employment insurance payments being classiﬁ ed as income; and • an accelerated process for employees to seek redress from the company directors.

Bill C-55 Bill C-55 aims to establish the Wage Earner Protection Program Act (the WEPP), which, in the event of a bankruptcy, would give claims for unpaid wages and vacation pay priority over secured creditors to a maximum of $2000. The WEPP also aims to provide guaranteed payment for unpaid earnings during the six months before a bankruptcy or receivership to a maximum of $3000 and place unremitted pension plan contributions in priority over secured creditors.

Bill C-281 and Bill C-55 are now being reviewed by the Industry, Natural Resources, Science and Technology committee before returning to the House of Commons for a ﬁ nal vote.

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9423 Insolvency 3 legislative.indd 277 7/03/2006, 1:06:30 PM DEVELOPMENTS IN THE UNITED STATES OF AMERICA

Recent amendments to the United States Bankruptcy Code affecting commercial entities

The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (US) amends Title 11 of the United States Code (the Bankruptcy Code), making signiﬁ cant changes to US bankruptcy law. While commentators have given most attention to consumer issues, the Act will have a signiﬁ cant impact on commercial bankruptcies. The Act (for the most part) became effective on 17 October 2005. The major changes that affect commercial bankruptcies are summarised in the table below.

Issue BAPCP Section of Old law New law Act Bankruptcy section Code amended or added Exclusivity 411 1121(d) No limit on Limits exclusivity extensions to extensions to exclusive periods 18 months after for ﬁ ling a chapter date of ﬁ ling. 11 plan. Appointment 1405 1104 A bankruptcy Chapter 11 of chapter 11 court must appoint trustee must be trustee in a chapter 11 appointed where cases of trustee when there fraud is reasonably suspected is ‘cause’ or when suspected. fraud it ‘is in the interests of creditors’. Conversion or 442 1112 Where ‘cause’ can be Where ‘cause’ is dismissal shown, courts have shown, a bankruptcy discretion to either court generally must dismiss a chapter 11 dismiss or convert case or convert it to a (subject to some chapter 7 case. exceptions). Expands non-exhaustive list of examples of ‘cause’. Commercial 404 365(d)(4) A chapter 11 Extends initial real property debtor has 60 days deadline to assume or leases to assume or reject reject to 120 days but any leases of limits any extensions non-residential of the 120 days to an real property. extra 90 days. The No limit on landlord of the debtor extensions of has the right of veto this period. over any extension beyond 210 days.

278

9423 Insolvency 3 legislative.indd 278 7/03/2006, 1:06:31 PM Issue BAPCP Section of Old law New law Act Bankruptcy section Code amended or added Commercial 445 503(b) Allowance of various New category of real property administrative administrative leases expenses. expenses for damages incurred by landlord where a non-residential real property lease is assumed and then later rejected. Preferences 409 547(c)(2) Ordinary course of The defence is business defence. liberalised, reducing Test with three the burden on the elements must be defendant. Only two satisfi ed. of the three elements need to be proved. Fraudulent 1402 548 Fraudulent transfers Reach-back period transfers made by a debtor up extended from one to one year before year to two years. the debtor fi led for And transfers can be bankruptcy can be avoided where they avoided by a trustee. were to an insider under an employment contract and not made in the ordinary course of business. Reclamation 1227 546(c) Bankruptcy Code • Extends reclamation refers to non- period from 10 days bankruptcy law that to 45 days. allows a seller to • Brings reclamation reclaim goods – claims under normally s2-702 federal jurisdiction Uniform Commercial once a debtor fi les Code. Reclamation for bankruptcy. period is 10 days. • Creates an administrative expense in the debtor’s bankruptcy case for goods received within 20 days of fi ling, regardless of whether the seller complies with the reclamation procedures.

279

9423 Insolvency 3 legislative.indd 279 7/03/2006, 1:06:31 PM Issue BAPCP Section of Old law New law Act Bankruptcy section Code amended or added Key Employee 331 503 Allows debtors to Signifi cant restraints Retention establish bonus and on ability to establish Plans (KERPs) severance programs KERPs. to encourage ‘insiders’ to continue to work for the debtor. Taxes 701- Various Establishes rights Strengthens the 720 and remedies for tax (already robust) rights authorities in and remedies of tax debtors’ bankruptcy authorities in proceedings. bankruptcy proceedings. Rights of 417 366 Establishes rights of Expands the rights of utilities utilities when their utilities in this customers fi le for situation. bankruptcy under chapter 11. Unsecured 405(b) 1102(b) Bankruptcy Code Committees must creditors says nothing about provide access to the duties of information and seek creditors’ comments from committees to creditors that they disclose information. represent. Advisers – 414 101(14) Investment banks Defi nition of investment that acted regarding ‘disinterested banks an outstanding persons’ is amended. security are not Investment banks can ‘disinterested now represent a persons’ and cannot debtor or a creditors’ act for the estate. committee during bankruptcy proceedings. Financial 901- Various Bankruptcy Code Existing protections contracts and 911 provides protections are broadened and netting to parties that are made applicable to non-debtor additional fi nancial counterparties to products. Allows certain fi nancial cross-product netting. contracts.

280

9423 Insolvency 3 legislative.indd 280 7/03/2006, 1:06:32 PM Issue BAPCP Section of Old law New law Act Bankruptcy section Code amended or added Cross-border Section 304 A foreign New Chapter 15 insolvency 801 representative could closely follows the claims inserts a commence, in the UNCITRAL Model new US, a case ancillary Law on Cross-Border Chapter to a foreign Insolvency. Signiﬁ cant 15 proceeding to request changes that require injunctive relief, a US courts and turnover order, or representatives to ‘other appropriate cooperate with their relief’. foreign counterparts, and that streamline access to US courts for foreigners in cross- border cases.

281

9423 Insolvency 3 legislative.indd 281 7/03/2006, 1:06:33 PM DEVELOPMENTS IN SOUTH AFRICA

Government establishes interdepartmental task team to investigate liquidations industry issues

In July 2004, the South African Government appointed a Committee of Enquiry to examine matters in the liquidation industry. The committee was asked to enquire into and investigate the following issues:

• strengths and weaknesses in the administrative system relating to the liquidation industry; • the appointment of liquidators; • identifying practices that encourage undesirable or illegal practices; and • identifying and dealing with any information relating to corruption in the industry.

In early 2005, the Government announced that the Committee of Enquiry had delivered its fi nal report and had recommended a comprehensive overview of problems identifi ed in the Masters’ Offi ces and in the liquidation industry.

The committee’s report has not been made public, but its ﬁ ndings were released to Cabinet for consideration. On 22 June 2005, Cabinet appointed an interdepartmental task team from the Departments of Justice and Constitutional Development, Trade and Industry, and Treasury to investigate, consider and report on some of the recommendations.

The Cabinet statement noted that the team will report on the following issues (among others):

• business rescue and judicial management; • a Code of Conduct for the Masters’ Ofﬁ ces and the liquidations industry; and • the overall regulation of the industry.

The inter-departmental task team has not yet ﬁ nished investigating the issues and will, more than likely, hand down its report in early 2006.

282

9423 Insolvency 3 legislative.indd 282 7/03/2006, 1:06:34 PM DEVELOPMENTS IN INDIA

Government setting up expert committee to review the company and insolvency law

In 2005, India entered into another phase of insolvency law reform. The dust had not yet settled on the reforms that were made with the enactment of the Companies (Second Amendment) Act 2002 (Second Amendment Act), when, on 2 December 2004, the Indian Government set up a high-level expert committee (the committee) to review the existing company and insolvency laws. The committee was constituted following the release of a draft concept paper by the Ministry of Company Affairs about a broad-based examination of various company law issues that required revision.

Chaired by Dr JJ Irani, a director of Tata Sons (a company member of the Tata conglomerate), the committee was given the mandate by the Government to revamp the Companies Act 1956 (the Act), to make it ‘compact, realistic and modern’. The committee’s members represent key stakeholders, experts and regulators.

The committee submitted its report to the Government on 31 May 2005. It concluded the following:

The Indian system provides neither an opportunity for speedy and effective rehabilitation nor for an efﬁ cient exit. The process for rehabilitation, regulated by the Sick Industrial Companies (Special Provisions) Act 1985 through the institutional structure of BIFR is amenable to delays and does not provide a balanced or effective framework for all stakeholders. The process of liquidation and winding up is costly, inordinately lengthy and results in almost complete erosion of asset value.

The committee has recommended wide-ranging measures to reform the country’s company and insolvency regime. The key changes recommended for insolvency law included the following:

• Corporate insolvency may be addressed through the Act. A separate insolvency law is not necessary. • The law should strike a balance between the rehabilitation and the liquidation processes. It should provide an opportunity for genuine efforts towards revival. Winding up should take place only where revival/rehabilitation is not feasible. • Insolvency proceedings should be time bound. The committee stated: ‘a period of one year should be adequate for the rehabilitation process from the commencement of the process till sanction of the plan’. • Introducing a liquidity test for early rescue proceedings following the ﬁ rst instance of a payment default, ie the ‘test should prescribe default in payment of matured debt on demand (liquidity test) within a prescribed period’. However, it should be noted that sections 433(e) and 434 of the Act already has incorporated this test. • Stipulating a deﬁ nitive and predictable timeframe for rehabilitation and liquidation, including limits on the possibility of appeals at every stage, so that frivolous appeals do not stall the company’s rehabilitation or liquidation.

283

9423 Insolvency 3 legislative.indd 283 7/03/2006, 1:06:34 PM • Both debtors and creditors should have fair access to an insolvency procedure. Rather than the net worth erosion principle, the test for insolvency should be default in payment of matured debt on demand within a prescribed time. Debtors seeking rehabilitation should be able to approach the tribunal (see below) only with a draft scheme. A group of creditors being at least three- quarters in value may also fi le for a scheme. • The law should be amended to look into the interests of the unsecured creditors and special provisions should be incorporated into the Act. It has been suggested that a committee of the unsecured creditors should be formed and such a committee should be empowered with ‘limited right to represent and hearing without right to vote on the plan and other decisions’. • A limited ‘standstill’ period is essential for genuine business restructuring to be regulated through the Tribunal’s orders during which there is a prohibition on unauthorised disposition of debtors’ assets and suspension of actions by creditors to enforce their rights. The law should provide for appropriate prohibitions on certain debtors’ rights, subject to certain exemptions on initiations of insolvency. • There should be a legal responsibility on companies to convene a creditors’ and shareholders’ meeting as soon as insolvency is apparent, for creditors to consider suitable steps to protect the interests of stakeholders, preserve assets and adopt necessary steps to contain insolvency. • The debtor assets should be subjected to supervision or management of an impartial, independent, and effective administrator. • Provisions should be made for setting up a committee of secured creditors to safeguard their interests and provide a suitable platform for creditors’ participation in the process. The law should also provide for a mechanism to recognise and record claims of unsecured creditors. • A panel of administrators and liquidators should be prepared and maintained by an independent body out of experienced and knowledgeable insolvency practitioners. Private professionals should play a meaningful role in all aspects of the insolvency process. The law should encourage and recognise the concept of insolvency practitioners. • The law should prescribe a fl exible but transparent system for disposal of assets effi ciently and at maximum value. Secured creditors’ claims should rank pari passu with employees? Government claims should not get precedence over private rights. Revival plans should be required to be approved by secured creditors holding three-quarters of total value and would be binding on all creditors. • The requirement to establish the National Company Law Tribunal (NCLT) (as introduced by the Second Amendment Act), which would provide a major initiative for insolvency system reforms in the country. The NCLT should have a general, non-intrusive and supervisory role. The NCLT should adopt a commercial approach to dispute resolution observing the established legal principles of fairness in the process. Selection of the president and members of the NCLT should be done in such a way as to enable a wide mix of expertise for this work. • Provisions relating to the rehabilitation process should be replaced by the concept of an ‘Insolvency Fund’ with optional contributions by companies.

284

9423 Insolvency 3 legislative.indd 284 7/03/2006, 1:06:35 PM The Government may make grants for the fund and provide incentives to encourage contributions by companies to the fund. Companies that make contributions to the Fund should be entitled to certain drawing rights in the event of insolvency. Administration of the fund should be by an independent administrator. The Insolvency Fund should not be linked or credited to the Consolidated Fund of India. • A suitable framework for cross-border insolvency, which provides for rules of jurisdiction, recognition of foreign judgments, cooperation and assistance among courts in different countries and choice of jurisdiction, is required.

The Ministry of Company Affairs has since noted that they are in the process of drafting an amendment Bill incorporating the recommendations made by the Committee’s Report.

285

9423 Insolvency 3 legislative.indd 285 7/03/2006, 1:06:36 PM DEVELOPMENTS IN BRAZIL

New insolvency regime

On 9 June 2005, Brazil’s new insolvency regime, The Restructuring Law of Brazil (the NBRL), entered into force.1 It replaced an antiquated insolvency framework that was ‘old fashioned when Brazil introduced it in 1945’.2 One of the ﬁ rst companies to use its provisions was Varig, the Brazilian national carrier. The NRBL’s aim was to provide struggling, but viable, companies with the chance to restructure their operations through a plan directly negotiated with creditors.3 The regime also sought to provide equitable solutions to disputes between creditors with different rights in any distribution of the debtor’s assets.4

The NRBL delivered three alternatives for insolvent companies.

Judicial reorganisation is a process overseen by the court. Its main features are:

• an administrator is appointed by the court to oversee the debtor’s progress and enforce its obligations under the statute to the creditors; • the formation of a creditors’ committee with substantial powers of supervision over the whole process; • additional safeguards for creditors who contribute to the debtor; • a series of mechanisms to support the debtor’s recovery process, including a 180-day moratorium on most litigation and collection proceedings; and • a reorganisation that can last for up to two years.

Out-of-court reorganisation is also court-supervised if: • it is similar to a pre-packaged bankruptcy proceeding; and • the debtor can privately negotiate with creditors and, after securing 60 per cent support of the claimed amount, will seek conﬁ rmation by the court.

Bankruptcy liquidation: Key provisions include that

• a creditor must show that it is owed a liquidated debt, equivalent to Brazil’s minimum monthly wage, for 40 months; • it is aimed at reducing frivolous claims; and • it eliminates the risk that a purchaser of the debtor’s assets could inherit claims against the debtor.

The aim of all these measures is to prioritise reorganisation over liquidation.5

1 New Bankruptcy and Restructuring Law.

2 ‘Brazil gets its own Chapter 11’’, Globalturnaround, Issue 62, March 2005, www.globalturnaround.com, p 6.

3 C.A. Jarvinen and L.F. Valente de Paiva, ‘Brazil: New Bankruptcy and Restructuring Law’, Insol World, Third Quarter 2005, p 27.

4 ibid, p 27.

5 ibid, p 28.

286

9423 Insolvency 3 legislative.indd 286 7/03/2006, 1:06:36 PM INDEX

ABM Plastic (Aust) Pty Ltd (receivers and managers appointed) v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union 185

Re ACN 005 973 688 Pty Ltd (in liquidation); Edward Gem Pty Ltd 29

Albarran v Thin Seam Mining Pty Ltd 51

Altmann & Ors v FN Management Pty Ltd 111

Andrew Garret Wine Resorts & Anor v National Australia Bank Ltd (No 2) 92

Angas Law Services Pty Ltd (in liquidation) v Carabelas 76

ASIC v Australian Foods Co Pty Ltd 188

ASIC v Edwards 82

ASIC v Maxwell & Ors 115

ASIC v Primelife Corporation Limited 136

Australian Winch & Haulage Co Pty Ltd v State Debt Recovery Ofﬁ ce 52

Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd (receivers and managers appointed) 117

Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd 130

Bidjara Aboriginal Housing & Land Co Ltd v Bidjara Motor Corp P/L (in liquidation) 210

Boulos v Carter; Re TARBS World TV Australia Pty Ltd 85

Brodyn Pty Ltd v Dasein Constructions Pty Ltd 20

Broke Hills Estate Pty Ltd v Oakvale Wines Pty Ltd 211

Cadence Asset Management Pty Ltd v Concept Sports Ltd 196

Cadence Asset Management Pty Ltd v Concept Sports Ltd 204

Canty v Deputy Commissioner of Taxation 78

Re Carlovers Carwash Ltd & Ors 73

Cassegrain & Anor v CTK Engineering Pty Ltd & Anor 80

Re Centaur Mining & Exploration Ltd (in liquidation); McKern v Roche Mining Pty Ltd 219

Chacmol Holdings Pty Limited v Handberg (as administrator of Australian Risk Analysis Pty Ltd) 100

Clark v Korda 25

Clynton Court Pty Ltd (subject to DOCA); Korda and Mentha v The J Aron Corporation and The Goldman Sachs Group, Inc 56

Re Colorbus Pty Ltd (in liquidation); Mentha & Anor v Colorbus Pty Ltd (in liquidation) & Anor 19

Re Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (receivers and managers appointed) (subject to a DOCA) 66

Crosbie, in the matter of Media World Communications Ltd (administrator appointed) 192

Danich Pty Ltd Re Cenco Holdings Pty Ltd 175

Di Francesca Holdings Pty Ltd v Hatziplis Holdings Pty Ltd 208

Federation Group Ltd (ACN 007 532 827) (in liquidation) [2005] 137

Federation Group Ltd (ACN 007 532 827), In the matter of Federation Group Ltd (ACN 007 532 827) 62

9423 Insolvency 4 index.indd 287 7/03/2006, 1:07:15 PM Florgale Uniforms Pty Ltd (ACN 004 233 167) (receiver and manager appointed) (in liquidation) & Ors v Orders & Anor 183

Freakley & Ors v Centre Reinsurance International Co & Anor 27

Glenariff Holdings Pty Ltd v Tah Land Pty Ltd 90

Green Re Oz-US Film Productions Pty Ltd 125

Grossman v E. Katz Manufacturing Jewellers (ACT) Pty Ltd 153

Grosvenor Constructions (NSW) Pty Ltd v Hunter 60

Hall & Anor as liquidators of New Tel Ltd v Ledge Finance Ltd 181

Re Henry Walker Eltin Group Ltd (administrators appointed) 30

HIH Casualty & General Insurance Limited & Ors 122

Re HIH Casualty and General Insurance Ltd 149

IMF (Australia) Ltd v Sons of Gwalia Ltd (administrators appointed) 194

Inetstore Corporation v Southern Matrix International 145

In Re Gate Gourmet Pty Ltd (in liquidation) 159

Re Independent Insurance Company Ltd 139

In the matter of Ansett Australia Holdings Ltd (subject to DOCA); International Air Transport Association v Ansett Australia Holdings Limited (subject to DOCA) and Mark A Korda and Mark F Mentha 49

In the matter of Far East Structural Steelwork Engineering Limited (in liquidation) 88

In the matter of Henry Walker Eltin Group Ltd (administrators appointed) 43

In the matter of Motor Group Australia Pty Ltd (administrators appointed) (No 3) 71

In the matter of Pasdonnay Pty Ltd (administrators appointed) 45

J Aron Corporation v Newmont Yandal Operations Pty Ltd 38

Re Jay-O-Bees Pty Ltd (in liquidation); Rosseau Pty Ltd (in liquidation) v Jay-O-Bees Pty Ltd (in liquidation) 170

Javorsky v Commissioner of Taxation 215

John Frederick Lord as liquidator of Silverline Technologies Pty Limited 102

Johnston v McGrath & Ors 202

Kassem v Sentinel Properties Ltd (in liquidation) & Ors 132

Re Kershaw (as liquidator of Equiticorp Tasman Ltd) 128

Knights Insolvency Administration Ltd v Duncan 161

Korda, in the matter of Stockford Ltd (subject to DOCA) 22

Krishell Pty Ltd v Nilant & Ors 155

Kyabram Property Investments Pty Ltd & Anor v Murray & Anor 94

Lewis (as liquidator of Doran Constructions Pty Ltd (in liquidation), & Anor v Doran & Ors 217

Lockwood & Anor v White 32

Lombe, in the matter of Bosnjak Holdings Pty Ltd (administrators appointed) 36

McDonald v Deputy Commissioner of Taxation 109

McGrath & Anor re HIH Insurance Ltd & Ors 168

9423 Insolvency 4 index.indd 288 7/03/2006, 1:07:18 PM McIntyre & Ors v Eastern Prosperity Investments Pte Ltd (No 6) 75

McLellan v Australian Stock Exchange Ltd 58

Metledge (trading as Metledge & Associates) v Bambakit Pty Ltd (in liquidation) 119

Mine & Quarry Equipment International Ltd v McIntosh 157

Re Motor Group Australia Pty Ltd (administrators appointed) (ACN 101 051 101); Marsden & Anor (as voluntary administrators of Motor Group Australia Pty Ltd (administrators appointed)) 68

National Westminster Bank plc v Spectrum Plus Limited & Ors 104

Re New Tel Limited (in liquidation) 165

One.Tel in the matter of application by liquidators 147

Papua New Guinea Dockyard Ltd v Adams 98

Phelan v Ambridge Corp Pty Ltd 142

Pico Holdings Inc v Wave Vistas Pty Ltd 96

Pilmer v HIH Casualty & General Insurance Ltd (No 2) 172

Re Application of Campbell & Ors; Gebo Investments (Labuan) Ltd & Ors v Signatory Investments Pty Ltd & Ors 127

Ronald John Dean-Willcocks & Anor v Nothintoohard Pty Ltd (in liquidation) & 2 Ors 186

Rupert Co Ltd v Chameleon Mining NL 206

Shepard & Dean-Willcock v Sports Mondial of Australia Pty Ltd (in liquidation) 54

Sherred & Anor v McDonald & Ors 64

Sims & Anor (as liquidators of Enron Australia Pty Ltd) v TXU Electricity Ltd & Anor 113

Sons of Gwalia Ltd (administrator appointed) v Margaretic 199

Starmaker (No 51) Pty Ltd v Majda & Ors 179

Re Strarch International Ltd 166

Tayeh and De Vries re The Black Stump Enterprises Pty Ltd & Ors 134

Tolcher (as liquidator of Lloyd Scott Enterprises Pty Ltd (in liquidation)) & Anor v Capital Finance Australia Ltd & Anor 213

Tolcher v Gordon 177

Re TVSN Ltd 190

University of Sydney v Australian Photonics Pty Ltd & Ors 46

Van Blitterswyk v Sons of Gwalia & Ors (in administration) 34

Walker & Anor as liquidators of One.Tel Ltd 163

Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd 40

Westpac Banking Corporation v Adelaide Bank Limited 107

9423 Insolvency 4 index.indd 289 7/03/2006, 1:07:18 PM ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW

2005 ANNUAL REVIEW OF INSOLVENCY &RESTRUCTURING LAW 2005

9423 Insolvency 5 cover.indd 1 7/03/2006, 12:59:59 PM