Annual Review of Insolvency & Restructuring

ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW

2006 ANNUAL REVIEW OF INSOLVENCY &RESTRUCTURING LAW 2006

10049 Insolvency cover.indd 1 1/03/2007, 3:56:48 PM For further information about Insol ven cy & Restructuring Law, please contact:

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10049 Insolvency cover.indd 2 1/03/2007, 3:56:58 PM ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW 2006

Also available online at: http://www.aar.com.au/pubs/arir/index.htm © Allens Arthur Robinson 2007, Australia 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. PREFACE

It gives us great pleasure to introduce our Annual Review of Insolvency & Restructuring Law 2006. Now in its eighth year, the Review has become part of the insolvency and restructuring calendar. We hope that this year’s edition will be a useful reference for bankers, insolvency practitioners, corporate counsel, credit managers and for those who conduct business in Australia and throughout the Asia Pacifi c region. A full online version of this edition can be found at http://www.aar.com.au/pubs/arir/index.htm. A number of signifi cant insolvency and restructuring decisions were handed down by the courts during 2006, including: • the NRG decision relating to solvent schemes of arrangement; • the T&N decision on the provability of future tort claims; • the Fostif decision on litigation funding; • the Box Valley decision on the meaning of ‘debts’ for insolvency purposes; • the Black Stump decision on pooling and personal costs exposure to lawyers acting for insolvency practitioners; • the decision of the English Court of Appeal in HIH Casualty and General Insurance Limited concerning letters of request and priorities in cross-border insolvencies; • the Environmental Earth Sciences decision on the provability of costs orders made after the commencement of the liquidation; and • the New Cap Re decision relating to the distribution of reinsurance company assets. Although not a 2006 case, the Review also reports on the 31 January 2007 decision of the High Court in Sons of Gwalia v Margaretic, which held that shareholders who have a claim against a company for misleading or deceptive conduct or breach of continuous disclosure obligations can prove in the administration or liquidation of the company and rank equally with other unsecured creditors. Insolvency, restructuring and banking laws were again the focus of legislative attention during 2006, with the key developments being: • the release by the Parliamentary Secretary to the Treasurer of the draft Corporations Amendment (Insolvency) Bill 2007 and the Corporations and ASIC Amendment Regulations. The proposed legislation has been dubbed the fi rst comprehensive package of insolvency law reform since the 1988 Harmer Review; and • the conclusion of the Federal Parliamentary enquiry into corporate responsibility in Australia. These developments (and more) are set out in this Annual Review of Insolvency & Restructuring Law 2006. We are also pleased to highlight the publication of the Allens Arthur Robinson Directors’ Duties During Insolvency (2nd edition) by Thomson Law Book Co book, which was released in December 2006 and is another feature of our contribution to the insolvency landscape. The performance of the world and Australian economy generally remained robust during 2006. However, Australia could be said to be experiencing something of an economic divide between its south-east and the resource-rich states of Queensland and Western Australia. Media reports have suggested that New South Wales and Victoria may be nearing a recession. Mortgagee sales have increased in New South Wales and the drought has had a signifi cant effect on some sectors. In contrast, Queensland and Western Australia are in an expansion phase driven by the commodities boom and population increases. It remains to be seen what effect recent rate rises, the residential property downturn, and the so-called private equity ‘binge’ will have on the medium-term performance of the economy. We thank all of the partners, senior associates, lawyers, research assistants and summer clerks at Allens Arthur Robinson who have contributed to yet another outstanding publication this year. We give our particular thanks to Della Stanley, who oversees the selection of the cases for the review and edits the developments section. Also thanks to Anne Ferguson in Melbourne, Michael Ilott in Brisbane and Christa Walker in Perth for co-ordinating the preparation of case notes. Other signifi cant contributors to whom we are grateful are Lucy McKernan, Jenny Campbell, Matthew McLennan, Simon Keizer, Nicola Nygh, Chris Prestwich and Patrick Holmes. Thanks also to the publications team led by John Savic and Jason Silverii 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 2007.

John Warde, Partner and co-editor Kim Reid, Partner and co-editor March 2007

EDITORS

John Warde Kim Reid

CONTRIBUTORS

Caroline Adler Derek Heath Michael Popkin Will Atkins Patrick Holmes William Potts Cameron Ball Philip Hopley Christopher Prestwich Alison Barnett Emily Howie Georgia Price Michelle Bennett Jeremy Hudson Tom Prince Eleanor Bishop Michael Ilott Alex Purtill George Blades Sara Ironside Michael Quinlan Carla Bongiorno Aurelie Jacquet Gavin Rakoczy William Boyce Martin James James Rayner Julian Brun Brooke Johnson Sean Redden Jenny Campbell Peter Jones Kim Reid Robert Carey Simon Keizer Liz Ricossa Adrian Chek Vanessa Kingston David Salter Larissa Chu Suzanne Komatu-Mathews Tim Scanlan Simon Cobb Przemek Kucharski Ben Schokman Simone Collier Meg Lee Mark Schneider Gabi Crafti Kate Madgwick Christopher Scott Clementine Davidson Angela Martin Tony Sheehan Susie Downie Posy McGrane Elizabeth Southwood Andrew Dyer Simon McConnell Irina Stepanova Andrea de Smidt Jane McCosker Della Stanley Anne Ferguson Jaime McKenzie Viede Thipthorp Talitha Fishburn Lucy McKernan Peter Thomas Adrian Fisher Matthew McLennan Christa Walker Nick Fletcher Danielle Nahum John Warde Joseph Garas Nicola Nygh Justine Woodford Shelley Golden Catherine Parr Mun Yeow Richard Harris Chris Peadon Charlie Harrison Julie-Anne Pearce 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] 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, Perth Alf Pappalardo Ph: +61 7 3334 3269 Steve Pemberton Ph: +65 6535 6622 Kim Reid Ph: +61 8 9488 3727 [email protected] [email protected] [email protected]

Partner, Brisbane Partner, Sydney Partner, Sydney Adam Thatcher Ph: +61 7 3334 3157 Ian Wallace Ph: +61 2 9230 4712 John Warde Ph: +61 2 9230 4892 [email protected] [email protected] [email protected]

Partner, Brisbane Sandy Wilson Ph: +61 7 3334 3229 [email protected] TABLE OF CONTENTS

Deeds of company arrangement and voluntary administration Does an administrator hold the deed fund on trust? 19 Lombe v Wagga Leagues Club Ltd

Applications to set aside, terminate or void a DOCA 21 Natarajan v ACIB Acumulus Pty Ltd (in administration)

Fixing insolvency practitioners’ remuneration prospectively 23 Gidley, in the matter of Aliance Motor Body Pty Ltd (subject to DOCA)

Validity of resolution approving DOCAs 25 The J Aron Corporation and The Goldman Sachs Group Inc v Newmont Yandal Operations Pty Ltd & Ors

No pooling where creditors would be disadvantaged 27 In the matter of Ansett Australia Limited

Validation of the appointment of voluntary administrators 30 Albarran v Pascoe

Requirements for valid appointment of a proxy at a creditors’ meeting 31 Shivnani v Australian Foods Co Pty Ltd (receiver & manager appointed) (In liquidation)

Voting rights of a creditor with a contingent claim for litigation costs 33 Environmental & Earth Sciences Pty Ltd v Vouris

Appointment of a caretaker? 35 McMaster v Eznut Pty Ltd (administrators appointed)

Power to appoint special purpose administrators 37 Honest Remark Pty Limited v Allstate Explorations NL & Ors

Using casting vote to approve remuneration was a breach of duty 39 Krejci as liquidator of Eaton Electrical Services

Court approval of post-administration secured ﬁ nancing 41 Sims, in the matter of Huon Corporation Pty Limited (administrators appointed)

Application of funds under a terminated DOCA 43 Purchas; in the matter of Estore Pty Ltd (in liquidation)

Rectiﬁ cation of a DOCA in respect of insured claims 44 Brandrill v Newmont Yandal

Principles to be applied in determining whether to set aside a casting vote 46 Blue Ring Pty Ltd v Landshore Pty Ltd (subject to DOCA) & Anor

Court says air association can’t ﬂ y under the radar of insolvency distribution laws 48 Ansett Australia Holdings Ltd & Ors v International Air Transport Association Deregistered companies Reinstatement of a company for the purpose of winding up 50 CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd

Application for reinstatement of registration of a company 52 Re Piccoli Tesori Pty Ltd (deregistered); Ex parte Bertuol

Effect of reinstatement of registration of a company 54 White v Baycorp Advantage Business Information Services Ltd

Aggrieved persons: applying to reinstate a deregistered company 56 Pilarinos and Ors v ASIC

Directors and corporate governance Directors’ liability to Commissioner of Taxation for legal costs 57 Sims in his capacity as liquidator of Classic Cedar Venetians Pty Ltd (in liquidation) v Deputy Commissioner of Taxation

Directors not to be excused for insolvent trading where their conduct has been dishonest 59 ASIC v Edwards

Standard of proof in insolvent trading cases 61 Tru Floor Service Pty Ltd v Jenkins (No 2)

Directors’ defences to company tax debt liability 63 Deputy Commissioner of Taxation v Dick

Court says no to director’s appointment of another director under power of attorney 65 Cheerine Group (International) Pty Ltd v Yeung

Lending and securities Validity of subordination arrangements in a liquidation 67 SSSL Realisations (2002) Ltd v AIG Europe (UK) Ltd

Application for injunction by the unit holder of a trust 69 Highwater Nominees Pty Ltd v Mead & Ors

Enforcement of security given by a wife for the beneﬁ t of her husband 71 Roseville Estate Pty Ltd v Bouris

Loan terms unjust under the NSW Contracts Review Act 73 Perpetual Trustee Company Limited v Albert and Rose Khoshaba

Contribution between co-guarantors 75 Harpley Nominees Pty Ltd & Anor v Jeans & Anor

The importance of using the right form and knowing when to register a charge 77 Re Regis Towers Real Estate Pty Ltd Liquidation When not saying ‘no’ does not mean saying ‘yes’ – when can a liquidator pool a corporate group’s assets? 78 Re Black Stump Enterprises Pty Ltd

Conﬂ ict of duties as basis for removal of a liquidator of several companies 80 Handberg in the matter of Greight Pty Ltd (in liquidation)

Review of liquidator’s conduct in seizing property 82 Richmond Sales Pty Ltd (In liquidation) v Robert McDermott

Status of pre-winding-up solicitors’ fees in a creditors’ voluntary winding-up 84 Compustore Limited (in voluntary liquidation) v Companies Act

Director to indemnify company for costs of opposing winding-up application 86 Cassegrain v Cassegrain

Potential future liability for damages is not a debt for the purposes of the test for insolvency in s95A CA 88 Box Valley Pty Ltd v Kidd & Anor

Moneys paid by would-be investors held upon constructive trust 91 ASIC v Karl Suleman Enterprizes Pty Ltd

Good intentions: not enough to justify the pooling of assets 93 Re Application of Whitton (as liquidator of Global Gossip Group of Companies)

Failure by director to provide report on company affairs or access to company books 95 Bassoak Pty Ltd (receivers and managers appointed) v Rellgrove Pty Ltd

Winding-up of unregistered managed investment scheme; priority of payments 97 Warne v GDK Financial Solutions Pty Ltd; Billingham v Parbery

Test case re distribution of liquidation assets of insurance & reinsurance companies 100 AssetInsure Pty Limited v New Cap Reinsurance Corporation Limited (in liquidation)

Terminating a winding-up 103 Vero Workers Compensation v Ferretti

Discount fuel ‘club’ is an unregistered managed investment scheme 105 ASIC v McDougall

Powers of the court to make orders under Part 5.9 for co-operatives 107 Roy v Riverland Fruit Co-operative Limited (In liquidation)

Unregistered managed investment schemes and relevant considerations in winding-up 108 Burton v Arcus

Liquidator’s powers to carry on a business 110 Warne v GDK Financial Solutions; Peridon Village Nominees, application of Billingham

You abuse, you lose! Court summarily dismisses winding-up application for abuse of process on several accounts 112 Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd Do letters of request in cross-border insolvencies provide assistance? 114 In the matter of HIH Casualty and General Insurance Limited

I’m special – stay of proceedings 118 Re Zhuang PP Holdings Limited

Public examinations – production of documents by insurers 119 In the matter of Southland Coal Pty Ltd (receivers & mortgagors appointed) (In liquidation)

Discretionary issues – granting of leave to ASIC to order winding-up of companies in insolvency 121 ASIC v Neolido Holdings Pty Ltd

Injunctions and proceedings in winding-up of managed investment schemes 123 ASIC v Primelife Corporation Ltd

Title to goods in the possession of a company in liquidation 125 Nicholas James Crouch & Anor v Lynne Adams & Ors

Just say yes: unanimous consent sufﬁ cient to justify pooling assets 127 Whittingham re Hunter Valley Gravel Supplies Ltd & Ors

Liquidators The discretion to displace priority creditors 128 Australian Steel Company (Operations) Pty Ltd v EPS Group Pty Ltd

Can you examine third parties about their internal affairs? 130 Meteyard & Ors v Love & Ors (in their capacity as receivers and managers of Southland Coal Pty Ltd (in liquidation))

Voting for your own remuneration by proxy – OK? 132 Re HIH Casualty and General Insurance Ltd & Ors

Circumstances in which court will appoint an additional liquidator 134 McGrath & Anor Re HIH Insurance Ltd & Ors

Cancellation or suspension of registration of a liquidator 135 Albarran v The Members of the Companies, Auditors and Liquidators Disciplinary Board

Anshun estoppel and abuse of process: grounds for rejecting a proof of debt? 137 Re Linknarf Management Services (in liquidation); Scarcella & Ors v Davies

Criminal contempt: the outer limits of public comment on litigation 139 Melbourne University Student Union Inc (in liquidation) v Ray & Ors

Special purpose liquidator should have funds for expenses 141

Onefone Australia Pty Ltd v One.Tel Ltd

Seeking extensions of time to apply for court orders regarding voidable transactions 143 Re Harris Scarfe Ltd (in liquidation)

Access to afﬁ davit in support of examination summons 145 Ariff v Fong Professional standards and guidelines are a relevant consideration for CALDB 147 Dean-Willcocks v Companies Auditors & Liquidators Disciplinary Board

Procedure Non-party insurer joined to proceedings to pay costs order 149 Hong Kong Housing Authority v Hsin Yieh Architects & Associates Limited & Ors

When will the court order that solicitors pay the costs of proceedings? 151 Re The Black Stump Enterprises Pty Ltd and Associated Companies (No 2)

Effect of formal defect or irregularity in bankruptcy notice 153 Adams v Lambert

Service outside Australia: establishing a prima facie case 155 Akai Pty Ltd (in liquidation) v Ho

Slip rule application 157 J Aron Corporation v Newmont Yandal Operations

Rectiﬁ cation of ASIC registers in relation to an application for the winding-up of a company 159 Lavercombe v Auscott Ltd

Resolving substantive issues on an application for interim relief 161 ASIC, Re Richstar Enterprises Pty Ltd ACN 099 071 968 (No 9) v Carey

Receivership Is a receiver in breach of its duty of care if it sells for less than the highest offer? 163 Deangrove Pty Ltd (receivers and managers appointed) v Buckby

Trials about remuneration to be avoided 165 ASIC v Australian Foods Company Pty Limited & Anor

Appointing a receiver to preserve assets of individuals suspected of breaching the CA 167 Re Richstar Enterprises Pty Ltd (ACN 099 071 968) and Others; ASIC v Carey (No 3)

The scope of the directions which can be provided to receivers under s424 CA 169 White v Huxtable, Re Lake Federation Pty Ltd (receivers and managers appointed)

Priority of court-appointed receivers’ remuneration 171 Jefferson & Joiner v Shirlaw & Ors

The power of receivers over property held under discretionary trust 173 ASIC v Carey (No 6)

When will a court appoint a receiver? 175 Singh v Shah & Ors

Powers of receivers and managers to refuse applications for funding 177

ASIC; Re Lanepoint Enterprises Pty Ltd Court’s power to appoint interim receivers in oppression proceedings 179 Rambal v Oswal & Ors

Schemes of arrangement Cross-border schemes of arrangement 182 Re the Home Insurance Company

Procedural and substantive deﬁ ciencies in conduct of meeting of members 184 Re Phosphate Resources Ltd (ACN 009 396 543)

Is a completed cause of action needed to be a contingent creditor? 186 T&N Limited and Others

Bringing an early end to run-off in the insurance industry 188 NRG London Reinsurance Company Ltd, Re NRG Victory Aust Ltd and the Corporations Act 2001

The court’s power to approve schemes of arrangement 190 Re WebCentral Group Ltd (No 2)

Altering a scheme of arrangement after its approval by creditors 191 Re HIH Casualty and General Insurance Ltd & Ors

Shareholder actions and litigation funding When will a court approve liquidator’s entry into a litigation funding agreement? 193 Leigh re King Bros

Discovered documents may be produced to a third party funding the action where there is no ‘ulterior or foreign purpose’ 195 Cadence Asset Management Pty Ltd v Concept Sports Ltd

A green light for litigation funding? 196 Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd

Factors relevant to determining whether a creditor has been unreasonably prejudiced by a resolution 199 Ravenswood Resort Pty Ltd (in liquidation) v Kammal

Misled shareholders’ claims rank equally with other unsecured creditors 201 Sons of Gwalia Limited v Margaretic

Statutory demands Challenging statutory demands by the Tax Commissioner: R&D tax offsets can constitute offsetting claim 203 Ozone Manufacturing P/L v Deputy Commissioner of Taxation (Cth)

Duty of care arising from statutory requirements to supervise 205 C & E Pty Ltd v Andrew Corrigan

Statutory demands must be challenged at the right time and place 207 G & J Gears Australia Pty Ltd v Brobo Group Pty Ltd Principles governing statutory demands and offsetting claims 209 Gujarat NRE Australia v Williams

Grounds for subpoenaing documents to prove solvency 211 ASIC v Eastlands Pty Ltd

Winding-up after failure to comply with statutory demand 213 Shakespeares Pie Co v Multipye

Uncommercial transactions, preference payments and disclaimer of onerous property Identifying the ‘transaction’ for the purposes of the uncommercial transactions provisions 215 Lifestyle Earls Court Pty Ltd (in liquidation) & Ors v Mentone Mansions Pty Ltd

When a reasonable person would suspect insolvency 216 Sheldrake & Anor v Paltoglou

Insolvency transactions at an undervalue 218 Hill (as trustee in bankruptcy of Nurkowski) v Spread Trustee Company Limited

Please sign the deed! Voidable transactions, good faith and estoppel by convention 220 Mulherin v Bank of Western Australia Ltd; McCann & Ors v Bank of Western Australia Ltd

Recovering payments made by a director with company money 222 Kalls Enterprises Pty Ltd (in liquidation) & Ors v Baloglow & Anor

Death and taxes: s588FF(1) threatens certainty of the latter, but s588FGA saves the Tax Commissioner’s day 224 Duncan v Commissioner of Taxation: in the matter of Trader Systems International Pty Ltd (in liquidation)

Out of time: exclusive regime for bringing application to set aside voidable transactions 227 Davies and Anor v Chicago Boot Co Pty Ltd

Solvent or insolvent: a question of commercial reality 229 Wily v Terra Cresta Business Solutions Pty Ltd

Severance of a joint tenancy is not void against a trustee in bankruptcy 231 Peldan v Anderson

A good deed? Directions for payment and assignment 232 Universal Financial Group v Mortgage Elimination Services

Developments in Australia Insolvency reform package released 234

Extending corporate responsibilities 239

A simpler regulatory system – corporate and ﬁ nancial services 243

Corporate responsibility parliamentary inquiry 248

Amendments to Federal Court Rules 251 Developments in Asia Hong Kong SAR and PRC mutual recognition of judgments 252

The use of provisional liquidation as a corporate rescue tool frowned on by Hong Kong Court of Appeal – the Legend Story 255

New PRC bankruptcy law 258

Developments in New Zealand Insolvency law reforms enacted 260

Developments in Europe Reforms to Italian bankruptcy law 262

Interpretation of the European Community Regulation on Insolvency Proceedings 263

New Czech Insolvency Act 264

Introduction of ﬂ oating charges into Danish corporations law 266

Changes to Dutch insolvency law 267

Hungary’s new insolvency laws 268

Developments in Great Britain The UNCITRAL Model Law on cross-border insolvency in Great Britain – working towards a common approach in global insolvencies 270

Changes to UK company law 275

Developments in the British Virgin Islands New insolvency regime now in operation 278

Developments in the United States Limiting the scope of liability for ‘deepening insolvency’ 279

Extraterritorial application of the US Bankruptcy Code’s fraudulent provisions 280

Settlement providing for a carve-out to unsecured creditors before priority creditors are paid in full not prohibited 281

Developments in South Africa New policy for appointment of liquidators and trustees in South Africa 282 GLOSSARY

ASIC Australian Securities & Investments Commission

ASX Australian Securities Exchange

CA Corporations Act 2001 (Cth)

DOCA Deed of Company Arrangement ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW 2006

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

DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Does an administrator hold the deed fund on trust?

Case Name: This decision considers the capacity in which a deed Lombe v Wagga Leagues administrator deals with deed property and whether a liquidator Club Ltd may deal with any residual deed property once a DOCA is terminated. Citation: The plaintiff was the administrator and later the liquidator of the Wagga Leagues [2006] NSWSC 3, Supreme Club Limited (the company). The plaintiff, Queensland Club Management Ltd Court of New South Wales per (QCM), and Birjo Pty Ltd (Birjo) had entered into a DOCA. QCM and Birjo did not Barrett J fulfi l all of their fi nancial obligations under the terms of the DOCA and the creditors resolved to terminate the DOCA and wind up the company. Date of Judgment: The plaintiff, the company, QCM and Birjo reached a conditional settlement on the 31 January 2006 outstanding amounts owed under the DOCA. The plaintiff sought (amongst other orders) judicial advice under the Trustee Act 1925 (NSW) on whether he was Issues: justifi ed in entering into the conditional settlement and how the residual moneys • Sections 444A, 444B, contributed to the deed fund pursuant to the DOCA (the deed fund) should be 444D, 444G, 445F, 560 applied. As a preliminary issue, the court had to determine whether the deed and 561 CA administrator held the deed fund as trustee or as agent for the company. The DOCA • Basis upon which a deed incorporated clause 1 of Schedule 8A of the Corporations Regulations, which administrator holds funds provides that the deed administrator acts as agent for the company under contributed pursuant to a the DOCA. DOCA The court held that where, in accordance with a DOCA incorporating clause 1 of Schedule 8A of the Corporations Regulations, funds are provided by someone other than the company for application towards creditors’ claims pursuant to the DOCA, those funds become the property of the company and the deed administrator, as agent of the company and a fi duciary, has no proprietary interest in the contributed funds. Unless it can clearly be seen that the company has divested itself of the legal and benefi cial interest in its property, the common form of DOCA, which segregates part of the company’s property so that it becomes a fund to be applied by the deed administrator as the company’s agent in accordance with the DOCA, despite the use of language referring to a trust, does not create a trust.

The residue of the deed fund was property of the company to be applied by the plaintiff as liquidator in the due course of the winding-up. Creditors who were formerly participating creditors under the DOCA could prove for their residual claims in any subsequent liquidation of the company.

The court stated that, even if there had been a trust under which the deed administrators held the deed fund, upon termination of the DOCA that trust had failed. The residue of the deed fund was then held on a resulting trust for the company and was to be applied by the plaintiff as liquidator in the due course of the company’s winding-up.

19 Under a DOCA, the usual position is that the deed administrator holds and deals with property as agent for the company and not as trustee. If the former deed administrator holds any residual deed property following the termination of a DOCA, that property is to be applied to creditors’ claims in the winding-up of the company. Participating creditors who have residual claims under the DOCA can prove in any subsequent liquidation.

20 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Applications to set aside, terminate or void a DOCA

Case Name: This case provides an indication of the approach courts will take Natarajan v ACIB Acumulus Pty when considering whether a DOCA should be set aside, Ltd (in administration) terminated or declared void under, respectively, ss 600A, 445D and 445G CA. Citation: Two directors of ACIB Acumulus Pty Limited (the company) sold the business to [2006] VSC 22, Supreme Court their son and placed the company into VA. As part of the sale some of the of Victoria per Mandie J company’s creditors were paid in full. The administrators approved the sale agreement and proposed a DOCA. A resolution accepting the DOCA was passed by Date of Judgment: majority at a creditors meeting. The plaintiff (the other director and a creditor of the company) opposed the sale agreement, although he did not attend the 10 February 2006 creditors’ meeting. He wished the company with ‘all of its assets’, and not ‘the shell’ of the company, to be placed into VA. He sought to have the creditors’ Issues: resolution set aside, terminated or declared void. • Sections 600A, 445D and 445G CA Justice Mandie dismissed the plaintiff’s argument that the DOCA should be • Whether a DOCA is ‘unfairly terminated on the basis that it was unfairly discriminatory (s445D(1)(f)(i) CA) discriminatory’ against the creditors who had not been ‘taken over’ by the party who bought the • Whether a DOCA should be business. Justice Mandie found that, while the trade creditors ‘taken over’ were terminated ‘for some other paid in full, this resulted from the sale agreement, not the DOCA, and would have reason’ occurred even had there been no DOCA. • Whether a DOCA should be set aside as being The plaintiff’s argument that the DOCA should be terminated for some other reason ‘reasonably likely to (s445D(1)(g) CA) also failed. Justice Mandie noted that concerns about the sale prejudice’ the interests agreement were legitimate, but that the sale was at a slight undervalue only and it of creditors who voted was improbable, even if the sale of the business had been advertised more widely, against it that the company could have found any other buyer. Signiﬁ cantly, according to • Whether a DOCA should be Justice Mandie, the plaintiff had never directly attacked the sale agreement. voided for not being entered in accordance with Part Nor did the court accept that the DOCA should be set aside for unreasonably 5.3A CA prejudicing the interests of the creditors who had voted against it (s600A(1)(c)(ii) CA). The crucial question here was whether creditors would be better off under the DOCA or in a liquidation. The other two directors had contributed $150,000 to the company and fully discharged the company’s debt to Westpac so that Westpac would not would not participate in any distribution. This meant that the return to creditors under the DOCA was likely to be much better than the return under a liquidation.

21 Finally, the court rejected the plaintiff’s s445G CA argument that the DOCA should be declared void due to a failure to adequately notify creditors (in particular, the plaintiff) of the creditors’ meeting. It found that the plaintiff did know of the directors’ meeting on 15 November and chose not to attend and that it had not been proven that there had been a failure to inform all creditors of the creditors meeting where the resolution accepting the DOCA was passed.

This decision constitutes a straightforward application to the facts of the law concerning the setting aside, termination and voiding of a DOCA.

22 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Fixing insolvency practitioners’ remuneration prospectively

Case Name: In a test case, Aliance Motor Body Pty Limited’s administrators Gidley, in the matter of Aliance sought a direction from the court as to whether the prospective Motor Body Pty Ltd (subject to remuneration of an administrator could properly be fi xed at a DOCA) meeting of creditors by reference to a scale of hourly rates, subject to an upper limit. Citation: On 20 June 2005, by board resolution, Aliance Motor Body Pty Limited (Aliance) [2006] FCA 102, Federal Court appointed Paul William Gidley and Stewart William Free as joint and several of Australia per Gyles J administrators of Aliance under section 436A CA. Aliance’s creditors subsequently resolved that Aliance should execute a DOCA with Mr Gidley as deed administrator. Date of Judgment: At the same meeting, the creditors passed resolutions that sought to set the future 16 February 2006 remuneration to be paid to the administrators pending the commencement of the DOCA and the remuneration of the deed administrator based on a scale of hourly rates and subject to a limit or cap. The administrator, with the support of the Issues: Insolvency Practitioners Association of Australia (IPAA), sought a declaration from • Remuneration of an the court that the resolutions had properly fi xed his remuneration. insolvency practitioner can be fi xed prospectively ASIC appeared as a friend of the court and made submissions as a contradictor. (s449E(1)(A) CA) ASIC submitted that the means of fi xing remuneration contained in the resolutions was misleading since hourly rates could not be applied prospectively and without reference to the tasks to be carried out and the appropriate allocation of staff by the administrators. ASIC also referred to the potential for abuse in fi xing remuneration prospectively on the grounds that creditors may not be suffi ciently well informed or have suffi cient funds to properly scrutinise what was proposed.

Justice Gyles held that remuneration could be fi xed prospectively provided that the formula used is suffi ciently objective. Here the formula was based upon the number of hours worked by the administrator and the administrator’s staff and a scale of rates for each category of person working on the administration. The remuneration could be ascertained defi nitely using the formula provided, and the formula was therefore valid.

As far as the issues raised by ASIC regarding the potential for abuse were concerned, Justice Gyles stated that there are already safeguards in place which counter these:

• remuneration can only be ﬁ xed by a resolution of creditors or by the courts, not by the administrator; and • an ofﬁ cer, member or creditor of the company may apply to the court for a full review of the remuneration.

23 Although a cap was not considered relevant in determining whether the remuneration was fi xed, Justice Gyles noted that a cap may be relevant to the question of reasonableness in the event of a challenge by any offi cer, member or creditor of Aliance to the remuneration fi xed.

It is possible for an insolvency practitioner to fi x remuneration prospectively, but care should be taken to ensure this is based on a formula where the quantum of remuneration can be ascertained defi nitely. It is understood that this decision will be used by ASIC to prepare a guide for insolvency practitioners seeking to fi x their remuneration.

24 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Validity of resolution approving DOCAs

Case Name: The court considered whether a resolution passed at a second The J Aron Corporation and The meeting of creditors to execute DOCAs was valid and applicable Goldman Sachs Group Inc v to all companies in the group. Newmont Yandal Operations Pty Newmont Yandal Operations Pty Limited and thirteen related companies (the NYOL Ltd & Ors Group) were a corporate group bound by a deed of cross guarantee (such that each company guaranteed the debts of the other companies in the group). The Citation: administrators of the group proposed a DOCA for each company that could only [2006] NSWCA 46, Court of operate if all other DOCAs were passed. A single vote was taken at the second Appeal of New South Wales meeting of creditors on whether the deeds should be passed. per Spigelman CJ, Ipp JA and Bryson JA Goldman Sachs challenged the effectiveness of the meeting and the resolution. At ﬁ rst instance, Justice Austin found that the resolution, and therefore the DOCAs, were valid. Goldman Sachs appealed arguing that: Date of Judgment: 15 March 2006 • the NYOL Group companies were not, by reason of the deed or otherwise, creditors of other NYOL Group companies; Issue: • the formal steps required to be taken at the second meeting of creditors (under • Concurrent meeting of Corporations Regulations 5.6.23(1) and (2)) to ensure that the creditors were the creditors of a group of eligible to vote on the DOCAs had not been taken; and companies • in fact, no meeting of the creditors of each company was conducted and the • Effectiveness of resolution resolution was not passed by the creditors of each company. at second meeting of creditors to execute DOCAs The Court of Appeal, dismissing the appeal, held that: • having regard to the deed of cross guarantee, it was appropriate for the administrators to treat creditors of each group company as creditors of the other companies, and to conduct all meetings as one meeting and report on the administrations in one report; • the fact that the vote of a creditor for one company was effectively a vote in relation to all the other companies did not mean that the method of voting at the meeting failed to comply with Corporations Regulation 5.6.31; and • it was clear to the meeting and to the voters that each vote was in respect of a resolution that would apply to the corporate group as a whole, rather than just the company of whom the voter was a creditor.

25 A group of companies can, in appropriate circumstances, hold a concurrent second meeting of their respective creditors, and the resolutions passed at that meeting can be valid and binding on each group company and each creditor of those companies. This is possible in circumstances where the group companies are bound by a deed of cross guarantee whereby each guarantees the others’ debts and where the group’s statutory accounts are prepared on a consolidated basis.

26 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

No pooling where creditors would be disadvantaged

Case Name: In this case, the administrators of the Ansett group of companies In the matter of Ansett sought orders and directions from the court which would have Australia Limited enabled them to implement proposals for the pooling of assets and liabilities of each of the companies of the Group into one company. Citation: The court was asked to sanction a pooling arrangement which would be beneﬁ cial to the interests of creditors as a whole, but [2006] FCA 277, Federal Court of Australia per Goldberg J would disadvantage certain creditors. The case arose out of the external administration of the Ansett group of companies Date of Judgment: (the Group). Most companies in the Group entered into DOCAs and the administrators 22 March 2006 were appointed deed administrators of the DOCAs (the administrators). Early in the administration, the administrators concluded agreements with third Issues: parties which contemplated a pooling regime. Under those agreements, the • Pooling of assets and administrators were required to seek the implementation of a pooling regime. To liabilities of companies in a that end, each of the DOCAs required the administrators to convene a meeting of group creditors to vote upon a proposal to pool all assets and liabilities of the Group • Sections 447A and 447D companies. CA and s63 of the Trustee Act 1958 (Vic) However, the administrators had also entered into a number of agreements which did • Method of giving notice of not contemplate pooling. The administrators had disposed of the businesses of two creditors’ meeting regional airlines, Skywest and Aeropelican. The liabilities of Skywest and Aeropelican – and certain of their assets – were transferred to two trusts established for the beneﬁ t of the creditors of those companies (the Skywest Trust and the Aeropelican Trust), for which the administrators were the trustees.

The Administrators called a creditors meeting and put forward proposals for a pooling regime and applied to the court for orders and directions under sections 447A and 447D CA, approving the pooling regime. The grounds advanced in support of the pooling were as follows.

• The Group had effectively been operating as a single economic unit. There was a signiﬁ cant amount of inter-company debt within the Group as a result of previous transfers of funds within it. Those transfers were not always properly documented and interest did not appear to have been charged in relation to the resulting inter-company debt. • There had been common use by companies within the Group of employees, intellectual property and plant and equipment which were the property of certain Group companies. However no ‘charge backs’ had been raised in relation to such common use of staff and property. • There was uncertainty as to the identity of the companies within the Group, which were the beneﬁ cial owners of a number of important assets.

27 The administrators asserted that these factors rendered an administration of each company on an individual basis more complex, costly and protracted, though not impossible. However, the administrators conceded that the proposals for pooling would result in certain creditors, particularly creditors of asset rich companies within the Group, being disadvantaged.

By reason of the inter-company debt position, many Group companies were entitled to vote on the pooling proposals as a creditor of other Group companies. The exercise of the administrators’ votes on behalf of the companies, and their casting votes, could determine whether or not the pooling proposals were adopted.

In these circumstances, the administrators found themselves in a position of conﬂ ict as the interests of certain creditors of certain Group companies differed from the interests of the remainder of creditors. Further, as trustees of the Skywest Trust and the Aeropelican Trust, the administrators were unable to dispose of trust property other than in the interests of the beneﬁ ciaries of those trusts and thus were compelled to vote accordingly.

The administrators sought orders and directions that would, in effect, have resolved their conﬂ ict of interest by allowing them to vote for the pooling proposals in their capacity as administrators of the companies, the creditors for which would be disadvantaged, and as trustees of the trusts.

Justice Goldberg reviewed the authorities on pooling and concluded that a court should not approve such arrangements in circumstances where a creditor will be signiﬁ cantly disadvantaged. The fact that an administration would otherwise be complex and costly was not a sufﬁ cient basis for such an order. His Honour said it was important to keep in mind that the administrators had not asked the court to approve the pooling resolution or sanction pooling, but had asked for a direction as to the manner in which they may be the cause of the trusts and companies voting in favour of the pooling resolutions at the creditors’ meetings.

In the absence of consent by all creditors, his Honour held that, where it is not impossible or impracticable to determine the ownership of company assets, the additional costs of doing so is no reason to disadvantage some creditors. There was insuffi cient evidence of the specifi c additional administration costs for each company for the court to determine whether those costs might erode any benefi t to certain creditors in a non-pooling scenario.

Whilst there had been no creditor objection to the pooling arrangements, his Honour considered that the notice given to creditors by the administrators was deﬁ cient as it had not drawn the attention of creditors that would be disadvantaged, to the extent of the disadvantage that they were likely to suffer if the proposals were implemented.

28 Justice Goldberg further held that neither s447A nor s447D could support an order or direction to the administrators in their capacity as trustees of the trusts that would allow them to distribute trust property in a manner contrary to the interests of the beneﬁ ciaries. Such an application would need to be made pursuant to s65 of the Trustee Act 1958 (Vic). However, his Honour took the view that that provision did not allow a court to make orders which would allow the trustee to dispose of trust property adversely to the interests of the beneﬁ ciaries.

This is an important decision on pooling arrangements as it sets out what factors a court will take into account when considering a pooling arrangement that disadvantages certain creditors. A court will not conduct a balancing exercise and will have due regard to the rights of individual creditors in exercising its powers under ss 447A and 447D CA.

29 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Validation of the appointment of voluntary administrators

Case Name: This decision concerns the appointment of voluntary Albarran v Pascoe administrators to SMTC Pty Ltd by its purported directors, who were bankrupt at the time of the appointment. The court found Citation: the appointment was invalid but made an order under section 447A(1) CA validating the appointment. [2006] NSWSC 418, Supreme Court of New South Wales per Mr and Mrs Ioannou, the purported directors of SMTC Pty Ltd (SMTC), appointed Austin J the plaintiffs as voluntary administrators of SMTC. The plaintiffs subsequently discovered that Mr and Mrs Ioannou were both bankrupt at the time of that Date of Judgment: appointment and therefore were not directors and not empowered to make the appointment. The plaintiffs made an urgent application to the court for an order 5 May 2006 under section 447A(1) of the CA validating their appointment in order that they could consider an offer for the purchase of SMTC’s business. Issues: • Section 447A CA Justice Austin noted that the combined effect of sections 206B(3) and 206A(2) CA • Order validating the invalid was that Mr and Mrs Ioannou were not directors of SMTC at the time of the appointment of voluntary appointment owing to their status as undischarged bankrupts. administrators Justice Austin referred to two similar cases in which the court had validated the appointment of administrators in circumstances where:

• the decision to appoint the administrators had been made at an invalidly convened directors’ meeting (Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453); and • the administrators had been appointed by directors who had been invalidly appointed as directors of the company (Re Wood Parsons Pty Ltd (in liq) (2002) 43 ACSR 257).

Justice Austin made an order under s447A(1) CA validating the appointment of the plaintiffs as voluntary administrators. In making this order, he noted that SMTC’s creditors had been made aware of the proposed application and had made no objection.

This case illustrates that in the appropriate circumstances, the court is prepared to take a pragmatic approach and utilise s447A to validate the appointment of voluntary administrators where that appointment was otherwise invalid.

30 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Requirements for valid appointment of a proxy at a creditors’ meeting

Case Name: In this case, both the administrator of a company and the Shivnani v Australian Foods Co company’s sole director circulated proxy forms to creditors Pty Ltd (receiver & manager before a creditors’ meeting. At the meeting the administrator appointed) (In liquidation) rejected proxies completed on the proxy form circulated by the director and only accepted those proxies that were completed on Citation: the form the administrator had circulated. The court reviewed the [2006] WASC 85, Supreme requirements for a valid proxy at a creditors’ meeting and what Court of Western Australia per orders the court will grant pursuant to section 1321 CA to Blaxell J remedy the situation. The plaintiff was the sole director, as well as a shareholder and creditor, of Date of Judgment: Australian Foods Co Pty Ltd (Australian Foods). Australian Foods had been put into 18 May 2006 administration after a resolution of the creditors. The second defendant was appointed as administrator of Australian Foods (the administrator).

Issues: A second meeting of creditors was set down for 5 December 2005 to determine the • Sections 439B(2), 1321, status of the company. The administrator circulated a proxy form to all creditors, 1322 CA allowing each creditor to vote on a number of resolutions. The plaintiff circulated • The requirements for validly his own form of appointment of proxy, which provided for directions to be given as appointing a proxy at a to the manner of voting in respect of various resolutions. The form was only given to creditors’ meeting some of the creditors.

At the second creditors’ meeting, the administrator rejected 69 proxy votes from creditors who had appointed the plaintiff to vote on their behalf. The creditors had used the forms issued by the plaintiff. If the proxies had been accepted at the meeting, a majority of creditors would have resolved to adjourn the meeting and the administration of Australian Foods would have continued. Instead, the meeting voted to end the administration, on the recommendation of the administrator. The plaintiff appealed against the administrator’s decision to reject the votes appointing the plaintiff as proxy.

The court allowed the appeal. Justice Blaxell found that all that is required for a proxy vote to be valid is that it complies with the Corporations Regulations. Regulation 5.2.29 requires that the proxy votes comply with Form 532. Justice Blaxell noted that the Regulations do not provide that a creditor can only appoint a proxy by completing the form forwarded with the notice of the meeting. His Honour noted that a number of authorities conﬁ rmed the proposition that an administrator cannot impose any greater requirements on the appointment of a proxy than those found in the CA. As the proxy form issued by the plaintiff had complied with Form 532, the plaintiff was validly appointed as proxy in each case.

31 The court held that the rejection of the proxies was a procedural irregularity under s1322 CA and that the resolution could only be held invalid if the irregularity caused a substantial injustice that could not be remedied. In his Honour’s opinion, the rejection of the proxies was a substantial injustice, because a majority of voters were denied their vote. Further, if the votes had been accepted, Australian Foods would still be in administration. The court ordered that the administration of Australian Foods be continued and ordered that an early meeting of creditors be held to determine whether the administration should continue.

A proxy form is valid so long as it complies with Form 532. The proxy form does not need to be the same form forwarded with the notice of meeting. Further, the proxy forms do not need to be circulated to all creditors. The rejection of proxies is a procedural irregularity which can only be remedied if the irregularity caused substantive injustice.

32 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Voting rights of a creditor with a contingent claim for litigation costs

Case Name: This decision examines whether an entitlement to vote at a Environmental & Earth creditors’ meeting arises from a claim to litigation costs where the Sciences Pty Ltd v Vouris court has not yet made an order for those costs. The administrator rejected the plaintiff’s proof of debt in respect of the costs of a Citation: successful appeal, on the basis that the court order for those costs had not been made at the date the company went into (2006) 57 ACSR 629, Federal Court of Australia per Graham J external administration. Charben Haulage Pty Ltd (Charben) sued the plaintiff (EES) for misleading conduct Date of Judgment: and was awarded more than $2.1 million in damages. EES appealed and agreed to 1 June 2006 pay $1.4 million of the damages to Charben, with the remaining $747,800 being held on trust by Charben’s solicitors pending the outcome of the appeal. The appeal was successful and Charben’s solicitors returned the $747,800 to EES. Charben did Issues: not repay the remaining $1.4 million and subsequently went into external • Entitlement to vote at administration. At this stage, the court had not made any order as to the costs of creditors’ meeting in respect the appeal. of a contingent claim • Admissibility of claim for EES submitted a proof of debt for more than $2 million (being the $1.4 million paid litigation costs where no to Charben plus $617,000 for estimated litigation costs). While the court then made costs order has been made an order for costs in EES’s favour, Charben’s administrator rejected that part of • Section 553 CA EES’s proof that represented the litigation costs, as no costs order had been made at the date of his appointment. EES brought a proceeding against the administrator challenging his decision to reject its proof for litigation costs.

Justice Graham discussed legislative reforms relating to the rights of creditors to vote at creditors’ meetings and case law surrounding ‘contingent creditors’ and concluded that the CA allows for the admission of the widest possible categories of legitimate claims against an insolvent company. This includes claims which have not yet come into existence but have their basis in events occurring prior to the company entering into administration (the contingent claims).

Justice Graham held that EES’s proof of debt for litigation costs was a present claim which had its genesis in the judgment delivered by the court in EES’s favour, before the administrator’s appointment. Therefore EES’s proof of debt for the litigation costs should be admitted and a just estimate made of those costs, for the purposes of voting at the creditors’ meeting.

33 The Federal Court’s decision demonstrates that a proof of debt in respect of a claim for litigation costs, where there has been no court order made for those costs, may be admissible for the purposes of voting at creditors’ meetings. Administrators should not necessarily reject such a proof on the grounds that it is not a claim arising before the relevant date for admission. They should consider the ‘genesis’ of the claim and whether or not the ‘seeds’ of the claim arose prior to the relevant date for admission.

34 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Appointment of a caretaker?

Case Name: In this case, the court considered whether a board resolution to McMaster v Eznut Pty Ltd appoint administrators should be overturned: on the basis of the (administrators appointed) evolving ‘caretaker principle’; or, because the resolution was made for an improper purpose, it was not bona fi de nor genuinely Citation: formed; or because reasonable notice of the board meeting had not been given to one of the directors. [2006] WASC 109, Supreme Court of Western Australia per Administrators had been appointed under section 436A CA following interlocutory Simmonds J orders for the reinstatement of two directors (with those orders were subject to appeal and to fi nal orders after a full trial). Justice Simmonds accepted that, in Date of Judgment: such a case, a ‘caretaker principle’ could be applicable. This would prevent 16 June 2006 directors from making ‘fundamental or signifi cant’ decisions where such decisions were ‘not otherwise necessary for the proper running of the company’ until fi nal orders had been made. However, his Honour concluded that in this case it had Issues: been established that the board decision to put the company into administration • Sections 436A, 436(1)(a), was necessary for the proper running of the company. This conclusion was informed 248C and 447A(1) CA by four signifi cant issues in the case. • Application for the validation of the The fi rst of these issues was whether the resolution of the board to appoint appointment of administrators was bona fi de and genuinely formed. His Honour found that it was. administrators Section 436 (1) (a) CA requires a resolution that, in the opinion of those voting in • Application of the ‘caretaker favour of the resolution, the company is ‘insolvent or likely to become insolvent at principle’ in relation to some future time’. Justice Simmonds held that the evidence established that those reinstated directors who had voted in favour of the relevant resolution had ‘properly formed’ this opinion. He noted the evidence of insolvency and stated that, while the realisation of the company’s intellectual property might have been suffi cient to meet its debts, this might have resulted in the end of the business of the company or, at least, a radical change in that business. Assets essential to the continuation of the company’s business are not to be included in a determination of solvency.

The second issue was whether the resolution was for an improper purpose. The purpose relied upon by the administrators was that of arranging for a payment necessary to protect the company’s patent without incurring liability for insolvent trading. However, the second and third defendants argued that the only object of the administration was to achieve a winding-up (it was suggested that in a winding- up debts owed to the directors who had supported the resolution to appoint administrators would take priority over those owed to the second and third defendants) or to continue the reinstated directors’ control of the company even if it was later found that they had been validly removed as directors. Justice Simmonds stated that the evidence did not allow him to conclude that these were, in fact, the only or substantial purposes of the administration.

35 The third issue was whether reasonable notice of the board meeting was given to the second defendant. His Honour held that it had been, even though the second defendant was only told of the meeting at, or just before, the meeting itself. It was signiﬁ cant that: the meeting concerned urgent business; directors have a duty to attend meetings where there is any business to be done; and an offer was made to the second defendant to delay the meeting.

Fourth, Justice Simmonds concluded that, in case he was in error in deciding that reasonable notice had been given, an order should be made under s447A (1) CA validating the appointment of the administrators. It was relevant that the administrators were appointed to protect the company’s intellectual property where there was a real possibility of the company becoming insolvent, there was no evidence that the second defendant’s presence at the meeting would have changed the result of the meeting and, again, those who called the meeting were prepared to delay the meeting if the second defendant wished to attend.

This case provides support for the existence of a ‘caretaker principle’, although Justice Simmonds found that such a principle was not applicable to the facts in this case. It also provides some guidance concerning what constitutes ‘reasonable notice’ of a board meeting, in what circumstances a board resolution will be considered to be made for an improper purpose, and the circumstances in which a court will make an order under s447A validating the appointment of administrators.

36 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Power to appoint special purpose administrators

Case Name: The plaintiff sought an order appointing a special purpose Honest Remark Pty Limited v administrator to investigate certain transactions of the Allstate Explorations NL & Ors administrators of a deed arrangement on the basis that they had acted in a manner prejudicial to the interests of the defendant’s Citation: unsecured creditors. The court held that neither the CA nor the inherent jurisdiction of the court allows the court to make [2006] NSWSC 735, Supreme Court of New South Wales per such orders. Brereton J The court considered the plaintiff’s claim on the basis that an investigation into whether there a claim existed against the administrators for mismanagement was a Date of Judgement: matter that needed to be investigated by someone other than the administrators 21 July 2006 themselves. It then addressed the four grounds on which the plaintiff argued that it was in the court’s power to appoint a special purposes administrator in order to conduct such an investigation. Issues: • Sections 447A and 447E First, the plaintiff attempted to draw a parallel with the powers provided for by CA section 473(8) CA, which allows a court to refer matters in the course of • Court’s jurisdiction liquidation to special purpose liquidators. In reviewing the case law, the court to appoint a special found no support for the proposition that the investigation of the conduct of a administrator to investigate liquidator in their capacity as liquidator was part of the matters reviewable by a original administrator special purposes liquidator. Rather, it was held that this is part of the supervisory function of the court.

Second, the plaintiff sought to rely on s447A CA, which enables the court to make orders that affect how Part 5.3A CA operates in relation to a particular company. The court held that this section had no application, as the investigation of, and reporting on, the conduct of a deed administrator does not have anything to do with how Part 5.3A operates in relation to a particular company: it is not part of a voluntary administration or of a deed administration; nor is a matter entrusted to an administrator or a deed administrator.

The court was also asked to consider whether the plaintiff’s orders could be granted on the basis of s447E CA, which provides that the court may make such order it sees ﬁ t where the administrators conduct would be prejudicial to the interests of company’s creditors. Again the court rejected this argument, stating that the plaintiff’s case related to a failure to investigate a possibility of liability only. Given that the administrators were under no duty to investigate, their failure did not amount to prejudicial conduct. Further, the plaintiffs could not adequately establish that the proposed order would remedy the conduct complained of or prevent similar conduct from occurring.

37 Finally, the court held that it did not have any inherent jurisdiction to make the sought orders under s23 of the Supreme Court Act 1970 (NSW), as the power concerned with the administration of justice does not extend to anything that might possibly lead to justice. Although the court had a duty to supervise company arrangements, voluntary and deed administrations are creatures of statute from which the court’s power must derive. The court concluded that even if any of the above sources of power were available, it was manifestly unreasonable to grant relief. To do so would be inconsistent with the caution with which the courts proceed in relation to actions against liquidators and administrators where there are other statutory remedies apt for the circumstances.

The court does not have power to appoint a special purpose administrator for the purposes of investigating and reporting on the conduct of a deed administrator.

38 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Using casting vote to approve remuneration was a breach of duty

Case Name: An administrator brought proceedings to determine whether Krejci as liquidator of Eaton certain resolutions concerning his remuneration had been validly Electrical Services passed. The decision provides guidance as to how an administrator should act when faced with a resolution in which Citation: they have a personal interest. [2006] NSWSC 782, Supreme Mr Krejci was the administrator, and then the liquidator, of Eaton Electrical Court of New South Wales Services Pty Ltd (Eaton). During Eaton’s administration, Mr Krejci convened a Equity Division, Corporations meeting of creditors, pursuant to section 439A CA. At the meeting, having resolved List per Barrett J to wind up Eaton, the creditors then considered two further resolutions, one to ﬁ x Mr Krejci’s remuneration as administrator and the other to ﬁ x his remuneration as Date of Judgment: liquidator. Mr Krejci exercised his casting vote to pass both resolutions.

8 August 2006 The court held that, as administrator, Mr Krejci had a fi duciary duty not to put himself in a position where his obligations to Eaton confl icted with his own Issues: interests. By voting in favour of the resolutions, Mr Krejci had breached that duty. • Administrators’ power to exercise casting vote at If an administrator’s remuneration is not fi xed by creditors’ resolution, the court s439A CA meetings may fi x that remuneration, on application by the administrator: s449E(1)(b) CA. • Fiduciary duties of Similarly, the court may fi x the remuneration of a court-appointed liquidator under administrators s473(3)(b). Section 511(1)(b) CA allows a liquidator in a voluntary winding-up to • Remuneration of ask the court to exercise any powers the court might exercise in a court-ordered administrators and liquidation. liquidators Exercising its powers under sections 449E(1)(b) and 511(1)(b), the court ordered that, to the extent the resolutions were invalid due to the breach of fi duciary duty, Mr Krejci’s remuneration should be fi xed in the terms set out in those resolutions.

This solution was appropriate because:

• Mr Krejci had acted conscientiously (eg Mr Krejci ‘took and had due regard to’ legal advice before exercising his vote); • all the creditors who had participated in the s439A meeting had had an opportunity to be heard on Mr Krejci’s entitlement to the sums ﬁ xed by the resolutions; and • none opposed that entitlement.

Mr Krejci was not, however, entitled to recoup his court costs out of Eaton’s assets, given that the proceedings were ‘in the nature of a salvage exercise…for [Mr Krejci’s] own ﬁ nancial beneﬁ t’.

39 Administrators will breach their ﬁ duciary duties by exercising a casting vote to pass a resolution ﬁ xing their own remuneration. This case suggests that if the creditors cannot agree, the best course is for the administrator to either vote against or abstain from voting, and seek to have the remuneration determined by the court.

40 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Court approval of post-administration secured ﬁ nancing

Case Name: Uncertainty about whether an administrator could repay debts as Sims, in the matter of Huon an expense of the administration with priority over unsecured Corporation Pty Limited creditors has limited post-administration ﬁ nancing possibilities. (administrators appointed) This case considers how such arrangements may be sanctioned by the court to enable the continuation of business and the best Citation: possible return to creditors. [2006] FCA 1201 Federal Voluntary administrators were appointed to Huon Corporation (Huon). In order to Court of Australia per Gyles J maximise the value of Huon’s assets for the creditors’ beneﬁ t, the administrators formed the view that it was necessary to maintain Huon’s business as a ‘going Date of Judgment: concern’ in readiness for sale. Accordingly, Huon entered into supply agreements 1 September 2006 with four major customers in order to improve Huon’s prospects for sale as a going concern.

Issues: Under the supply agreements, the customers agreed to pay a 35 per cent price • Sections 443A, 443D, increase and committed to purchasing specifi ed volumes of products for a four- 443E, 443F, 447A and month period. In return, the administrators agreed to pay the customers a price 447D CA rebate, which would be paid ahead of Huon’s unsecured creditors. To ensure that • Conferral of priority to the administrators’ obligations to pay the price rebate was a personal liability of secure post-administration the administrators pursuant to section 443 CA and was therefore subject to the funding arrangements statutory lien (which, under ss 443D, 443E and 443F CA, ranks ahead of other unsecured debts of the company), the parties agreed to apply to the court for specifi c directions. The administrators sought two alternative court orders. The fi rst was:

• Directions pursuant to s447D CA, that the price rebate was a ‘debt’ incurred by the administrators to which s443A CA applied.

Justice Gyles refused to make give this direction because incurring the obligation to pay the price rebate did not fall within any of the categories of ‘debts’ enumerated in s443A(1) CA. The court therefore did not need to decide whether it was, in fact, a ‘debt’ within the meaning of s443A CA. The alternative court order was:

• An order pursuant to s447A that the liabilities incurred by Huon pursuant to the supply agreements are deemed to be debts incurred pursuant to s443A for ‘services rendered’.

Justice Gyles was satisﬁ ed that notice had been given to all those affected and that the arrangement was for the beneﬁ t of all creditors. He made the order such that the price rebates were deemed to be a ‘debt incurred’ for the purposes of s443A(1)(a) by the administrators for ‘services rendered’ and for which they were personally liable. This order entitled the administrators to rely on their statutory indemnity and lien over the assets of Huon to secure payment of that obligation.

41 This commercial decision demonstrates the court’s preparedness to use the broad power in s447A CA to assist administrators to obtain secured post-administration ﬁ nancing, thereby enabling the company to continue to trade and to maximise the prospects of a restructure or sale. Administrators will welcome this decision, which improves the ability of companies in administration to raise post-administration ﬁ nance.

42 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Application of funds under a terminated DOCA

Case Name: Are funds received by an administrator pursuant to a DOCA, that Purchas; in the matter of Estore is subsequently terminated, held on trust for deed creditors or as Pty Ltd (in liquidation) agent or trustee for the company and available for liquidation creditors? Citation: The plaintiff was the administrator and later the liquidator of Estore Pty Limited [2006] FCA 1222, Federal (the company). A DOCA was executed and the company paid some money into a Court of Australia per Gyles J fund to be held by the administrator, pursuant to the DOCA, on a non-refundable basis. No dividend was paid to participating creditors. The creditors eventually Date of Judgment: resolved to terminate the DOCA and wind up the company. 8 September 2006 The plaintiff, as liquidator, sought directions and declarations pursuant to section 447D(2) CA from the court as to whether the administration fund ought to be Issues: distributed to those creditors who participated in the DOCA, in accordance with the • Section 447D(2) CA terms of the DOCA, or the administration fund was the property of the company • Status of fund held by and should be distributed to the liquidation creditors in accordance with the an administrator under a provisions of Part 5.6 CA. terminated DOCA Justice Gyles followed the decision of Lombe v Wagga Leagues Club Ltd and held that the amount received by the administrator under the DOCA was received by him as agent for the company and remained the property of the company when the DOCA was terminated. The liquidator was justiﬁ ed in applying and distributing the administration fund moneys to liquidation creditors in the course of the winding-up of the company.

Funds received by an administrator pursuant to a DOCA that is subsequently terminated are received by the administrator as agent for the company. Such funds are property of the company and, where that company then goes into liquidation, are to be distributed to creditors in the usual course of the winding-up.

43 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Rectiﬁ cation of a DOCA in respect of insured claims

Case Name: This decision considers the operation of DOCAs that extinguish a Brandrill v Newmont Yandal company’s liability for damages and the effect on claims made against an insurance policy held in respect of that liability. It Citation: considers the circumstances in which the court may, pursuant to section 447A(1) CA, rectify a DOCA so as to put creditors with [2006] NSWSC 974 Supreme insured claims in no worse position than they would be in a Court of New South Wales per Austin J liquidation. Brandrill Ltd and its insurer (together Brandrill) brought a claim for damages Date of Judgment: against Newmont Yandal Operations Pty Ltd (NYOL) in the Supreme Court of 20 September 2006 Western Australia (the Brandrill claim). NYOL was insured in respect of the Brandrill claim. Subsequently, NYOL was placed in voluntary administration and then entered into a DOCA (as did each of its subsidiaries). Issues: • Rectifi cation of the terms of After the DOCAs were substantially performed and some had been terminated, a DOCA Brandrill brought an action in the Supreme Court of NSW for rectifi cation of the • Effect of a DOCA on access DOCAs. It contended that the effect of the DOCAs was to extinguish NYOL’s liability to insurance proceeds by for the Brandrill claim and deny Brandrill access to any insurance monies held in creditors with claims against respect of that liability. If NYOL had been put into liquidation, by operation of the company section 562 CA, Brandrill would have been entitled to the benefi t of any insurance • Sections 447A(1) and 562 money paid to NYOL in respect of its claim for damages. Further, Brandrill CA contended that representations had been made at the second creditors’ meeting that no creditor would be worse off under the DOCAs than they would be under a liquidation. Brandrill sought orders, pursuant to s447A, that the DOCAs be rectifi ed to ameliorate this unfairly prejudicial or discriminatory effect.

The court considered that the effect of the DOCAs’ operation was that NYOL was released and discharged of all liabilities, and instead creditors were given access to a distribution fund established by the DOCAs. The court concluded that the DOCAs effectively extinguished NYOL’s liability for the Brandrill claim and also the loss against which NYOL’s insurers had indemniﬁ ed NYOL.

Under s562 CA, a company in liquidation is required to pass on payment from its insurers for liability incurred by a third party, in priority to the claims of unsecured creditors. The court found that Brandrill was put in a worse position under the DOCAs than a liquidation, because the extinguishment of its claim left it without recourse to any insurance monies that would otherwise have been available in a liquidation.

44 The court held that s447A(1) empowered it to make orders rectifying the DOCAs in the form sought by Brandrill, since:

• the evidence showed that the DOCAs had clearly been drafted with the intention of replicating the effect of s562 CA, but that, because of a common mistake, the drafting failed to achieve this objective; • an instrument inter partes could not have achieved the same effect, as DOCAs also have statutory effects such as binding all creditors and company ofﬁ cers; and • the representations made at the second creditors’ meeting that Brandrill would not be worse off than they would be in a liquidation established the case for the exercise of the court’s discretion in favour of making the order.

The court therefore made orders that the DOCAs be rectiﬁ ed so as to preserve Brandrill’s rights with respect to NYOL and that Part 5.3A is to operate in relation to each of the deed companies, as if the DOCAs were in the rectiﬁ ed form from the time of their execution.

The common form of DOCA that releases all company liabilities and substitutes a right to claim against the DOCA fund has the effect of denying creditors with insured claims access to the insurance proceeds that would be available in a liquidation scenario pursuant to s562. In certain circumstances, the court will be prepared to exercise its discretion under s447A and make an order that such a DOCA be rectiﬁ ed to place creditor’s with insured claims in no worse position than they would have been in a liquidation.

45 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Principles to be applied in determining whether to set aside a casting vote

Case Name: This case involved an application to set aside a casting vote Blue Ring Pty Ltd v Landshore made by the administrator which resolved that the company Pty Ltd (subject to DOCA) & enter into a DOCA. In this case, the court considered the Anor investigations an administrator must carry out before exercising a casting vote and on what grounds a casting vote may be Citation: set aside. [2006] WASC 245, Supreme This case concerns a DOCA entered into by Landshore Pty Ltd (Landshore), the ﬁ rst Court of Western Australia per defendant in the proceedings. The second defendant was appointed as Newnes M administrator of Landshore by the directors. The administrator subsequently prepared a report to the creditors recommending that Landshore enter into the Date of Judgment: DOCA. The DOCA proposed to have a creditor of Landshore fund a dividend to be 10 November 2006 paid to the unsecured creditors. In his report, the administrator estimated that unsecured creditors would receive a dividend of about $8000 to $10,000.

Issues: At the time of the creditor’s meeting, the DOCA had been amended to include a • Section 600B CA superannuation guarantee charge as a priority payment, which meant that • When will a casting vote be unsecured creditors would receive no beneﬁ t under the DOCA. set aside? • Investigations an At the meeting, a majority of creditors representing a debt of $559,090 accepted administrator must carry the DOCA. Creditors who were opposed to the DOCA held debts of $601,513. The out before exercising their administrator exercised his casting vote in favour of the DOCA. casting vote The plaintiff, a creditor and shareholder of Landshore, applied under section 600B CA to set aside the administrator’s casting vote on the basis that the administrator had inadequately investigated the value of Landshore’s assets.

In determining whether the casting vote should be set aside, Master Newnes held that a person who has a casting vote is under a duty to exercise it honestly and in accordance with what they believe to be in the best interests of those who may be affected by the vote. In considering whether administrator has acted appropriately, the court may have regard to a number of factors, including the accuracy of the administrator’s report and whether the administrator has made adequate investigations before deciding on the casting vote.

In this case, Master Newnes held that the investigations and reporting of the administrator were inadequate because:

• the administrator did not himself investigate the alleged misappropriation of funds; • the administrator did not mention in his report to creditors that legal proceedings had been commenced against a former director even though the claim involved potentially the largest asset of Landshore;

46 • there was no evidence that the administrator had determined the date of insolvency and therefore whether the transactions were, or were likely to be, voidable; • the report did not show what investigations were carried out by the administrator to determine the value and whereabouts of the physical assets of the company; and • the administrator should have realised that the amendment to the DOCA to give priority to the payment of superannuation meant that unsecured creditors would receive no beneﬁ t under the DOCA.

As a result, Master Newnes held that the administrator had not properly exercised his casting vote and the vote was set aside.

Administrators are under a duty to exercise casting votes honestly and in the interests of creditors as a whole. Whether a particular casting vote has been properly exercised will depend on the particular facts. Factors that the court will look at include whether the administrator has investigated for themselves the affairs of the company and whether the unsecured creditors will receive any beneﬁ t from the resolution.

47 DEEDS OF COMPANY ARRANGEMENT AND VOLUNTARY ADMINISTRATION

Court says air association can’t ﬂ y under the radar of insolvency distribution laws

Case Name: Ansett Australia Holdings Ltd was under a DOCA. Under a Ansett Australia Holdings Ltd & multilateral agreement Ansett was a member of the Air Transport Ors v International Air Transport Association clearing house system, which settles claims for Association payment between airline operators. The issue was whether the clearing house system was repugnant to the insolvency laws Citation: under which the DOCA was constituted so as to render it, for [2006] VSCA 242, Court of public policy reasons, inapplicable to Ansett after it had entered Appeal of Victoria per Maxwell into the DOCA. P, Nettle JA and Bongiorno AJA Until its insolvency in 2001, Ansett Australia Holdings Ltd (Ansett) was a party (with other airlines) to a Multilateral Interline Trafﬁ c Agreement (the Interline Date of Judgment: Agreement) with the International Air Transport Association (IATA). Under the 10 November 2006 Interline Agreement, a member airline issuing a ticket (Issuing Airline) to a passenger in relation to a ﬂ ight on another member airline (Carrying Airline) is required to pay the Carrying Airline’s cost of transporting that passenger. The Issues: Clearing House facilitates such transactions, entering and setting off debits against • Whether interposed and credits in favour of each member in respect of its dealings with other entity removed ordinary members, settling on a monthly basis the balances owing by members and relationship of debt between collecting the balances due. transacting parties • Whether arrangement The Interline Agreement incorporated and was subject to the IATA Clearing House that removed pari passu Regulations (the Regulations). Clause 9(a) of the Regulations provides that (subject relationship of one group of to irrelevant exceptions): creditors with the remainder was repugnant to insolvency no liability for payment and no right of action to recover payment shall accrue between laws applying to a DOCA members of the Clearing House. In lieu thereof members shall have liabilities to the and therefore inoperative for Clearing House for balances due by them resulting from a clearance or rights of action public policy reasons against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance.

IATA argued that it was a creditor of Ansett for balances owing under the clearing house arrangements. Appealing a decision of the court below to that effect, Ansett argued that the clearing house arrangements under the Interline Agreement and the Regulations were contrary to public policy in that they amounted to a contracting out of the pari passu principle embodied in the DOCA and the insolvency law regime. This was because they purported to make the underlying debts owed to Ansett by debtor airlines unavailable for distribution among non-airline creditors and to prevent creditor airlines from having to seek recovery of their debts along with the general body of Ansett’s creditors. Accordingly, Ansett argued, it should be held that those arrangements are inoperative as against Ansett after the DOCA was entered into and that IATA was not a creditor.

48 The court was unanimous in ﬁ nding that the intention of Regulation 9(a) was to remove the debt relationship between transacting members, thereby quarantining amounts owed by an insolvent member from dissipation among the general body of unsecured creditors. However, the judges differed in their view as to whether Regulation 9(a) was effective in achieving that outcome.

The majority (Justice of Appeal Nettle, with whom Acting Justice of Appeal Bongiorno agreed) considered that despite the intention of Regulation 9(a), the relationship between Issuing Airline and Carrying Airline was one of debtor and creditor until the debt is cleared in accordance with the clearing house procedures, despite the assertion in Regulation 9(a) to the contrary. In reaching this conclusion, they gave weight to the intentions manifested by other paragraphs of the Interline Agreement and Regulations, which were inconsistent with Regulation 9(a). It followed that IATA was not a creditor in respect of uncleared debts.

Having decided the question on factual grounds, it was not strictly necessary to decide whether the clearing house arrangements (which purported to remove the underlying airline debts) should be held inapplicable on public policy principles. Nevertheless, applying the principle in British Eagle [1975] 1 WLR 758 (which considered the Regulations’ compatibility with English bankruptcy laws), they held that Regulation 9(a) in its terms amounted to a purported contracting out of the insolvency regime provided by Part 5.3A CA and (whether or not the circumventing of the insolvency regime was intentional) was contrary to public policy. It was no answer that Part 5.3A does not require distribution under a DOCA to be on pari passu principles because ‘the principle itself rests in the broader conception that the whole of a debtor’s estate should be available for distribution among creditors in accordance with whatever regime for the distribution of property may apply according to the laws of insolvency’.

In a strong dissenting judgment, President Maxwell found in favour of IATA. His Honour considered that Regulation 9(a) was the ‘dominating factor’ in the Interline Agreement, and that it prevailed over any inconsistent clauses. His Honour considered that the court must seek to give effect to the contract as intended, ‘so as not to frustrate the reasonable expectations of businessmen’. In his opinion, the act ‘of making contractual amendments intended to govern countless transactions between solvent parties into the indeﬁ nite future’ could ‘on no view…be characterised as an attempt to deprive creditors of their rights on an insolvency’.

In this case, despite the express intention of removing a debtor- creditor relationship between Clearing House members, the court held that such a relationship existed between them on a proper understanding of the agreement between them as a whole. Furthermore, the purported contracting out of pari passu principles embodied in Australian law was held to be contrary to public policy and thus inoperative even if the debt relationship had been effectively removed.

49 DEREGISTERED COMPANIES

Reinstatement of a company for the purpose of winding up

Case Name: This decision considers the meaning of section 601AH(5) CA and CGU Workers Compensation also the appropriate grounds for winding up a company that has (NSW) Ltd v Rockwall Interiors been reinstated. In particular, the court further elucidated the Pty Ltd effect of reinstatement of a deregistered company on actions taken while that company was deregistered. Citation: The case involved three separate proceedings in each of which the plaintiff, GGU [2006] NSWSC 690, Supreme Workers Compensation (NSW) Ltd (CGU), sought an order for the reinstatement of Court of New South Wales per the registration of a company and orders that the company be wound up and a Barrett J liquidator appointed. CGU sought the reinstatement in order to comply with its statutory requirements under the WorkCover regime. CGU sought the winding-up of Date of Judgment: the companies to avoid the effect of section 601AH CA which would oblige the 7 July 2006 former directors and ofﬁ cers to resume their responsibilities in the reinstated company, in circumstances where this was not appropriate. CGU sought the winding-up of the companies on the grounds of insolvency and on just and Issues: equitable grounds. • Reinstatement of a company • Grounds for winding up a In each case, the plaintiff had, after deregistration, caused a statutory demand to reinstated company be delivered to the place that was the registered ofﬁ ce of the company immediately • Section 601AH(5) CA before deregistration. The plaintiff argued that, because of the operation of s601AH(5), which provides that a reinstated company ‘is taken to have continued in existence as if it had not been deregistered’, upon being reinstated the company would have failed to comply with a statutory demand giving rise to grounds for winding up in insolvency.

Justice Barrett ordered the reinstatement of each of the companies. However, his Honour held that there had not been a non-compliance with the statutory demand and, therefore, the companies could not be presumed insolvent. In reaching this view, he discussed s601AH(5) CA and stated that the ‘deemed continuity created by 601AH(5) cannot … support a fi ction that, in the period after deregistration, there was both service of and non-compliance with a statutory demand.’ It was not a statutory demand as it was not ‘served on a company’ as required by s459E CA, since delivery to the place that was the registered offi ce of a now non-existent company cannot be service ‘on a company’. Section 601AH(5) creates only a limited retrospectivity and cannot retrospectively ‘give effi cacy to active steps taken in relation to a company which, because of the company’s non-existence, were, when taken, simply devoid of legal effect’.’

50 Alternatively, the plaintiff argued that a winding-up order should be made on the just and equitable ground. His Honour accepted this argument, ﬁ nding that the substratum of the company was gone and that when examined ‘in light of the special considerations arising from the WorkCover regime’ the reinstatement of the registration of each company was just, so long as the company was immediately wound up. His Honour ordered that each of the reinstated companies be wound up.

This case adds to the growing case law on the effect of reinstatement of a company’s registration on actions purportedly taken whilst the company was deregistered. The relatively little detail in s601AH(5) about the deemed continuity of a company’s existence is sure to produce further case law on this issue.

51 DEREGISTERED COMPANIES

Application for reinstatement of registration of a company

Case Name: The directors in this case sought to have a company reinstated Re Piccoli Tesori Pty Ltd as a registered company after it had been deregistered. The case (deregistered); Ex parte Bertuol explores whether a deregistered company has the capacity to make an application for the restoration of registration, Citation: notwithstanding the cessation of the existence of the company. [2006] FCA 462, Federal Court Piccoli Tesori Pty Ltd (the company) was deregistered by ASIC on 17 July 2005 of Australia per Lee J pursuant to s601AD CA for failure to pay a ‘review fee’. However, the company continued to operate as an ongoing concern and lodged taxation statements every Date of Judgment: quarter. The directors suggested it was not until February 2006 that they became aware that the company had been deregistered and soon after, applied to have the 26 April 2006 company reinstated.

Issues: Under s601AH(2) CA, the court may make an order that ASIC reinstate the • Section 601AH(2)(a)(i) CA registration of a deregistered company if satisfi ed that it is just to do so. However, • Whether a deregistered under s601AH(2)(a)(i) only a ‘person aggrieved’ may apply for an order that the company has capacity to registration of a company be reinstated. make an application under s601AH In determining whether a deregistered company itself fi ts the requirements of a • Whether a shareholder ‘person aggrieved’, the court considered judicial treatment of earlier equivalent or director fi ts the provisions of company law, which acknowledged that a deregistered company had requirements of a ‘person capacity to make application for the restoration of registration, notwithstanding the aggrieved’ for the purposes cessation of existence of the company. of s 601AH The court concluded that although a deregistered company has no standing to commence other proceedings, if a company is subjected to deregistration when it was successfully carrying on a business it meets the requirements of a person ‘aggrieved’ for the purposes of s601AH(2) CA.

The court also considered the issue of whether a shareholder or director of a deregistered company fi ts the requirements of a ‘person aggrieved’ for the purposes of s601AH. Justice Lee held that, although the fact that a person is a shareholder or a director of a deregistered company does not in itself establish that person to be a ‘person aggrieved’, and considering the company’s fi nancial position and the fact that the company had assets that exceeded its liabilities and the net worth of the company was represented in substantial measure by undistributed profi ts, a shareholder of the company is in fact a ‘person aggrieved’.

52 The court also considered the issue of whether reinstatement was ‘just’ in the circumstances of the case, per s601AH(2) CA. The court concluded that considering the company was not deregistered as a consequence of insolvency, there were ample funds from which to pay outstanding fees to ASIC, a third party would not be adversely affected by an order for reinstatement and that the company moved reasonably promptly to obtain reinstatement, the court could be satisﬁ ed that it was just to reinstate the company per s601AH(2).

If a company is subject to deregistration while successfully carrying on a business, the company has capacity to make an application for the restoration of registration. If the company is not insolvent, has sufﬁ cient funds to pay outstanding ASIC fees and third parties would not be adversely affected, it will generally be just for the court to reinstate the company.

53 DEREGISTERED COMPANIES

Effect of reinstatement of registration of a company

Case Name: In this case, the New South Wales Supreme Court considered the White v Baycorp Advantage application of the provisions of the CA relating to reinstatement Business Information Services of a company to the validity of actions purportedly taken by a Ltd company at a time when it was deregistered. The plaintiffs, White Group Holdings Pty Limited (White Holdings) and its director, Citation: John Anthony White, entered into a fi nancing agreement with Capital Corporate [2006] NSWSC 441, Supreme Finance Limited (Capital Corporate) in respect of the leasing of certain equipment. Court of New South Wales per The plaintiffs allegedly defaulted and so default notices were issued. Baycorp Campbell J Advantage Business Information Services Limited (Baycorp), a credit reference agency, was notifi ed of that default. Baycorp made entries in its credit reference Date of Judgment: database which gave White Holdings a poor credit rating, with the effect that it was 18 May 2006 unable to arrange fi nance for its business. The default notices were issued by Capital Corporate’s parent company, Capital Issues: Finance Australia Ltd (Capital Finance), allegedly on behalf of Capital Corporate, • Effect of reinstatement of and at a time when Capital Corporate had been deregistered pursuant to section registration of a deregistered 601AA(4) CA. ASIC subsequently reinstated the registration of Capital Corporate. company • Section601 CA The plaintiffs contended that they were not in default and sought an injunction to remove the entries from Baycorp’s database on the grounds that they were misleading and deceptive. In addition, they sought an order restraining Capital Finance from providing any credit information or personal information relating to the plaintiffs to any other credit provider.

One of the grounds on which the plaintiffs relied was that the default notices were ineffective as they could not have been issued by, or on behalf of, Capital Corporate, as it was deregistered. The plaintiffs’ argument was put as a matter of fact and as a matter of the law of corporate reinstatement. They argued that Capital Finance could not have had authority from Capital Corporate to exercise any contractual power to give the notices when Capital Corporate did not itself exist and the contractual powers had become vested in ASIC.

Justice Campbell considered the provisions relating to deregistration and reinstatement. A company ceases to exist once it is deregistered. However, when a company is reinstated, s601AH(5) CA requires that it be treated as though it had never been deregistered. His Honour emphasised that this is not to be read as meaning ‘that anything which purported to be done on behalf of Capital Corporate during the period of its deregistration is thereby regarded as valid’. In support of this interpretation, his Honour cited s601AH(5) CA, which provides that a director regains his ofﬁ ce only from the time of reinstatement and that property revests in the company only from the time of reinstatement.

54 Justice Campbell held that:

…notwithstanding the reinstatement, any contractual power which Capital Corporate had prior to the deregistration is still regarded, even after the deregistration, as having been vested in ASIC during the period of deregistration.

Since the contractual power to issue the default notices was vested in ASIC, Capital Finance could not have had authority to exercise that contractual power. Therefore, the notices were ineffective, the debt was not due and payable and the plaintiffs were entitled to the injunction sought.

This decision demonstrates that the notion that a reinstated company be treated as though it has never been deregistered requires some qualiﬁ cation. When a company is reinstated its actions taken while deregistered will not necessarily be retrospectively validated upon reinstatement. In order to validate actions of a company purportedly carried out while it was deregistered, it is necessary to apply to the court for reinstatement and ancillary orders validating those acts.

55 DEREGISTERED COMPANIES

Aggrieved persons: applying to reinstate a deregistered company

Case Name: This decision considers the meaning of ‘person aggrieved’ in Pilarinos and Ors v ASIC section 601AH(2) CA and also whether a potential defendant of a company in relation to which an application for reinstatement is Citation: made, is an interested party in the application. [2006] VSC 301, Supreme Palais de Danse Pty Ltd was deregistered in February 1998. Section 601AH(2) CA Court of Victoria per Gillard J permits an application for reinstatement to be made by a ‘person aggrieved’ by the deregistration. Three plaintiffs brought such an application. ASIC claimed that the Date of Judgment: plaintiffs were not persons aggrieved under CA. The basis for that argument was that the plaintiffs did not have a grievance at the time of the company’s 11 August 2006 deregistration. The court considered whether there was any requirement that the grievance must have occurred prior to the deregistration. Issues: • Reinstatement of a company The ‘grievance’ had been acquired after the time of deregistration as the result of • ‘Person aggrieved’ by the an agreement between the ﬁ rst and third plaintiffs on the one hand and the second deregistration of a company plaintiff on the other, whereby the ﬁ rst and third plaintiffs would purchase the • Section 601AH(2) CA second plaintiff’s shares in the company for $100 if it was reinstated. That would enable them to bring a claim against the State of Victoria (an interested party in the proceedings) based on a claim that the State of Victoria had granted Palais de Danse an equitable lease prior to its deregistration.

Justice Gillard held that s601AH(2) only requires proof of a genuine loss, which was caused by the company’s deregistration. There is no requirement that the grievance must have occurred at the time of the deregistration. On that basis, the ﬁ rst and third plaintiffs were persons aggrieved under CA. The second plaintiff was not a person aggrieved as he only stood to lose the $100 purchase price for the shares, which was not a ‘real’ loss.

His Honour also found that the State of Victoria should not have been allowed to intervene because it had no interest in the application for reinstatement. The State of Victoria argued that reinstatement was futile as the action against it was bound to fail. Justice Gillard found that, except in the ‘clearest of clear’ cases, such as where reinstatement was sought in order to bring an action that was ‘hopeless’, the merits of a future claim by a company are not relevant to an application for its reinstatement.

A person can apply to a company to be reinstated even if they did not have a grievance at the time of the company’s deregistration. A person can be a ‘person aggrieved’ even where the grievance arose due to conduct of the applicant, with knowledge of the deregistration.

56 DIRECTORS AND CORPORATE GOVERNANCE

Directors’ liability to Commissioner of Taxation for legal costs

Case Name: In this case, the Supreme Court of New South Wales considered Sims in his capacity the extent of a director’s liability to indemnify the Commissioner as liquidator of Classic of Taxation, pursuant to section 588FGA(2) CA. Cedar Venetians Pty Ltd Mr Sims was the liquidator of Classic Cedar Venetians Pty Ltd (Classic). Mr Sims (in liquidation) v Deputy instituted proceedings against the Commissioner of Taxation (the Commissioner) to Commissioner of Taxation recover $33,000 plus interest and costs as a preference. This sum constituted amounts paid to the Commissioner within the relevant timeframe for Classic’s Citation: taxation liabilities. The parties settled the proceedings on the basis that the [2006] NSWSC 305, Supreme Commissioner pay the liquidator $33,000. Court of New South Wales per Campbell J The Commissioner then sought to recover $23,124, being the PAYG liability of Classic, together with interest and costs, from Classic’s director, pursuant to section 588FGA(2) CA. The director did not appear at the hearing of this Date of Judgement: application. 3 & 18 April 2006 Justice Campbell made orders that the director indemnify the Commissioner for the Issues: PAYG component of the preference, together with interest on that amount, pursuant to the Civil Procedure Act 2005 (NSW). • Recovery of PAYG tax • Directors’ liability to The Commissioner withdrew a further claim that the director was liable to Commissioner of Taxation indemnify him for his own legal costs of the preference proceedings brought by the for legal costs as ‘loss or liquidator. While the court made no decision or order on the director’s liability for damage resulting from the the Commissioner’s costs of the preference proceedings, Justice Campbell made order’ some observations on whether such costs could constitute ‘loss or damage resulting • Section 588FGA(2) CA from the order’ under s588FGA(2) CA.

Justice Campbell made it clear that he did not agree with the decision of Justice Nicholas in Gibbons v DCT [2003] NSWSC 1126; (2004) 22 ACLC 81, in which he held that a director was liable under s588FGA(2) for the Commissioner’s costs of defending a preference proceeding. Justice Campbell considered that arguments could be put to the contrary. One argument is that there is a causal relationship between the order referred to in s588FGA(2) and the incurring of costs. Since the incurring of costs of defending the preference proceeding must logically pre-date the making of the order to repay a preference, those costs do not fall within the indemnity in s588FGA(2).

57 The court’s observations in this case on whether directors are liable to indemnify the Commissioner of Taxation for legal costs under s588FGA(2) CA will be of interest to directors. While Justice Campbell’s comments are not binding, they do provide directors with some useful arguments to make in attempting to avoid an order against them for the Taxation Commissioner’s costs of defending the related preference proceeding.

58 DIRECTORS AND CORPORATE GOVERNANCE

Directors not to be excused for insolvent trading where their conduct has been dishonest

Case Name: ASIC sought a disqualiﬁ cation order against a director found to ASIC v Edwards have failed to prevent a company from trading while insolvent. The director sought that the court exercise the discretion Citation: afforded to it by the CA to relieve him from liability. The court found it was unable to exercise the discretion because the court’s [2006] NSWSC 376, Supreme earlier judgment prevented a conclusion that the director had Court of New South Wales per Barrett J acted honestly. The director was disqualiﬁ ed from managing corporations for 10 years.

Date of Judgment: In ASIC v Edwards [2005] NSWSC 831, Justice Barrett made a declaration that Mr 5 May 2006 Edwards, a company director, had contravened the prohibition on insolvent trading in the CA (section 588G(2)). ASIC sought orders that the director be disqualiﬁ ed under s206C CA from managing corporations for at least 12 years. The director Issues: submitted that the court should exercise its discretion under s1317S or s1318 CA • Sections 206C, 1317S and to relieve him from liability. 1318 CA • Insolvent trading Section 1317S CA allows the court to relieve a person, either wholly or partly, • Disqualiﬁ cation from acting from a liability where a person has, or may have, contravened a civil penalty as a director provision where:

• the person has acted honestly; and • having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an ofﬁ cer, or employment as an employee), the person ought fairly to be excused for the contravention.

Section 1318 CA gives the court the power to relieve a person where it appears to the court that the person is, or may be, liable in respect of negligence, default or breach under the CA but, like s1317S, requires that the person has acted honestly.

Justice Barrett noted that each of these sections posed two central questions. First, whether the director acted honestly. And second, whether, having regard to all the circumstances, the person ‘ought to be fairly excused’ for the shortcoming in conduct.

In respect of the ﬁ rst question, Justice Barrett held that a person may fail to act honestly even though they had no intention to deceive.

Justice Barrett held that his earlier ﬁ ndings on the issues of the contraventions of the insolvent trading provisions prevented him from now reaching a conclusion that the director acted honestly. In those circumstances, the question as to whether the court should exercise the discretions in ss 1317S and 1318 CA in Edward’s favour did not arise.

59 In considering the length of the disqualifi cation to be imposed, Justice Barrett had regard to the approaches taken by the courts in other disqualifi cation cases. Justice Barrett placed particular emphasis on his previous fi ndings that:

• the director’s contraventions were knowing and wilful and involved elements of unconscionability and moral turpitude; • the director had attracted adverse reports in other corporate contexts from liquidators, receivers and in another court proceeding; • the director was not remorseful or contrite; and • the director had materially changed his evidence during the course of the proceeding.

The court also found that the fact the director had not been found to have engaged in any deliberate dishonesty, criminal conduct or dishonest deception was irrelevant. As a result, the director was disqualiﬁ ed for 10 years.

The court does not have discretion to relieve a person from liability for insolvent trading in circumstances where their conduct was dishonest. In imposing disqualiﬁ cations, the courts will have regard to the director’s conduct as a whole and the public interest in not having dishonest, reckless or negligent directors involved in the management of corporations. The difﬁ culty in uncovering breaches of this nature, and the expense associated with them, mean that the court will also impose penalties with a view to acting as a general deterrent to such conduct.

60 DIRECTORS AND CORPORATE GOVERNANCE

Standard of proof in insolvent trading cases

Case Name: This case provides some guidance on the approach to be taken Tru Floor Service Pty Ltd v in applying the ‘balance of probabilities’ standard in insolvency Jenkins (No 2) cases. It then applies that approach to the question of whether the company in question was insolvent during the various periods Citation: of time alleged. [2006] FCA 632, Federal Court The proceedings arose from the collapse in 2001 of a building contractor, A B & M of Australia per Sundberg J A Chick (Vic) Pty Ltd (Chick Vic). The nine plaintiffs were building sub-contactors, each of whom had been engaged by Chick Vic on various building projects. Chick Date of Judgment: Vic owed a substantial debt to each of the plaintiffs at the time a liquidator was appointed. 26 May 2006 The plaintiffs claimed that the defendants (who were directors of Chick Vic) had Issues: contravened s588G(2) or 588G(3) CL or, alternatively CA, by failing to prevent the • The approach to be taken company from engaging in insolvent trading at the time the relevant debts were in applying the ‘balance of incurred. The plaintiffs claimed damages in the amount of their unpaid debts from probabilities’ standard in the defendants under s588M. insolvency cases • Had the company of The threshold question to be considered by the court was whether Chick Vic was in which the defendants fact insolvent at the time that each of the relevant debts was incurred. This issue were directors engaged in was complicated by the fact that the claim was made on behalf of multiple insolvent trading? creditors seeking to recover a ‘multiplicity – and variety – of debts’ incurred at different times. In these circumstances, the court was required to consider Chick Vic’s solvency during a number of deﬁ ned periods rather than at a particular point in time as would ordinarily be the case.

Prior to considering Chick Vic’s solvency, Justice Sundberg considered the standard of proof which should be applied having regard to the fact that s588G(2) is a civil penalty provision and s588G(3) creates an offence requiring proof of dishonesty. This was a civil matter in which the statutory standard of proof was the ‘balance of probabilities’. His Honour held that, in applying that standard, the correct approach was to apply the approach adopted by Justice Dixon in Briginshaw v Briginshaw (1938) 60 CLR 334 while also bearing in mind what was said by the High Court in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 10 ALR 449. This approach required more than a ‘mere mechanical comparison of probabilities independently of its reality’, but rather a reasonable satisfaction of the tribunal that the allegation had been proven. The seriousness of the allegation made, the inherent likelihood of an occurrence of a given description, or the gravity of the consequences ﬂ owing from a particular ﬁ nding are considerations which must affect the answer to the question, whether the issue has been proved to the reasonable satisfaction of the tribunal. However, although the fact that fraud or an analogous serious allegation of dishonesty has been made may be a relevant consideration, this does not affect the standard of proof, but rather ‘merely

61 reﬂ ect[s] the conventional perception that members of our society do not ordinarily engage [in such conduct]’.

His Honour also confi rmed that s95A CA (which provides the statutory defi nition of insolvency) mandates a ‘cash fl ow’ rather than ‘balance sheet’ approach to determining solvency.

After a thorough review of Chick Vic’s ﬁ nancial position during the relevant periods, Justice Sundberg held that the plaintiffs had not proven that the company was insolvent during any of the alleged periods. This was despite the fact that his Honour found that:

• Chick Vic suffered from a substantial, though variable, working capital deﬁ ciency throughout the relevant periods; • Chick Vic suffered substantial losses throughout the duration; and • Chick Vic’s accounts disclosed a relatively high portion of aged creditors.

Applying the approach to the standard of proof discussed above, his Honour held that, beyond those factors, the evidence that Chick Vic was in fact unable to pay its debts as and when they became due and payable was scant and far too vague to act upon.

Having regard to the ﬁ nding that Chick Vic was not insolvent at the relevant times, it was not necessary for his Honour to consider the conduct of the defendant directors.

In applying the civil standard of proof, the court will take into account the seriousness of the allegation made, the inherent likelihood of the matters alleged to have occurred, and the gravity of the consequences fl owing from a particular fi nding. Vague evidence in support of an allegation of insolvency will not be suffi cient.

62 DIRECTORS AND CORPORATE GOVERNANCE

Directors’ defences to company tax debt liability

Case Name: This decision considers the liability of a director for company tax Deputy Commissioner of debts. It extends the range of defences available under the tax Taxation v Dick legislation to include defences under the corporations legislation which involve the notion of a director acting honestly in all the Citation: circumstances of the case. [2006] NSWDC 17, District The Northern Spirit Football Club 2000 Pty Ltd (Northern Spirit) failed to remit Court of New South Wales per monthly PAYG deductions to the Commissioner of Taxation during the period Johnstone DCJ 1 June 2002 to 31 March 2003. The defendant, a director of Northern Spirit from 19 January 2001 to 14 March 2003, failed to take remedial steps under section Date of Judgment: 222AOB(1) Income Tax Assessment Act 1936 (Cth). The Commissioner of Taxation 6 September 2006 alleged that the defendant became personally liable for a penalty equal to the amount of the withheld PAYG deductions under s222AOC(1) of the Income Tax Assessment Act. Issues: • Whether the director is The defendant argued that he was not liable to pay the penalties and under liable for company tax debts s222AOJC2 of the Income Tax Assessment Act, or alternatively under s1318 CA. under s222AOB(1) of the Income Tax Assessment Act Judge Johnstone held that the defence under s222AOJ(2) did not apply to exclude 1936 (Cth) the defendant from liability: the defendant had taken part in the management of • Whether the director is Northern Spirit during the relevant period and, even if he had not, there was no excused from liability ‘good reason’ for his failing to do so. by the defence under The defendant was held to have taken part in the management of Northern Spirit s222AOJ(2) of the Income because the scope of ‘management’ extends beyond fi nancial operations to the Tax Assessment Act 1936 (Cth) company’s other signifi cant affairs, in this case football organisation and • Whether the director is administration. excused from liability by the There was no ‘good reason’ for a failure to take part in the management of Northern defence under s1318 CA Spirit because the defendant had knowledge of Northern Spirit’s fi nancial position and its failure to remit the deductions, and, relying on his ignorance, failed to ensure compliance in breach of his duty as a director to exercise reasonable care and diligence.

However, Judge Johnstone held that the defence under s1318 CA could apply to breaches of s222AOB(1) ITAA and that the defendant’s failure to comply with the tax obligations is a breach of duty or default for the purposes of s1318 CA. He found further that:

• s1318 CA is a broad remedial provision to be liberally interpreted to apply to ‘an innocent, honest director, appointed as a director in circumstances where ignorance of the circumstances giving rise to the liability ought fairly be excused’;

63 • the Income Tax Assessment Act is not an exhaustive code; • s1318 and the relevant provisions of the Income Tax Assessment Act are not inconsistent; • s1318 may excuse a breach of s222AOB(1) ITAA because it was passed later in time and there is no express provision prohibiting its application to the Income Tax Assessment Act; and • s1318 acts like a ‘safety net’ behind the limited defence of s222AOB(1).

His Honour held that the defence under s1318 CA applied to exclude the defendant from all liability. Although the defendant’s liability arose from a breach of his duty to exercise reasonable care and diligence, under the wide discretion granted by s1318 CA, his Honour considered a number of mitigating circumstances were relevant including:

• the relative innocence of the defendant; • the fact that a penalty notice demand arrived after his resignation as director resulting in his inability to ensure compliance with s222AOB(1) ITAA; • the fact that it was unlikely that a penalty would have been paid to the Commissioner even if there had been compliance with s222AOB(1); • the defendant’s lack of involvement in Northern Spirit’s ﬁ nancial affairs from January 2003; • the defendant’s positive steps to address the outstanding payments and his genuine belief, though mistakenly and in breach of his director’s duties, that the problem was solved as a result; • the defendant’s outstanding community service generally, cumulating in an Order of Australia; and • the defendant’s position as the ‘last man standing’ after Northern Spirit’s demise.

If a director is personally liable for their company’s tax debts, but acted honestly in all the circumstances of the case, although the limited defence under the tax legislation may not apply, the director may be excused from liability under the broader defence in the CA.

64 DIRECTORS AND CORPORATE GOVERNANCE

Court says no to director’s appointment of another director under power of attorney

Case Name: In this case, the court afﬁ rmed three previous decisions of the Cheerine Group (International) court that a director cannot appoint another director under a Pty Ltd v Yeung power of attorney and held that a resolution to appoint administrators by a purported board that included the director so Citation: appointed was invalid. The court held that neither section 1322(2) nor s198D CA remedied the faulty appointment or resolution. It [2006] NSWSC 1047, Supreme Court of New South Wales per also made costs orders against the purported administrators of Young CJ the company in circumstances where they had pursued a hopeless case. Date of Judgment: Cheerine Group (International) Pty Ltd (the company) had two directors, Mr Wong 26 September 2006 and Mr Yeung. Mr Wong had given two powers of attorney to Mr Yeung, both on very broad terms. Mr Yeung became concerned that Mr Wong was failing to pay the company’s suppliers and called a meeting of directors of the company to deal with Issues: the problem. Mr Wong did not attend the board meeting at the appointed time, so • Director appointing an Mr Yeung was the only director present. After allegedly trying to contact Mr Wong alternate director under a without success, Mr Wong purported to appoint Mr Solferini as an alternate director power of attorney for Mr Wong under one of the powers of attorney (the Director Appointment). • Administrators paying costs Mr Yeung and Mr Solferini, purporting to act as the board of the company, then of failed proceedings resolved to appoint joint administrators to the company on the basis of their alleged • Sections 1322(2) and 198D belief that the company was insolvent (the Administration Resolution). CA The administrators applied for an order that the Director Appointment and Administration Resolution were valid.

Justice Young held that the Director Appointment and Administration Resolution were ‘obviously invalid’. He noted that it had ‘been held on three previous occasions by judges of this court that a power of attorney given to a person who is also a director of a corporation confers no authority whatsoever for that person virtually to be or appoint an alternate director or exercise the functions of a director of that corporation, even though the donor is a director of the corporation and even though the power of attorney is in very wide terms’.

His Honour rejected arguments that the appointment of the alternative director and the resolution to appoint administrators were valid because of section 1322(2) or s198D CA.

Section 1322(2) CA provides that proceedings under the Act are not invalidated because of a procedural irregularity unless the court is of the opinion that he irregularity caused or may cause substantial injustice that cannot be remedied by an order of the court. Justice Young said that when, as here, ‘a plain decision is made to do something contrary to the Act, then one cannot say it is a procedural irregularity’. Further, the appointment of administrators involved the company in

65 ‘loss of representation (possibly intended to read ‘reputation’) and ‘liability for a large amount of professional fees’, which clearly involved ‘substantial injustice’ to the company.

Section 198D CA provides that directors of a company may delegate any of their powers to, inter alia, a director. Justice Young held that this section only applies to a delegation by the board of directors and not by any individual director. His Honour noted that this view was supported by an explanatory memorandum issued by the Treasury in connection with CLERP 9. Accordingly, s198D did not assist the administrators.

Justice Young ordered Mr Yeung to pay the costs of the company and Mr Yeung, as ‘the problem was caused wholly’ by Mr Yeung. However, he ordered that in default of such payment by Mr Yeung, the administrators were to pay those costs. A factor in his Honour’s decision to do so was that the administrators were professional administrators who had solicitors appearing for them. Their attention had been explicitly directed to a decision of the court that said that the appointment of the alternate director was invalid. Despite this, they chose to commence proceedings.

The Supreme Court of New South Wales has held on numerous occasions that a director cannot be appointed by another director under a power of attorney, even if the donor of the power of attorney is also a director of the corporation and the power of attorney is in broad terms. Administrators who pursue hopeless actions risk having personal costs orders made against them.

66 LENDING AND SECURITIES

Validity of subordination arrangements in a liquidation

Case Name: This decision has important ramiﬁ cations for lenders seeking to SSSL Realisations (2002) Ltd v prove in liquidations and for liquidators seeking to avoid AIG Europe (UK) Ltd indemnity agreements. It demonstrates the validity of subordination clauses in the insolvency context. Citation: Save Group Plc (SGP) purchased petrol and onsold it to its subsidiaries, including [2006] EWCA Civ 7, Court of ‘SSSL Realisations’. AIG Europe (UK) (AIG) agreed to provide a bond in respect of Appeal of England and Wales certain tax liabilities of SGP and other related companies (the Group) and in return per Chadwick LJ, Parker LJ and SGP and some of its subsidiaries provided AIG with a joint and several indemnity. Etherton J The indemnity deed included the following subordination provisions in favour of AIG. Date of Judgment: • Until all amounts payable by the group to AIG have been fully paid, no group 18 January 2006 company will prove as a creditor of another group company in competition with AIG, nor receive any payment from another group company (no proof clause). Issues: • Each group company will hold in trust for, and pay to, AIG any payment • Section 178 of the distribution received by it contrary to the non-competition clause (turnover trust Insolvency Act 1986 (UK) clause). • Validity of subordination provisions during liquidation In 2001, the Group went into administration and then into liquidation in 2002. of a corporate group There was a substantial inter-company debt due from SSSL Realisations to SGP which was SGP’s main asset. AIG was owed almost £10 million under the deed, and it was a creditor for that amount in respect of both SSSL Realisations and SGP, as well as other subsidiaries. AIG contended that under the deed the debt owed by SSSL Realisations to SGP was subordinated to the debt owed to AIG. The effect of the subordination, if valid, was that nothing could be paid on account of the inter- company debt due from SSSL Realisations to SGP until AIG had been paid in full. Conversely, the liquidators of SSSL Realisations sought to disclaim the contract on the basis that it was unproﬁ table.

The court held that the subordination provisions were valid, binding and enforceable. The deed was not an ‘unprofi table’ contract for the purposes of disclaimer under section 178(3) of the Insolvency Act 1986 (UK). A contract was not unprofi table merely because it was fi nancially disadvantageous or because the company could have made, or could make, a better bargain. Accordingly, the subordination provisions in favour of AIG could not be disclaimed. The court also noted the application of the equitable rule in Cherry v Boultbee 1839 4My&CR 442 that a person cannot share in a fund in relation to which he is also a debtor without fi rst contributing to the whole by paying his debt. This meant that SGP would receive nothing from the liquidation of SSSL Realisations.

67 This commercial and pragmatic (unanimous) decision demonstrates how debt subordination operates in insolvency law by conﬁ rming that a subordination agreement is likely to be valid and unlikely to be able to be disclaimed by a liquidator of the subordinated creditor under the UK Insolvency Act.

68 LENDING AND SECURITIES

Application for injunction by the unit holder of a trust

Case Name: The plaintiff was the unit holder in a trust, which was the Highwater Nominees Pty Ltd v sub-lessee of a restaurant. The director of the trustee company Mead & Ors was the controlling mind and will of the lessee of the restaurant. The lessee sought to terminate the sub-lease for failure to pay Citation: rent. The plaintiff sought an injunction to prevent the termination of the lease and the issuance of a statutory demand on the basis [2006] WASC 17, Supreme Court of Western Australia per that the director of the trustee company owed ﬁ duciary duties Hasluck J to it. Highwater Nominees Pty Ltd commenced proceedings to obtain injunctive relief to Date of Judgment: prevent Seascape Holdings Pty Ltd (Seascape) from taking possession of a seafood 20 January 2006 restaurant. Seascape was the lessee of the premises. The restaurant was run by a sublessee, Bigwest Corporation Pty Ltd (Bigwest), which was the trustee of Bigwest Corporation Unit Trust (the Trust). Highwater was a unit holder in the Trust. Mr Issues: Mead, the ﬁ rst defendant, was the director of Bigwest and the controlling mind and • Does the unit holder of a will of Seascape. trust have standing to seek an injunction to protect Seascape argued that Highwater, as a unit holder in the Trust, did not have property leased by the trust? standing to bring the proceedings.

Justice Hasluck noted that the principles applicable to the grant of an interlocutory injunction are well known and that the applicant must satisfy the court that there is a serious issue to be tried. If there is a serious issue to be tried, the court must consider whether the balance of convenience is for or against the grant of injunction.

In respect of Seascape’s argument that Highwater did not have standing, Justice Hasluck found that the decided case authorities support the view that, in special circumstances, the director of a trustee company may owe fi duciary duties to the benefi ciaries or unit holders in the subject trust (such as where the director of a trust company is in a position of knowledge and infl uence).

Although he did not decide the issue in this case, Justice Hasluck held that there was suffi cient evidence before him to allow for a claim for breach of fi duciary duty to be put forward. As a result, he was satisfi ed that there was a serious issue to be tried. He also found that the balance of convenience favoured Highwater, because if the lease of the restaurant was terminated and Bigwest was evicted, it would be almost impossible to remedy the situation if Highwater ultimately succeeded in its application for relief. Justice Hasluck granted an injunction to restrain the termination of the lease and the issue of the statutory demand.

69 A director of a trustee company may owe fi duciary duties to the unit holders or benefi ciaries of a trust in circumstances where the director of a trustee company is in a position of knowledge and infl uence. In such cases, the unit holders or benefi ciaries may bring legal proceedings to enforce those duties.

70 LENDING AND SECURITIES

Enforcement of security given by a wife for the beneﬁ t of her husband

Case Name: Unconscionability by the lender? The lender in this case sought a Roseville Estate Pty Ltd v declaration that it was entitled in equity to an estate or interest Bouris as mortgagee over the surety’s property. The surety contended that the mortgage was not binding on her on the basis of the Citation: equity dealt with by the High Court in Garcia v NAB. [2006] VSC 49, Supreme The defendant, Mrs Bouris, signed a mortgage over her property in favour of Court of Victoria, Common Law Roseville Estate Pty Ltd (Roseville) as security for advances made to her husband Division per Hansen J pursuant to a loan agreement. The loan was made by the husband’s brother, Richard Bouris, who was a director of Roseville. Date of Judgment: The advances were made for the purposes of making restitution in a criminal 23 February 2006 proceeding in which the husband was charged with theft of money from his former employer. Mrs Bouris and her husband wished to make restitution, believing that Issues: this might result in him receiving a lesser term of imprisonment or a suspended • Unconscionable conduct by sentence. lender • Circumstances in which a The proceedings were not to enforce the mortgage, but for a declaration to the lender may not be entitled effect that, pursuant to the mortgage, Roseville held an equitable interest in the to enforce a mortgage given subject property. Justice Hansen, however, considered the real issue to be whether by a wife in favour of her Mrs Bouris was bound by the mortgage. husband Mrs Bouris claimed that it would be unconscionable to enforce the mortgage relying on the High Court’s decision in Garcia v National Australia Bank (1998) 194 CLR 395. In that case, the High Court held that it was unconscionable to enforce a guarantee provided by a wife for the beneﬁ t of her husband in the following circumstances:

• the wife did not understand the purport and effect of the transaction; • the transaction was voluntary in the sense that the wife obtained no gain from the contract the performance of which she had guaranteed; • the lender is to be taken to have understood that, as a wife, the surety may repose trust and conﬁ dence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet • the lender did not itself take steps to explain the transaction to the wife, or ﬁ nd out that a stranger had explained it to her.

71 Justice Hansen was satisﬁ ed that each of these elements was satisﬁ ed in this case. When Mrs Bouris signed the mortgage documents, she had no understanding of the nature and terms of the documents. Further, her husband had assured her that the money lent would only have to be repaid if they had a windfall gain, the documents were a mere formality, and Roseville would never make a claim against her property.

Roseville knew (through Richard) that Mrs Bouris had trust and conﬁ dence in her husband in matters of business and understood that the husband may not fully and accurately explain the purport and effect of the transaction. Yet, crucially, Roseville did not take reasonable steps to explain the transaction to Mrs Bouris. Nor did Roseville, objectively considered, ﬁ nd out that a stranger had explained the documents to her.

Accordingly, the court made declarations that the mortgage was not binding on Mrs Bouris and that Roseville was not entitled to an estate or interest in the mortgaged property.

This case confi rms well settled law about the kind of unconscionable conduct that arose in Garcia v NAB where a wife gives security in favour of her husband for his benefi t only. In these cases, the lender must take reasonable steps to explain the transaction to the wife or actively fi nd out that someone else had explained it. Failure to do this may result in the lender being unable to enforce the security.

72 LENDING AND SECURITIES

Loan terms unjust under the NSW Contracts Review Act

Case Name: The plaintiffs in this case sought relief under section 7 of the Perpetual Trustee Company Contracts Review Act 1980 (NSW) in relation to a loan agreement Limited v Albert and Rose under which they granted a mortgage over their principle Khoshaba residence in order to fund their participation in an investment scheme. The court considered whether the terms of the loan Citation: agreement or the circumstances in which it was made rendered [2006] NSWCA 41, New South the agreement unjust within the meaning of the Contracts Wales Court of Appeal per Review Act. Spigelman CJ, Handley and The plaintiffs, Mr and Mrs Khoshaba, were pensioners who had limited education Basten JJA and English was their second language. They invested in a trolley-collecting business operated by Karl Suleman Enterprises Pty Limited (KSE) and received Date of Judgment: assistance with ﬁ nancing their investment from Mr Abdelkodous, who was 20 March 2006 associated with KSE. On behalf of Mr Khoshaba, Mr Abdelkodous submitted a loan application to certain lenders (Perpetual). The loan application did not specify the purpose of the loan and falsely stated that Mr Khoshaba was employed and Issues: received an annual income of $43,000. The trial judge found that Mr Khoshaba • Contracts Review Act 1980 was not aware of the misstatements in the loan application. Subsequently, Mrs (NSW) Khoshaba’s name was added to the loan application but it did not disclose her • Whether a loan contract is occupation or income. an ‘unjust contract’ The loan application was required to be assessed according to certain lending guidelines which required Perpetual to make enquiries to establish the purpose of the loan and to verify the Khoshaba’s capacity to repay the loan. Perpetual failed to make those enquiries, although it did run a credit check on Mrs Khoshaba, which revealed that she was a pensioner.

Perpetual agreed to lend the Khoshabas $120,000 in return for a mortgage over their residence (the loan agreement). With the funds, the Khoshabas then entered into the investment agreement with KSE.

KSE collapsed and the Khoshabas defaulted under the loan agreement. The Khoshabas sought relief under section 7 of the Contracts Review Act 1980 (NSW), which broadly allows the court to vary terms of a contract, in circumstances in which the court ﬁ nds the contract to be unjust either on its terms or in the circumstances in which it was made.

At ﬁ rst instance, Judge Rolfe held the loan agreement was unjust in the circumstances in which it was made on the basis that:

• Perpetual’s conduct in failing to adhere to the lending guidelines amounted to a departure from prudent lending practice; and

73 • Perpetual ought to have advised the Khoshabas to seek independent legal advice in relation to the entire arrangement.

His Honour varied the terms of the loan agreement, signiﬁ cantly reducing the debt owed by the Khoshabas to Perpetual. Perpetual appealed.

While the appeal was dismissed, the Court of Appeal departed from the reasons given by Judge Rolfe in a number of important respects. First, as to the nature of applications for relief under s7 of the Contracts Review Act, the majority held that the court must engage in a three-stage process. The court is fi rst required to make preliminary fi ndings of fact and then to make an ‘evaluative fi nding’ as to whether or not the contract is ‘unjust’. Finally, it must decide whether it should exercise its discretion to grant relief.

The court unanimously held that Judge Rolfe was in error in ﬁ nding that the loan agreement was unjust. The court noted that the Mr and Mrs Khoshaba’s case had not been brought on the basis that the loan was made contrary to prudent lending practice and no expert evidence had been adduced on that issue. The court further held that independent advice could only be relevant to the investment agreement, of which Perpetual had no knowledge. It is not appropriate, in such a ‘tripartite’ transaction, to impose a duty on a party in relation to that part of the transaction with which it is not involved.

However, the court held unanimously that by failing to make proper enquiries as to the purpose of the loan in circumstances in which, on the information actually available to it, Perpetual knew that the Koshabas were of limited means and offering security over their residence, Perpetual could be taken to have advanced funds solely on the value of that security. The court held that signiﬁ cant weight in the determination of unjustness ought to be given to the fact that Perpetual had been indifferent both to the purpose of the loan and the Koshaba’s capacity to repay it, and were thus speculating. The court therefore held that the loan agreement was unjust.

This case establishes that a lender who takes a mortgage over residential premises when advancing funds to persons of apparently limited means must make meaningful enquiries as to the borrowers’ capacity to repay the loan. Failure to do so, or to inquire as to the purpose of the loan, will be viewed unfavourably by the courts. Loan agreements entered in to speculatively may well be the subject of relief under the Contracts Review Act and similar legislation.

74 LENDING AND SECURITIES

Contribution between co-guarantors

Case Name: The Court of Appeal was asked to review the New South Wales Harpley Nominees Pty Ltd & Supreme Court’s decision to make a declaration that one Anor v Jeans & Anor co-guarantor was liable to pay contribution to the second co-guarantor for his liability for the guaranteed debt, in Citation: circumstances where the second co-guarantor was not ready or able to pay the principal debt due to insolvency. [2006] NSWCA 176, Court of Appeal of New South Wales per The plaintiff, Harpley Nominees Pty Ltd, and Mr Bruce entered into a guarantee in Handley, Beazley and Basten favour of the Commonwealth Bank of Australia (CBA) to secure a loan to Deangrove JJA Pty Ltd (the company). The plaintiff had previously sought to set aside the security given to CBA and CBA cross-claimed, seeking the amount due under the loan. In Date of Judgment: the course of those proceedings, CBA and Mr Bruce settled their claims. CBA 30 June 2006 obtained judgment against the company and the plaintiff for the outstanding loan amount.

Issues: The plaintiff brought these proceedings seeking conﬁ rmation that, as co-guarantor • Right of contribution to the CBA, Mr Bruce was obliged to reimburse the plaintiff for any amount paid by between co-guarantors the plaintiff in excess of 50 per cent of the liability of the company to CBA. • Ability and willingness of a Mr Bruce had become bankrupt and the plaintiff was effectively insolvent. co-guarantor to pay the debt The NSW Supreme Court made a declaration (amongst others) to the effect sought. The issue before the Court of Appeal was whether the plaintiff could claim contribution from Mr Bruce when the plaintiff himself had not, and could not have, paid any part of the principal debt pursuant to the guarantee.

The court held that the right to contribution against a co-guarantor arises upon the accrual of a liability to the principal creditor which the guarantor is legally obliged to immediately discharge (usually a judgment). Both guarantors are then obliged to contribute to one another, although the actual amount of the liability will not be determined until one of the guarantors has paid more than their equitable proportion.

The court stated that a distinction should be maintained between the accrual of the cause of action and the appropriate relief to be granted. In this case, the court considered that the relief sought should be refused on discretionary grounds since the plaintiff was currently insolvent and, therefore, not able to pay the amount due. It was not enough that a cause of action had accrued to the plaintiff creating a right to contribution: the plaintiff must also be ready and able to pay his just proportion of the debt.

75 While an insolvent guarantor may have a right of contribution against a co-guarantor for an outstanding debt pursuant to a guarantee, the court will be reluctant to grant discretionary relief because the insolvent guarantor is not ready, willing and able to pay the debt.

76 LENDING AND SECURITIES

The importance of using the right form and knowing when to register a charge

Case Name: The New South Wales Supreme Court confi rmed an administrator Re Regis Towers Real Estate of a company was justifi ed in treating two purported mortgages Pty Ltd as void where one in the Torrens title form failed to describe the property mortgaged and the other charge was unregistered in Citation: contravention of section 262(1) CA. [2006] NSWSC 852, Supreme The case concerns an application by the administrator of a company under section Court of New South Wales, 447D CA for directions in relation to two mortgages. Equity Division per Young CJ The court held that the fi rst mortgage was ineffective as the land mortgaged was not specifi ed in the Torrens title form. Moreover, it appeared that the company did Date of Judgment: not have any interest in any land. 23 August 2006 In examining the validity of the second mortgage, the court considered whether the Issues: mortgage was a fi xed or fl oating charge, a fact which the court acknowledged was often extremely diffi cult to distinguish. His Honour concluded that the second • Validity of mortgage where mortgage was a fl oating charge as the company was able to carry on its business property mortgaged not specifi ed in Torrens title after the mortgage was entered into without interference, nor was there any form requirement that monies collected should be banked into any specifi c account let • Whether mortgage a fi xed or alone a frozen account. fl oating charge His Honour also acknowledged that a single charge could legitimately cover two • Requirement to register types of property. If this was the case, the second mortgage represented a fi xed charge under s262 CA charge in respect of certain rights and a fl oating charge in respect of other rights. As s262(7) CA requires the registration of those charges mentioned in s261(1), including a fl oating charge, where the instrument also charges other property not otherwise required to be registered, the mortgage was void as against the administrator.

The case highlights the diffi culties associated with determining whether a charge is fi xed or fl oating. A single charge may cover more than one type of property, being fi xed in respect to one and fl oating as to the other. In addition the case highlights the importance of ascertaining whether charges must be registered pursuant to s262 CA, lest they be rendered void.

77 LIQUIDATION

When not saying ‘no’ does not mean saying ‘yes’ – when can a liquidator pool a corporate group’s assets?

Case Name: This decision considers the circumstances in which the court will Re Black Stump Enterprises make orders pooling the assets of corporate groups and, in Pty Ltd particular, the nature of creditor approval necessary for a court to consider making such orders. Citation: The plaintiffs were the liquidators of the Black Stump group of companies. Having [2005] NSWCA 480, Court of concluded that the group’s books and records did not enable them to accurately Appeal of New South Wales per identify the assets and liabilities of each company, the liquidators notiﬁ ed the Santow, Bryson JJA and Young creditors of each company that they intended to seek orders of the court to pool the CJ assets of the companies for the purposes of the liquidations.

At ﬁ rst instance, Justice Barrett recognised ﬁ ve procedural possibilities for giving Date of Judgment: effect to a pooling of assets of the kind sought by the liquidators: 14 December 2005 • a scheme of arrangement between each company and its creditors under Pt 5.1; Issues: • a compromise under s477(1)(c) which is made applicable to voluntary winding • Sections 447A, 477(1)(c), up by s506(1)(b); 479(3), 506(1)(b), 511(1) • an arrangement under s510 between a company in the course of winding up & (2) of the CA and its creditors; • Appeal from decision of the • resort to the extensive jurisdiction created by s447A, where applicable; and lower court dismissing an • a deed of company arrangement under Div 10 of Pt 5.3A where Pt 5.3A application by liquidators to administration is in progress. pool assets of companies in liquidation The plaintiffs made their application pursuant to ss 477(1)(c), 506(1)(b) and • Whether mere acquiescence 511(1) and (2). Justice Barrett found that a liquidator could resort to the by creditors constituted s477(1)(c) power, via s506(1)(b), without any approval or other order of the court, consent to pooling assets although s477(1)(c) cannot bind any creditor who has not actively assented to the proposed compromise. His Honour further found that s511 could only be of relevance in an application to pool assets if the creditors had given their unanimous assent to the pooling.

The liquidators brought the possibility of pooling or consolidation of the nine windings up to the creditors’ attention numerous times. At no time, however, were the creditors asked to actively consent to such an action or informed that the unanimous consent of creditors was necessary for the pooling to occur. The most that the creditors were asked to do was to inform the liquidators in writing should they oppose the intention to pool the nine companies’ assets and liabilities. Justice Barrett found that this was an insufﬁ cient basis on which to imply unanimous creditor consent and concluded that without such consent, in the terms of s511(1)(a), there was no question arising in the winding up of any of the nine companies, a positive determination of the court, which would cause the creditors’ legal rights to be varied. He therefore dismissed the liquidators’ application.

78 On appeal, Justice Barrett’s decision was upheld. Chief Justice Young in Eq explicitly confi rmed that the court has no power to order the pooling of assets in the liquidation of a group of companies, no matter how commercially expedient such an action may appear to be. While there are a number of ways to achieve pooling, in this case his Honour found that ‘what has happened is not one where one can say that there has been consents or assents by any of the creditors to waive or vary their rights. Nor has there been the facts which would show that there has been a compromise or arrangement between the creditors and the liquidators.’ The liquidators’ proposition that, by telling creditors on three occasions in broad outline that they intended to make an application for pooling and by no complaint having been received to such notices, they had obtained suffi cient waiver or assent from the creditors was rejected. Without unanimous creditor assent, it was his Honour’s opinion that the liquidators’ application in this case was doomed to failure. Appeal Justice Santow, in agreement, added that, to be effective, any creditor assent to pooling must be fully informed. In broad terms, what is called for by way of information is: ‘a clear and simple explanation of the qualitative difference between creditors claiming against a known debtor company as against claiming against a group of companies, assuming a pro rata distribution to creditors in the latter case with the latter amount only having to be quantifi ed.’

It is not sufﬁ cient for a liquidator to apply for a pooling of assets based solely on a lack of creditor objection. Informed unanimous creditor consent is required if no formal compromise or arrangement has been reached with creditors.

79 LIQUIDATION

Conﬂ ict of duties as basis for removal of a liquidator of several companies

Case Name: This case involved an application by the plaintiff under section Handberg in the matter of 503 CA for the removal of the liquidator of the second and third Greight Pty Ltd (in liquidation) defendants. L was the liquidator of three companies: the second and third defendants and a Citation: third company (Company C). Those three companies were unrelated. However, prior [2006] FCA 17, Federal Court to their liquidation, they had had dealings with, or were under the control of, the of Australia per Finkelstein J same person (X). Some of the dealings between the three companies resulted in some of those companies making claims in the liquidations of others. The plaintiff Date of Judgment: had claimed to be a creditor of the second and third defendants. At the time of the hearing of the application, it was not known whether that claim had any merit. In 25 January 2006 some instances, only X knew the relevant facts. Justice Finkelstein considered that it was probable that X would tell L only what best suited X’s interests. On that Issues: basis, Justice Finkelstein concluded that L was in: • Section 503 CA • Authority to apply for the an impossible position. As liquidator of one company he may wish to believe [X]. As removal of a liquidator liquidator of another he may not. This is a problem when one has several masters. [L] • Single liquidator of several owes duties to each and there is now a confl ict between duty and duty. companies and actual To address his position of confl ict, L had made an independent application for the confl ict appointment of a special liquidator.

Section 503 CA provides that ‘the Court may, on cause shown, remove a liquidator and appoint another liquidator’.

Section 503 does not specify who may make such an application, that being a question for the court’s discretion. Justice Finkelstein referred to the general principle that ‘any person with a real interest in the winding up of a company’ may make an application under s503. Such a person is:

one whose rights or interests will directly be affected by action taken by a liquidator in the course of performing the liquidator’s duties. If the company is solvent the persons with a real interest are the contributories. If it is insolvent they are the creditors.

Here, the plaintiff may have been a creditor of the second and third defendants, although there was no conclusive evidence that that was the case. Nevertheless, Justice Finkelstein considered that the plaintiff’s interest as a potential creditor of the second and third defendants was sufﬁ cient to sustain its application under s503 for the removal of L as liquidator from those companies.

Justice Finkelstein acknowledged that, in any event, as L had made his own application for the appointment of a special liquidator to deal with the conﬂ ict, the issue of standing was not determinative of the question of whether to remove L.

80 Justice Finkelstein observed that where there are likely to be disputes between companies in liquidation that are under the control of one liquidator then the general rule is that different persons should be appointed as liquidator to each company. Justice Finkelstein recognised that it may not be inappropriate to appoint one person as liquidator of a group of companies or companies that are closely connected; however, once the likelihood of conﬂ ict becomes clear, ‘it is necessary to take action’.

However, Justice Finkelstein viewed the arrangement sought by L for the appointment of a special liquidator as problematic on at least two grounds:

• as the liquidations progress, other problems would come to light with which L would be unable to deal, leading to further court applications and expense; and • the appointment of special liquidators would necessarily entail the revisiting of grounds already covered by L, thereby adding to the costs of the liquidations.

Justice Finkelstein considered that the best solution would be one in which L resigned from two of the companies and retained his position with the third. The court would then appoint a new liquidator to each of the companies from which he had resigned. As the plaintiff, not being a potential creditor of Company C, had no standing to apply for L’s removal from Company C, Justice Finkelstein proposed that L resign as liquidator from Company C; and that the third defendant, which claimed to be a creditor of Company C, could apply for the appointment of a new liquidator to Company C. L wished to retain the liquidation of the third defendant, the most complex of the liquidations. Justice Finkelstein saw no reason to remove L as liquidator of the third defendant. The third defendant was also a party to complex litigation in the Family Court by X’s wife. As L was on top of that litigation, Justice Finkelstein considered that it would be wasteful if another liquidator were required to incur expense in reaching the same state of knowledge.

Justice Finkelstein did not consider in the circumstances that a meeting of creditors was necessary to approve the removal of L. The largest creditor, the Australian Taxation Ofﬁ ce, was to be advised of the court’s orders and reasons for judgment so as to enable it to decide whether to object to L remaining as liquidator of the third defendant.

Justice Finkelstein ordered that upon the resignation of L as liquidator of Company C and the second defendant, a new liquidator was to be appointed to each of the second defendant and Company C. Costs in the application were to be paid from the funds of the second and third defendant.

The circumstances of this case were such that the duties of the liquidator of three companies were found to be in conﬂ ict with each other, requiring his removal as liquidator from two of the companies. The plaintiff’s interest as a potential creditor of two of the companies was considered to be sufﬁ cient to sustain its application under s503 CA for the removal of the liquidator from two of the companies.

81 LIQUIDATION

Review of liquidator’s conduct in seizing property

Case Name: The applicants claimed ownership of vehicles seized by the Richmond Sales Pty Ltd liquidator of Richmond Sales Pty Ltd, pursuant to a section 530C (In liquidation) v Robert CA warrant. Subsequently, the applicants and the liquidator McDermott entered into a deed of settlement with respect to ownership of the vehicles. Despite this, the applicants continued to pursue an Citation: application under s536 CA to review the liquidator’s conduct and [2006] FCA 52, Federal Court have the warrant set aside. of Australia per Kenny J On 3 December 2003, the liquidator of Richmond Sales applied under section 530C CA for a warrant authorising him to seize the property and books of Date of Judgment: Richmond Sales, including seven luxury vehicles. The warrant was issued by 8 February 2006 Justice Merkel on the following day. There followed protracted legal proceedings involving various parties, including the present applicants about the ownership of the vehicles. On 29 August 2005, the defendants ﬁ led an application pursuant to Issues: s536 CA. However, following negotiations between the parties, the court was • Review of liquidator’s informed on 10 October 2005 that the parties had agreed to settle the proceedings conduct in seizing property and consent orders were made by Justice Kenny disposing of the vehicles in accordance with the parties’ settlement. Despite this, the applicants continued to pursue the merits of their s536 CA application.

Justice Kenny dismissed the application with costs for the following reasons.

(a) There was insuffi cient evidence before the court for a determination to be made as to whether the warrant should be set aside and accordingly a full trial was required before the orders sought by the applicants could be made. (b) In determining whether such a full trial was justifi ed, it was necessary to consider whether an inquiry into the conduct of the liquidator was warranted, ie whether there was a prima facie case that the liquidator had not performed his duties faithfully and it was in the public interest that such an inquiry be pursued. (c) In deciding if in all of the circumstances of the case an inquiry into the conduct of the liquidator was warranted, relevant factors included: (i) the nature of the alleged misconduct of the liquidator; (ii) the strength of the evidence of the alleged misconduct of the liquidator; (iii) whether the complainant had a stake in the results of any inquiry; and (iv) whether the complainant delayed fi ling the application and, if so, the magnitude of any such delay. Justice Kenny held that, for the following reasons, a s536 CA inquiry into the liquidator’s conduct in obtaining the warrant was neither warranted nor in the public interest.

82 • With respect to factors (c)(i) and (c)(ii) above, the applicants had failed to show more than an inadvertent error or misjudgment on the liquidator’s part. • Save for costs, the applicants no longer had a proprietary or pecuniary interest in the outcome of the application to set aside the warrant and this factor weighed against conducting an inquiry, particularly in circumstances where this had resulted from the applicants’ own actions (ie settling their claims to the vehicles). • As a result of the parties’ settlement, the court was no longer in a position to remedy any prejudice allegedly suffered by the applicants as a result of the warrant. • Even if the applicants’ respective accounts were accepted, Justice Kenny considered that the applicants had not provided a reasonable excuse for their extraordinary collective delay in applying to set aside the warrant – some 20 months after the warrant was ﬁ rst served.

If an application is intended to be made pursuant to s536 CA to set aside a warrant, then it should be made as soon as reasonably possible after the service of the warrant. The court will consider whether there was a prima facie case that the liquidator had not performed his duties faithfully and whether it was in the public interest that such an inquiry be pursued.

83 LIQUIDATION

Status of pre-winding-up solicitors’ fees in a creditors’ voluntary winding-up

Case Name: This decision considers whether in a winding-up in Ireland costs Compustore Limited (in incurred by a law fi rm in advising a company on entering into a voluntary liquidation) v creditors’ voluntary liquidation can be paid in priority to all Companies Act creditors, pursuant to a provision that gives priority to the costs incurred in the winding-up of the company. The court considered Citation: the position in Ireland and the United Kingdom. [2006] IEHC 52, High Court of Compustore Limited (Compustore) sought advice from the applicants, a law fi rm, Ireland per Laffoy J on the procedures to be followed in initiating a creditors’ voluntary liquidation. The applicants sought payment of their fees in advance. While the directors of Date of Judgment: Compustore confi rmed that they had adequate cash reserves at the bank to make 22 February 2006 such a payment, the bank refused to allow a withdrawal of any funds. Although nothing was paid to the applicants up front, the applicants nevertheless provided the advice. Issues: • Are solicitors fees for They advised on the imminent liquidation and prepared all documents relating to pre-resolution advice on the creditors’ meeting. The speed with which events unfolded resulted in a large winding-up ‘expenses amount of legal advice being provided in a very short period. The fi rm also made properly incurred in the preparations with, and paid for, a venue for the creditors’ meeting. winding-up’? • Section 281 of the A liquidator was appointed to Compustore and the applicants sought payment of Companies Act 1963 their fees in priority to other creditors, pursuant to section 281 of the Companies (Ireland) Act 1963 (Ireland) which states:

All costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims.

The liquidator opposed the application. As there were no Irish authorities on point, the applicants urged the court to follow the UK case of A.V. Sorge and Company Limited [1986] BCLC/490 which considered the meaning of a similar provision of the Companies Act 1948 (England and Wales). In that case, the UK court held that pre-resolution costs incurred, whether through a solicitor or otherwise, so as to enable the company to pass the winding-up resolution and take other statutorily required steps are costs ‘incurred in the winding up’.

The applicants also argued on policy grounds that if no priority were to attach to the costs of obtaining legal advice prior to the passing of a resolution to wind up a company, companies in fi nancial diffi culties could fi nd it diffi cult to obtain appropriate advice, or the directors might not initiate winding-up proceedings at all.

Justice Laffoy of the High Court of Ireland found that the case turned on the proper construction of the words ‘costs, charges and expenses properly incurred in the

84 winding-up’. She found that those words referred to costs, charges and expenses properly incurred while the winding-up was in existence, in other words, after the resolution to wind up the company had been passed. Her Honour held that the words in the section were clear and unambiguous and the intention of the legislature was plain. Her Honour was satisﬁ ed that the legislature intended that there would be a rigid cut-off at the time of the passing of the resolution to wind up voluntarily. Therefore, the fees and expenses due to the applicants for pre- resolution advice and services did not fall within the meaning of s281.

This is an interesting decision for lawyers and insolvency practitioners who provide advice to ﬁ nancially distressed Irish companies prior to a winding-up. It conﬁ rms that, as in Australia, such practitioners should insist on payment of their fees in advance or they will rank equally with all other unsecured creditors for payment of those fees. The position is different in the UK where a court has been prepared to characterise pre- winding-up fees as costs of the winding-up and therefore entitled to priority.

85 LIQUIDATION

Director to indemnify company for costs of opposing winding-up application

Case Name: This case considered an application to wind up a company on Cassegrain v Cassegrain grounds of oppression under section 233(1)(a) CA and on the just and equitable ground under s461(1). The plaintiffs also sought an Citation: order under s233(1)(j) that the company’s sole director indemnify the company for the costs of opposing the application, on the [2006] NSWCA 39, Court of basis that that opposition was unreasonable. Appeal of New South Wales per Mason P and Ipp JA The second defendant, Claude Cassegrain (Mr Cassegrain), was the sole director of and effectively controlled, CTK Engineering Pty Limited (CTK). Members of his Date of Judgment: family and others held shares in CTK (the other shareholders) and, after a 22 February 2006 protracted dispute, commenced proceedings in the NSW Supreme Court seeking orders that CTK be wound up:

Issues: • under section 233(1)(a) CA, on grounds that its affairs had been conducted in a • Sections 233(1)(j) and manner oppressive, discriminatory, and unfairly prejudicial to their interests and 461(1) CA contrary to the interests of the members as a whole; and • Winding-up on just and • under s461(1) CA, on the grounds that it was just and equitable to do so. equitable grounds • Indemnity costs of an The application for a winding-up order was vigorously opposed by CTK and application for a winding-up Mr Cassegrain. Mr Cassegrain caused CTK to incur signiﬁ cant costs in opposing the order application. Mr Cassegrain did not dispute that the company should be wound up, but asserted that this should be done through a members’ voluntary winding-up after the clariﬁ cation of two outstanding disputes.

The court appointed a provisional liquidator, who decided that the company should no longer continue its business. A winding-up order was then made by consent on the just and equitable ground pursuant to s461(1), and the provisional liquidator was appointed liquidator. However, there was no agreement between the parties as to the costs of the winding-up proceedings.

The other shareholders sought orders that CTK and Mr Cassegrain pay their costs. As Mr Cassegrain had used CTK’s assets to fund his opposition to the winding-up order, the other shareholders also sought an order pursuant to s233(1)(j) requiring Mr Cassegrain to indemnify CTK against its costs of opposing the application and its liability for the costs of the other shareholders.

The question of costs came before Justice White, who found that the affairs of the company had been conducted in a manner oppressive to the interests of the other shareholders over a long period and that CTK and Mr Cassegrain’s opposition to the winding-up order was unreasonable. Justice White therefore made an order requiring Mr Cassegrain to indemnify CTK under s233(1)(j) against its costs of opposing the application and its liability for the opponents’ costs.

86 Mr Cassegrain appealed and Justice White’s decision was upheld by the Court of Appeal. The court held that the availability of a similar form of costs order pursuant to the Supreme Court Act 1970 (NSW) did not preclude the granting of this relief under s233(1)(j).

The case demonstrates the inherent ﬂ exibility in ss 232 and 233(1). Where opposition to a winding-up order under s233(1) is found to be unreasonable, s233(1)(j) can be used to recover wasted costs from the controller of a company, thus restoring part of the company’s assets.

87 LIQUIDATION

Potential future liability for damages is not a debt for the purposes of the test for insolvency in s95A CA

Case Name: In this case, the New South Wales Court of Appeal upheld the Box Valley Pty Ltd v Kidd & view of the trial judge that the claimant creditor did not prove Anor that the company in question was unable to pay its debts as, and when, they fell due and consequently there was no liability on Citation: the part of the directors for insolvent trading. A likely liability for damages in the future is not a ‘debt’ for the purposes of [2006] NSWCA26, Court of Appeal of New South Wales per s95A CA. Bryson JA, Basten JA, Gzell J David Kidd Grain Trading Pty Limited (David Kidd Grain) was incorporated on 1 February 1993 and traded in grains, including sorghum and white cottonseed, Date of Judgment: and other rural commodities. 24 February 2006 Prior to April 2001, it entered into futures contracts for the sale of white cottonseed at a speciﬁ ed price for delivery on various dates between May and Issues: August 2001. As time elapsed, the price of white cottonseed increased • Director’s duty to prevent signiﬁ cantly, leaving the company facing crippling losses if it closed out its insolvent trading positions by entering into opposing purchase contracts. The exposure was of such a • Whether a likely future magnitude that when the contracts expired, the company would have defaulted and liability for damages is a become insolvent immediately. debt for the purposes of s95A CA On 29 May 2001, David Kidd Grain signed an agreement to purchase a quantity of sorghum from the claimant, Box Valley Pty Limited (Box Valley) for $100,600. Between approximately 5 June 2001 and 15 June 2001, Box Valley delivered the sorghum to David Kidd Grain.

David Kidd Grain entered into voluntary administration on 21 June 2001 as a result of its liabilities under the white cottonseed futures contracts. David Kidd Grain subsequently went into liquidation on 27 June 2001 upon a resolution of its creditors and a liquidator was appointed.

Box Valley received a dividend of $5,030 in the liquidation leaving a shortfall of $95,570 from the amount owing to Box Valley at the date of the commencement of the liquidation.

Following an investigation by the liquidator into the affairs of David Kidd Grain, the liquidator decided not to bring proceedings against the directors. However, under s588R CA, he consented to Box Valley bringing proceedings against the directors in respect of its own debt. Box Valley subsequently brought proceedings against Mr and Mrs Kidd as directors of David Kidd Grain under s588M CA which provides that a creditor, who has suffered loss or damage ‘in relation to the debt because of the company’s insolvency’, can recover from a director an amount equal to the amount of loss or damage. In order for there to be a right of recovery under s588M,

88 a director must have breached s588G(2) or s588G(3) in relation to the incurring of the relevant debt by the company.

During the four day trial, the main issue was whether David Kidd Grain was insolvent at the time it incurred its debt to Box Valley. The test for insolvency is whether a company is able to pay its debts as and when they fall due (s95A CA).

Box Valley placed considerable reliance upon expert opinion evidence given by Mr Russell, a chartered accountant, about the solvency of David Kidd Grain. The primary basis on which Mr Russell reached the conclusion that David Kidd Grain was insolvent at the time the Box Valley debt was incurred was its potential liability under the white cottonseed contracts. The trial judge rejected Mr Russell’s evidence on the basis that it was inappropriate for him to take into account the unrealised losses from the white cottonseed contracts in determining the company’s solvency.

The exposure under these contracts, although unsustainable by the company, did not create a contingent liability to pay a liquidated sum. It was, at most, an unliquidated sum because the market price of white cottonseed could have changed from the time of sale to the expiry of the contracts. In these circumstances, David Kidd Grain’s exposure under the contracts ﬂ uctuated and the exact amount payable was not ascertainable until expiry. Further, even though it was likely that David Kidd Grain would default on the contracts at expiry, the company would only be liable for a claim for damages for breach of contract.

On this basis, the trial judge held that the exposure under the white cottonseed contracts did not constitute a ‘debt’ for the purposes of s95A CA and dismissed the proceedings.

On appeal, the Court of Appeal stated that:

Insolvency is a state of affairs, not an event at a single point of time, and the question of solvency cannot be addressed in a narrow time frame.

The Court of Appeal considered the opinion expressed by Mr Russell about the signiﬁ cance of the white cottonseed contracts to the question of the solvency of David Kidd Grain. However, the court ultimately agreed with the ﬁ ndings of the trial judge that a liability for damages for breach of a contractual obligation to sell and deliver goods is not a ‘debt’. A ‘debt’ would only arise when:

• default on the contracts had occurred; • the amount owing was ascertained by the counter-parties purchasing on the market against the contracts entered into by David Kidd Grain; and • notice of default and the amount owing was given to David Kidd Grain.

The Court of Appeal also took into account the fact that there was no evidence of defaults in meeting obligations to pay debts or other indications of a cash ﬂ ow difﬁ culty of the type usually encountered in insolvency. Nor was there any late payment of taxes, statutory demands or similar.

89 It is clear from this decision of the New South Wales Court of Appeal that a potential (or even likely) future liability for damages does not constitute a ‘debt’ for the purposes of s95A CA .

90 LIQUIDATION

Moneys paid by would-be investors held upon constructive trust

Case Name: In this case, the court was required to consider whether loan ASIC v Karl Suleman contracts had been formed between would-be investors and a Enterprizes Pty Ltd company that was subsequently wound up and if so, could moneys paid by those would-be investors remain held on Citation: constructive trust. [2006] NSWSC 91, Supreme Ten applicants sought orders against the liquidators of Karl Suleman Enterprizes Court of New South Wales per Pty Ltd (Enterprizes) and Suleman Investments Ltd (together, the companies) to Barrett J return the bank cheques delivered by each of the applicants before the commencement of the companies’ winding-up. Date of Judgment: The applications followed earlier directions to the liquidators that where: 28 February 2006 • persons had delivered bank cheques to Enterprizes with the intention of Issues: investing in debentures in circumstances of illegal solicitation and an illegal investment scheme on the part of Enterprizes, could bank cheques were held • Unregistered managed intact by the liquidator; and investment scheme • Bank cheques delivered by • no contracts had been concluded by the parties, would-be investors the moneys were held upon constructive trust for the persons who had provided • Quarantined proceeds them, being ‘would-be investors’. Accordingly, the liquidators of Enterprizes were held by liquidators on justiﬁ ed in returning the bank cheques, or quarantined proceeds, to the persons constructive trust from whom they had been received.

The threshold question for determination in this case was whether a contract was made between each of the applicants and Enterprizes. If the court found that no contract was made and the applicants were only ‘would-be investors’, the directions would follow those set out above.

Each applicant had:

• provided a bank cheque in favour of Enterprizes to a person whom the applicant believed was associated with Enterprizes; and • signed a document expressed to be a deed between Enterprizes and the applicant.

However, in respect of each applicant’s case:

• there was no attestation of the applicant’s signature; • there was no evidence that Enterprizes ever executed the deed; • the applicant never received a document executed by Enterprizes; and • the applicant never received, in respect of the sum paid, any payment retention of which might have indicated the applicant’s acquiescence in the existence of a contractual relationship with Enterprizes.

91 that Mr Casaretto had a long history of rent defaults, realised that the proceeds of sale represented her only chance of recovering the arrears, had no reason to believe that GBR was in a better position to repay its debts than Mr Casaretto was personally, and was ‘very apprehensive’ about the prospect of being paid either by Mr Casaretto or GBR.

Whether a creditor can rely on s588FG CA to prevent an ‘insolvent transaction’ from being voided will depend on the facts of the individual case. Creditors will not succeed where, at the time of entering the transaction, a reasonable person in their position would have had a ‘positive feeling of actual apprehension or mistrust’ concerning the company’s ability to pay its debts as they fell due.

92 LIQUIDATION

Good intentions: not enough to justify the pooling of assets

Case Name: The liquidator sought directions as to the apportionment of funds Re Application of Whitton (as received from the sale of the business operated by companies liquidator of Global Gossip over which he was appointed. His preference was to distribute Group of Companies) the funds pro rata to those group companies with priority employee claims. The court ruled that, failing an express Citation: resolution of creditors supporting a pooling of assets, the funds (2006) 230 ALR 323; [2006] belonged to the group companies whose assets were sold. NSWSC 163, Supreme Court of Several companies in the Global Gossip Group were placed into voluntary New South Wales per Austin J administration on 14 June 2002 and subsequently entered into various DOCAs. The DOCAs provided for employee entitlements to be paid in full, out of a fund Date of Judgment: established from monthly trading proﬁ ts of the group. In July 2003, the deed 20 March 2006 administrator was informed that that month’s contribution to the fund would not be made. He subsequently entered into an agreement for the sale of the group’s business, naming 10 group companies as vendors, even though only three of those Issues: companies held any assets. • Section 511 CA • Whether to apportion In September 2003, the deed administrator recommended to creditors that the proceeds of a business sale DOCAs be terminated and the companies be wound up. In that report, the return to by a group of companies creditors was calculated on a group basis rather than on a separate company basis pursuant to priority and implied that the priority employee creditors in all of the companies would employee claims in the receive the same distribution per dollar in priority over all other unsecured group or ownership of the creditors. sale assets The DOCAs were terminated and the companies went into liquidation on 19 September 2003. The deed administrator became the liquidator of each company. Proceeds from the business sale were received by the liquidator in instalments between October 2003 and January 2004. Under section 511 CA, the liquidator sought directions from the court as to how those proceeds should be apportioned between the companies.

The liquidator presented the court with two alternative proposals for apportionment:

• apportion the funds between the only three group companies with liabilities to employee creditors in proportion to those liabilities; or • apportion the funds between the three group companies that held assets at the time of the business sale in proportion to the value of those assets.

The liquidator favoured the fi rst alternative because the directors of the group companies had confi rmed that they intended, at the time of the business sale, to apply the proceeds of sale in a manner that would give fi rst priority to employee claims, although no express apportionment effecting this intention was made at the time.

93 The court found that the second alternative was the correct approach. Had each of the group companies with assets sold their assets independently of each other, then in the absence of implementation of a pooling arrangement in a manner permitted by law the liquidator and the court have no discretion to authorise a distribution in which the creditors of one group company would beneﬁ t from the realised assets of another group company, however fair and equitable it might seem. Justice Austin went on to consider whether the facts in this case provided a basis for preferring the ﬁ rst alternative notwithstanding that principle.

His Honour found that neither the fact that that the three companies that sold their assets were part of a corporate group nor that the sale was done under a single agreement was a sufﬁ cient basis to prefer the ﬁ rst alternative, absent a pooling arrangement authorised by law.

The business sale agreement had allowed for the vendors to apportion the proceeds amongst themselves but such an apportionment had not, in fact, occurred notwithstanding the directors’ intention to apportion the funds to beneﬁ t employee creditors.

The court therefore directed that the liquidator would be justiﬁ ed in apportioning proceeds of sale to the group companies whose assets were sold, in proportion to their respective values, rather than to the group companies with priority employee creditors. Justice Austin said that this was not an irrational or unfair outcome when the underlying principle was grasped, namely that creditors are entitled to deal with a company on the basis of their assessment of its net worth.

An expressed intention to distribute assets on a group basis rather than an individual company basis is not by itself a sufﬁ cient basis on which to allow creditors of one company to beneﬁ t from the realised assets of another.

94 LIQUIDATION

Failure by director to provide report on company affairs or access to company books

Case Name: A liquidator sought declarations of contravention of section 530A Bassoak Pty Ltd (receivers CA and a warrant under s530C CA to search and seize property and managers appointed) v and books of the company. This case considers whether it is Rellgrove Pty Ltd appropriate to make a declaration of contravention under s530A CA and the circumstances in which a warrant under s530C may Citation: be issued. [2006] NSWSC 262, Supreme Sections 530A and 530B CA impose various duties on the ofﬁ cers of a company in Court of New South Wales, liquidation to provide company documents, information and assistance to the Equity Division per Austin J liquidator. Despite being requested to do so by the liquidator, Mr Anstee, the sole director of Rellgrove Pty Ltd (the company in liquidation), failed to provide a report Date of Judgment: on the company’s affairs. In addition, certain information that Mr Anstee had 5 April 2006 provided to the liquidator was inaccurate or incorrect and requests by the liquidator for further company information relating to these matters had not been complied with. Issues: • Sections 530A, 530B and As a result, the liquidator applied to the court, in interlocutory proceedings, for 530C CA declarations of contravention by Mr Anstee of ss 530A and 530B CA, with the • Whether declaration of court to use its discretion to determine an appropriate civil penalty, and the contravention of s530A execution of a warrant to seize company books and property held by Mr Anstee. CA could be made in interlocutory proceedings Justice Austin held that it was inappropriate to make orders for declarations • Exercise of the court’s of contravention of s530A and orders for civil penalties in interlocutory discretion to issue warrant proceedings as: to seize books of a company • it was not clear that the court had jurisdiction to impose some other discretionary penalty in civil proceedings; and • it was inappropriate to grant a declaration of a contravention of s530A (which may result in the imposition of a criminal sanction) without a full hearing on the pleadings.

In determining whether it was appropriate to issue a warrant to search and seize property and books of the company, Justice Austin followed the decision in Cvitanovic v Kenna & Brown Pty Ltd (1995) 18 ACSR 387. The court in that case held that the warrant procedure is available only where it is necessary to take an extreme step in order to administer the company. Justice Austin found that this was an extreme case, as Mr Anstee had refused to answer the questions and requests of the liquidator, had participated in an attempt to sell real and personal property owned by the company to an entity related to Mr Anstee, and had provided incorrect information to the liquidator.

Justice Austin also held that s530C only permitted a warrant to be issued with respect to property of the company if it has already been concealed or removed.

95 However, with respect to the books of the company, s530C allows a warrant to be issued if they have been concealed, destroyed or removed or if they are about to be.

On the evidence, Justice Austin was not satisﬁ ed that the property of the company had already been removed or concealed and so did not grant a warrant. However, as he was satisﬁ ed that the company’s books had been, or would be removed or concealed, a warrant in respect of the books only was issued.

A declaration of contravention of s530A should not be made without a full hearing on the pleadings, particularly as it may result in criminal sanctions. A warrant under s530C may only be issued in extreme cases. A warrant in respect of property may only be issued where the property has already been concealed or removed, but may be issued in respect of the company’s books if they are about to be concealed or removed.

96 LIQUIDATION

Winding-up of unregistered managed investment scheme; priority of payments

Case Name: An investor in an unregistered managed investment scheme Warne v GDK Financial involving a retirement village sought orders regarding the winding- Solutions Pty Ltd; Billingham v up of an unregistered managed investment scheme under section Parbery 601EE CA. In a related set of proceedings, liquidators of the scheme’s trustee sought priority in payment of costs. That order Citation: was resisted by a court-appointed investigative accountant and (2004) 24 ACLC 1000; [2006] the liquidator of the scheme. NSWSC 259, Supreme Court The Peridon Scheme (the Scheme) was an unregistered managed investment of New South Wales per Young scheme involving the Peridon Retirement Village (the Village) in New South Wales. CJ in Eq Section 601ED CA requires a managed investment scheme to be registered if it has Date of Judgment: more than 20 members, or if it was promoted by a person in the business of promoting managed investment schemes. Section 601EE CA empowers the court 7 April 2006 to make ‘any orders it considers appropriate for the winding-up’ of an unregistered scheme that was required to be registered under s601ED. Issues: • Court’s power to make In earlier hearings, the court had declared the Scheme to be in contravention of orders for a winding-up s601ED and ordered that it be wound up. It has also appointed an accountant (the under s601EE CA Investigative Accountant) to investigate allegations of misuse of the Scheme’s • Priority for payment of costs assets and funds by the trustee of the head partnership of the Scheme and the among a court-appointed promoter of the Scheme. A liquidator had been appointed by the court to accountant, court-appointed administer the winding-up of the Scheme (the Scheme Liquidator). liquidator and liquidator of the trustee of scheme In the principal proceeding before the judge, the plaintiff was an investor in the scheme who sought to have the Scheme wound up. The ﬁ rst defendant was the trustee of the scheme, which also owned the Village (the Trustee), and was in liquidation. The other defendants were the company that managed the Scheme (the Manager), and the company that promoted the scheme (the Promoter). While an order for winding-up had already been made, there were questions as to whether it was necessary to deﬁ ne more precisely what constituted the Scheme, whether an order that the defendants had contravened the CA should be made and how the winding-up should take place. The plaintiff sought orders that would in effect transfer the assets of the Scheme into a new scheme created for that purpose (the New Scheme), which was duly registered with ASIC and had a responsible entity.

In a related proceeding before the judge, the liquidators of the Trustee (the Trustee Liquidators) sought an order that his costs ranked in absolute priority by virtue of ss443D, 443E, 443F and 556(1) CA or under the general law. They relied on the Trustee’s rights of indemnity against the Scheme assets and argued that, in the case of a company that only conducts a trust business, the liquidator’s costs, expenses and remuneration are to be paid out of the trust assets (relying on Re Suco Gold Pty Ltd (1983) 7 ACLR 873). The Investigative Accountant and the

97 Scheme Trustee resisted such an order and sought orders that their fees be paid in priority.

With respect to the orders sought by the plaintiff investor, Justice Young made the following conclusions and orders:

• A declaration that the defendants (the Trustee, Manager and Promoter) had contravened the CA was not a necessary precursor to orders sought and made under s601EE CA. The Scheme having been unregistered contrary to s601ED, the precondition to a winding-up order under s601EE had been satisfi ed. ‘That being so, the court may make such orders as it considers appropriate for the winding-up of the scheme’. • The power of the court to make ‘any orders it considers appropriate for winding- up of a scheme’ pursuant to s601EE(2) includes the power to make orders as to the method of its winding-up. This power includes the power to ‘make the necessary adjustments to convert it into a duly registered scheme if that is possible’, provided that ‘if an existing investor did not agree to invest in the new scheme, he or she would need to be repaid the existing investment’ (following ASIC v Atlantic 3 Financial (Aust) Pty Ltd (2003) 47 ACSR 52). Justice Young made provisional orders for the transfer of assets to the New Scheme, subject to providing for investors who did not wish to participate in the New Scheme and reserving certain matters that created practical diffi culties for further consideration. Justice Young noted that it may well be that those diffi culties ‘are such that there is no viable alternative to realising the assets and providing for some plan of distribution’. • Based on reports by the Investigating Accountant, the Scheme Liquidator and the Trustee Liquidator, there were serious questions as to misuse of the Scheme’s assets by Management and its associates. An enquiry into such misuse and the taking of accounts of the Scheme was therefore justifi ed. However, as this was an expensive exercise, Justice Young said that he would not order it ‘without some plan as to who in the fi rst instance is to pay the cost’ of the investigation and accounting. • The costs priority issues could not be fi nally determined until further steps had been taken to clarify various material facts, including whether there had been a misuse of the Scheme’s assets. However, Justice Young said that there must be provision for payment of the Investigative Accountant and the Scheme Liquidator as the court’s appointees. If the Investigative Accountant’s fees could not be recovered pursuant to a previous order with respect to his costs, ‘it may well be appropriate’ to order them to be paid out of the Scheme’s assets. Furthermore, the Scheme Liquidator was entitled to an indemnity out of the assets of the Scheme ‘if other proper orders for costs are not productive of cash funds’. • On the other hand, there was signifi cant doubt about the Trustee Liquidators’ right to an indemnity out of the Scheme assets. Accordingly, a decision on the priority of payment of their costs should await the result of the taking of accounts, and any right of indemnity they had should be suspended until that time. In reaching this conclusion, Justice Young said that there is no automatic right of administrators or liquidators to get their costs out of trust assets regardless of individual circumstances (citing Re Sutherland; French Caledonia

98 Travel Service Pty Ltd (2003) 59 NSWLR 361). He also criticised the Trustee Liquidators for having ‘misunderstood their limited role’. Despite knowing that the Trustee was a trustee, the Trustee Liquidators spent ‘considerable amount of effort in and about the business of the trust and endeavouring to ﬁ nd purchasers for it, all of which was beyond their proper activities’. Finally, citing various authorities, Justice Young considered that ‘it is good practice to assume that the trustee (whether bare or active) has a prima facie right of indemnity, but to order accounts if there is doubt about the entitlement of the trustee because of a default, and suspend the right of claimant whilst those accounts are taken’.

This case illustrates the court’s broad power to make orders with respect to the winding-up of an unregistered managed investment scheme under s601EE CA. The power includes taking the necessary steps to have it converted to a registered scheme. In this case, the judge took a staged and practical approach to progress resolution of complex factual questions. In doing so, he discussed authority that a trustee has a prima facie, but not automatic right, to an indemnity out of the trust’s assets, and that the existence of such a right may depend on the probity and reasonableness of the trustee’s conduct.

99 LIQUIDATION

Test case re distribution of liquidation assets of insurance & reinsurance companies

Case Name: In Allens Arthur Robinson’s Annual Review of Insolvency & AssetInsure Pty Limited v New Restructuring Law 20031 and 20042, we reported on the ﬁ rst Cap Reinsurance Corporation instance and Court of Appeal decisions on the priorities for the Limited (in liquidation) distribution of the assets of New Cap Re (a reinsurance company in liquidation). The decision provides guidance concerning the Citation: distribution of liquidation assets of insurance and reinsurance [2006] HCA 13, High Court of companies. Australia per Gleeson CJ, Kirby, Background Hayne, Heydon and Crennan JJ New Cap Re went into liquidation in 1999. Prior to it being wound up, it was in the business of international reinsurance and took out its own outward reinsurance for Date of Judgment: liabilities under inward reinsurance policies written by it. Before its winding up, 7 April 2006 New Cap Re had entered into contracts of reinsurance with Faraday Underwriting Limited (Faraday), a London-based insurer, under which Faraday was the cedent. Issues: AssetInsure Pty Limited (AssetInsure) was a reinsurer and had entered into a • Section 562A CA contract of retrocession with New Cap Re in which AssetInsure was the retrocedent • Section 116(3) Insurance (that is, it had reinsured with New Cap Re certain policies of reinsurance that Act 1973 (Cth) AssetInsure had itself underwritten). • Distribution of liquidation assets of a reinsurance The liquidator of New Cap Re sought directions from the court about the company application of s116(3) of the Insurance Act 1973 (Cth) and the priority provisions of s562A CA.

At the time New Cap Re’s winding-up commenced, s116 of the Insurance Act essentially provided that where an insurance company was subject to a winding up, its assets were to be applied only to the discharge of its ‘liabilities in Australia’ and not to other liabilities, unless it had no such liabilities in Australia. Section 31 of the Insurance Act described the concept of ‘liabilities in Australia’ for the purposes of the Act and s31(4) described certain categories of insurance contracts that could constitute ‘liabilities in Australia’. The primary question for the court was whether the description of ‘liabilities in Australia’ in s31(4) was exhaustive for the purposes of interpreting the meaning of that concept in s116.

Section 562A CA dealt with the distribution of reinsurance proceeds obtained by the liquidator of an insurance company and effectively required the liquidator to pay those proceeds to that company’s insured, unless the court ordered otherwise. The primary question for the court was whether a ‘contract of insurance’ for the purposes of s562A included a contract of reinsurance.

1 page 127.

2 page 114.

100 The decision at fi rst instance In a judgment handed down in September 2003,3 Justice Windeyer held that, according to s116 of the Insurance Act, New Cap Re’s Australian assets, including Australian reinsurance recoveries, were to fi rst be applied to all Australian liabilities (and not just policy-holding creditors). In doing so, his Honour held that s31(4) of the Insurance Act was not intended to provide an exhaustive defi nition of ‘liabilities in Australia’.

Justice Windeyer also held that second priority is governed by s562A and that this section only applies to give priority to policy-holding creditors for any excess Australian reinsurance assets that have not been exhausted by Australian liabilities and any foreign reinsurance recoveries. Accordingly, s562A applied to contracts of reinsurance.

The decision on appeal

New Cap Re and its liquidator, AssetInsure and Faraday appealed the ﬁ rst instance decision on various grounds. The Australian Prudential Regulation Authority also obtained leave to appear in the appeal.

In relation to s116(3) of the Insurance Act, Justice Windeyer’s ﬁ nding that the expression ‘liabilities in Australia’ was not intended to be exhaustive was upheld by a majority in the Court of Appeal.

In relation to s562A CA, Justice Windeyer’s ﬁ nding that ‘contracts of insurance’ for the purposes of s562A included contracts of reinsurance was unanimously reversed on appeal. The Court of Appeal held that contracts of reinsurance were not ‘contracts of insurance’ for the purposes of s562A.

The High Court decision AssetInsure was granted special leave to appeal to the High Court on the following issues:

• whether s31(4) of the Insurance Act contains an exhaustive deﬁ nition of ‘liabilities in Australia’ (the Insurance Act issue); and • whether ‘reinsurance’ is ‘insurance’ for the purposes of s562A CA such that s562A covers contracts of retrocession, as well as contracts of reinsurance (the CA issue).

The Insurance Act issue The High Court held by a majority of 3 to 2 on the Insurance Act issue that s31(4) of the Insurance Act does not contain an exhaustive deﬁ nition of ‘liabilities in Australia’ arising under a contract of insurance. The majority (Chief Justice Gleeson and Justices Heydon and Crennan) held that the general law also applies in determining what constitutes a ‘liability in Australia’.

The majority agreed with Justice Windeyer’s ﬁ ndings at ﬁ rst instance and the majority of the Court of Appeal that, at general law, and apart from the operation of

3 New Cap Reinsurance Corporation Limited (In Liquidation) & Anor v Faraday Underwriting Limited (formerly DP Mann Limited) & Ors [2003] NSWSC 842.

101 s31(4), the liability under the contract in question (known as ‘Contract FC3A’ – a facultative reinsurance policy used as a typical reinsurance policy for the purpose of this case) was a ‘liability in Australia’.

The key characteristics of Contract FC3A were that the proposal for the policy was accepted in Australia and the policy was issued in Australia. However, as it related to liabilities contingent on events that could only happen outside Australia and which the company had not undertaken to satisfy in Australia, the contract was expressly excluded from the description of ‘liabilities in Australia’ contained in s31(4). The majority held that Contract FC3A was, however, a liability in Australia at general law and was therefore a ‘liability in Australia’ for the purpose of s116(3).

The majority relevantly concluded that ‘liabilities in Australia’ for the purpose of s116(3), included not only those liabilities speciﬁ cally identiﬁ ed in s31(4), but also other liabilities that are liabilities in Australia under the general law relating to the location of a chose in action.

Justices Kirby and Hayne, dissenting, gave guidance on the application of the general law. They summarised the common law principles of conﬂ ict of laws about locating a liability and stated that a debt is generally situated where the debtor resides. If a debtor has two or more places of residence and a creditor stipulates for payment at one of those places, the debt will be situated there. If a debtor has more than one place of residence, but there is no express or implied promise to pay at one of them, the debt will be situated where it would be paid in the ordinary course of business. Although Justices Kirby and Hayne accepted that some of the aspects of these rules might be open to debate in light of their dissenting view that s31(4) was essentially a code, it was not necessary for them to resolve any question of that nature for the purpose of the appeal.

The CA issue The High Court was unanimous in its decision on the CA issue that the reference to ‘contracts of insurance’ in s562A CA includes contracts of reinsurance.

According to Justices Kirby and Hayne, the expression ‘contract of insurance’ should not be read as intended to exclude a contract by which an insurance company, now insolvent, had reinsured its risks under reinsurance contracts.

Accordingly, the High Court held that Justice Windeyer at ﬁ rst instance was right to hold the contract of reinsurance made by New Cap Re in favour of AssetInsure and Faraday was a relevant ‘contract of insurance’ within the deﬁ nition of s562A CA.

This decision clearly explains how s562A CA and s31(4) of the Insurance Act operate. The main ﬁ ndings are twofold. Firstly, in determining what constitutes ‘liabilities in Australia’ for the purpose of s116(3) of the Insurance Act, both s31(4) and the general law apply. Secondly, s562A of the CA applies to contracts of reinsurance. As there can be no appeal from the High Court decision, some certainty in this area has ﬁ nally been given.

102 LIQUIDATION

Terminating a winding-up

Case Name: The court considered whether to terminate the winding-up of a Vero Workers Compensation v company that was subject to a DOCA, where claims by certain Ferretti existing creditors had been deferred. The liquidator and deed administrator of Ferretti Pty Ltd (in liquidation) (subject to Citation: DOCA) applied for an order terminating the winding-up of the company. [2006] NSWSC 292 Supreme Court of New South Wales per A voluntary administration can interrupt a winding-up process. Under CA, a Austin J liquidator is permitted to apply to the court for an order terminating a winding-up if, for example, the creditors’ interests would be better served by the appointment of an administrator and the entry, by the company, into a DOCA. Date of Judgment: 13 April 2006 Justice Austin said the court has a discretion as to whether the winding-up should be terminated and, in exercising its discretion, the court will consider the Issues: interests of: • Section 482(1) CA • the creditors (including future creditors); • Liquidator’s application to • the liquidator; terminate a winding-up • any contributories; and • Balance of relevant interests • Impact of a DOCA and • the public interest. deferral arrangements In this case, the court speciﬁ cally noted that the interests of the existing creditors, the contributories, the liquidator and the public interest in ‘public morality’ would all be served by a termination order. The company had become subject to a winding-up order on the basis of a statutory demand for a small sum of money. The creditors and the contributories (the directors of the company) had acceded to a DOCA, and the directors had complied both with the terms of the DOCA and deferred their own claims against the company.

However, the court refused to grant the order. It held that the existence of directors’ claims against the company (worth nearly $1 million), although subject to deferral arrangements which could be enforced by the existing creditors and the administrator (as parties to a deed of deferral), were contrary to the interests of future creditors and to the public interest that insolvent companies should be wound up. The court considered that the directors’ claims would hang over any future trading creditors of the company, to the extent that they would be unlikely to recover in any future administration. The court took the view that this risk to future creditors was too great and that it outweighed the interests of the existing creditors, the liquidator and the contributories.

Justice Austin noted that a termination order might have been appropriate, if the deferral arrangements had effectively subordinated the directors’ claims to all future creditors.

103 The court will take a long-term view in considering whether to terminate a winding-up even where a DOCA is in place. Any deferral of claims by existing creditors might adversely effect future creditors and may therefore lead the court to refuse to terminate the winding-up.

104 LIQUIDATION

Discount fuel ‘club’ is an unregistered managed investment scheme

Case Name: The defendants in this case operated a fuel discount ‘club’. ASIC v McDougall Members of the club paid various membership fees and were, in turn, offered signifi cant discounts on fuel purchases. When the Citation: scheme failed, ASIC sought to have it wound up on the basis that it was an unregistered managed investment scheme. [2006] FCA 427, Federal Court of Australia per Young J BTS Management Pty Limited (the company) and its sole director, Mr McDougall, conducted a business known as ‘Chargeitcards’, which in turn operated a scheme Date of Judgment: known as ‘Fulltank’ that was marketed as a discount fuel club. Under the Fulltank scheme, club members paid a membership fee and a plan fee to the business. The 20 April 2006 business represented that, in return for paying the fees, members would obtain signifi cant discounts on their fuel purchases. This discount was to work on the Issues: basis that each member would be issued with a debit card, which could be used to • Whether the particular pay for fuel. The debit card would be linked to an account, into which the company arrangement was a managed would pay funds of approximately 200 per cent of the member’s initial payment to investment scheme the scheme. • Whether the particular arrangement involved ASIC examinations established that Mr McDougall intended to fi nance the provision of fi nancial Chargeitcards’ contributions to each debit card account by investing members’ services funds in online foreign exchange trading. Mr McDougall apparently believed he • Whether the scheme should would receive returns of at least 360 per cent per year on such investments, with be wound up by the court very little risk. In its promotional material, Fulltank stated that it would not disclose • Whether the individual who to members how the funds were to be invested, because this would ‘forfeit its formulated and directed intellectual property and therefore limit our ability to pass savings onto members’. the scheme was a person operating the scheme In fact, the online foreign exchange trading only resulted in losses. Mr McDougall together with the company also used members’ funds to make various purchases and payments on behalf of himself and family members.

ASIC argued that Fulltank was an unregistered managed investment scheme and sought various orders, including that the scheme be wound up and that Mr McDougall and the company pay the liquidators an amount sufﬁ cient to discharge all the liabilities of the scheme.

The court considered the deﬁ nition of a managed investment scheme in section 9 CA and held that Fulltank was a managed investment scheme, particularly because:

• members paid funds to acquire rights to beneﬁ ts produced by the scheme (namely, at least a 50 per cent return on the initial investment which could then be used to purchase fuel); • the members’ funds were pooled in accounts held by the company, which were then invested at the direction of Mr McDougall; and

105 • the members had no control over the operation of the scheme, and indeed had no knowledge of how Mr McDougall intended to invest the members’ pooled funds.

Accordingly, the court made the orders ASIC sought relating to the winding-up of the scheme.

ASIC also sought declarations that the company and Mr McDougall had contravened s601ED CA by operating an unregistered managed investment scheme, and had contravened s911A CA by carrying on a ﬁ nancial services business without a licence.

The court held that, as Mr McDougall was the person who formulated and directed the scheme and was the directing mind and will of the company, both he and the company were operating the scheme. The court also held that the company and Mr McDougall were providing a fi nancial service in promoting and operating the scheme. This was because, by investing in the scheme, members were making a fi nancial investment, and by offering a facility through which to make a fi nancial investment, the company and Mr McDougall were offering a fi nancial product. The court therefore made the declarations sought by ASIC.

This case again indicates that the court will look at the substance of a scheme to determine whether it is a managed investment scheme and, thus, whether it is subject to the court’s powers to order the winding-up of a managed investment scheme. The court also held that even where a scheme was formally operated by a company, an individual can also be regarded as operating that scheme where the individual formulated and directed the scheme and was the directing mind and will of the company.

106 LIQUIDATION

Powers of the court to make orders under Part 5.9 for co-operatives

Case Name: The liquidator of a co-operative ﬁ led an application seeking Roy v Riverland Fruit Co- examination orders against persons pursuant to section 596B operative Limited (In CA. The proposed examinees argued that the court lacked the liquidation) power to make examination orders under Part 5.9 CA due to the interaction between the Co-operatives Act 1997 (SA) and the Citation: CA. This case considers the relationship between the CA and the [2006] SASC 116, Supreme Co-operatives Act and establishes that Part 5.9 CA applies to co- Court of South Australia Civil operatives. Division per Withers J The plaintiff applied for a winding-up order under the CA and the Co-operatives Act 1997 (SA) in respect of Riverland Fruit Co-operative Limited (receivers and Date of Judgment: managers appointed). Leave was granted and a liquidator was appointed. 21 April 2006 On 7 October 2005 the liquidator applied for examination orders against certain persons pursuant to section 596B CA. The proposed examinees’ applied to the Issues: court for orders that they be given access to afﬁ davits relied on by the liquidator in • Sections 596A and 596B obtaining leave to issue the summonses, that the summonses be discharged or, CA alternatively, that the scope of summonses be varied. • Section 223 of the Co- operatives Act 1997 (SA) The proposed examinees argued that, by virtue of the interaction between the • Power of liquidator of a co- Co-operatives Act and the CA, the court had no power to make orders for operative to examine under examination under Part 5.9. In particular, it was argued that: Part 5.9 CA • the Co-operatives Act provides for examination summonses to be issued by inspectors, but not liquidators; • s223 of the Co-operatives Act provides that ss 344, 589-598 and 1307 CA apply to declared co-operatives; • s223(a) states that a reference in those provisions to a company is to read as a reference to a co-operative; and • because ss 596A and 596B refer to corporations and not to companies, those provisions do not apply to co-operatives.

Justice Withers reviewed the relevant legislation and stated that the structure of the Co-operatives Act was such that the CA would not apply unless the Co-operatives Act speciﬁ cally applied a section of the CA. He further held that as a matter of statutory interpretation, the legislature must have intended ss 596A and 596B to apply to cooperatives as it would not make sense to have a provision that applies ss 596A and 596B and that then instantly cancels or modiﬁ es their application. As a result, the application to discharge the summonses was dismissed.

This case conﬁ rms that a liquidator of a co-operative has the power to examine persons under Part 5.9 of the CA.

107 LIQUIDATION

Unregistered managed investment schemes and relevant considerations in winding-up

Case Name: This case involved an appeal against a lower court decision to Burton v Arcus dismiss an application from investors for a declaration that investment arrangements were a managed investment scheme Citation: and an order winding up the scheme. In this decision, the Court of Appeal considers the characteristics that are necessary to [2006] WASCA 71, Court of constitute a managed investment scheme and the circumstances Appeal of Western Australia per Steytler P, McLure and Buss in which the court may grant a winding-up order. JJA This case concerns an investment arrangement created by Global Finance Group Pty Ltd (Global). Global invited private investors to participate as lenders in the Date of Judgment: development of a property of one of its clients. The loan by the investors was 5 May 2006 secured by ﬁ rst mortgage and a personal guarantee. Under the arrangement, Global was to send interest payments to the investors. Payments were made by Global to the investors until February 1999. From that date, no further payments were made Issues: and no principal was repaid to the investors. • Sections 9, 601EB, 601ED and 601EE CA An administrator was appointed in respect of Global, which went into liquidation on • What are the characteristics 20 April 1999. The investors, however, had not exercised their power of sale as the of a managed investment largest investor, Mr & Mrs Arcus, had refused to sell the property for less than scheme? $4 million. • When should a managed investment scheme be The plaintiffs (being the remainder of the investors) brought proceedings in the wound up? Western Australian Supreme Court, arguing that the investment arrangement was a managed investment scheme under the CA and that the court should use its powers under the CA to wind up the scheme.

At ﬁ rst instance, Justice Johnson dismissed the plaintiffs’ application on the basis that the arrangements relating to the loan did not constitute a managed investment scheme, and that even if the arrangements did constitute a managed investment scheme, winding-up orders were not warranted.

The Court of Appeal allowed the appeal and granted a winding-up order against Global.

Appeal Justice Buss, delivering the court’s judgment, referred to the deﬁ nition of a managed investment scheme in section 9 CA. The deﬁ nition provides that in a managed investment scheme:

• people contribute money, or money’s worth, as consideration to acquire rights to benefi ts produced by the scheme; • the contributions, or some of them, are to be pooled or used in a common enterprise to produce fi nancial benefi ts for people who hold interests in the scheme; and

108 • the members do not have day-to-day control over the operation of the scheme.

After a detailed review of the authorities on the deﬁ nition of managed investment schemes and the facts, the Court of Appeal held that all three elements were established as:

• each of the investors paid money to Global as consideration to acquire rights to benefi ts produced by the scheme; • the money contributed was to be pooled to produce fi nancial benefi ts consisting of interest and rights or interests in the property; and • the investors did not have day-to-day control of the scheme as, after the initial investment, each and every management activity in relation to the scheme was undertaken by Global.

Although Mr and Mrs Arcus (who opposed the winding-up) were owed the single largest sum, the court considered that their rights and interests were signiﬁ cantly and decisively outweighed by a number of factors, including that:

• the company had been in default under the mortgage for more than seven years; • there was a deadlock between the investors relating to the enforcement of their powers of sale under the mortgage; and • there was no credible evidence that the investors were likely to recover signiﬁ cantly more money by postponing the realisation of their security under the mortgage.

Accordingly, the court ordered that the scheme be wound up.

A managed investment scheme arises where investors contribute money to receive a benefi t, that money is pooled to produce fi nancial benefi ts, rights or interests for investors and the investors do not have day-to-day control over the scheme. Factors relevant to whether a winding-up order should be granted include the period of time the company is in default, the current and long-term profi tability of the security and the needs of the investors.

109 LIQUIDATION

Liquidator’s powers to carry on a business

Case Name: In this case, liquidators of a company sought court approval to Warne v GDK Financial enter into a number of long-term leases and to pay certain Solutions; Peridon Village classes of creditors in full, on the basis that these actions would Nominees, application of assist in the running of the business for the beneﬁ cial winding-up Billingham of the company. This case is a good example of the circumstances in which court approval will be granted. Citation: On 6 July 2005, an order was made to wind up an unregistered managed [2006] NSWSC 464, Supreme investment scheme (the Scheme) and appoint liquidators. The liquidation Court of New South Wales per arrangements implied that the retirement villages managed by the Scheme would Austin J continue to function. To protect the goodwill of the business and maintain the market price of the Scheme’s properties, the liquidators sought to enter into long- Date of Judgment: term leases over vacated properties owned by the Scheme and to pay in full former 19 May 2006 and departing residents of the properties. As the leases were for terms of more than three months, the liquidators required Issues: approval to enter into them, pursuant to section 477(2B) CA. They applied to the • Sections 477(1)(a), court for approval under s477(2B) and for directions that they were empowered to 477(1)(b), 4772B and enter into such leases pursuant to s477(1)(a) and to pay in full certain classes of 479(3) CA creditors pursuant to s477(1)(b). • Approval for liquidator to enter into long-term Justice Austin held that s477(1)(a) authorised the liquidator to carry on the agreements business so far as was necessary for the beneﬁ cial disposal or winding-up of the • Approval for liquidator to Scheme and that, having regard to the nature of the Scheme’s business, the long- pay one class of creditors in term leases were part of that business. Since unit vacancy was likely to harm the full goodwill of the Scheme and depress its market value, s477(1)(a) authorised entry into the leases.

Justice Austin held that approval under s477(2B) would usually be given only where the transaction is the proper realisation of the company’s assets or otherwise assists in the winding-up of the company. Approval would usually not be given where the long-term agreement was intended solely to generate income. However, his Honour held that since the leases were essential to ensure the beneﬁ cial winding-up of the company, approval should be granted. Justice Austin noted that the role of the court was to:

review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all the circumstances of the liquidation, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the ‘expeditious’ and beneﬁ cial administration of the winding up.

Justice Austin found that the full payment of this class of creditors was necessary to preserve the value of the business and enhance realisations in the winding-up for

110 the beneﬁ t of all creditors. Therefore, the court was prepared to describe the former and departing residents of the properties as a class of creditors for the purposes of s477(1)(b) and to ﬁ nd that s477(1)(b) authorised the liquidators to pay that class in full, notwithstanding that this was contrary to the priorities for payment of creditors in sections 555 and 556 CA.

This decision demonstrates that, while there are limits upon the powers of liquidators to carry on a business, extended powers may be permitted where they are likely to produce a better outcome for all creditors. The court’s comments in this case will be of assistance to liquidators who are contemplating the extent of their power to continue to run the business of a company in liquidation.

111 LIQUIDATION

You abuse, you lose! Court summarily dismisses winding-up application for abuse of process on several accounts

Case Name: This case provides a stern lesson on how (and when) not to bring Australian Beverage Distributors winding-up proceedings. In this case, the defendant’s winding-up Pty Ltd v Evans & Tate proceedings were labelled an abuse of process on various counts Premium Wines Pty Ltd and dismissed summarily. Evans & Tate Premium Wines Pty Ltd (E&T) and its parent company Evans & Tate Citation: Ltd (ETL) were wine suppliers. Australian Beverage Distributors (ABD) was a wine (2006) 58 ACSR 22; [2006] distributor. All parties were in an ongoing commercial relationship. NSWSC 560, Supreme Court of New South Wales per White J There had been extensive litigation between ABP and E&T in which costs orders giving rise to judgment debts had been made in favour of each party and other debts had been admitted. While some of the debts had not been quantiﬁ ed, it was Date of Judgment: likely (the judge concluded) that ABD was a net debtor of E&T. 6 June 2006 ETL’s only obligations to ABD were a prospective debt under a series of convertible Issues: notes (of which ABD held acquired a ‘miniscule’ number by percentage and value) and a contingent liability under a deed of cross-guarantee for E&T’s debts in the • Dismissal of winding-up event that E&T was wound up. proceedings as abuse of process ABD ﬁ led an originating process seeking orders that both E&T and ETL (the • Proceedings brought for defendants) be wound up in insolvency. The same day, the defendants’ solicitors improper purpose wrote to ABD’s solicitors drawing their attention to the fact that their clients had • Supreme Court not been served with a sealed originating process and to the requirements of rule (Corporations) Rules 1999 5.6 of the Supreme Court (Corporations) Rules 1999 (NSW). That rule requires an (NSW) rule 5.6 applicant for a winding-up order to publish a notice of the application in a newspaper (circulating generally in the state) at least three days after the originating process is served. The defendants’ solicitors sought an assurance that this rule would be complied with.

In a subsequent letter, ABD’s solicitors stated ‘On our instructions any ‘publication’ as required under the Corporations Act or regulations will be made in accordance with the Act or regulations’. Justice White held that this was an undertaking on behalf of ABD that rule 5.6 of the Supreme Court (Corporations) Rules would be complied with. Despite the undertaking, ABD issued a press release before the prescribed three day period giving notice that it had issued the winding-up proceedings. Various newspaper reports of the winding-up proceedings were published as a result.

On several grounds (each of which was sufﬁ cient to dispose of the application), Justice White upheld the defendants’ application for the winding-up proceedings to be dismissed summarily as an abuse of process.

112 As to the winding-up application against ETL:

• First, ETL’s liabilities to ABD were a prospective debt and a contingent one. Section 459P(2)(a) CA provides that a person who is a creditor only because of a contingent or prospective debt may only apply for a company to be wound up in insolvency with the leave of the court. In failing to obtain leave and contravening s459P(2)(a), ABD had committed a ‘serious abuse of the process of the court’. • Second, in its press release ABD had stated that the winding-up proceedings had been issued ‘in response to [E&T] refusing to pay costs orders in previous proceedings’ and that E&T were seeking to restrain ABD from enforcing in separate proceedings. Justice White concluded that ABD was motivated to bring the winding-up proceedings in the hope of deterring E&T from pressing its claim to restrain enforcement of the costs orders, persuading a liquidator not to pursue it or merely as retaliation for E&T’s claim. It was an abuse of process to commence winding-up proceedings for the improper purpose of preventing E&T’s claim from being determined on its merits or retaliating for action that was ‘displeasing to ABD’. • Third, the purpose of rule 5.6 of the Supreme Court (Corporations) Rules is to give a company against which an originating process for winding-up has been served to take steps prior to the advertising of the proceedings to protect itself (such as by seeking an injunction) from being damaged by adverse publicity relating to proceedings that have no merit. The rule is not concerned (as ABD contended) only with the prescribed form of notice in the prescribed newspaper, but extended to other forms of notiﬁ cation. The publication by ABD of a press release before the three day period prescribed by the rule had expired was an abuse of process and not a mere procedural defect. It was calculated to, and did, cause harm to the defendants. The position may have been different if the premature publication had not been intentional and had been shown not to cause any harm, but that was not the case here. The breach of ABD’s undertaking to comply with rule 5.6 SCCR was an aggravating factor.

As to the winding-up proceedings against E&T, Justice White accepted that E&T owed a current debt to ABD (even though ABD was probably a net debtor), but noted that E&T was challenging the enforcement of that debt in separate proceedings. ABD’s status as a creditor was therefore under substantive challenge. In those circumstances, the ﬁ ling of the winding-up proceedings against E&T was an abuse of process and should be dismissed. The improper purpose for which ABD had ﬁ led the proceedings and its breach of rule 5.6 of the Supreme Court (Corporations) Rules were additional grounds for dismissing the proceedings.

Having regard to the extent and deliberate nature of ABD’s abuses, Justice White ordered that it pay the defendants’ costs on an indemnity basis.

Winding-up applications brought for improper purposes, such as stiﬂ ing genuine disputes, are liable to be disposed of decisively. Parties should also beware of the consequences of ﬂ outing the spirit, as well as the letter, of rules designed to protect their opponent’s reputation.

113 LIQUIDATION

Do letters of request in cross-border insolvencies provide assistance?

Case Name: In this case, the English Court of Appeal unanimously dismissed In the matter of HIH Casualty an appeal by the Australian liquidators of HIH Casualty and and General Insurance Limited General Insurance Limited against the decision of the English High Court that, in an English liquidation of a foreign company, Citation: the English court had no power to direct the English liquidator to transfer funds to Australia for distribution in the principal [2006] EWCA Civ 732, Court of Appeal of England and liquidation. Wales per Morritt C, Tuckey and In March 2001, an originating process to wind up HIH Casualty and General Carwarth JJ Insurance Limited (HIH) and three associated companies was presented to the New South Wales Supreme Court (NSWSC) and provisional liquidators were appointed in Date of Judgment: Australia on 27 August 2001. Contemporaneously with the presentation of winding 9 June 2006 up petitions to the NSWSC, that court requested the High Court in England, pursuant to s426 of the UK Insolvency Act 1986, to appoint provisional liquidators to HIH and the English provisional liquidators were duly appointed. Issues: • Efﬁ cacy of the letter of At the time of the HIH insurance group collapse in Australia, it comprised 274 request procedure companies through which the group carried on insurance business in many • Effectiveness of s562A CA countries including Australia and England. Following the provisional liquidation of where Australian insurers HIH, it subsequently became clear in Australia that, unless the sums collected by are reinsured in London the English provisional liquidators from reinsurers of HIH were remitted to Australia for the Australian liquidators to apply in the due course of the winding up of HIH or in accordance with the scheme of arrangement, insurance creditors of HIH would lose the beneﬁ t of s562A CA. At the relevant time, English law contained no priority for insurance creditors in the winding up of an insurer.

In Australia, the CA provides for the courts to act in aid of, and be auxiliary to, each other in all external administration matters. Section 581 provides that, where a 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 in its own jurisdiction. Reciprocally, the Australian court may request a court of a foreign country that has jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external administration matter.

In June 2005, the Australian liquidators asked the English provisional liquidators to remit the assets under their control to Australia for distribution by them in accordance with the CA. The English provisional liquidators declined to do so on the basis that they did not have such power and instead applied to the High Court in England for directions as to the appropriate distribution of the sums collected in England. Accordingly, the Australian liquidators applied to the NSWSC for a letter of request to the English courts to be issued to this effect.

114 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 did not directly ask that the English court direct the English provisional liquidators to pay over to the Australian liquidators the asset realisation. Instead, the letter requested the English court:

to assist and to act in aid of and be auxiliary to this court in its proceeding by hearing and determining an application by the Australian liquidators for:

(a) Directions to the English provisional liquidators to pay over to the Australian liquidators all sums collected, or to be collected, by them in their capacity as English provisional liquidators.

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 High Court ordered that the application for the directions and the request application be expedited.

Reviewing the decision at ﬁ rst instance In October 2005, Justice Richards in the High Court in England 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 in the way that the English rules provided. The court was also concerned with whether, notwithstanding that ﬁ nding, it should direct the English provisional liquidators to make such a transfer in view of the fact that the directions for transfer were sought under a letter of request from the NSWSC.

The judge directed the English provisional liquidators not to pay over to the Australian liquidators all or any sums collected, or to be collected, by them and refused to extend their powers to enable them to do so.

Justice Richards explained his reasoning as follows:

In an English liquidation of a foreign company, the court has no power to direct the liquidator to transfer funds for distribution in the principal liquidation, if the scheme for pari passu distribution in that liquidation is not substantially the same as under English law.

The English Court of Appeal decision The Court of Appeal heard the appeal of the Australian liquidators in May 2006 and delivered one main judgment on 9 June 2006.

Essentially, the question before the court was whether it had jurisdiction to entertain a request under the UK Insolvency Act 1986 for directions to the liquidators in England to transfer the assets collected by them to the liquidators in the principal Australian liquidation even though the result of such a transfer would be to interfere with the statutory scheme imposed on those assets by the UK Insolvency Act 1986 and whether or not the court ought to exercise its discretion in favour of such a transfer.

115 The Court of Appeal considered the jurisdiction to wind up foreign companies in England under s221 of the UK Insolvency Act 1986 and the relevant case law and found that Justice Richards had gone too far in his view that:

The substantive rules of distribution under the English statutory scheme are mandatory and the court has no power to make an order which has the effect of disapplying them.

The Chancellor found that there may be circumstances in which a transfer of assets is for the beneﬁ t of creditors and the transfer should be made, notwithstanding that this would involve the disapplication of English insolvency priorities. The example given by the Chancellor was a savings in costs by avoiding duplication which could offset any reduction in a prospective dividend.

The Court of Appeal also found that if the companies were in liquidation in England, the English court would have jurisdiction to entertain a request under s426 of the UK Insolvency Act 1986 for directions to the liquidators in England to transfer the assets collected by them to the liquidators in the principal liquidation, even though the result of such a transfer would be to interfere with the statutory scheme imposed on those assets by the UK Insolvency Act 1986.

The Court of Appeal stated:

Thus the court should comply with the request if it may properly do so. That will involve a consideration of all the circumstances including whether the transfer sought will prejudice the creditors or any class of them and whether there would be other advantages sufﬁ cient to counteract such prejudice.

The Court of Appeal went on to say:

If the interests of creditors would be prejudiced by the transfer sought, then the fact that the principal liquidation is in Australia is immaterial.

The court also considered the regard to be paid to the rules of private international law when exercising its discretion under s426 of the UK Insolvency Act 1986. The court found that whilst the provision for cross border cooperation might serve a useful purpose where the request relates to a matter in which the rules of private international law might operate, there is no rule of domestic or private international law in this case which entitled the court to disregard the interests of creditors or any class of creditors.

Accordingly, the Court of Appeal held that the starting point was to consider the scope of s426 of the UK Insolvency Act 1986. Here, the NSWSC letter of request did not fall outside the ambit of the concept of ‘assistance’ and the jurisdiction conferred by s426 did not preclude the High Court in England from a proper consideration of the request. The court also held that if s426 could authorise a transfer from the liquidators of an ancillary winding up to the liquidators of the principal winding up, then the only question would be whether the court should exercise its discretion to do so. In exercising its discretion, the court had to consider the prejudice to the interests of some creditors of such a transfer. In this case, the Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors.

116 Accordingly, the appeal was dismissed.

The English Court of Appeal has found that where it is asked by a letter of request to do so, it can apply foreign (rather than English) law. Whether or not it should do so is a matter of discretion. Where the exercise of that discretion will see creditors or a class of creditors disadvantaged, the court will not exercise its discretion in favour of disapplying English law.

117 LIQUIDATION

I’m special – stay of proceedings

Case Name: In this case, the Hong Kong Court of Appeal considered whether Re Zhuang PP Holdings Limited winding-up proceedings against a company should be stayed or adjourned pending the conclusion of a separate claim by the Citation: company against a petitioner in respect of related matters. [2006] HKCA 200, Hong Kong The petitioner had granted a loan to a subsidiary of a company which was to be Special Administrative Region used to ﬁ nance the purchase of property. The loan was secured by a guarantee from Court of Appeal, per Rogers VP the company. The subsidiary defaulted on the loan and the petitioner sought to and Le Pichon JA enforce the company’s guarantee. The company commenced a High Court action against the petitioner and others claiming a conspiracy to procure the purchase of Date of Judgment: the property at a gross overvalue. The petitioner subsequently applied to wind up the company, alleging that the company’s management had deliberately stripped 15 June 2006 the company of its assets so as to place those assets beyond the reach of creditors and therefore it was just and equitable that it be wound up. The company applied Issues: to the court for orders staying or adjourning the winding-up proceeding pending the • Winding-up proceedings conclusion of the High Court claim against the petitioner. • Stay application where a cross-claim has been made The court held that where there is a genuine cross-claim, a winding-up petition against the petitioner should be dismissed or stayed unless special circumstances exist. In this case, it held that special circumstances did exist and therefore the proceeding should not be stayed. The court said:

This is not a case where a creditor simply seeks payment of a debt and there is a monetary cross-claim by the company. In this case, the grounds of the petition are [of]… serious asset stripping….done speciﬁ cally to defeat the creditors and, most importantly, in respect of what…. was a publicly quoted company in Hong Kong.

The court emphasised the importance of this last fact, noting that sound corporate governance and ethical standards were vital if Hong Kong is to ‘retain its place in the ﬁ nancial services world’.

The court’s suspicion that the company’s cross-claim was a ‘rearguard action to delay the practitioner recovering its debts’ was a further factor inﬂ uencing its decision that the petition not be stayed.

This case demonstrates that in Hong Kong, in the absence of special circumstances, winding-up proceedings will be stayed if the company has a genuine cross-claim against the petitioner. However, ‘special circumstances’ are likely to exist where there is a prima facie case of asset-stripping by the company aimed at placing such assets beyond the reach of creditors.

118 LIQUIDATION

Public examinations – production of documents by insurers

Case Name: This case considers the circumstances in which the court will In the matter of Southland Coal order the production of documents by an insurer in connection Pty Ltd (receivers & mortgagors with public examinations, the ‘examinable affairs’ of an insured appointed) (In liquidation) corporation and the procedure for dealing with privilege claims arising in relation to production of documents. Citation: The case involved an application by the receivers of Southland Coal Pty Ltd [2006] NSWSC 184, Supreme (Southland) for the production of documents by the company’s insurers QBE, and Court of New South Wales per QBE’s agents (collectively the QBE parties) in connection with examination Austin J summonses.

The QBE parties also sought access to the receivers’ initial section 596C affi davit. Date of Judgment: 30 June 2006 The receivers issued examination summons under s596B to QBE’s offi cers to examine Southland’s ‘examinable affairs’ to help the receivers decide whether to Issues: institute proceedings against QBE in respect of insurance claims, and to examine whether QBE had acted with the utmost good faith in assessing the Southland • Section 596 CA • Public examinations claims and denying indemnity. – ‘examinable affairs’ The receivers sought orders for production of documents relating to the denial • Production of documents of indemnity by QBE, the reasons for that decision, the considerations taken into and procedure for dealing account by QBE in making them, and the inquires relied upon by QBE for that with privilege claims purpose. • Access to affi davit Justice Austin held that the receivers’ purpose in conducting examinations of Southland’s examinable affairs to determine whether to institute proceedings against QBE was a proper and permissible purpose. This extended to pursuing the examinations to investigate whether QBE had assessed the claim with utmost good faith because this was part of considering whether proceedings should be instituted and a ground on which they could be. His Honour held that this would not necessarily amount to a dress rehearsal for cross-examination or destroy the credibility of witnesses as examinees, infl ict fi nancial or other collateral harm or otherwise be vexatious, oppressive or abusive.

His Honour found that the restricted scope of the documents meant that any privilege claims could be dealt with in the normal procedural way, with the exception of an entirely privileged category of documents (QBE reports of claims provided to its reinsurers) that was deleted from the order.

119 The application for access to the s596C afﬁ davit was denied on the basis it was not relevant to deciding the issue about production of documents, and because the Supreme Court and Court of Appeal had previously found that the examinations could not be challenged for being improper, oppressive or exceeding the scope of s596B.

This case conﬁ rms that an insurer’s internal documents relating to a decision and/or assessment of an insurance claim of a corporation may be ‘examinable affairs’.

120 LIQUIDATION

Discretionary issues – granting of leave to ASIC to order winding-up of companies in insolvency

Case Name: This decision concerns the issues that a court may legitimately ASIC v Neolido Holdings Pty consider when deciding whether to grant a party leave to apply Ltd for the winding-up of a company under section 459P CA. When determining whether leave should be granted, a court must Citation: consider the strength of the case of insolvency put forward by the applicant, and not issues associated with the course of the [2006] QCA 266, Court of Appeal of Queensland per winding-up, such as who should bear the costs associated with Williams, Keane and Holmes that process, and any associated investigations. JJA The companies under consideration (the companies) incurred substantial debts during the course of their business. ASIC sought leave under s459P(2)(d) CA to Date of Judgment: apply for the companies to be wound up. Leave was granted by Justice Fryberg of 28 July 2006 the Queensland Supreme Court on the condition that ASIC pay all the costs of the liquidator involved in the winding-up.

Issues: ASIC appealed Justice Fryberg decision to impose a condition on the leave to the • Section 459P CA Queensland Court of Appeal. The Court of Appeal initially dealt with an objection to • Whether a court can grant its competency to hear an appeal on costs issues. The court rejected this argument, leave to ASIC to wind up a pointing out that Justice Fryberg’s order imposing the condition was not an ‘order company under s459P(2)(d) as to costs only’, but rather an order giving ASIC leave to apply to have the on the condition that companies wound up. ASIC pay all costs of the liquidator involved in the The court then turned to the substance of the appeal. It found that Justice Fryberg winding-up of that company imposed the condition primarily because he assumed that the liquidator would most likely bear the costs of investigating and prosecuting any offences of insolvent trading by the directors, using funds which would otherwise go to the satisfaction of the companies’ creditors, and, as a result, it was necessary to impose prospectively some judicial control over the allocation of the burden of the costs that might hypothetically be incurred. It effectively imposed on ASIC the cost of both investigating the insolvent trading claim and also the entirety of the liquidator’s cost of the winding-up. The Court of Appeal found Justice Fryberg’s reasoning in this respect largely unwarranted, and otherwise inappropriately wide in scope.

The Court of Appeal held that leave to apply to wind up a company should only be granted to ASIC where ASIC can demonstrate that there exists a strong prima facie case of insolvency. However, considerations relating to the future control of the liquidation, including the costs and expenses of the liquidation, are not relevant to the discretion to grant or withhold leave to ASIC to apply for a winding-up order under s459P. The court noted that the CA gives the court ample power to deal with the question of the costs and expenses of the liquidation as those matters arise.

121 The court also noted that, contrary to Justice Fryberg’s reasoning, it is generally a matter for ASIC, and not for the liquidator, to investigate any alleged contraventions of the CA by the directors and, if appropriate, to institute proceedings. It added that, to the extent that investigations into insolvent trading are undertaken by the liquidator in such a manner that their successful outcome will be of pecuniary beneﬁ t to the company, then the companies and their creditors, and not the public purse, should foot the costs.

When granting ASIC leave under s459P CA to apply for the winding-up of a company, the court must primarily consider the strength of the case presented by ASIC that the company is insolvent. It is not appropriate for the court, in deciding whether to grant leave, to also concern itself with the course of the winding-up, and particularly with the issue of which party should bear the costs of such winding-up.

122 LIQUIDATION

Injunctions and proceedings in winding-up of managed investment schemes

Case Name: This decision considers the breadth of the court’s powers in ASIC v Primelife Corporation section 601EE(2) CA to grant an injunction in relation to the Ltd winding-up of a managed investment scheme and the ability of a liquidator to bring proceedings on behalf of a managed Citation: investment scheme (which is not a legal entity) and its investors. [2006] FCA 1072, Federal This case concerned the winding-up of two managed investment schemes which Court of Australia per had not been registered, as required by the CA (the Schemes). The Schemes were Goldberg J constituted by a partnership between two companies (Novena and Kastabon), both acting as managers for investor syndicates and by other contractual arrangements. Date of Judgment: ASIC successfully applied for the winding-up of the Schemes pursuant to section 18 August 2006 601EE(1) and Justice Goldberg made various other orders relating to the winding- up. At the time the winding-up orders were made, Novena and Kastabon had Issues: entered into a contract for the purchase of land and the construction of an aged • Sections 1324, 601EB, care facility. They had paid the deposit but had not completed the sale. The 601ED(1) and 601EE CA investors in the Schemes sought further orders that: • The court’s power to grant injunctions in the winding- • the vendor under the contract of sale be restrained from taking any steps to up of unregistered managed rescind or terminate the sale contract; and investment schemes • the liquidator be entitled to bring proceedings in the name ‘Colin McIntosh • The ability of the Nicol as Liquidator of the Claremont Terrace Scheme’ on behalf of the scheme liquidator of a managed and/or Kastabon and/or Novena (notwithstanding that it had been deregistered). investment scheme to bring proceedings in their own The investors submitted that the court was empowered by s601EE(2) to grant the name temporary injunction. The vendor interests opposed the injunction on the basis that the court had no power to grant the injunction as it was not sought in aid of a principal cause of action for which ﬁ nal relief was sought and, further, that the usual undertaking as to damages was not given.

Justice Goldberg held that the court’s powers under s601EE(2) extend to the granting of an injunction to restrain a third party from affecting, terminating or dealing with subject matter which is an asset of a scheme pursuant to a contractual or proprietary relationship. That power is not circumscribed by the principles and equitable doctrines relating to the grant of interlocutory injunctions, such as the requirement for an undertaking as to damages and that the injunction be sought in aid of a principal cause of action for ﬁ nal relief. The purpose of the injunction should be to preserve the assets of the scheme only for so long as is needed for the liquidator to make an informed judgment as to how best to deal with the asset. He stated that such an injunction was procedural only, and not substantive and indicated that an injunction which substantively impacted third-party rights would be viewed differently.

123 In this instance, however, he found that the purpose for granting the injunction, which was to preserve the status quo to allow the liquidator to consider the appropriate course of action, was an insufﬁ cient ground to grant the injunction. This was because the investors did not intend to complete the sale contract and did not have the funds to do so, and because any causes of action that may be available to the investors would not be lost to them on the rescission of the sale contract.

Justice Goldberg made the order entitling the liquidator to bring proceedings on behalf of the Schemes and/or Novena and/or Kastabon. While he recognised that the Schemes were not legal entities, he considered it desirable and appropriate that the liquidator be entitled to bring proceedings as liquidator of the Schemes on behalf of the parties to the partnership agreement, which formed the core of the Schemes. The order would ensure that no challenge could be made to any proceeding brought by the liquidator, on the ground that he or the entities (the contracting entities which brought the Schemes into existence) are not proper parties to that proceeding.

Section 601EE(2) empowers the court to order an injunction restraining third parties from dealing with the assets of a managed investment scheme being wound up, despite the injunction not being sought in aid of a principal cause of action for ﬁ nal relief and the absence of an undertaking as to damages. A liquidator of a managed investment scheme may apply for an order to bring proceedings in their name on behalf of the scheme, to bar any challenge to the proceedings on the grounds that they, or the constituent entities of the scheme, are not proper parties to the proceeding.

124 LIQUIDATION

Title to goods in the possession of a company in liquidation

Case Name: This decision considers how a liquidator may deal with goods in Nicholas James Crouch & Anor the possession of a company in liquidation that are subject to v Lynne Adams & Ors contracts of sale, ‘buy-back’ agreements and other agreements with third parties. It also considers the application of liquidators’ Citation: liens in respect of remuneration for work done in preserving and realising such property. [2006] NSWSC 1029, Supreme Court of New South Wales per VIP Vending Pty Ltd (the company) carried on the business of buying, leasing, White J selling and managing vending machines and went into liquidation. The liquidator of the company sought directions pursuant to section 511 CA as to how he could deal Date of Judgment: with certain vending machines in the company’s possession, where:

28 September 2006 • there was a contract for the sale to a third party of a specifi cally identifi able machine; Issues: • there were successive sales of identifi ed machines to a series of buyers; • Title to goods the subject • there was a contract of sale to a third party, but the machine was unidentifi able; of partially completed sale • the company agreed to ‘buy-back’ the machine from the original buyer, but the contracts agreement was not completed and the company still owed money to the buyer; • Liquidator’s lien for and reasonable remuneration for • a deposit was paid towards the purchase of a machine, but no contract of sale preserving property of third was concluded and no machine was appropriated to the contract. parties • Section 511 CA and ss 21, Justice White dealt with each category separately and held as follows: 23 and 28 of the Sale of Goods Act 1923 (NSW) • In the fi rst case, the buyer became the legal owner of the machine on payment and the appropriation of the identifi ed machine to the contract. • In respect of all categories, the liquidator is entitled to a lien for reasonable remuneration for work done in the identifi cation, preservation, or realisation of the property. That lien is enforceable against the machine even if it belongs to the buyer. The liquidator may refuse to deliver the machine to the owner until payment of a levy for work done and, if the levy is not paid, the liquidator may, after giving notice to the owner, apply for an order authorising him to sell the machine to give effect to his lien. • In the second category, where there is an identifi able order of sales and the machine has remained at all times in the possession of the company, the last purchaser is the owner of the machine (s 28(1) of the Sale of Goods Act 1923 (NSW), subject to the last purchaser acting in good faith and not having notice of any previous sales. The company was the bailee of such machines. The liquidator may not distribute the machines or their proceeds of sale, pari passu between the innocent claimants, unless he obtains each of their consents. The liquidator may only sell the machine either with the owner’s consent or pursuant

125 to a court order for sale, if he seeks to exercise his lien, upon failure of the owner to pay the levy. Where the order of sales (of identifi ed machines) cannot be ascertained, the principles from the third category below apply, such that the claimants should be treated pari passu. • In the third category, title to such ‘unascertained goods’ does not pass unless there is an unconditional appropriation of the goods to the contract by the company with the assent of the buyer (ss 21 and 23 of the Sale of Goods Act). The evidence established that the machines were appropriated to the relevant contracts with the assent of the buyers and therefore title passed to the buyers. Where property passed to the buyers, but it is not possible to identify the relevant machines, the buyers are entitled, as tenant in common, to a proportionate interest in the total number of such machines in the company’s possession that are now identifi ed as having been appropriated to some buyer. The buyers may jointly sell the machines and divide the proceeds, or individually seek an order for division of the goods. The court directed that, if partition is not consented to, the liquidator may sell the machines in this class and, after satisfaction of his lien, distribute the proceeds between the owners pari passu. • In the fourth category, the company regained ownership of the machines upon entering into the buy-back agreement. The sellers have no lien over the goods for the unpaid purchase price. • In the fi fth case, title did not pass to the purchasers and they are unsecured creditors of the company for the amounts of their deposits.

Liquidators and administrators will ﬁ nd this case useful for understanding how to deal with goods in the possession of the company in external administration, which are subject to claims of ownership by third parties. In particular, it provides assistance in dealing with the situation where it is not possible to identify the relevant goods. Further, this case conﬁ rms that a liquidator is entitled to a lien in respect of their fees for work done in preserving that property.

126 LIQUIDATION

Just say yes: unanimous consent sufﬁ cient to justify pooling assets

Case Name: A liquidator applied for assistance in pooling the assets of three Whittingham re Hunter Valley interrelated companies to satisfy the claims of the creditors of all Gravel Supplies Ltd & Ors the companies. The court held that unanimous consent of all relevant entities was suffi cient to justify the order sought. Citation: The operation of the three companies, which were in liquidation, was so closely [2006] NSWSC 1070, Supreme linked that, in the liquidator’s opinion, the assets, income and liabilities of the Court of New South Wales, companies ‘were utilised and applied by the sole director of the companies and Equity Division, Corporations shared randomly by him against each of the companies’. List per Barrett J The liquidator was unable to ascertain the true fi nancial position of each of the three companies and submitted that the returns to creditors would be much higher Date of Judgment: under a pooled administration. The full implications of pooling were made known to 13 October 2006 all creditors and a unanimous decision was made to proceed with the pooling proposal. The sole director also provided written consent to the pooling. The court Issues: considered that the consent of the parties alone was suffi cient to justify the • Pooling of three interrelated liquidator implementing the proposal. companies’ assets in winding-up In reaching its conclusion, the court considered the combined application of • Signifi cance of consent of sections 511 and 477(1)(c) CA, under which the liquidator sought an order all relevant parties allowing him to wind up the companies on a pooled basis. Section 511 provides • Application of ss 511, that a liquidator may apply to the court to make an order in relation to the winding- 477(1)(c) and 510 CA up of a company and s477(1)(c) provides that a liquidator may make arrangements with creditors of a company in liquidation. The court determined that, although the present case involved an ‘arrangement’, there was no evidence of an arrangement being ‘made with’ any individual creditor. Therefore, the court decided that these were not the appropriate sections.

The court then considered the application of s510 CA, which concerns when an arrangement between a company and its creditors is binding. The court concluded that there was no arrangement between the company and its creditors as referred to in that section. Nevertheless, the court concluded that it should make a direction that the liquidator may proceed with winding-up on a pooled basis because where every relevant person consents there is no need to resort to statutory mechanisms.

The mere fact that the statutory requirements of the CA cannot be satisﬁ ed does not mean that a liquidator cannot proceed with the winding-up of companies on a pooled basis. Where the individual consent of every relevant person is obtained, it is not necessary to resort to any statutory mechanisms.

127 LIQUIDATORS

The discretion to displace priority creditors

Case Name: In this case, the New South Wales Supreme Court considered the Australian Steel Company circumstances in which the court will exercise its discretion under (Operations) Pty Ltd v EPS section 564 CA to distribute funds to a funding creditor ahead of Group Pty Ltd priority creditors in the classes identifi ed in section 556 (1) CA. The plaintiff, the largest creditor of the defendant, indemnifi ed the defendant’s Citation: liquidator for the costs of a preference recovery proceeding brought by the [2006] NSWSC 1080, Supreme liquidator against Onesteel Reinforcing Pty Ltd (Onesteel). The liquidator eventually Court of New South Wales per received payment in settlement of this proceeding and sought an order under Austin J section 564 CA authorising him to distribute an amount to the plaintiff in payment of amounts owed to it by the defendant, out of the proceeds of this settlement, Date of Judgment: before paying priority creditors. He also sought a declaration that he had no 18 October 2006 obligation to seek similar orders under s564 CA in regard to another preference recovery proceeding against BASF Australia Ltd (BASF) in relation to which the plaintiff alleged it had provided an indemnity. Issues: • Sections 556(1)(e),(g) and Justice Austin held that s564 gives the court a discretion to give a funding creditor (h) and 564 CA a higher position on the scale of priorities in the winding-up than a creditor in one • The court’s discretion under of the priority classes identifi ed in s556(1) CA. That discretion is not unfettered section 564 to displace the but is a power to make such orders as the court deems just. The onus is on the ranking of priority creditors funding creditor to persuade the court to disturb s556 priorities. The court’s in favour of a funding consideration of the merits of an order under s564 must involve carefully creditor considering whether there is a strong enough case to justify such interference. This will include an assessment of the extent and nature of the risk assumed by the funding creditor. Employees are not to be given special treatment above other priority creditors.

Justice Austin found that here the case for interference was very weak and therefore made no order under s564. The fact that the plaintiff had taken no signiﬁ cant risk in giving the indemnity was particularly signiﬁ cant (it had done so only after Onesteel had offered to settle for $75,000 and the liquidator was recommending a counter-offer of $95,000-$100,000).

Other relevant factors were:

• the sum advanced by the plaintiff to the liquidator for his fees had been refunded; • the plaintiff did not pay any of the liquidator’s legal fees; • any priority allocation to the plaintiff would reduce the amount paid to priority creditors; and

128 • the public interest in encouraging recovery actions would not be advanced by interfering in this case as the liquidator initiated the proceeding against Onesteel and brought it to the point of settlement negotiations without the beneﬁ t of the plaintiff’s indemnity.

In relation to the BASF proceeding, his Honour held that the plaintiff gave no indemnity and, even if it had, he would have been unlikely to make an order under s564 re-ordering creditor priorities, as both the liquidator and the plaintiff acted on the basis that no such indemnity was in place.

This case gives some guidance concerning the factors that will be taken into account by a court in determining whether it is just to make an order under s564 CA, distributing funds of a company in liquidation to a funding creditor ahead of priority creditors.

129 LIQUIDATORS

Can you examine third parties about their internal affairs?

Case Name: This decision of the New South Wales Court of Appeal has two Meteyard & Ors v Love & Ors (in important ramifi cations for those involved in conducting public their capacity as receivers and examinations. First, it has clarifi ed the extent to which information managers of Southland Coal Pty may be obtained from a third parties and their agents. Second, Ltd (in liquidation)) privilege is now more widely available than before to prevent the disclosure of independent reports obtained by third parties. Citation: This case concerned the attempt by an insurance company and its appointed loss (2005) 65 NSWLR 36, Court adjusters and expert consultants to challenge examination summonses issued of Appeal of New South Wales under the discretionary grounds in section 596B CA. per Beazley, Santow and Basten JJA The insurer had declined a claim for indemnity made by the owners of a coal mine. Receivers and managers appointed by the mine owner’s lender had issued Date of Judgment: summonses to obtain information about the reasons behind the refusal of the claim in order to determine whether to commence separate indemnity proceedings. 13 December 2005 While the reasons behind an insurer’s refusal of a claim are well established as an Issues: ‘examinable affair’ of a corporation, the Court of Appeal held that examining the • Section 596B CA internal affairs of a third party, such as an insurer, will only be permitted where the • The scope of ‘examinable applicant can identify the factual basis upon which the proposed examinee has affairs’ information concerning the corporation’s ‘examinable affairs’ which is not known to • Claims for privilege on the applicant. This requirement will not be construed so broadly as to include any reports prepared by third information which may affect the value of a corporation’s assets. parties In this case, that meant that the internal assessment of information by the loss adjusters and experts and communicated to the insurer that helped form its decision on indemnity went beyond the scope of an ‘examinable affair’ and so amounted to an abuse of process. This result may well have been different had the insurer specifi cally referred to these internal reports in its formal response to the claim for indemnity.

The issue of privilege arose because, at ﬁ rst instance, the NSW Supreme Court held that reports prepared by the loss adjusters and expert consultants were not privileged because they had not been obtained on the insurer’s express instructions. This meant that the loss adjusters and experts could not be construed as acting as the agent of the insurer or its lawyers in order to obtain the protection of legal advice privilege under s118 of the Evidence Act 1995 (NSW).

The Court of Appeal held that the loss adjusters and experts should, as a matter of commercial reality, be treated as acting as the agents of the insurer because it paid their fees. This meant that legal advice privilege could apply so long as each report satisﬁ ed the usual test that it had been prepared for the dominant purpose of the lawyers providing legal advice.

130 The practical effects of this decision are: that the examination of third parties about their internal affairs is unlikely to be permitted unless it can be identiﬁ ed with some precision why this information is likely to affect the value of the corporation’s assets; and, the increased prospect of independent consultants, as examinees, being able to claim legal advice privilege when answering questions or producing documents.

131 LIQUIDATORS

Voting for your own remuneration by proxy – OK?

Case Name: The chairman of a creditors’ meeting held proxies instructing him Re HIH Casualty and General to vote in favour of a scheme of arrangement. The chairman Insurance Ltd & Ors stood to receive remuneration out of the assets of the company if the scheme of arrangement was approved and was therefore Citation: barred by regulation from voting in favour of the scheme. This was an application to exclude the operation of the relevant [2006] NSWSC 191, Supreme Court of New South Wales per regulations. Barrett J This was an application by the liquidators of the HIH Group of Companies that regulations 5.6.33(1) and 5.6.34(e) of the Corporations Regulations 2001 (Cth) Date of Judgment: (the Regulations) not apply to creditors’ meetings to be held for the purpose of 23 March 2006 approving proposed schemes of arrangement between the group companies and their creditors.

Issues: The Regulations prohibit a proxyholder from voting in favour of any resolution that • Regulations 5.6.33 and would directly or indirectly place them, their partner or employer, ‘in a position to 5.6.34 of the Corporations receive any remuneration out of assets of the company except as a creditor rateably Regulations 2001 (Cth) with the other creditors of the company’. • Application for exclusion of operation of regulations that Proxies had been circulated to creditors allowing them to appoint the chairman of would prohibit chairman the meetings as their proxy. By court order, the chairman of the meetings was to be of creditors’ meeting from one of the liquidators. The proposed schemes of arrangement contemplated that voting proxies the liquidators would automatically become scheme administrators and made provisions for their remuneration. The liquidators were therefore concerned that the operation of the Regulations would prohibit the chairman of the meetings from voting the proxies in favour of a resolution approving the schemes of arrangement.

Justice Barrett found that: • the court should allow matters to go forward in such a way as does not frustrate the wishes of persons who have chosen to appoint the chairman as their proxy; and • should any creditor take the view that the voting of the proxies by the chairman resulted in any improper consequence, that creditor would be able to raise its complaint with the court at the section 411(4)(b) hearing prior to the approval of the proposed scheme of arrangement.

In light of these considerations and not having received any objection from creditors who had been notiﬁ ed of the application, Justice Barrett ordered that the Regulations not apply to the creditors’ meetings.

132 Justice Barrett did not accept that any of the applicants had intended to abandon their interest in the relevant moneys at the point of parting with the bank cheque. Rather, his Honour was of the view that the intention of each of the applicants could only have been that Enterprizes’s promises under the foreshadowed deed would be received by the applicant and that a loan would be completed. Justice Barrett found that none of the supposed intermediaries with whom the applicants dealt had authority to bind Enterprizes. Each dealing was on the basis that the supposed intermediary would pass on the bank cheque and document signed by the applicant to Enterprizes, which would then also execute the document and provide the promise to repay to the applicant, and that promise Justice Barrett found, was never given in any of the cases.

Accordingly, the applicants were found by Justice Barrett to be ‘would-be investors’. Justice Barrett concluded that, in each case, there was a total failure of consideration, and the moneys held by the liquidator of Enterprizes in quarantined form were held upon a constructive trust for the persons who had provided them.

Moneys paid by would-be investors were found to be held upon constructive trust by the liquidator given the total failure of consideration by the company.

133 LIQUIDATORS

Circumstances in which court will appoint an additional liquidator

Case Name: The liquidators of the HIH Group applied to the court for an order McGrath & Anor Re HIH appointing a special purpose liquidator for certain parts of the Insurance Ltd & Ors winding-up of FAI companies that formed part of the HIH Group. The court considered its jurisdiction to make such an Citation: appointment and the circumstances in which that jurisdiction should be exercised. [2006] NSWSC 385, Supreme Court of New South Wales per The liquidators of the HIH Group (which included both HIH and FAI companies) Barrett J planned to bring proceedings on behalf of certain HIH companies in the group. The liquidators had identifi ed two possible confl icts of interest: Date of Judgment: • the potential defendants in the threatened proceedings sought to propound 4 May 2006 cross-claims against the FAI companies in the HIH group; and • the HIH companies might need to prove in the winding-up of either or both the Issues: FAI companies. • Section 472(1) and 473(8) CA Justice Barrett commented that it was obvious that the existing liquidators could • Appointment of a special not deal with these possible confl icts, and these aspects of the insolvent purpose liquidator administrations of the FAI companies therefore required separate and independent attention.

Section 472(1) CA confers the power to appoint a special purpose liquidator in a court-ordered winding-up and s473(8) CA enables the court to confer special and limited powers upon a special purpose liquidator. Justice Barrett stated that one possibility for liquidators, upon encountering a situation of confl ict, would be to vacate the fi eld, but that would be highly counterproductive in this case where the liquidators had acquired considerable knowledge over a fi ve-year period. Accordingly, he made orders to the effect that a special purpose liquidator should be appointed with certain limited powers.

Where a conﬂ ict of interest arises for liquidators, the appointment of a special purpose liquidator is an alternative to those liquidators ceasing to act.

134 LIQUIDATORS

Cancellation or suspension of registration of a liquidator

Case Name: This decision considers whether the exercise of certain powers Albarran v The Members of conferred on the Companies, Auditors and Liquidators the Companies, Auditors and Disciplinary Board to cancel or suspend the registration of Liquidators Disciplinary Board company liquidators involves the exercise of judicial power and therefore is an ineffective attempt to confer the judicial power of Citation: the Commonwealth upon a body which is not a court and, as [2006] FCAFC 69, Federal such, breaches the Constitution. Court of Australia per Emmett, The two applicants were registered as liquidators under the CA. ASIC applied to the Allsop and Graham JJ Companies, Auditors and Liquidators Disciplinary Board (the Board) to have Mr Albarran’s registration as a liquidator cancelled and Mr Gould’s registration Date of Judgment: suspended. The liquidators both applied to the court for a declaration (amongst 19 May 2006 other orders) that section 1292 CA is unconstitutional because it invests judicial power of the Commonwealth in the Board.

Issues: The Board is formed under the Australian Securities and Investments Commission • Whether suspension or Act 2001 (Cth) and must comprise a chairperson, deputy chairperson, one cancellation of a liquidator’s chartered accountant, and at least one member who represents the business registration is an exercise community and has qualifi cations, knowledge or experience in fi elds such as of the judicial power of the business, fi nancial markets or law. Commonwealth • Section 1292(2) CA and Section 1292(2) confers power on the Board to cancel or suspend registration of a s57 of the Australian liquidator if they contravene s1288 CA, cease to be a resident of Australia, or fail Constitution to carry out or adequately perform the duties or functions of a liquidator. The Board’s functions under s1292 CA are exercised by a panel of the Board. The panel is permitted to summons a person to appear at a hearing to give evidence and to produce documents. Proceedings are to be conducted informally and as quickly as possible and the panel is not bound by the laws of evidence, although it must observe the rules of natural justice.

The grants of legislative power under s51 of the Constitution do not permit the conferral of the judicial power of the Commonwealth upon any body or person except a ‘court’ contemplated by Chapter 3 of the Constitution (conﬁ rmed in the Boilermakers case). The Federal Court found that the Board was not a court and that Parliament therefore could not vest any part of the judicial power of the Commonwealth in the Board. The question which then arose was whether the relevant parts of the CA and the Australian Securities and Investments Commission Act purported to vest Commonwealth judicial power in the Board.

135 The liquidators contended that, in conducting an inquiry and in determining whether a registered liquidator has failed to carry out or perform certain duties or functions adequately, the Board acts as a decision maker in the context of adversarial proceedings between ASIC and the registered liquidator, and that those proceedings are based on evidence and submissions of the parties.

The court concluded that the exercise of power under s1292 does not involve the exercise of judicial power. The question to be determined by the Board under this section is ‘whether, in the view of the Board, taking into account past failures of duties, a defeasible right should continue into the future’. It was held that the Board makes a subjective determination, following which it will consider whether ‘the rights of the registered liquidator as to the future are to be changed’. The court found that the function of the Board was not to fi nd whether an offence has been committed and, if so, to infl ict punishment. It’s function is to assess whether someone should continue to occupy a statutory position involving skill and probity, where the Board is satisfi ed that the person has failed in the performance of their professional duties in the past.

The powers exercised by the Companies, Auditors and Liquidators Disciplinary Board under s1292 CA in relation to the cancellation or suspension of the registration of a liquidator are not judicial powers and do not therefore infringe s51 of the Constitution.

136 LIQUIDATORS

Anshun estoppel and abuse of process: grounds for rejecting a proof of debt?

Case Name: The New South Wales Supreme Court considered Anshun Re Linknarf Management estoppel and abuse of process as grounds for rejecting a Services (in liquidation); creditor’s proof of debt and found that, in this matter, they were Scarcella & Ors v Davies not valid bases for rejecting the proof of debt. Linknarf Management Services Pty Ltd (Linknarf) leased commercial premises Citation: owned by the plaintiffs. During the term of the lease, Linknarf ceased paying rent [2006] NSWSC 497 Supreme and thereby repudiated the lease. In earlier proceedings, the court held that the Court of New South Wales per plaintiffs had accepted this repudiation (Scarcella v Linknarf [2004] NSWSC Austin J 1168), and the liquidator of Linknarf accepted their proof of debt for rental income for the period of time up until the acceptance of the repudiation. Date of Judgment: The plaintiffs subsequently submitted a proof of debt for damages for the loss of 26 May 2006 the beneﬁ t of Linknarf’s covenant to pay rent from the acceptance of the repudiation until the expiry of the term of the lease. The liquidator rejected this Issues: proof of debt on the grounds of Anshun estoppel or, alternatively, that it was an • Appeal under s1321 abuse of process, and the plaintiffs appealed under section 1321 CA. CA against decision of liquidator The court had to consider whether anything had happened, in the nature of • Whether proof of debt estoppel or abuse of process, to deprive the plaintiffs of their entitlement to precluded by Anshun damages for the loss of the beneﬁ t of Linknarf’s covenant to pay rent from the estoppel or on grounds of acceptance of the repudiation until the expiry of the lease. abuse of process Anshun estoppel is an extension of the doctrines of res judicata and issue estoppel, and acts to preclude a party from raising a claim in a future proceeding which the party could, and should, have raised in an earlier proceeding.

The court concluded that the plaintiffs’ proof of debt was not precluded by Anshun estoppel because:

• there could have been no reasonable expectation that the plaintiffs should have included in the earlier proceeding a claim for damages for the loss of the beneﬁ t of the lessee’s covenant to pay rent for the remainder of the term. Such a claim would have undermined the plaintiffs’ assertion in the earlier proceeding that the lease remained on foot; • the plaintiffs’ claim for the subsequent proof of debt was an ‘assertion...of the lessor’s rights after acceptance for the lessee’s repudiation [and] is wholly compatible with the assertion of a claim to recover rent for the period up until acceptance of the repudiation occurs’; and

137 • the law did not offer the plaintiffs alternative remedies arising out of the same facts: if the lease had been terminated, the only remedies available to the plaintiffs were remedies based on the facts constituting termination and if the lease had not been terminated, the only remedies available to the plaintiffs were remedies based on the fact that the lease remained on foot.

The court also concluded, based on the same reasoning, that no abuse of process arose from the plaintiffs’ proof of debt.

This case provides a clear illustration of the tests for Anshun estoppel and abuse of process as grounds for rejecting a creditor’s proof of debt application.

138 LIQUIDATORS

Criminal contempt: the outer limits of public comment on litigation

Case Name: Litigants and their lawyers seem to increasingly use the press Melbourne University Student and the Internet as weapons in litigation. A recent decision of the Union Inc (in liquidation) v Ray Victorian Supreme Court considered a plaintiff’s allegation that a & Ors defendant had brought such improper pressure on him to discontinue or settle proceedings as to constitute criminal Citation: contempt. [2006] VSC 205, Supreme The liquidator of the Melbourne University Student Union (MUSU) issued Court of Victoria per proceedings against former MUSU ofﬁ cers, including a former president of the Hollingworth J MUSU (the defendant), for breaches of ﬁ duciary duties seeking damages in excess of $3 million. While the proceedings were still on foot, the defendant set up a Date of Judgment: website on which he criticised the liquidator. The liquidator sought an injunction to 14 June 2006 restrain the defendant from publishing his criticisms on the basis that publication amounted to criminal contempt of court by publication.

Issues: To establish criminal contempt by a publication, the liquidator needed to prove • Use of press and Internet to beyond reasonable doubt that: discredit a liquidator • Whether defendant had • the defendant had exerted improper pressure on him to settle or discontinue the committed criminal proceedings; and contempt • the publication had ‘as a matter of practical reality, a tendency’; or a ‘clear tendency’ or a ‘real and deﬁ nite tendency’ to prejudice, embarrass or interfere with the course of justice in a proceeding or there was a substantial risk of serious interference of that type.

Justice Hollingworth found that many of the defendant’s statements were factually correct in essence and, accordingly, did not display the relevant tendency. She held, however, that it was at least arguable that the more general public allegations that the liquidator had engaged in lies, deception and fraud, and had misled the court, might have the relevant tendency.

Her Honour concluded that while there was, at least in part, a serious question to be tried, the liquidator’s prospects of ultimately establishing criminal contempt were not strong. Balanced against this was the competing public interest in protecting free speech, which she said carried considerable weight. She concluded that, on balance, she should not grant the injunction.

Justice Hollingworth then turned to the question of whether there were any discretionary matters which would nonetheless persuade her to grant the injunction. Her Honour considered the liquidator’s own conduct and his capacity to resist the defendant’s criticisms. She said these tended to support her conclusion that this was not an appropriate case in which to grant the injunction sought.

139 Proving criminal contempt involves proving, beyond reasonable doubt, that the accused exhibited a clear tendency to interfere with the administration of justice. This case makes it clear that it is not enough to show that the accused has brought pressure to bear on the claimant to discontinue or settle litigious proceedings. The pressure must be shown to be improper. Publication of information that is factually correct, albeit disruptive to the proceedings, will not of itself constitute criminal contempt.

140 LIQUIDATORS

Special purpose liquidator should have funds for expenses

Case Name: In this case, the court considered whether a special purpose Onefone Australia Pty Ltd v liquidator should have a separate fund for the payment of his One.Tel Ltd expenses in relation to the special purpose. One.Tel was subject to a creditors’ voluntary winding-up and liquidators were Citation: appointed. However, a special purpose liquidator was appointed to One.Tel by order [2006] NSWSC 815, Supreme of the court for a specifi c additional purpose in relation to which the principal Court of New South Wales per liquidators had a possible confl ict of interest (Matter X). However, no order was Barrett J made at that time as to the fi nancial considerations surrounding the appointment and functions of the special purpose liquidator. Date of Judgment: The principal liquidators and special purpose liquidator agreed that the principal 15 August 2006 liquidators should make funds available to the special purpose liquidator to enable him to comply with subsequent court orders that varied his functions and gave Issues: directions as to certain measures to be taken by him. However, there was • Funding for special purpose disagreement between the two as to the amount. liquidator appointed by Justice Barrett remarked that the situation was unusual. There was an additional court liquidator who had limited functions only and those functions did not include the receipt and recovery of moneys nor the holding of the estate that was being administered in the winding-up of One.Tel. All relevant fi nancial resources remained in the hands of the principal liquidators. Justice Barrett commented that the applications by the principal liquidators and the special purpose liquidator were directed at the same end: equipping the special purpose liquidator with a fund to which he could resort from time-to-time in the same way as an ordinary liquidator to meet the costs of the winding-up.

Justice Barrett agreed that the availability of a separate fund for the special purpose liquidator would avoid the situation whereby he might be compelled to request funds from the principal liquidators, placing upon them some actual or implied responsibility to review the expenditures of the special purpose liquidator. The fund would be under the sole control of the special purpose liquidator for retention and application by him towards expenses of his administration (but not his remuneration):

… in the way in which any liquidator would retain and apply the fund under administration – that is, without review and supervision by, and without any obligation to answer to, anyone occupying a position akin to that occupied by the principal liquidators in this particular case.

Justice Barrett held that, given the grounds upon which the special purpose liquidator was appointed, it would be inappropriate for the principal liquidators to have any control over expenditures by the special purpose liquidator. The appointment of the special purpose liquidator had been ‘with a view to placing

141 [Matter X] under the control and oversight of someone not affected by the possibility of self-interest in relevant decision making’. The basis for the appointment of a special purpose liquidator – a legitimate concern that the principal liquidators were not, or might not, be in a position to exercise disinterested decision-making in relation to Matter X – would be undermined if the principal liquidators, by being capable of denying or threatening to deny funds, were in a position of inﬂ uence over the conduct of the special purpose liquidator.

The court found that the special purpose liquidator, who was subject to the ordinary duties and responsibilities of a liquidator in relation to the conservation and application of funds, should have available to him a ﬁ nite fund for application as and when the occasion required.

142 LIQUIDATORS

Seeking extensions of time to apply for court orders regarding voidable transactions

Case Name: This case looks at whether: liquidators appointed to replace other Re Harris Scarfe Ltd (in liquidators are entitled to rely on orders made in favour of the liquidation) original liquidators; and applications to extend the time limitation under section 588FF(3) CA should not be made ex parte; and if Citation: they are, the absent party will be able to have the extension set aside as of right. (2006) 24 ACLC 1034; [2006] SASC 277, Supreme Court of In this case, the liquidators applied under section 588FF(1) CA to set aside South Australia per Debelle J payments made by the company on the ground that they were voidable transactions. A short time later, the liquidators sought orders to extend the Date of Judgment: limitation period prescribed by s588FF(3) within which to institute an application 8 September 2006 under s588FF(1) against certain creditors. Those orders were made, but the liquidators did not serve the application on some of the creditors because the liquidators had not, at the time of the application, decided whether they would Issues: pursue claims against them. • Section 588FF CA • Whether orders apply only Some time later, the liquidators were replaced with new liquidators. to the original or to all subsequent liquidators of a The creditors in respect of whom the limitation period had been extended argued company that the new liquidators could not rely upon the extension order because it had • Whether ex parte been made in favour of ‘the plaintiffs’. They argued that ‘once a person holding the applications for extensions offi ce of liquidator is for whatever reason replaced, the new liquidator is not able to of time can be set aside as continue to prosecute the proceedings’. of right by creditors Justice Debelle rejected this argument on the basis that the original liquidators had made the application as liquidators and they would not have had standing to make the application as individuals. As a result, where a liquidator is replaced, the new liquidator is bound by any order made while the former liquidator held offi ce as liquidator and also has the benefi t of any such order. It follows that:

• the new liquidators could enforce the order; and • it was binding upon the creditors.

The creditors then claimed that because the order had been made in their absence, they could apply to have it set aside as of right.

Justice Debelle held that:

• extending a limitation period substantively affected both the rights of the creditor (to raise a statutory defence of a limitation period) and the company (to bring an action); • generally, a liquidator should not seek ex parte orders extending the time limit prescribed by s588FF(3), but that there may be circumstances in which such a course could be justiﬁ ed (for example, in cases of ‘urgency’); and

143 • if an order is made extending the time period under s588F(3), the affected creditor is entitled, as of right, to have the extension order set aside, and the application for the extension will be heard afresh.

This decision reinforces the need for liquidators to move quickly to identify all voidable transactions. If the liquidator needs to seek an extension of time within which to make the application under s588FF(1), the liquidator should ensure that the relevant creditors are identiﬁ ed and served. Otherwise, the creditor whose interests are affected by the ex parte order will be entitled to have the extension set aside as of right.

144 LIQUIDATORS

Access to afﬁ davit in support of examination summons

Case Name: Obtaining an examination summons under section 596B CA Ariff v Fong requires a supporting affi davit. Under s596C(2) CA, that affi davit ‘is not available for inspection except so far as the Court orders’. Citation: In dealing with an unusual fact situation, this case confi rmed the principles on which a court will grant access to s596C CA [2006] NSWSC 1030, Supreme affi davits. Court of New South Wales per Barrett J The CarLovers group of companies (the CarLovers Companies) were subject to a DOCA of which Mr Ariff was the deed administrator (the Deed Administrator). The Date of Judgment: Berjaya group of companies (the Beraya Companies) owned 97 per cent of the 3 October 2006 shares in the holding company of the CarLovers Companies and was owed about 90 per cent of their indebtedness. Mr Fong was a representative of the Beraya Companies. Issues: • Sections 596B, 596C CA Mr Fong had obtained the issue of examination summonses under Part 5.9 CA • Entitlement of examinee against the Deed Administrator. Mr Fong had been given written authority by ASIC under an examination to apply for the summonses and was therefore an ‘eligible applicant’ for the summons to inspect the summonses under ss9(e)(i) and 596B(1)(a) CA. As required by s596C CA, Mr Fong affi davit in support of the had fi led affi davits in support of the summonses. The Deed Administrator sought summons access to the affi davits, which under s596C(2) CA were not available for inspection • Improper purpose behind without a court order. the examination summons • Relationship between the In determining the question of access, Justice Barrett followed the following ‘well applicant for the summons settled’ principles: and the examinee • An applicant seeking inspection of the affi davit must ‘demonstrate an arguable case that the issue of the summons exceeded the power of the court under s596B [CA] and that access to the affi davit is likely to assist in determining the correctness of the challenge’ (citing Justice Basten in Meteyard v Love (2005) 224 ALR 588) • ‘But even then, the court must be conscious of the possibility that an examination might nevertheless proceed and that access by an examinee to the affi davit may compromise that process’, (applying Re Excel Finance Corp (1994) 14 ACSR 407).

The Deed Administrator argued that in obtaining the examination summonses, Mr Fong was motivated by one or more improper purposes and that their issue therefore constituted an abuse of process and exceeded the court’s power under s596B CA. The Deed Administrator argued that those improper purposes included:

• exerting pressure on the Deed Administrator to accede to the Beraya Companies’ demand that he return control of the CarLovers Companies to the directors;

145 • threatening the Deed Administrator with moves to have his registration as a liquidator revoked; • circumventing a previous judgment relating to the Deed Administrator’s remuneration by subjecting him and his staff to a broad ranging examination about his disbursements and remuneration; and • oppressing him in the conduct of his business by diverting time and resources and money to responding to the examination summonses.

Justice Barrett rejected these arguments, fi nding that the Deed Administrator had not shown an arguable case to support the existence of any of these improper purposes. Rather, Fong’s purpose in obtaining the examination summonses appeared to be one of ‘scrutiny of the administrator’s fi nancial management with particular reference to the matter of disbursements and accounting for them’. Justice Barrett supported this fi nding by reference to evidence that the Deed Administrator had issued ‘one line invoices’ for disbursements (which gave rise to ‘legitimate concern’) and had not been forthcoming on requests to produce fi nancial records to Mr Fong, after originally being ‘receptive to the idea’.

Justice Barrett noted that issues of the kind that arose in this case ‘are most often addressed in a context where the person proposing to conduct examinations is a liquidator or similar ofﬁ cial – in other words, someone whose role and functions are clear and whose purpose and motives in the matter of examinations may be expected to be shaped by the incidents of the role and functions’. By contrast, it appeared to Justice Barrett that in this case that ‘ASIC has seen ﬁ t to accord ‘eligible applicant’ status to a person who, on the person’s view of matters, is to act in the matter of examinations as the agent of the group which is the largest shareholder and creditor’ of the relevant companies. While Justice Barrett considered this unusual, he did not see this as evidence that the summonses had been obtained for an improper purpose.

While it dealt with an unusual fact situation, this case supports established authority regarding access to a s596C CA afﬁ davit. In considering an application for access to a s596C afﬁ davit the court will assess whether the applicant has made out an arguable case that the issue of the summons exceeded the court’s power, which will generally proceed on an argument that the applicant for the summons obtained it for an improper purpose.

146 LIQUIDATORS

Professional standards and guidelines are a relevant consideration for CALDB

Case Name: The applicant sought judicial review of a determination made by Dean-Willcocks v Companies the Companies Auditors & Liquidators Disciplinary Board. This Auditors & Liquidators case looks at the way in which section 1292 CA should be Disciplinary Board interpreted and the test to be applied. On 31 May 2005 ASIC applied to the Companies Auditors & Liquidators Citation: Disciplinary Board (CALDB) for an order that Mr Dean-Willcocks’ registration as a [2006] FCA 1438, Federal liquidator be cancelled. The contention was that Mr Dean-Willcocks had failed to Court of Australia per perform adequately and properly the duties and functions of a liquidator and that Tamberlin J he displayed a lack of professional independence and had an actual or apparent conﬂ ict of interest. It was alleged that Mr Dean-Willcocks was appointed as an Date of Judgment: administrator to a company with whom he had a previous and continuing 8 November 2006 professional relationship and that the acceptance of this appointment demonstrated a lack of independence and a conﬂ ict of interest.

Issues: On 12 April 2006 CALDB found that Mr Dean-Willcocks had failed to carry out or • Section 1292(2)(d)(ii) CA perform adequately and properly the duties or functions required by Australian law • Whether CALDB made an to be carried out by a liquidator. Mr Dean-Wilcocks brought an application for error of law judicial review of CALDB’s decision. • Whether professional standards should be taken He argued that CALDB had improperly considered professional standards and into account guidelines in determining whether he had adequately and properly carried out his • Whether the conﬂ ict of duties under section 1292(2)(d)(ii) CA. Justice Tamberlin found that consideration interest test was correctly should be given to the sufﬁ ciency and quality of performance. The level of applied performance called for is that of ‘adequacy’. The standard is that the duty must be performed ‘properly’. Justice Tamberlin held that it is permissible to have regard to the standards operative to the relevant sphere of activity in assessing whether a liquidator has properly performed their duties. The court found that CALDB did not err in considering professional standards in coming to its decision.

Mr Dean-Willcocks also submitted that CALDB applied the wrong test in determining whether there had been a confl ict of interest. In determining whether there was a confl ict of interest, CALDB considered expert evidence and the accepted professional standards, while acknowledging that the standards could not override the law. Justice Tamberlin held that it was open to CALDB to take these matters into account in its evaluation. Further, he held that it was not necessary for CALDB to conclude that there was a confl ict as a matter of fact, but rather it was open to conclude that the acceptance of the position was contrary to professional standards which was suffi cient to establish a failure to properly or adequately perform the functions of an administrator.

147 Justice Tamberlin also considered the appropriateness of the penalties imposed on Mr Dean-Willcocks and found there was no error of law in imposing the sanctions in this case.

For the purposes of s1292 CA, it is appropriate to take into account relevant professional standards and guidelines in determining whether the duties of the liquidator have been properly and adequately performed. These guidelines may also form the basis of considerations going to conﬂ ict of interest.

148 PROCEDURE

Non-party insurer joined to proceedings to pay costs order

Case Name: In this case, the Hong Kong High Court considers the procedural Hong Kong Housing Authority question of whether leave should be granted to join a party to a v Hsin Yieh Architects & proceeding and to serve that party out of the jurisdiction, when Associates Limited & Ors no cause of action is alleged against that party and the sole purpose of joining the party is to obtain a cost order against it. Citation: The Hong Kong Housing Authority (the plaintiff) obtained a judgment debt for CACV 85/2005 High Court HK$553 million plus costs against B+B Construction Company Limited (in of the Hong Kong Special liquidation) (B+B). B+B was in liquidation but was insured for the judgment and Administrative Region Court costs orders by AXA Versicherung AG (AXA). of Appeal per Tang JA and Sakhrani J In Hong Kong, under section 52A(2) of the High Court Ordinance, no costs order can be made against a person who is not a party to the proceedings. Therefore, the Date of Judgment: plaintiff sought leave to join AXA to the proceedings with a view to obtaining a costs order against it under s52A. The plaintiff did not assert that it had a cause of 5 October 2005 action against AXA. As AXA was a foreign company the plaintiff also sought leave to serve it out of the jurisdiction. Issue: • Section 52A(2) of the High The court granted leave to the plaintiff to join AXA as a defendant under Order 11 Court Ordinance of Hong Rule 1 (1)(c) of the Court Rules and to serve the pleadings upon AXA out of the Kong jurisdiction. AXA applied to have those orders set aside, but the court dismissed • Application for leave to AXA’s application. serve writs outside the AXA appealed against that decision claiming that: jurisdiction • What constitutes ‘a good • under Order 11 Rules 1 and 4, the court cannot grant leave to the plaintiff to cause of action’ serve writs out of the jurisdiction, unless the plaintiff can, and has, asserted a good cause of action against the party sought to be served; and • leave cannot be granted under Order 11 Rule 1 where a plaintiff only seeks ancillary relief against the person sought to be served.

The High Court upheld the judgment of the lower court, adopting the same reasoning.

The High Court considered whether the plaintiff needed to establish a good cause of action against AXA, and found that, if AXA is ‘a necessary or proper party’ to the claim, provided a proper cause of action had been alleged against a defendant, leave to serve the writ on AXA should be granted. There must also be a real issue between the plaintiff and AXA which the plaintiff will ask the court to try and a good arguable case. The court found that both requirements were satisﬁ ed in this case.

149 The High Court also found that, even though the plaintiff only sought ancillary relief against AXA, leave to serve the writ should still be granted. The High Court explained that in this case the right asserted by the plaintiff against AXA is ancillary to the enforcement of the plaintiff ‘s substantive rights against the third defendant

In Hong Kong it is permissible to join a non-party to proceedings for the purpose of obtaining a costs order against it. In the circumstances, insurers should be wary that they might be joined to proceedings and made liable for cost orders in favour of their insured’s opponents, where their insured is a losing party in litigation and is in liquidation.

150 PROCEDURE

When will the court order that solicitors pay the costs of proceedings?

Case Name: This decision considers the circumstances in which the court will Re The Black Stump order a solicitor to pay the costs of a proceeding personally. Enterprises Pty Ltd and In dismissing the appeal of the liquidators in Re The Black Stump Enterprises Pty Associated Companies (No 2) Ltd [2005] NSWCA 480, Chief Justice Young in Eq found that the liquidators’ application at ﬁ rst instance was one that could not succeed, that sufﬁ cient Citation: examination of the law and circumstances did not take place and that the [2006] NSWCA 60, Court of proceedings had been doomed to failure. Notwithstanding the lower court’s Appeal of New South Wales per decision against them, the liquidators appealed and his Honour was of the opinion Santow, Bryson JJA and Young that the appeal was again, doomed to fail. CJ in Eq Under section 99 of the Uniform Civil Procedure Act 2005 (NSW), the solicitors for the liquidator were required to show cause why they should not be personally liable Date of Judgment: for the whole of the costs of the application and the appeal. 31 March 2006 The liquidators’ solicitors submitted that the fact that the court decided to expedite Issues: the appeal showed that the appeal must have been thought by an independent person to have some merit and not a ‘hopeless case’. In support of their position, • Section 99 Uniform Civil the solicitors cited Appeal Justice McColl in the NSW Court of Appeal decision in Procedure Act 2005 (NSW) Lemoto v Able Technical Pty Ltd [2005] NSWCA 153 that: ‘The jurisdiction to • Solicitors’ liability for costs • Appeal without reasonable order a legal practitioner to pay the costs of legal proceedings in respect of which prospects of success he or she provided legal services must be exercised “with care and discretion and only in clear cases”.’

In this case, the court considered the fact that the plaintiffs were professional liquidators and said that they must have been taken to have some knowledge of the facts and circumstances surrounding the application and appeal. As it was not clear whether the case was pursued by the solicitors to justify advice, they had given or on the insistence of the liquidators, thinking it would save creditors’ money in the long run, the court was not satisﬁ ed that the standard had been met to make an order for costs against the solicitors personally. No orders as to costs were made.

Chief Justice Young in Eq did, however, take the opportunity to warn solicitors that: ‘this Court is very concerned about dividends to creditors in a winding up being whittled away by expensive legal proceedings which have little chance of success. If, in a future case, the facts clearly showed that a solicitor had given very bad advice to an unsophisticated client who had accepted it without question with the result that the company concerned had incurred substantial legal costs…’ the court might well make an order that the solicitor pay the costs personally.

151 Where it is clear that a solicitor has encouraged the pursuit of a hopeless case, to the detriment of creditor dividends in a winding-up, the court will not hesitate to order that the solicitor pay the costs personally.

152 PROCEDURE

Effect of formal defect or irregularity in bankruptcy notice

Case Name: The court was asked to consider whether a bankruptcy notice Adams v Lambert which contained a minor defect of form should have been declared invalid, as it had been at ﬁ rst instance in the Federal Citation: Court. In the notice in question, the claim for interest on a judgment debt contained an error of the statutory provision under [2006] HCA 10, High Court which interest upon a judgment debt is claimed. At issue was of Australia per Gleeson CJ, Gummow, Kirby, Hayne, whether this defect breached the requirement of the Bankruptcy Callinan, Heydon and Crennan Act 1966 (Cth) that the notice must be in accordance with the JJ form prescribed by the governing regulations. The appellant, Mr Adams, had obtained judgment against the respondent, Date of Judgment: Mr Lambert, in the District Court of New South Wales in the amount of $54,000. 4 April 2006 Mr Adams served a bankruptcy notice on Mr Lambert, claiming as a debt the judgment debt plus interest at 9 per cent per annum from the date of the judgment. Mr Lambert failed to comply with the bankruptcy notice and so Issues: Mr Adams ﬁ led a creditor’s petition alleging that the failure to comply was an act • Does a formal defect or of bankruptcy. irregularity render invalid a bankruptcy notice issued In the Federal Court, Justice Gyles found that the bankruptcy notice was invalid pursuant to the Bankruptcy since it referred erroneously to interest claimed pursuant to section 83A of the Act 1966 (Cth)? District Court Act 1973 (NSW). There was no disputing the amount of interest, nor that the interest claimed was due as interest from the date of judgment. The issue which was held to invalidate the bankruptcy notice was that s83A of the District Court Act in fact governs pre-judgment interest. The bankruptcy notice should instead have referred to s85, which governs post-judgment interest.

On the basis of this failure to comply with the requirements for a bankruptcy notice, Justice Gyles felt obliged to follow the decision of the Full Court of the Federal Court in Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33 (Lewis) in declaring the notice to be invalid (although Justice Gyles had dissented in Lewis). An appeal to the Full Court from the decision of Justice Gyles was dismissed. This decision was then appealed to the High Court.

The court held unanimously that the appeal should be allowed and the precedent of Lewis be overruled as having been wrongly decided. The court held that the resolution of the issue turned on the application of s306 of the Bankruptcy Act, which provides that proceedings under the Bankruptcy Act are not invalidated by a formal defect or irregularity unless substantial injustice has been caused.

As there was no question of ‘substantial injustice’, the question for the court was whether the irregularity came within the meaning of ‘formal defect or irregularity’ for the purposes of the Bankruptcy Act.

153 The court said that if the error was one which could reasonably mislead a debtor as to what is necessary to comply with the notice, it would not be merely a formal defect or irregularity. In this instance, the debtor would not have been misled in this way. That the creditor had cited the wrong provision of the empowering Act was in this context immaterial. Therefore the error was merely a ‘formal defect or irregularity’.

A second consideration was whether there was a failure to meet a requirement made essential by the Bankruptcy Act. In this respect, s41(2) of the Act states: ‘The [bankruptcy] notice must be in accordance with the form prescribed by the regulations’. In this respect, the court made the following statement:

The use of the word ‘must’ is signiﬁ cant, but it should be kept in perspective. A prescription as to a form to be followed will normally be expressed in language of obligation rather than of permission. That is the idea of a form. Such a prescription raises the question to be considered in the present case; it does not answer it.

The court then considered its own decision in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. In that case, the court had found that a bankruptcy notice which substantially understated the amount of money owed was covered by s306 (ie not invalidated by the error) and that it was not the legislative purpose that a substantial understatement should necessarily result in invalidity.

The court decided that the Full Court of the Federal Court in Lewis had wrongly applied the principles of Kleinwort Benson and that the decision in Lewis should therefore be overruled. It held that the minority position of Justice Gyles was to be preferred over a position which attributed to the legislature an overwhelming preference for form over substance.

Notwithstanding a regulation which appeared, through use of the word ‘must’, to make strict compliance with the requirements of form obligatory, an error which amounted to a mere ‘formal defect or irregularity’ and which caused no substantial injustice was held, pursuant to s306 of the Bankruptcy Act, not to invalidate a bankruptcy notice.

154 PROCEDURE

Service outside Australia: establishing a prima facie case

Case Name: This decision considers the service of a Federal Court application Akai Pty Ltd (in liquidation) v outside Australia. The respondents challenged the validity of Ho service, claiming that the applicant had not established a prima facie case in relation to the relief claimed. Citation: Akai Pty Ltd (Akai) went into liquidation in April 2000. A few months previously, (2006) 57 ACSR 456, Federal Akai’s holding company had entered into an agreement with a Singaporean Court of Australia per Gyles J company, The Grande Group Ltd (Grande), under which Grande was given ‘all authority to manage the Business of Akai’. Akai’s liquidator commenced Date of Judgment: proceedings against seven respondents, including Grande, its holding company (The Grande Holdings Ltd) and Christopher Ho, a director of Grande Holdings, 5 May 2006 claiming:

Issues: • they had contravened the CA by trading whilst insolvent (as deemed directors • Service outside Australia of Akai); (Order 8, rule 3, Federal • they had breached their duties under sections 180 – 182 CA (as deemed Court Rules) directors and/or offi cers of Akai); and • Whether prima facie case • Grande and Grande Holdings had engaged in insolvent trading (as holding has been established in companies of Akai). relation to relief claimed • Whether respondents were Akai obtained leave to serve its application on the respondents outside Australia, deemed directors/offi cers and did so. Mr Ho, Grande and Grande Holdings challenged the validity of service on the basis that Akai had not satisfi ed Order 8 rule 2(2)(c) (now Order 8 rule 3(2)(c)) of the Federal Court Rules, which requires that ‘the person seeking leave has a prima facie case for the relief claimed by the person in the proceeding.’

Justice Gyles said that for a ‘prima facie case’, ‘it is necessary that there be a foundation established for an arguable case’. He found that Akai had provided evidence suffi cient to establish a prima facie case for some but not all of its claims. While Justice Gyles was satisfi ed that a prima facie case had been established that Grande and Grande Holdings were deemed directors of Akai (and therefore attracted the insolvent trading provisions), in relation to Mr Ho, he found that there was a prima facie case that Mr Ho was a deemed offi cer, but not a deemed director, of Akai.

Justice Gyles held that the ﬁ nding of a prima facie case in relation to one of the causes of action did not necessarily lead to the dismissal of the challenge to service. The requirements of Order 8, rule 3 must be applied to each separate and independent form of relief claimed in the application.

In conclusion, he ordered that service be set aside in respect of the relevant claims for which a prima facie case had not been established and the application be amended accordingly to strike out those claims.

155 This decision highlights the importance of providing a suffi cient evidentiary basis for claims made in a Federal Court application when seeking leave to serve that application outside Australia. The decision also touches on the law regarding shadow directors and offi cers and illustrates the need for companies to be wary of commercial relationships which could implicate them as deemed directors or offi cers of an insolvent company.

156 PROCEDURE

Slip rule application

Case Name: This decision considers when a judgment or order of the court, J Aron Corporation v Newmont once made and entered, can be amended pursuant to either the Yandal Operations ‘slip rule’ in Rule 36.17 of the Uniform Civil Procedure Rules 2005 (NSW) or the court’s inherent jurisdiction to vary orders Citation: which do not refl ect the intention of the court at the time the order was made. [2006] NSWSC 849, Supreme Court of New South Wales per Two sets of proceedings between the plaintiffs and defendants are relevant to this White J decision (the 2003 Proceedings and 2004 Proceedings respectively). The 2004 Proceedings were heard fi rst and the plaintiffs were unsuccessful at fi rst instance Date of Judgment: and on appeal.

24 August 2006 Justice Austin, at fi rst instance in the 2004 Proceedings, ordered the determination of separate questions. The hearings and judgments at fi rst instance Issues: and on appeal in the 2004 Proceedings related only to those separate questions. • Varying judgments and However, the order which was made and entered was the dismissal of the orders under the statutory proceedings and the entry of judgment for the defendant (the Order). slip rule or the inherent jurisdiction of the court The defendants notifi ed the plaintiffs of their intention to amend their defence in • Intention of court when the 2003 Proceedings to raise defences of res judicata and estoppel, which they making order alleged arose as a result of the dismissal of the 2004 Proceedings. The plaintiffs • Judgments and orders applied for the variation of the Order. varied because of Once an order disposing of proceedings has been made and entered, the court has unintended or unforseen consequences of an order no jurisdiction to re-open the proceedings to vary or set aside the order, except where the order does not correctly refl ect the court’s intention or where there is statutory authority to do so. The plaintiffs argued that the court had power to amend the order under Rule 36.17 of the Uniform Civil Procedure Rules 2005 (NSW), which provides that:

… if there is a clerical mistake, or an error arising from an accidental slip or omission, in a judgment or order, the court, on the application of any party or of its own motion, may, at any time, correct the mistake or error.

Alternatively, the plaintiffs argued that the court had inherent jurisdiction to vary the Order as it did not reﬂ ect the intention of the court at the time the Order was made.

Justice White held that the court has jurisdiction to amend the Order and that there was no reason to decline to exercise his discretion to do so as:

• the slip rule and the court’s inherent jurisdiction to amend orders is not restricted to the amendment of merely ancilliary or consequential matters;

157 • Justice Austin made clear that he did not intend that the Order would create any occasion for the raising of res judicata or other estoppel arguments; • there is authority to suggest that the jurisdiction to amend an order extends to the correction of the order on the ground that the consequences of it are contrary to those intended by the court; and • the court does not lack jurisdiction to amend the Order on the basis that the precise terms of the amendment are not clear. The test is whether the amendment is beyond controversy to give effect to the judge’s intention, not whether it is beyond controversy that the amendment proposed would be a proper order.

This case is authority for the proposition that the court has jurisdiction to amend orders either under the statutory slip rule or the inherent jurisdiction of the court if the order has unintended or unforseen consequences.

158 PROCEDURE

Rectiﬁ cation of ASIC registers in relation to an application for the winding-up of a company

Case Name: Once notice of an application for the winding-up of a company is Lavercombe v Auscott Ltd duly lodged with ASIC, a court does not have the power to order rectifi cation of ASIC registers to remove all references to the Citation: application. Accordingly, companies should try to ensure that such applications are not lodged in the fi rst place, if any [2006] NSWSC 867, Supreme prejudice that may fl ow from such an application appearing in Court of New South Wales, Equity Division, per Barrett J ASIC records is to be avoided. Auscott Ltd owed Kenneth Lavercombe $11,805. When payment was not Date of Judgment: forthcoming, Mr Lavercombe served a statutory demand under s459E CA on 29 August 2006 Auscott Ltd. When payment was still not forthcoming, Mr Lavercombe applied to the NSW Supreme Court for Auscott Ltd to be wound up under section 459A CA. Reliance was placed on the presumption of insolvency that fl ows under s459C(2)(a) Issues: CA from a failure to comply with a statutory demand under s459E CA. In • Section 1322(4)(b) CA compliance with s465(a) CA, Mr Lavercombe lodged notice of the application • The power of a court to with ASIC. order rectifi cation of a register kept by ASIC under However, by the time the matter came before the court, the debt had been paid. the CA Both parties consented to the dismissal of the application for winding-up and Lavercombe lodged notice to this effect with ASIC in compliance with s470(1)(c) CA. Auscott Ltd sought an order from the court under s1322(4)(b) CA that ASIC registers be rectifi ed to remove all references to the application for winding-up. Section 1322(4)(b) CA states that the court may make ‘an order directing the rectifi cation of any register kept by ASIC’ under the CA.

The court found that, to be successful, Auscott Ltd would have to pass a three-step test.

• Does the order sought from the court relate to a relevant ‘register kept by ASIC’ under the CA? • Does the order sought from the court direct ‘rectiﬁ cation’ of that register? • Should the court exercise its discretion to make the order?

In relation to the ﬁ rst question, the court held that the order sought did not relate to any relevant register that ASIC is required to maintain under the CA. The CA does not establish any register in which ASIC is obliged to store details of notices relating to applications for winding-up or dismissal of such applications. The CA simply states that such notices must be lodged with ASIC. Neither this, nor the fact that as a matter of practice ASIC stores such notices in its databases, was enough, according to the court, to make this situation one in relation to which the court may make an order under s1322(4)(b) CA.

159 With Auscott Ltd having failed on the fi rst question, there was no need for the court to consider the second question. Nonetheless, the court found that the order sought would, if granted, amount to more than mere rectifi cation. This was because, according to the court, s1322(4)(b) CA does not create any general reformatory jurisdiction. It merely allows the court to make such orders to ensure that the content of registers kept by ASIC under the CA accords with the statutory requirements for such content. Accordingly, if a register does not contain something that the CA requires it to contain, the jurisdiction to order rectifi cation is enlivened. Similarly, if the register contains something that the CA requires it must not contain, the jurisdiction to order rectifi cation is also enlivened. But if a register contains information that represents precise compliance with a requirement imposed by the CA, the jurisdiction to order rectifi cation is not enlivened. In this case, the court held that the notices relating to the application for winding-up and for the dismissal of this application were duly lodged with ASIC as refl ecting undisputed facts and there was thereby nothing to rectify. The order sought from the court went beyond rectifi cation in effectively requiring destruction of records of public note.

The court did not consider the third question. The order sought by Auscott Ltd from the court under s1322(4)(b) CA that ASIC registers be rectiﬁ ed to remove all references to the application for winding-up was not granted.

This case clarifi ed the power of a court to order rectifi cation of a register kept by ASIC under the CA. Once notice of an application for the winding-up of a company is duly lodged with ASIC, a court does not have the power to order rectifi cation of ASIC registers to remove all references to the application.

160 PROCEDURE

Resolving substantive issues on an application for interim relief

Case Name: This decision considers whether it is appropriate for the court to ASIC, Re Richstar Enterprises determine substantive rights of parties as an incident of Pty Ltd ACN 099 071 968 (No protective proceedings under section 1323 CA. The court 9) v Carey considered whether it was appropriate to make a declaration as to the nature of a charge and whether discovery should be Citation: ordered. WAD 83 of 2006, Federal Court In September 2005, Westpoint Corp granted a fi xed and fl oating charge over its of Australia per French J assets to Perpetual Nominees as custodian for ING Funds Management (ING). The assets included an option to purchase land which was to expire on 20 October Date of Judgment: 2006. The charge was fi xed over (among other things) any interest of Westpoint 15 September 2006 Corp in land and the benefi t of any contract to which Westpoint Corp was party. In October 2005, Westpoint Corp assigned the option to Bowesco Pty Ltd (Bowesco) without either notice to, or consent of, ING. Issues: • Section 1323 CA Suncorp Metway subsequently appointed receivers to Bowesco. Orders were made • Freezing orders under section 1323 CA freezing the assets of Bowesco pending investigations being • Circumstances in which carried out by ASIC. ING appointed receivers to Westpoint Corp under its charge substantive rights will be and also separately to the option on the basis that the option was still subject to determined in proceedings the fi xed charge. under s1323 Both the option receivers and the Bowesco receivers wished to have the option released from the freezing order so that they could exercise it before its expiry. Further, Bowesco submitted that the option was validly assigned (being covered only by the fl oating charge to ING), while the option receivers submitted that it was charged by the fi xed charge and that Bowesco held the option on a constructive trust for ING.

The court could not consider the applications for variation of the freezing order until the substantive point as to the proper ownership of the option had been determined. Justice French noted that it is normally undesirable and potentially confusing to decide substantive property disputes in considering such applications.

However, his Honour noted the urgency with which a decision was required (in order to allow the successful party to exercise the option before its expiry) and that it was not in the interest of either party that the option should be allowed to expire pending resolution of a dispute about its ownership. For that reason his Honour was prepared to hear argument on the substantive question.

Justice French also rejected a submission from Bowesco that discovery was necessary in order to properly construe the charge, holding that, in the circumstances, discovery (of some 3000 boxes of documents) would be oppressive.

161 Justice French held that the option was charged by the ﬁ xed charge and that Bowesco had taken it subject to that charge, and granted the application of the option receiver for the variation of the freezing order.

The court will generally not hear argument on substantive questions in considering an application under s1323 CA. However, if determination of the substantive question is necessary to rule on the application, and it is in the interests of the parties that the matter be settled quickly, the court will make such a determination. Further, it will make such procedural rulings as are necessary to enable the issue to be settled quickly.

162 RECEIVERSHIP

Is a receiver in breach of its duty of care if it sells for less than the highest offer?

Case Name: Is a receiver who sells property for less than the market price or, Deangrove Pty Ltd (receivers if there is no market price, for less than the best price that is and managers appointed) v reasonably obtainable, in breach of section 420A CA? The Buckby Federal Court confi rms that the court must consider the sale process to determine whether there is a breach. Citation: Deangrove Pty Ltd (Deangrove) was the registered proprietor of strata units in a (2006) 56 ACSR 630; [2006] development. Finance advanced to Deangrove was secured by, among other things, FCA 212, Federal Court of a registered fi rst mortgage over the unsold units in the development. Under a deed, Australia per Branson J IHL Australia Pty Limited (IHL) agreed to acquire certain rights for 50 of the units from Deangrove. Those rights included the right to cause Deangrove to sell any of Date of Judgment: the units on terms and conditions determined by IHL. In return, IHL agreed to pay 14 March 2006 $92,000 to the fi nancier on settlement of each unit in exchange for a release of the mortgage in respect of that unit.

Issues: On 6 January 2000, the ﬁ nancier appointed receivers and managers to Deangrove. • Section 420A CA At that time, Deangrove’s property included 49 units that remained subject to the • Receivers’ duties when deed. In March 2000, receivers commenced proceedings seeking exclusive exercising the power of sale possession of the units and an interlocutory order was made on 3 May 2000 granting that application. In the interim, BM Culley & Associates Pty Ltd (Culley) offered to purchase each of the units for $98,000 and IHL offered to purchase each of the units for $92,000. The receivers rejected IHL’s offer and invited IHL to make another offer. IHL resolved not to do so. Culley was ultimately unable to complete the purchase at the price offered and the units were eventually sold for an average price of $77,267.

In proceedings against the receivers, Deangrove alleged that by rejecting IHL’s offer to purchase the units for $92,000 the receivers breached their duty under section 420A CA to take all reasonable care to sell the property for its market price or, if there was no market price, the best price reasonably obtainable, having regard to the circumstances existing when the property was sold.

Justice Branson endorsed the observations of Justice Dodds-Streeton in Florgale Uniforms Pty Ltd v Orders (2004) 11 VR 54 at [410] (see AAR Annual Review of Insolvency and Restructuring Law 2005, p183) that a breach of s420A is not established merely because the market value or the best price obtainable has not been achieved. Rather a breach requires the receiver to fail to take all reasonable care to sell the property for not less than the market price or, if there is no market price, not less than the best price available. Justice Branson applied the test formulated in Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565 that, having regard to the sale process, the issue is whether the process was not one where all reasonable care was taken to sell the property for its market price, or alternatively for the best price reasonably obtainable. In the

163 circumstances, Justice Branson held that the receivers had not breached their duty by rejecting IHL’s offer.

This case conﬁ rms that the failure of a receiver to achieve the market price or the best price available in the circumstances does not of itself constitute a breach of s420A CA. The court must consider the sale process adopted by the receiver and whether the receiver failed to take all reasonable care to sell the property for the market price or the best price reasonably available.

164 RECEIVERSHIP

Trials about remuneration to be avoided

Case Name: The receiver made a proposal regarding his fees which would ASIC v Australian Foods have resulted in a 32 per cent discount from the total anticipated Company Pty Limited & Anor fees. The second defendant opposed the approval of the receiver’s fees and sought orders requiring the receiver to make Citation: available for inspection all source documents relevant to his remuneration. This case considers the procedure to be followed [2006] WASC 62, Supreme Court of Western Australia per in assessing remuneration. Sanderson M A receiver and manager was appointed on the application of ASIC under section 1323 CA. The order appointing the receiver provided for him to be paid reasonable Date of Judgment: remuneration. The receiver put forward a proposal to settle his claim for 6 April 2006 remuneration and fees for the sum of $300,000 on the basis that his remuneration be approved quickly. If, however, there was to be a contest over his fees, the receiver would seek all of the remuneration to which he was entitled, estimated to Issues: be about $440,000. • Procedure for resolving dispute over reasonableness The receivership had been followed by a liquidation. The liquidator and ASIC of remuneration accepted the receiver’s remuneration proposal. The remuneration was opposed by a member and creditor of the company. The objector was unable to give particulars of why the receiver’s remuneration should not be approved. Rather, the objector sought an order requiring the receiver to make available for inspection all documents relevant to his remuneration.

Master Sanderson M observed that the order sought was ‘akin to the receiver providing discovery so as to allow the objector to trawl through documents looking for the proverbial smoking gun’. Master Sanderson was satisﬁ ed that this was a situation which should be avoided and cited in support the decision of the Full Supreme Court of Western Australian in Venetian Nominees Pty Limited & Ors v Conlan (1998) 20 WAR 96 in which the Full Court held that the review of an external administrator’s remuneration should not become anything resembling a case trial.

Master Sanderson also placed weight on two other matters. First, that the procedure proposed by the objector would result in considerable cost and expense, which would reduce the amount of money available to the creditors. Secondly, the incumbent liquidator, who was an offi cer of the court and familiar with the affairs of the company, was satisfi ed that the receiver’s remuneration was reasonable. As a result, Master Sanderson was satisfi ed that the receiver’s proposal should be accepted.

165 This case demonstrates that the courts will take a practical approach in resolving remuneration disputes and will be reluctant to allow such disputes to become full-scale forensic investigations.

166 RECEIVERSHIP

Appointing a receiver to preserve assets of individuals suspected of breaching the CA

Case Name: Section 1323 CA protects the interests of aggrieved persons by Re Richstar Enterprises Pty ensuring persons that may be found personally liable for Ltd (ACN 099 071 968) and breaches of the CA in future proceedings have suffi cient assets Others; ASIC v Carey (No 3) to provide compensation. This case establishes that the court is not bound by rules of evidence in considering whether some form Citation: of protection under s1323 is required. (2006) 57 ACSR 307; [2006] The collapse of the Westpoint Group of companies left many out-of-pocket. In FCA 433, Federal Court of response, ASIC began to investigate suspected contraventions of the CA by a Australia per French J number of companies and individuals associated with the Westpoint Group (the Group). During the course of the investigations, ASIC applied under section 1323 Date of Judgment: CA to appoint receivers to the property of offi cers of the Group suspected of having 20 April 2006 contravened the CA. The purpose of s1323 CA is to protect the interests of creditors by ensuring the Issues: offi cers of companies have assets available to compensate affected parties if they • Section 1323 CA are found personally liable in later proceedings. Justice French determined whether • Whether hearsay and the protection of s1323 was required by assessing the risk of depletion of the transcripts of ASIC assets. He held that hearsay evidence from ASIC investigations could be received examinations admissible as as evidence of a risk that assets may be depleted. evidence • Appropriateness of The offi cers of the Group argued that such evidence was not admissible because: appointing a receiver to • the evidence would not be admissible in civil or criminal proceedings; and property of individuals suspected of breaching CA • the use of records of interviews conducted by ASIC and signed by the offi cers were not admissible in penalty proceedings under s68(3) of the Australian Securities and Investments Commission Act 2001 (Cth). Both of these arguments were rejected. Justice French held that, although the evidence may not be admissible in civil or criminal proceedings, this evidence was not received for the determination of any ultimate issue of liability, but rather was evidence of the risk of the assets being depleted.

In relation to the second objection, Justice French held that, although penalty proceedings may be taken against ofﬁ cers of the Group in the future, the current proceedings are not proceedings for the implementation of a penalty.

Although the appointment of a receiver was recognised by the court as a drastic step, Justice French considered that:

• the serious circumstances justifi ed the appointment of a receiver; and • the appointment of a receiver is a more fl exible response than granting a freezing order, as a receiver can be given the power to freeze assets as well as ensure that bona fi de dealings can be permitted without recourse to the court.

167 The extensive protection provided by s1323 CA is designed to ensure persons suspected of breaches of the CA retain their assets so that compensation may be available to aggrieved parties. This case confi rms that receivers can be appointed on the basis of preliminary evidence not suffi cient to fi nally determine liability for contraventions of the CA.

168 RECEIVERSHIP

The scope of the directions which can be provided to receivers under s424 CA

Case Name: This case considers the types of directions which the court will White v Huxtable, Re Lake make pursuant to s424 and confi rms that the court will not make Federation Pty Ltd (receivers any direction that approves, or appears to approve, the and managers appointed) undertaking of a commercial transaction by a receiver. The case also briefl y considers whether it is unlawful for a receiver to enter Citation: into a contract of sale with a purchaser who is related to the [2006] FCA 559, Federal Court appointer of the receiver. of Australia per Young J The plaintiffs were appointed as receivers and managers of Lake Federation Pty Ltd in July 2005 by Thorney Properties (Ballarat) Pty Ltd (Thorney). The plaintiffs Date of Judgment: made efforts to sell the primary asset of Lake Federation which was a property 20 April 2006 development project near Ballarat. When no other appropriate offers for the property were received, the plaintiffs entered a contract to sell the property to TIGA (Ballarat) Pty Ltd (TIGA), which was an associated company of the appointer of the Issues: receiver, Thorney. • Section 424 of the CA • Nature and scope of s424 The development of the property was to be funded by money borrowed by Lake directions which will be Federation from Thorney under a facility agreement. The advances by Thorney were made by the court secured by a fi xed and fl oating charge. The terms of the deed of charge included • Whether it is unlawful for that any receiver, or receiver and manager appointed under the charge, would be a receiver to enter into the agent of the chargor (Lake Federation). The receivers and managers were a contract of sale with a appointed under the charge by Thorney after Lake Federation defaulted on the purchaser who is related to facility agreement. the appointer of the receiver The plaintiffs sought directions from the court under s424 CA about the appropriateness of the proposed sale transaction. They originally sought a broadly worded order to the effect that it was not improper or unlawful for them (as receivers and managers of Lake Federation) to enter a contract of sale for the property with TIGA, notwithstanding the relationship between TIGA and Thorney. Upon objection to this broad wording, the plaintiffs narrowed the order sought during the course of argument at the hearing to the effect that it is not unlawful solely by reason of the relationship between TIGA and Thorney that they enter into the contract of sale. The revised order was ultimately not opposed.

In considering whether or not it was appropriate to make the revised order, Justice Young made the following comments about the nature and scope of directions which can be made under s424 CA:

• a direction under s424 is a direction only. It does not address the question of whether the receivers have acted reasonably and/or discharged their duties under s420A. Nor is such a direction binding on the defendants in such a way as to create any kind of legal estoppel;

169 • the authorities make it clear that it is not appropriate for the court to give directions about the commercial propriety or reasonableness of a transaction that the receiver proposes to enter into; • the cases decided under s424 show a distinct disinclination on the part of courts to make any direction that approves, or appears to approve, the undertaking of a commercial transaction by a receiver. Unless directions are carefully worded, they might give a false public perception that the court is placing its imprimatur upon a particular transaction; and • the cases make it clear, however, that it may be appropriate to make a direction to the effect that a particular transaction is not unlawful solely because the counter-party to the transaction is a company associated with the entity which appointed the receivers and managers. This was done by Justice Hodgson in Re Vartex Petroleum Industries Pty Ltd (Unreported, Supreme Court of NSW, 17 August 1989) and Justice Austin in Re One.Tel Networks Holdings Pty Ltd (2001) 40 ACSR 83.

Justice Young noted that, in Vartex, Justice Hodgson referred to the principle of mortgage law that a mortgagee cannot exercise a power of sale in favour of itself (‘the mortgage principle’) and went on to ﬁ nd that the mortgage principle does not apply to prevent a receiver appointed by a mortgagee from selling the mortgage property to the mortgagee who appointed him. His Honour also referred to the fact that Justice Austin in One.Tel had made a direction that the mortgage principle did not make it unlawful for a receiver and manager to enter into an agreement with a company solely by reason of the fact that the appointer of the receiver and manager was a director and sole shareholder of that company.

Having considered these authorities, Justice Young noted that the deed of charge granted by Lake Federation in favour of Thorney provided that the receiver and manager from appointment is the agent of the chargor. His Honour went on to say that, as Justice Hodgson pointed out in Vartex, the consequence of that agency is that the sale of property by receivers and managers to a company associated with the appointer does not infringe the mortgage principle.

On that basis, Justice Young considered it appropriate to make the revised form of order. His Honour stressed (as both Justice Hodgson in Vartex and Justice Austin in One.Tel did) that the direction is intended to establish only that the contract is not unlawful by reason of the relationship between TIGA and Thorney. The direction does not deal with the position of the plaintiffs under the law concerning the proper exercise of powers of sale by a receiver and manager.

It is not unlawful for a receiver to enter into a contract of sale with a purchaser who is related to the appointer of the receiver where the receiver is acting as an agent for the company. The court is disinclined to make a direction under s424 CA that is so broad that it may be construed as an approval of a commercial transaction to be entered into by a receiver.

170 RECEIVERSHIP

Priority of court-appointed receivers’ remuneration

Case Name: This decision considers whether court-appointed receivers are Jefferson & Joiner v Shirlaw & entitled to have their remuneration and expenses paid from the Ors sale proceeds of property in the receivership ahead of creditors who, after the receivers’ appointment, acquired existing Citation: registered mortgages over the land. [2006] QSC 153, Supreme The respondents were appointed by the court to two companies to receive the Court of Queensland per assets of a joint venture (the receivers), the parties to which had fallen out. The Holmes J only real asset of the receivership was land encumbered by seven registered mortgages. After the appointment of receivers, the fi rst and second mortgages were Date of Judgment: transferred to Mr Shirlaw and Ostabridge Pty Ltd (Ostabridge). Mr Shirlaw, in his 23 June 2006 own capacity, and as receiver and manager of Ostabridge, obtained a court order permitting him, in the exercise of their rights as mortgagees, to enter into possession of, and sell, the land. Subsequently the third to fi fth mortgages were Issues: transferred to Mr Shirlaw and Ostabridge (together, the mortgagees). Mr Shirlaw • Sections 184 and 185 of then sold the land for $500,000 pursuant to his power of sale under the the Land Title Act 1994 fi rst mortgage. (Qld) • Priority as between court The receivers applied to the court for a declaration as to their entitlements to have appointed receivers’ lien their remuneration, costs and expenses paid from the proceeds of sale of the land for their remuneration and in priority to the mortgagees. The mortgagees sought a declaration to postpone the registered mortgagees priority of the receivers’ claims to their rights under the registered mortgages.

The receivers claimed that they undertook work and incurred expenses in order to preserve and maintain the land and to carry out their duties as receivers and that they had a lien over the land in respect of their remuneration, which took priority over the claims of secured creditors. Alternatively, they claimed that, as the mortgagees knew of the appointment of the receivers and had not disputed the receiver’s claims, they, by their inaction, consented to the receivers’ remuneration being paid in priority. Finally, the receivers claimed that the special circumstances involved warranted them, as court-appointed receivers, being given priority for their remuneration or made it unconscionable that they should not.

Justice Holmes held that, although there is no doubt that a court-appointed receiver has a right to indemnity against the assets over which their receivership extends for their remuneration and costs, there was a question as to priority. The initial question was whether the land was the relevant asset of the receivership or whether the relevant asset was the land subject to the mortgages. Justice Holmes held that the asset of the receivership consisted not of the land alone, but the land encumbered by the mortgages. Thus, the original mortgagees’ interests were outside the receivership and passed to the mortgagees by transfer unaffected by the receivership and the receivers’ lien. Accordingly, Justice Holmes could ﬁ nd no

171 power to order that the receivers’ expenses and remuneration be paid in priority to amounts secured by a mortgage.

The receivers also argued that the actions of the mortgagees, in not disputing the receivers’ claims or challenging their continuing appointment, gave rise to the personal equity exception to indefeasibility under the Land Title Act 1994 (Qld). Justice Holmes did not agree and could not ﬁ nd any unconscientious act on the part of the mortgagees or any of their predecessors in title. He found that the mere desirability of court-appointed receivers having their position protected cannot prevail against the indefeasible title of the mortgagees.

Court-appointed receivers should be wary of appointments to companies whose only asset is mortgaged land. Although there is no doubt that a court-appointed receiver has a right to indemnity against the assets over which his receivership extends for his remuneration, expenses and costs, such a right will not take priority over the interests of a Torrens title registered mortgage.

172 RECEIVERSHIP

The power of receivers over property held under discretionary trust

Case Name: Receivers may be granted power over the assets of an individual ASIC v Carey (No 6) or corporation even if these assets are held by a third party under a discretionary trust of which the individual or corporation Citation: is a benefi ciary. [2006] FCA 814, Federal Court ASIC had previously had receivers appointed over the property of companies in the of Australia per French J Westpoint Property and Finance Group, as well as over the property of certain offi cers of those companies. This case concerned ASIC’s request that the receiver Date of Judgment: orders be varied to bring into the scope of the orders property held by third parties under any trust of which the relevant offi cers and companies are benefi ciaries. 29 June 2006 Section 1323 CA in certain circumstances grants courts the power to make various Issues: orders over property of a person (the relevant person), including the appointment of • Section 1323 CA a receiver over that property with such powers as the court orders. In this case, the • The power of receivers Federal Court confi rmed that the power granted it under s1323 CA extends to the over property held under appoint of a receiver over: discretionary trust • property of a third party in which the relevant person has an interest, so long as such interest itself falls under the defi nition of ‘property’; • property held on trust by the relevant person for a third party; • property held under a non-discretionary trust for the relevant person; or • property in a superannuation fund of which the relevant person is a benefi ciary.

The key question that arose in this matter was whether a receiver could be appointed over property held by a third party under a discretionary trust of which the relevant person is a beneﬁ ciary.

The Federal Court held that this could be the case, so long as the discretionary trust in question is such that the relevant person is its effective controller (eg where the relevant person controls the trustee). In such situations, the relevant person’s interest in the assets of the trust may be considered to fall within the deﬁ nition of property.

Accordingly, ASIC was granted its request that the receiver orders be varied to bring into scope property held by third parties under any trust of which the relevant offi cers and companies are benefi ciaries. However, in so far as such trusts are discretionary ones, the receivers were given power over assets only in those cases where the offi cers or companies in question effectively controlled the trust.

173 This case confi rmed that the court’s power under s1323 CA to appoint receivers to a person’s property extends to the appointment of a receiver over property: • of a third party in which the relevant person has an interest, so long as such interests itself falls under the defi nition of property; • held on trust by the relevant person for a third party; • held under a non-discretionary trust for the relevant person; • in a superannuation fund of which the relevant person is a benefi ciary; and • held by a third party under a discretionary trust of which the relevant person is a benefi ciary, so long as the discretionary trust in question is such that the relevant person is its effective controller.

174 RECEIVERSHIP

When will a court appoint a receiver?

Case Name: In this case, the Victorian Supreme Court was asked to appoint a Singh v Shah & Ors receiver and manager to two businesses that were the subject of a dispute between its joint venturers. The court’s decision Citation: provides useful guidance regarding the factors the court may consider when appointing receivers and managers. [2006] VSC 395, Supreme Court of Victoria per Cummins J In January 2003 the plaintiff, Mr Singh, entered into a joint venture with the fi rst defendant, Mr Shah, to open and operate two licensed liquor shops in Carrum Date of Judgment: Downs and Dandenong called Golden Liquor Pty Ltd (GL) and Golden Liquor Dandenong Pty Ltd (GL Dandenong), respectively. The plaintiff made fi nancial 23 October 2006 contributions to the joint venture. The plaintiff became aggrieved about the operation of the businesses by his joint venturers (the fi rst and fourth defendants) Issues: and instituted proceedings to restrain the misappropriation of the assets of the • Section 420 CA businesses and sought the appointment of a receiver to GL and GL Dandenong. The • Factors to be considered in plaintiff claimed both property and fi duciary interests in the businesses. He also appointing a receiver and alleged banking and other irregularities in respect of the fi rst defendant’s manager management of the businesses.

The plaintiff had previously made two applications for the appointment of a receiver. The ﬁ rst was unsuccessful, although Justice Hargrave did make a number of mandatory injunctions about the further operation of the businesses. The second application was made on the basis that the orders of Justice Hargrave had not been fulﬁ lled. A special referee was appointed pursuant to Order 50.01 of the Supreme Court Rules to give his opinion on questions relating to the management of the two businesses and the compliance or otherwise with the court orders. The Special Referee found that there was likely failure to account and an under-banking of sales in excess of $150,000 at both retail sites.

Justice Cummins heard the third application by the plaintiff for the appointment of an interim receiver. Justice Cummins ﬁ rst considered the report of the special referee and determined that it should be adopted by the court. In relation to the central question of whether a receiver should be appointed, the defendant relied on National Australia Bank Limited & Ors v Bond Brewing Holdings Limited & Ors (1991) VR 530 in which the court refused to appoint a receiver. Justice Cummins accepted the following principles set out in National Australia Bank Limited:

• the power to appoint a receiver is a drastic power which must be exercised with care, caution and with circumspection after full consideration of the facts and sensitivity to the interests of all parties concerned; • jurisdiction will not be exercised if there is an adequate remedy at law; and

175 • the court will not by injunction require a defendant to give security for the plaintiff’s claim, nor will it by the appointment of a receiver achieve the same result.

However, Justice Cummins distinguished National Australia Bank Limited on the following basis:

• National Australia Bank Limited was ex parte and the present case was not; • no undertaking as to damages was received in National Australia Bank Limited, whereas such an undertaking was received in the present case; • the proceeding in the present case was not the fi rst step, but rather the third step in seeking to obtain an appropriate interim remedy; • the plaintiff’s claim was for proprietary and fi duciary interests and breaches thereof, whereas in National Australia Bank Limited it was simply asserted by a creditor that the ultimate remedy may not be fulfi lled; and • the state of the businesses in the present case (as evidenced in the Report of the Special Referee) warranted the appointment.

As a result, Justice Cummins appointed an interim receiver to report to the court and to have the powers set out in section 420 CA.

This case provides a useful summary of the principles to be applied in determining whether a receiver and manager should be appointed to a company. In particular, it conﬁ rms that a court will be reluctant to appoint a receiver where the plaintiff seeks the appointment of a receiver to obtain security to protect assets the subject of the plaintiff’s claim.

176 RECEIVERSHIP

Powers of receivers and managers to refuse applications for funding

Case Name: In this case, two related companies sought court orders that the ASIC; Re Lanepoint Enterprises appointed receivers and managers be directed to make provision Pty Ltd for the funding of the companies’ legal expenses in defending two winding-up proceedings. This case considers the factors that Citation: receivers and managers should consider in determining whether to grant an application for funding. [2006] FCA 1493, Federal Court of Australia per French J In June 2006 ASIC ﬁ led applications in the Federal Court of Australia seeking orders for the winding-up of Lanepoint Enterprises Pty Ltd (receiver and manager Date of Judgment: appointed) (Lanepoint) and Bowesco Pty Ltd (receiver and manager appointed) 10 November 2006 (Bowesco). In the winding-up proceedings, Justice French ordered there to be liberty to apply on the question of whether any of the company assets could be applied to the costs of defending the applications. Issues: • Powers of receivers and Lanepoint and Bowesco subsequently applied to the court for orders directing the managers to refuse an receivers to make provision to enable the companies to meet various legal application for funding expenses, including the costs of defending winding-up proceedings WAD 177 of • Whether provisions for legal 2006 (the Bowesco proceedings) and WAD 152 of 2006 (the Lanepoint expenses and tax liabilities proceedings). appropriate • Whether relief should The court was asked to make the orders pursuant to section 423(1)(b) CA or in the be sought pursuant to alternative s1321 CA. Justice French held that he was not prepared to act under s423(1)(a) CA or s1321 CA the power conferred by s423(1)(b) as this section was not the proper method in a summary application to institute an inquiry about the basis for the receivers’ refusal. However, Justice French held that it was open for the court to deal with the applications for orders under s1321 CA.

The receivers resisted the orders sought on the basis that their refusal for funding was justiﬁ ed by a need to make provision for the following contingencies:

• the possibility that the receivers would incur legal costs in defending proceedings brought against them by the companies in connection with their administration; and • potential tax liabilities of the companies.

Justice French held that he was satisfi ed that it was within the power of the receivers and managers to retain a provision out of the funds held against the threatened legal action by Lanepoint and Bowesco. However, he noted that the estimated contingency for legal fees contains an element of risk assessment and that there was suffi cient fl exibility in the amount set aside to accommodate at least part of the amount sought for the costs of defending the proceedings.

177 On the provision allowed for tax liabilities, the receivers and managers relied on s254 of the Income Tax Assessment Act 1936 (Cth). Justice French held that it was not necessary to resolve the competing legal views on the section, as the receivers were entitled to take the view that they were obliged to make appropriate provisions against tax liabilities.

Justice French held that in this case it was reasonably clear that the combination of the allowance for legal expenses and the provision for tax liabilities dwarfed the quantum of funding sought by the companies. That, combined with the necessary latitude in estimating such provisions, was a relevant consideration for the receivers to take into account when considering a request for funding.

This case considers the ability of receivers and managers to make provision for contingencies and relevant considerations when a request for funding is made. In making this determination, receivers and managers are entitled to take into account possible legal expenses and tax liabilities, and the fact that the contingencies exceed the quantum of funding sought. However, receivers and managers should also consider the element of error in estimating such contingencies.

178 RECEIVERSHIP

Court’s power to appoint interim receivers in oppression proceedings

Case Name: The plaintiff, a minority shareholder, commenced an oppression Rambal v Oswal & Ors action under section 232 CA. Two months before the trial of the action, the plaintiff applied for an order appointing interim Citation: receivers and managers of the property of the company (and its subsidiary) and, alternatively, injunctive orders to protect the [2006] WASC 312, Supreme property of those companies. The application was dismissed. Court of Western Australia per Le Miere J Burrup Fertilisers Pty Ltd (BFPL) owns and operates the Burrup Fertilisers ammonia plant in Western Australia, one of the world’s largest ammonia plants. Date of Judgment: Burrup Holdings Pty Ltd (Holdings) is the parent company of BFPL.

22 December 2006 Mr Oswal owns 55 per cent of the shares in Holdings, Yara Australia Pty Ltd (Yara) owns 30 per cent and Mr Rambal owns the remaining 15 per cent. Under a Issues: shareholders’ agreement, they are entitled to appoint directors to the boards of • Court’s jurisdiction to Holdings and BFPL (the companies). The directors of the companies are Mr Oswal appoint receivers and and two other directors appointed by him, Mr Rambal and a non-executive director managers in oppression appointed by Yara. proceeding • Rights of secured creditors Mr Rambal was also managing director of the companies until April 2006, when he in relation to court- was discharged following a dispute with Mr Oswal. Mr Rambal remains a director. appointed receivers On 7 September 2006 Mr Rambal commenced an application under section 232 • Section 25(9) of the CA seeking relief against Mr Oswal, and the two directors appointed by Mr Oswal, Supreme Court Act 1935 on the basis that their conduct of the affairs of the companies is contrary to the (WA) • Section 232 CA interests of the members of the companies as a whole and is also oppressive, unfairly prejudicial and discriminatory against Mr Rambal.

The oppression action was expedited and its trial was listed to commence on 5 February 2007.

On 6 December 2006 Mr Rambal ﬁ led an interlocutory application (the receivership application) seeking an order appointing interim receivers and managers of the property and undertakings of the companies pursuant to s1324(5) or (9) CA, Order 51 of the Rules of the Supreme Court 1971 (WA) and the court’s inherent jurisdiction. Alternatively, Mr Rambal sought an injunction constraining the operations and transactions of the companies and orders requiring independent accountants to investigate the companies’ affairs and provide a report to the court.

There were three grounds to the receivership application, namely that:

• the plant had allegedly been mismanaged, causing safety incidents and a risk of further safety incidents, which might result in the plant being shut down and losing its licence;

179 • BFPL had allegedly made improper payments to third parties, including related entities, which might result in BFPL becoming insolvent; and • Mr Oswal and senior mangers of the companies were allegedly denying Mr Rambal access to the companies’ records and had deceived and concealed matters from Mr Rambal.

ANZ Bank provides loan facilities to BFPL totalling $360 million and holds a charge over BFPL’s property. ANZ opposed the receivership application on the basis, having regard to the imminent trial, the alleged risk of imperilment to the assets did not outweigh the potential prejudice to the companies and ANZ by the appointment. ANZ stated that if the court appointed a receiver it may appoint its own receiver.

The receivership application was dismissed.

Justice Le Miere held that the power to appoint interim receivers under s1324 CA was not enlivened because that power is only available in proceedings under s1324. Rather, the power is found under s25(9) of the Supreme Court Act 1935 (WA), which empowers the court to appoint a receiver by interlocutory order where it appears just and convenient.

Justice Le Miere set out, with implicit approval, principles he extracted from authorities, including that:

• despite its apparent breadth, the power under s25(9) SCA is governed by long-standing principles; • it is a drastic remedy and the court will only make an appointment where it is convinced of its need; • the damage that may be done by appointing a receiver is not so much that the receiver may exercise powers in a way occasioning loss in the business, but rather consists of the consequences ﬂ owing from the fact of appointment and the company’s loss of its title to control its assets and affairs; • the court will be particularly reticent to appoint a receiver on an interlocutory application and will not do so where some lesser remedy is adequate; and • the court may appoint a receiver at an interlocutory stage where there is a sufﬁ cient risk of jeopardy to the company’s assets to justify the appointment.

Justice Le Miere was not satisﬁ ed that the evidence established an imminent risk to the safety of the plant or people in its vicinity. While there was evidence to support Mr Rambal’s allegations of improper conduct by the other directors, most allegations were not new and it was appropriate for them to be tested at trial.

As the trial was only seven weeks away and taking into account the potentially substantial losses to the companies that might result from appointing a receiver, Justice Le Miere found that the balance of convenience was against appointing a receiver.

Justice Le Miere also declined to make any of the injunctive orders on the basis that they involved an unwarranted intrusion into the affairs and management of the companies and the proposed order appointing independent accountants was inappropriate in an adversarial proceeding.

180 This case conﬁ rms that the appointment of interim receivers on the just and convenient ground (which exists in all Australian jurisdictions) is a drastic remedy to be exercised only in extreme circumstances. Ordinarily, the making of any order appointing interim receivers must be expressed to be without prejudice to the rights of secured creditors, or (where the application is by a secured creditor) prior secured creditors. However, this case is authority for the proposition that the court will consider a secured creditor’s position in weighing up whether to appoint a receiver in the ﬁ rst place.

181 SCHEMES OF ARRANGEMENT

Cross-border schemes of arrangement

Case Name: A US corporation with assets in the UK sought approval of a Re the Home Insurance scheme of arrangement under English law. Company The hearing concerned a petition before the English High Court by the Home Insurance Company (HI), a corporation incorporated in New Hampshire, USA, for Citation: sanction of a scheme of arrangement. [2005] EWHC 2485 (Ch), HI contracted in the UK to reinsure certain risks in favour of the AFIA claimants High Court of Justice Chancery Division per Mann J (AFIA). HI then reinsured those risks with the ACE Companies (ACE). No claims were to be made against ACE on the outward reinsurance until a proper claim had been made on HI by AFIA. Date of Judgment: 10 November 2005 A rehabilitator was appointed to HI in March 2003 and, on 11 June 2003, a winding-up order was made by the Merrimack County Superior Court of New Issues: Hampshire (the Superior Court). The rehabilitator was also granted a winding-up order in the English court and provisional liquidators were appointed. The English • Whether a UK court should order contemplated that following the appointment of a liquidator in New approve a scheme of Hampshire, the provisional liquidators should exercise their powers as requested by arrangement where that liquidator, save where the English court otherwise directs or to do so would US court approval is subject contravene English law. to appeal Insurance creditors in New Hampshire do not all have an equal right to prove and so AFIA claims were subordinated and would not make any recovery in the liquidation of HI. However, if AFIA did not make properly formulated claims, no claims could be made against ACE and the beneﬁ t of the reinsurance would be lost to everyone.

A scheme of arrangement between AFIA and HI was negotiated so that AFIA would make claims which would give rise to claims against ACE. The recoveries from ACE would be split between AFIA and the other ordinary creditors of HI. AFIA agreed that they would not seek to enter into any direct arrangement with ACE during a ‘standstill’ period. The effective date of the scheme was postponed until:

• an order from the Superior Court approving the scheme in principle was obtained; • a global liquidation order from the UK Court was obtained, approving the remission of HI’s English assets to the New Hampshire liquidators for administration and distribution; and • approval from the UK Financial Services Authority (FSA) was obtained.

The FSA approval had been obtained but the application for a global liquidation order was still to be heard. The Superior Court had entered an order approving the scheme, but this order was subject to various appeals and applications.

182 The UK High Court had to decide whether it should sanction the scheme. ACE submitted that the petition for sanction should be adjourned because:

• the status of the proposal was uncertain given the pending appeal in the US; and • costs might be wasted if the liquidators continued their work in dealing with claims, when the scheme might not be approved on appeal in New Hampshire.

The court decided to sanction the scheme. It did so after considering whether the scheme should be sanctioned under English law. This did not involve the court determining issues pending appeal in the US as to whether the scheme should be approved under New Hampshire law.

This case shows the willingness of courts to support the use of schemes of arrangement where the proposed schemes will maximise the assets available to creditors.

183 SCHEMES OF ARRANGEMENT

Procedural and substantive deﬁ ciencies in conduct of meeting of members

Case Name: This decision emphasises the importance of having complied with Re Phosphate Resources Ltd the procedural requirements in the CA where the court is called (ACN 009 396 543) upon to approve a scheme of arrangement said to have been approved by shareholders at a court-ordered meeting. Citation: The applicant, Phosphate Resources Ltd (PRL), conducted phosphate mining on (2005) 56 ACSR 169, Federal Christmas Island. PRL then sought court approval of a scheme of arrangement Court of Australia per French J under which its shares were to be acquired by another company. The court ordered PRL to hold a meeting of shareholders under section 411 CA, seeking approval. Date of Judgment: The shareholders approved the scheme at that meeting. PRL then returned to court to report on the outcome of the meeting and seek an order approving the scheme. 24 November 2005 PRL’s application was opposed by three shareholders on the basis of alleged procedural and substantive irregularities relating to the conduct of the Issues: shareholders’ meeting. • Application for approval of a scheme of arrangement PRL also sought an extension of time to fi le its annual fi nancial reports and relief following approval by from civil liability in this respect. members • Procedural and substantive In relation to PRL’s application to have the scheme of arrangement approved, defi ciencies in conduct of Justice French found that the requirements of the CA for the holding of the meeting shareholders’ meeting and his earlier orders had been complied with. However, his • Application for extension of Honour concluded that approval should not be granted on the basis that: time to fi le annual fi nancial • due to a misconstruction of the court order in respect of the time zone to be reports applied, a signifi cant number of proxies, which were received within time, and • Sections 249L, 250B, whose votes were likely to have made a difference to the outcome of the 411 CA meeting, were disallowed; • the chairman of the meeting refused to entertain a motion to adjourn the meeting from one day to the next to allow those shareholders whose proxies had been excluded to attend and vote. The chairman’s view was not mandated by the court order, it was inconsistent with PRL’s articles of association and it put the integrity of the process further into doubt; and • there was a signifi cant question about the completeness of the information in the independent expert report on the proposed scheme that was provided to shareholders. Particularly so far as it related to the stability of the valuation of PRL shares in the report. This left a doubt about whether shareholders who read and relied upon the report were fully and properly informed.

PRL’s application for an extension of time for lodgment of the annual ﬁ nancial reports was allowed, however, because Justice French viewed PRL’s failure to comply with the CA requirements as reﬂ ecting distraction, carelessness and wrong assumptions, rather than any dishonesty or reckless disregard of statutory requirements.

184 This case conﬁ rms that, while the courts will not go behind a commercial judgment which it was reasonably open to shareholders to make, they will be reluctant to approve decisions purportedly made by shareholders where there are doubts about the integrity of the meeting process and about whether shareholders voted on a fully informed basis.

185 SCHEMES OF ARRANGEMENT

Is a completed cause of action needed to be a contingent creditor?

Case Name: This decision considers whether, in England, a scheme of T&N Limited and Others arrangement can bind possible future claims by individuals who do not have a completed cause of action. Justice Richards Citation: considered whether individuals who had been exposed to asbestos, but had not yet suffered any injury, could be a [2006] EWHC 1447 (Ch), High contingent creditor in a scheme of arrangement. Court of Justice, Chancery Division per Richards J The English Court considered whether to grant leave to sanction a meeting of the creditors of T&N Limited and 57 associated companies to consider a scheme of Date of Judgment: arrangement. The proposed schemes of arrangement sought to cover personal injury 16 June 2006 claims by employees, former employees and their dependents for damages for asbestos-related injuries (whether or not the injury had yet occurred) and claims for contribution made by other companies. More than £36 million was available to Issues: meet such claims as a result of a settlement between T&N Limited and its insurers. • Section 425 of the Companies Act 1985 (UK) In a 2005 decision (T&N Limited and Others [2005] EWHC 2870 (Ch)), Justice and Rules 12.3(1) and 13.2 Richards held that individuals who had been exposed to asbestos, but had not of the Insolvency Rules developed an injury, were ‘creditors’ under section 425 of the Companies Act 1985 1986 (UK) (UK). He held that an accrued cause of action in tort was required to be a creditor • Whether a future tort in a winding-up. In the context of a scheme of arrangement the term ‘creditor’ was claimant whose claim has broader and did not require a cause of action to have accrued. In his 2005 not yet accrued can be a decision, Justice Richards did not consider Edwards v Attorney General [2004] contingent creditor in a NSWCA 272 (Edwards). scheme of arrangement • Whether a person seeking In Edwards, the New South Wales Court of Appeal found that possible future tort a contribution can be a claims by persons who had been exposed to asbestos, but were presently not ill, contingent creditor in a were not provable in a winding-up. As they did not have a completed cause of scheme of arrangement action, they were held not to be contingent creditors. In this decision, Justice • Whether any surplus in a Richards considered whether this case altered his earlier decision. scheme of arrangement reverts to shareholders Justice Richards held that Edwards did not alter his view that future tort claimants • Whether a scheme of who had been exposed to asbestos, but who had not yet suffered an injury, were arrangement can affect contingent creditors for the purpose of schemes of arrangement. Justice Richards creditors’ rights against commented that he was not suggesting that the assumptions made in Edwards, insurers which relate only to a winding-up, were wrong as a matter of Australian law. He maintained his distinction between who is a creditor for the purpose of a scheme of arrangement and who is a creditor in a winding-up.

186 Justice Richards also considered whether a company seeking a contribution from one of the scheme companies in respect of a future claim by an employee who had been exposed to asbestos could be a contingent creditor. Having held that a person who had been exposed to asbestos could be a contingent creditor without an accrued cause of action, Justice Richards found no reason why a company with a claim for contribution as a result of that claim should not also be a contingent creditor.

In his 2005 decision, Justice Richards had concluded that any surplus assets in a scheme of administration would be available to future tort claimants with non- provable claims. This issue had been decided differently in Edwards. In that case, the court held that if there was any surplus assets in the liquidation these would be available to pay to shareholders, and those people with future claims in tort (and who were therefore not contingent creditors) would have no claim against those assets. In this decision, Justice Richards held that, despite the comments in Edwards, he saw no reason to revise his earlier decision.

The proposed schemes were challenged on the basis that they were not a scheme of arrangement for the purposes of s425 of the Companies Act as it was the creditors’ rights against the companies’ insurers, rather than against the companies themselves, that were the subject of the compromise. Justice Richards rejected this submission, holding that it is not a necessary element for an arrangement under s425 that it should alter the rights existing between the companies and the creditors.

In England, an accrued cause of action is not required to be a contingent creditor in a scheme of arrangement. As a result of a recent amendment to the relevant legislation, an accrued cause of action is also not required to be a contingent creditor in a winding-up.

187 SCHEMES OF ARRANGEMENT

Bringing an early end to run-off in the insurance industry

Case Name: The Federal Court of Australia considered whether to sanction a NRG London Reinsurance meeting of the creditors of two reinsurance companies, NRG Company Ltd, Re NRG Victory London Reinsurance Company Limited and NRG Victory Aust Ltd and the Corporations Australia Ltd. Each company was in run-off and had a clear Act 2001 surplus of assets over liabilities. Both companies were therefore in a position to pay potential claims in full. The purpose of the Citation: schemes of arrangement was to accelerate payment of possible [2006] FCA 872, Federal Court future reinsurance claims by resolving them now, thus enabling of Australia per Lindgren J the businesses of both companies to be terminated. NRG London is a reinsurance company incorporated in London with a branch in Date of Judgment: Australia. NRG Victory is a reinsurance company incorporated in Australia. They 5 July 2006 had ceased underwriting new risks in 1991 and 1993 respectively, and their businesses had been placed into run-off. Both were solvent. The liabilities of each company were possible claims for reinsurance indemnity and the companies Issues: proposed entering into solvent schemes of arrangement with their creditors. Justice • Section 411 CA Lindgren noted that there had only been one solvent scheme of arrangement (or • Solvent schemes of ‘cut-off’ scheme) in Australia before and considered whether to convene creditors’ arrangement meetings in respect of these two proposed solvent schemes of arrangement. • Classes of creditors for voting purposes Whilst both companies were in a position to pay claims in full, they expected run- off to continue for a considerable number of years, which would involve incurring administrative costs. They had concluded that a scheme of arrangement would be the most effective method of making payments to scheme creditors in the shortest practicable time.

The features of the scheme included:

• valuation of claims – the schemes contained a mechanism for determining the value of potential entitlements to reinsurance indemnity that scheme creditors might have. That mechanism was based on a methodology prepared by an actuary. The schemes then provided for that sum to be paid in full; • voting – a single class of creditors was proposed for voting purposes. This was upheld by Justice Lindgren, who held that scheme creditors whose losses had been ‘incurred but not reported’ did not fall into a separate class to scheme creditors whose claims had already accrued, but had not yet been paid; and • reversion to run-off – the scheme companies have the option to revert to run-off if the total amount of claims exceeded a certain amount.

The proposed schemes identiﬁ ed a number of advantages for scheme creditors:

• claims would be paid early and before they would have otherwise materialised; • there would be no discount applied for early payment;

188 • any uncertainty about the long-term solvency of the two scheme companies would be removed; and • claims would be dealt with quickly and efﬁ ciently, without protracted litigation.

The proposed schemes identiﬁ ed some potential disadvantages for scheme creditors:

• the value of future claims is estimated, and it may be the case that scheme creditors receive a different amount than they would have received if the companies had been run-off in the usual way; and • the proposed schemes also proposed a ‘cut-off’ date – if claims are not submitted by the relevant date, they may be valued at zero. The effect of the scheme would be that such creditors might receive nothing.

Justice Lindgren sanctioned the creditors’ meetings. Prior to this case, there had been only one ‘cut-off’ scheme of arrangement approved in Australia. Solvent schemes of arrangement have been used more often in England in relation to companies that underwrote insurance and reinsurance business. Solvent schemes of arrangement may become an increasingly popular way for Australian insurance companies in run-off to bring their businesses to an early termination.

189 SCHEMES OF ARRANGEMENT

The court’s power to approve schemes of arrangement

Case Name: In this case, the plaintiff company applied under section 411(6) Re WebCentral Group Ltd CA for an order approving a scheme of arrangement which (No 2) provided for the acquisition of all of the issued shares in the plaintiff by Melbourne IT Ltd. Citation: First, Justice Lindgren considered whether approval of a scheme of arrangement for [2006] FCA 1203, Federal the WebCentral Group (where all its issued shares would be sold to Melbourne IT Court of Australia per Ltd (MLB)) should be denied on the basis that another company, NetRegistry Pty Lindgren J Ltd, had indicated that it was interested in making a counter-offer for the shares in the plaintiff. His Honour concluded that the approach from NetRegistry was Date of Judgment: conditional, at an early stage of development and did not yet represent an offer capable of acceptance. If the board had ‘stalled’ the MLB proposal in the hope of 12 September 2006 grasping the NetRegistry offer it may have released the MLB ‘bird in the hand’ and ﬁ nished up with nothing. Issues: • Section 411(6) CA Secondly, Justice Lindgren considered whether he should remove a clause which • Whether a scheme of provided that the shares would be transferred to MLB free of all encumbrances. His arrangement should be Honour held that this clause might give the false impression that the interests of approved the holders of security over the shares were being adversely affected. To avoid such confusion, he ordered that the ‘no encumbrances’ clause be removed.

The court may grant its approval to a compromise or arrangement subject to alterations or conditions as it thinks just. This case shows that the court may make appropriate amendments to a scheme to address a false or misleading interpretation of the scheme’s terms.

190 SCHEMES OF ARRANGEMENT

Altering a scheme of arrangement after its approval by creditors

Case Name: This judgment considers the jurisdiction of the court to approve a Re HIH Casualty and General scheme of arrangement in a form other than that approved by Insurance Ltd & Ors creditors. Following a refusal by the court to approve a scheme of arrangement pursuant to Citation: section 411(4)(b) CA, the plaintiffs requested that the court allow minor alterations [2006] NSWSC 504, (2006) to the proposed Australian scheme and approve it in an amended form without 58 ACSR 1, (2006) ACLC 569, requiring a further vote by creditors. Two alterations were proposed: Supreme Court of New South Wales per Barrett J • the omission of clause 22.4 of the scheme; and • the substitution of a slightly different form of deed as Annex 5.

Date of Judgment: The ﬁ rst of these alterations was to address the concern expressed by the court in 26 May 2006 its judgment in Re HIH Casualty & General Insurance Ltd [2006] NSWSC 485. At paragraph [103] of that judgment, Justice Barrett stated that in all respects, other Issues: than those involving the class creating effect of clause 22.4 and the deﬁ ciency in • Sections 411(4) and 411(6) the explanatory statement in relation to clause 22.4, it would have been CA appropriate for the court to grant approval to the scheme under s411(4)(b). The • Application to approve second proposed alteration was the result of discussions with the proposed UK scheme of arrangement Government counterparty to the deed at Annex 5. subject to certain alterations Justice Barrett considered the interaction between sections 411(4) and 411(6) CA. Section 411(4) CA states that in order for a compromise or arrangement to be binding on creditors it must have been approved by the requisite majority at a meeting of creditors and be approved by the court. Section 411(6) CA allows the court to approve a creditors’ meeting’s decision ‘subject to such alterations or conditions as it thinks just’. After reviewing the authorities, Justice Barrett noted that the court may exercise its discretion under s411(6) CA:

• if the alteration is minor and does not affect the details of the scheme; • to omit wording which is not appropriate for inclusion in a scheme; • to omit, with the consent of the creditors at the scheme meeting and a priority creditor, the priority creditor from the deﬁ nition of ‘creditor’; and • to improve the smooth working of this scheme without affecting its substance.

In respect of the ﬁ rst alteration sought, Justice Barrett concluded that although the omission of clause 22.4 changed creditor rights under the scheme, it had the effect of putting the scheme into a form that was consistent not only with the procedures with respect to meetings and voting that were in fact adopted, but also with the regime described in the explanatory statement. He was therefore satisﬁ ed that it was just to impose the alteration on creditors.

191 In respect of the second alteration sought, Justice Barrett concluded that as the proposed changes were in no sense material and did not really affect the details of the scheme, it was appropriate to impose the alteration on creditors.

Using its powers under s411(6) CA, a court may impose alterations on a scheme of arrangement if it believes the imposition of such alterations to be just. In this case, the alterations sought were either inconsequential or they had the effect of making the scheme consistent with the regime approved by creditors. The court therefore approved the scheme subject to those alterations.

192 SHAREHOLDER ACTIONS AND LITIGATION FUNDING

When will a court approve liquidator’s entry into a litigation funding agreement?

Case Name: A liquidator sought the court’s approval to enter into a litigation Leigh re King Bros funding agreement under section 477(2B) CA. The court considered eight factors in assessing whether to grant approval, Citation: including the liquidator’s prospects of success in the litigation [2006] NSWSC 315, and the interests of creditors. The court did not seek to override Supreme Court of New South the liquidator’s commercial judgment, but said that there must be Wales per Austin J evidence that a commercial judgment had been made.

Date of Judgment: In this case, the liquidator of companies in the King Brothers group of companies (the companies) sought the court’s approval under section 477(2B) CA to enter into 21 April 2006 agreements with Litigation Lending Services (the funders). Under the agreements, the funders would fund proceedings on behalf of the companies against two Issues: defendants for the recovery of potential voidable transactions. • Section 477(2B) CA • Court approval to enter Section 477(2B) CA requires the approval of the court, or approval by resolution of funding agreements with creditors of the committee of inspection, for a liquidator to enter into an agreement litigation funders on the company’s behalf if the term of the agreement may end, or the obligation of • Court assessment of the a party may be discharged by performance, more than three months after the prospects for success in agreement was entered into. The proposed agreements clearly fell into this litigation category. Justice Austin said that, in deciding whether to approve an agreement covered by s477(2B) CA, the court undertakes ‘something less than a complete ‘merits review’. Courts will generally not interfere with the liquidator’s proposed agreement unless there is a lack of good faith, an error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct (following Justice Giles in Re Spedley Securities Ltd (in liquidation) (1992) 9 ACSR 83).

Justice Austin stated that there were eight relevant factors to be taken into account in considering whether an application for approval was prudent and in good faith:

• the liquidator’s prospects of success in the litigation; • the interests of creditors other than the proposed defendant; • possible oppression in the bringing of the proceedings; • the nature and complexity of the cause of action; • the extent to which the liquidator has canvassed other funding options; • the level of the funder’s premium; • the liquidator’s consultations with creditors; and • the risks involved in the claim.

193 In Justice Austin’s view, each of the factors other than the last favoured approval to enter into the funding agreements being granted. The judge referred to evidence of advice suggesting that the proposed litigation had reasonable prospects of success, that there was a prospect of substantial recovery for creditors as a result of the litigation, that negotiations for funding by other creditors had been explored and no resolution opposing the proposed agreements with the funders had been made, that the funders’ premium was consistent with the level of funding fees charged in other cases in which approval for funding agreements had been granted, and that creditors had been consulted and given the opportunity express their views on the proposed agreements with the funders. In addition, there was no evidence of oppression of the other parties to the proceedings and, while there was some factual complexity with respect to the contemplated proceedings, this neither strongly favoured approval being granted nor suggested that approval should be denied.

Justice Austin held, however, that there was a deﬁ ciency in the evidence relating to the risks involved in the claim. The proposed funding agreements capped the costs recoverable from the funders. While the court would not ‘override the liquidator’s commercial judgment, there must be evidence that a commercial judgment has been made, on the basis of appropriate advice’. In the circumstances, Justice Austin adjourned the application and said that if the liquidator provided satisfactory evidence of the kind identiﬁ ed, he would approve the funding agreements.

This case provides a useful summary of matters that a court will take into account in deciding whether to approve a liquidator entering an agreement with litigation funders on behalf of a company. Generally, the court will not interfere with the proposal unless there is evidence of lack of good faith, an error of law or doubts regarding the prudence of the liquidator. In deciding whether to grant approval, the court will scrutinise the terms of the proposed funding agreement and consider various other factors, including the prospects of success of the proposed litigation.

194 SHAREHOLDER ACTIONS AND LITIGATION FUNDING

Discovered documents may be produced to a third party funding the action where there is no ‘ulterior or foreign purpose’

Case Name: The plaintiffs sought permission from the court to provide Cadence Asset Management Pty discovered documents to a third party funding the litigation. This Ltd v Concept Sports Ltd case considers whether a non-party to the litigation has a sufﬁ cient interest to be provided with discovered documents. Citation: The plaintiffs’ litigation was funded by a third party, IMF (Australia) Ltd (IMF). IMF [2006] FCA 711, Federal Court is in the business of funding litigants. Under its agreement with the plaintiffs, IMF of Australia per Finkelstein J is required to pay costs and disbursements ‘reasonably incurred in commencing and prosecuting the action and to pay any costs made against the plaintiffs’ and Date of Judgment: was entitled to terminate the arrangement and its obligations with seven days’ notice. Such a decision involves an assessment of whether the claim has sufﬁ cient 2 June 2006 prospects of success. In order to make such an assessment, IMF sought access to the plaintiffs’ discovered documents. Issues: • Discovery of documents to The Federal Court was asked to decide whether the handing over of documents in third parties this context was consistent with the requirements of discovery that the use of the • Whether documents may be documents is not for a purpose that is foreign to the action. A party obtaining provided to a party funding access to discovered documents gives an implied undertaking not to use them for a the action collateral or foreign purpose (Harman v Secretary of State, Home Department • Implied undertakings not [1983] 1 AC 280). Justice Finkelstein stated that to use documents for a collateral or foreign purpose … the implied undertaking does not prevent absolutely a party giving discovered documents to a non-party. There are circumstances in which a party has a legitimate interest in disclosing documents to a non-party. (at [6])

His Honour held that the plaintiffs do not require the court’s permission to provide its discovered documents to IMF because the requirement that IMF view the documents does not constitute an ‘ulterior or foreign purpose’. IMF is not a ‘stranger’ to the action and has a legitimate purpose for viewing the documents, being its need to assess the merits of the plaintiffs’ action. His Honour noted that the private interests of the opposite parties are not affected because IMF is also bound by an implied undertaking not to use the documents for a collateral or foreign purpose.

A third party funding a proceeding is not a ‘stranger’ to the action and should not ordinarily be prevented from being provided with a party’s discovered documents. Such a third party will still be bound by an implied undertaking that the documents will not be used for any purpose other than the action then proceeding.

195 SHAREHOLDER ACTIONS AND LITIGATION FUNDING

A green light for litigation funding?

Case Name: In this case, the High Court considered the permissibility of Campbell’s Cash & Carry Pty litigation funding. The decision considered the circumstances in Ltd v Fostif Pty Ltd which the terms of a funding agreement between a litigant and a third-party litigation funder might render the agreement contrary Citation: to public policy and an abuse of process. [2006] HCA 41, High Court of A class action was brought by a number of tobacco retailers against licensed Australia per Gleeson CJ, Kirby, wholesalers for the recovery of state licence fees, following the High Court’s Gummow, Hayne, Crennan, declaration in Ha v State of New South Wales (1997) 189 CLR 465 that the Callinan and Heydon JJ tobacco licensing schemes of the states and territories were invalid. The proceeding was ﬁ nanced by a litigation funder, Firmstone, on the basis that it would take one- Date of Judgment: third of the proceeds if the case were successful.

30 August 2006 The wholesalers challenged the proceeding on the following grounds:

Issues: • that they were not permitted by the court rules regarding representative proceedings; and • Permissibility of third-party litigation funding • that the proceeding should be stayed as the litigation funding arrangement between the retailers and Firmstone was an abuse of process and contrary to public policy.

At ﬁ rst instance, Justice Einstein of the New South Wales Supreme Court held that the proceeding was an abuse of process and fell outside the court rules permitting representative proceedings. The Court of Appeal allowed the appeal and ordered the proceedings to continue as representative proceedings. The Court of Appeal found that neither Firmstone’s role in connection with the litigation nor the particular funding arrangements justiﬁ ed staying the proceeding.

The High Court upheld the retailers’ appeal on the question of whether the proceedings should continue as representative proceedings. However, the appeal was dismissed in relation to issues of public policy and abuse of process arising from the funding agreement between the retailers and Firmstone.

Justices Gummow, Hayne and Crennan, with whom Chief Justice Gleeson and Justice Kirby agreed on this issue, made a range of points in concluding that the funding arrangements between Firmstone and the retailers did not constitute a ground to stay the proceedings.

First, section 6 of the Maintenance, Champerty and Barratry Abolition Act 1993 (NSW) (the Abolition Act) makes it clear that questions of maintenance and champerty are not to be regarded as always legally irrelevant. That section preserves any ‘rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal’. However, the Abolition Act neither

196 states explicitly whether questions of maintenance and champerty are relevant to issues of abuse of process, nor does it address the scope of public policy or doctrines of illegality concerning those questions.

Second, in their Honours’ view, the wholesalers’ proposition that for the maintainer to institute and continue proceedings in the name of, or on behalf of, the maintained plaintiffs was an abuse of process which could be avoided only by a stay assumed that maintenance and champerty give rise to public policy questions beyond those relevant when considering whether the funding agreement is enforceable between the parties. However, in jurisdictions where legislation like the Abolition Act has been enacted, that assumption is not valid, for the following reasons:

• when the crimes and torts of maintenance and champerty were abolished, any wider rule of public policy, beyond the rules preserved by s6, lost any basis that it previously had; and • the asserted rule of public policy would not yield any certain rule, because the content and basis of the public policy asserted was identiﬁ ed only by the use of terms such as ‘trafﬁ cking’ or ‘intermeddling’.

Third, the particular complaints by the wholesalers that Firmstone had sought out claimants, exercised a great degree of control over the proceedings and bought the rights to litigation to obtain proﬁ t, were not, either alone or in combination, contrary to public policy or resulting in an abuse of process. Their Honours held that many people seek to proﬁ t from assisting in litigation, and seeking out and encouraging litigation could only be contrary to public policy if there were still a rule against maintaining actions. In the absence of such a rule, either in crime or in tort, there was no foundation to conclude that maintaining an action could be contrary to public policy.

Further, fears concerning the adverse effects on the processes of litigation and the fairness of the agreement between the funder and the plaintiff are not suffi cient to justify an ‘overarching rule of public policy’ that would prohibit funded actions or require funding agreements to meet particular standards concerning the funder’s degree of control or reward. Such a rule ‘would take too broad an axe to the problems that may be seen to lie behind the fears’. Similarly, fears for the administration of justice (for example, that the funder might infl ame the damages or suppress evidence) can be adequately met by existing doctrines of abuse of process, and fears that lawyers might fi nd themselves in positions of confl ict are also adequately addressed by the existing rules regulating their duties to the court and clients.

Importantly, their Honours considered it neither necessary nor appropriate to consider the position in jurisdictions where maintenance and champerty continue to be torts or crimes.

Justices Callinan and Heydon dissented on this point. Their Honours found that the Court of Appeal’s decision on this issue should be overturned since a combination of factors rendered the proceedings an abuse of process, including:

• Firmstone’s motive of proﬁ ting from the litigation of others;

197 • the fact that Firmstone sought out and encouraged persons to sue who would not otherwise have done so; • the large gains hoped for by Firmstone; • Firmstone’s control of the litigation; and • the subservience of the retailers’ interests to those of Firmstone’s.

The High Court’s decision is likely to encourage a rise in the number of litigation funders and funded cases, particularly for class actions which through economies of scale may be seen to offer the best chance of a large return for funders. Previously, it was difﬁ cult to predict whether a particular litigation funding agreement would be stayed on public policy grounds. That uncertainty has now been largely removed in New South Wales, Victoria, South Australia and the ACT, where the torts of maintenance and champerty have been abolished. The position remains unclear in the remaining jurisdictions.

198 SHAREHOLDER ACTIONS AND LITIGATION FUNDING

Factors relevant to determining whether a creditor has been unreasonably prejudiced by a resolution

Case Name: This case involved an appeal from a decision in which the court Ravenswood Resort Pty Ltd (in held that a resolution for the company to enter into a litigation liquidation) v Kammal funding agreement would cause unreasonable prejudice to a creditor. The Court of Appeal considered when a resolution Citation: causes, or is likely to cause, unreasonable prejudice to a creditor. [2006] WASCA 217, Court of At a meeting of creditors of Ravenswood Resort Pty Ltd (Ravenswood), a resolution Appeal of Western Australia per was passed for Ravenswood to enter into a litigation funding agreement (the Martin CJ, McLure and Buss Proposed Agreement) with Megacity Pty Ltd (Megacity). Ms Sim and Dr Teo were JJA directors of Ravenswood at the time of liquidation and were also directors and shareholders of Megacity. Date of Judgment: An application was brought by Mr Kammal, a creditor of Ravenswood, on the basis 26 October 2006 that the resolution would cause, or was likely to cause, unreasonable prejudice to him as: Issues: • the Proposed Agreement included a covenant by the liquidator not to sue • Section 600A CA • Unreasonable prejudice of a Ms Sim; creditor by a resolution at a • a conﬂ ict of interest or compromise in the integrity of the court may arise from creditor’s meeting the association between Megacity and the directors of Ravenswood; and • there was a prospect of the Proposed Agreement inhibiting a proper investigation of Ravenswood’s affairs or of Ravenswood commencing proceedings after the investigation.

At trial, Justice Hasluck held that for voting purposes at a creditors’ meeting, a person asserting creditor status must provide particulars to establish at a prima facie level the existence of the asserted debt. He upheld Mr Kammal’s application and held that the resolution caused him unreasonable prejudice. The second part of the decision was appealed to the Court of Appeal. No appeal was made against the ﬁ ndings of the trial judge regarding Mr Kammal’s proof of debts.

The Court of Appeal had to determine whether under section 600A CA, the Proposed Agreement prejudiced, or was reasonably likely to prejudice, the creditors to an extent that was unreasonable with respect to:

• the beneﬁ ts provided to related creditors because of the resolution; • the nature of the relationship between the related creditor and company or relationships between them; and • any other relevant matter.

Chief Justice Martin, with Justices Buss and McLure concurring, held that determining whether a creditor had been unreasonably prejudiced involves a two-step process:

199 • ﬁ rst, the court must identify any prospective source of prejudice by considering the consequences which the passage of the resolution would have on parties or interests other than those of the related creditor, and the creditor voting against the proposed resolution, including creditors generally, the liquidator and the public interest; and • the court must undertake a qualitative evaluation of the nature and signiﬁ cance of the prejudice to determine whether the prejudice is unreasonable.

The court considered that the covenant not to sue Ms Sim was a prospective source of prejudice to Mr Kammal because there was a possibility that distributions to creditors in liquidation might be reduced because of Ravenswood’s inability to sue Ms Sim. However, a qualitative evaluation of the prospect showed that the covenant was not unreasonable as:

• the covenant was not a release by Ravenswood. Therefore, Mr Kammal could commence proceedings against Ms Sim under s588R CA; • the terms of the covenant did not preclude the liquidator giving consent under s588R CA; • a claim against Dr Teo could potentially satisfy any claim or compensation order; and • ASIC would still have the power to commence proceedings against Ms Sim under s1317H CA.

The court agreed that the fact Ms Sim was involved in the funding of the litigation and involved in the events giving rise to litigation was, in itself, incapable of giving rise to a confl ict of interest. The court determined that there was no evidence that the litigation would be inhibited by Ms Sim’s interests in Megacity. In any event, the liquidator, as an offi cer of the court, would address any confl ict that arose.

The court held that there was no evidence that the liquidator, as an ofﬁ cer of the court, would fail to investigate the affairs of Ravenswood. Further, without the Proposed Agreement, there was unlikely to be any funding for Ravenswood to defend itself in proceedings or commence them.

A court will not set aside a resolution unless it is satisfi ed that the resolution is prejudicial to the opposing creditor, and that the prejudice is unreasonable. In determining whether unreasonable prejudice exists, the court will fi rst identify any prospective source of prejudice and then undertake a qualitative evaluation of the nature and signifi cance of that prejudice. In this case, a resolution for a company to enter into a litigation funding agreement with a company that had the same directors as the company in liquidation was not unreasonably prejudicial to the opposing creditor.

200 SHAREHOLDER ACTIONS AND LITIGATION FUNDING

Misled shareholders’ claims rank equally with other unsecured creditors

Case Name: This case considers whether a shareholder of a company who Sons of Gwalia Limited v has a claim (in this case, a misleading or deceptive conduct claim) Margaretic against that company, ranks equally with general creditors in the winding-up or administration of the company, or whether the Citation: shareholder’s claim is postponed under section 563A CA until all debts to the general creditors have been satisﬁ ed. [2007] HCA 1, High Court of Australia per Gleeson CJ, On 18 August 2004, Mr Margaretic bought shares in a publicly listed gold mining Gummow, Kirby, Hayne, Heydon company, Sons of Gwalia Ltd (Sons of Gwalia). On 29 August 2004, administrators and Crennan JJ – Callinan J were appointed to Sons of Gwalia and it became apparent that at the time the dissenting administrators were appointed, Mr Margaretic’s shares in the company were worthless. Date of Judgment: Mr Margaretic alleged that Sons of Gwalia was in breach of its continuous 31 January 2007 disclosure obligations under ASX Listing Rule 3.1 and section 674 CA, in that it failed to notify the ASX that its gold reserves were insufﬁ cient to meet its gold Issues: delivery contracts and that it could not continue as a going concern. Mr Margaretic • Section 563A CA alleged that he was the victim of misleading or deceptive conduct in contravention • Shareholders’ claims for of s52 Trade Practices Act 1974 (Cth), s1041H CA, and s12DA of the ASIC Act misleading conduct ranked 2001 (Cth). He claimed an entitlement to damages in the sum of the price he paid as unsecured creditors for the shares.

The administrators of the DOCA which Sons of Gwalia entered into after being placed in administration applied to the Federal Court for a declaration that Mr Margaretic’s claim was not provable in the DOCA or, alternatively, that the claim had to be postponed until after the debts owed to general creditors (as opposed to creditors whose debts are owed to them in their capacity as members of the company) had been met. The deed administrators were joined in their application by ING Investment Management LLC (ING), which was a general creditor of Sons of Gwalia.

Justice Emmett at ﬁ rst instance and the Full Federal Court on appeal held in favour of Mr Margaretic. The deed administrators and ING appealed to the High Court.

The majority of the High Court (Chief Justice Gleeson, and Justices Gummow, Kirby, Hayne, Heydon and Crennan – Justice Callinan dissenting) held in favour of Mr Margaretic and dismissed the appeal. They agreed that, under s553 CA, Mr Margaretic’s misleading or deceptive conduct claim against Sons of Gwalia was admissible to proof in the administration of the company. The question then was whether the effect of s563A CA was that this type of claim was postponed so that it ranked below the claims of general creditors in the payment of debts under the terms of the DOCA.

201 Section 563A provides that payment of a debt owed by a company to a person in the person’s capacity as a member of the company, whether by way of dividends, proﬁ ts or otherwise, is to be postponed until all debts owed to, or claims made by persons otherwise than as members of the company have been satisﬁ ed. Sons of Gwalia and ING argued that Mr Margaretic’s misleading and deceptive conduct claim would, if successful, be a debt owed to him in his capacity as a member of Sons of Gwalia (ie as a shareholder), and that payment of that debt would therefore be postponed until after the payment of general creditors such as ING.

The majority held that Mr Margaretic’s claim was not owed to him in his capacity as a member of the company, and was therefore not subject to postponement under s563A (meaning that it ranked equally with the claims of creditors such as ING). Several factors that were held to be important in reaching this decision were that:

• Mr Margaretic’s claim was not founded upon any rights he obtained by virtue of his membership of the company, but on statutory causes of action not confi ned to members but available to any person suffering loss as a result of the contravention of various statutory provisions. • If the Parliament had intended that member claims relating to damages arising from the purchase or sale of shares should rank behind claims of general creditors, it could have used the type of clear language to this effect as that contained in para 510(b) of the United States Bankruptcy Code. The fact that it chose to use the qualifi ed language of s563A indicates that it was not Parliament’s intention that s563A have an effect similar to that of para 510(b) of the US code. • The specifi c examples of debts that are postponed which are given in s563A (ie dividends and profi ts) indicate that the types of debts encompassed by the phrase ‘or otherwise’ are debts that normally inhere in the ordinary operation of the company as such, and not misleading or deceptive conduct claims.

The majority rejected the argument that principles derived from cases such as Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 and Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15, which suggested that claims such as Mr Margaretic’s ought to be postponed, were relevant to the interpretation of s563A. They indicated that Webb may no longer be good law, and also cautioned against the use of common law principles derived from 19th century English company law cases in the interpretation of a contemporary Australian statute.

While shareholders with claims for misleading or deceptive conduct or breach of continuous disclosure obligations can now prove in a liquidation or administration, they must be able to establish their claims and their entitlement to damages. This includes satisfying the principles of causation in light of the particular circumstances of each shareholder.

202 STATUTORY DEMANDS

Challenging statutory demands by the Tax Commissioner: R&D tax offsets can constitute offsetting claim

Case Name: This case involved an appeal by a company against the decision Ozone Manufacturing P/L of a Master to refuse to set aside a statutory demand served by v Deputy Commissioner of the Federal Commissioner of Taxation on tax debts owed. The Taxation (Cth) company argued that it had an offsetting claim (for research and development expenditure), which exceeded the amount of the Citation: demand. [2006] SASC 91, Full Court Ozone Manufacturing Pty Ltd (Ozone), a designer and manufacturer of ‘pollution of the Supreme Court of South technology’ was liable to pay the Federal Commissioner of Taxation GST and PAYG Australia, Civil Division per withholding payments. The Commissioner established a Running Balance Account Debelle, Besanko and Layton JJ (RBA) to track Ozone’s tax liabilities, debiting from it outstanding amounts together with penalties and interest. Date of Judgment: Ozone’s RBA was signifi cantly in defi cit. The Commissioner served a statutory 31 March 2006 demand on Ozone. Ozone applied to have it set aside. A Master heard the application and refused to set aside the statutory demand, though he did extend Issues: the time for compliance. Ozone appealed to the Full Court, arguing that it had an • Whether statutory demand offsetting claim in R&D expenditure which exceeded the amount of the demand. for payment of tax debts should be set aside Justice Debelle (with whom Justices Besanko and Layton agreed) considered the • What constitutes an relevant tax issues before concluding that, if Ozone is entitled to claim deductions offsetting claim for its expenditure on R&D, it is entitled to offset the amount of those deductions against the defi cit in its RBA. The question of whether or not it was entitled to claim those deductions was not considered.

Justice Debelle then went on to consider whether Ozone had an offsetting claim. His Honour reviewed the authorities about the meaning and scope of offsetting claims and concluded that the test for determining whether such a claim exists is whether the claim is bona ﬁ de and truly exists in fact, and that the grounds for alleging the existence of the claim are real and not spurious, hypothetical, illusory or misconceived.

Justice Debelle concluded that the facts demonstrated that Ozone’s claim was not artifi cial and had not been created for the purposes of attempting to defeat the statutory demand. Despite the fact that Ozone’s claim for the deductions giving rise to the offsetting claim might not ultimately be allowed, his Honour considered the offsetting claim to be a bona fi de claim which was in no sense spurious or fi ctitious.

In these circumstances, the court held that the offsetting claim had been sufﬁ ciently established and that, given that the amount of the claim exceeded the amount of the demand, ordered that the demand be set aside.

203 R&D expenditure can be used to offset a tax liability. The test for whether such an offsetting claim will justify setting aside a statutory demand from the Commissioner is whether the offsetting claim is bona ﬁ de, real and not spurious.

204 STATUTORY DEMANDS

Duty of care arising from statutory requirements to supervise

Case Name: Does a statutory requirement for building contractors to have a C & E Pty Ltd v Andrew supervisory role create for them a duty of care to other parties? Corrigan Further, do the supervisory obligations under statute, which specify offences for breaches, lay the foundation for a private Citation: right of action? The Queensland Court of Appeal says not. Also, as for getting CA applications to the court registry in time, the [2006] QCA 47, Court of Appeal of Queensland per missing of a 4pm deadline required in procedural rules does not Williams and Keane JJA and mean the submission date carries over to the next day. Muir J CMC Brisbane Pty Ltd (the contractor) was a building contracting company with Andrew Corrigan (Corrigan) was its sole director and its nominated supervisor under Date of Judgment: the Queensland Building Services Authority Act 1991 (Qld). The Contractor entered 3 March 2006 into an agreement with C & E Pty Ltd (the builder) to build 10 houses in Yeronga, Queensland. Nine months after practical completion of the project, the contractor entered into voluntary administration and subsequently a DOCA. Issues: • Section 459G CA The builder attempted to set aside the DOCA. It was unsuccessful and an order for • Rule 103 Uniform Civil costs of $11,503 was made in favour of Corrigan. Corrigan served a statutory Procedure Rules 1999 (Qld) demand on the builder for payment of those costs. The builder applied to have the • Service of application to set statutory demand set aside on the basis that it had an offsetting claim. Corrigan aside statutory demand out sought to have the application to set aside the demand dismissed on the basis that of time it was served out of time. The Queensland Supreme Court dismissed the builder’s application to set aside the statutory demand, ﬁ nding that there was no offsetting claim. It therefore did not need to decide the question of whether the application was served out of time.

The builder appealed. The Court of Appeal conﬁ rmed the decision that the builder had no offsetting claim. The offsetting claim was said to be a claim for damages arising from a breach of a duty of care that the builder said Corrigan owed it under particular provisions of the Queensland Building Services Authority Act and from which the builder claimed it derived a private right of action. The court held that the builder was not owed such a duty, and did not derive a private right of action under the particular provisions of the Queensland Building Services Authority Act having regard to the purpose and language of the statute.

While unnecessary for the disposal of the substantive application in the circumstances, the Court of Appeal considered Corrigan’s contention that the application to set aside the statutory demand was served out of time. Section 459G CA provides that an application to set aside a statutory demand may only be made within 21 days after the demand is served. The application to set aside the demand was served at 4.30pm on the 21st day after the demand was served. Corrigan submitted that rule 103 of the Uniform Civil Procedure Rules 1999 (Qld) applied

205 and that the application should therefore be dismissed. Rule 103 provides that if a document is served after 4pm, the document is taken to have been served the next day.

The court held that the application was served within the required time. It relied on the High Court decision in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, which established the principle that the time allowed by s459G(3) CA cannot be extended by reliance upon procedural provisions. Justice Keane held that, by parity of reasoning, the time allowed by s459(3) CA cannot be cut down by procedural provisions such as the Uniform Civil Procedure Rules and that such an interpretation would give rise to constitutional difﬁ culties, notably under s109 of the Commonwealth Constitution which provides:

When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.

The judgment conﬁ rms that deadlines for ﬁ ling applications under the CA are determined by the CA and cannot be altered by procedural provisions in court rules.

206 STATUTORY DEMANDS

Statutory demands must be challenged at the right time and place

Case Name: This case looks at the question of whether a court can give an G & J Gears Australia Pty Ltd v extension of time for compliance with a statutory demand after Brobo Group Pty Ltd the time for compliance has expired. It also considers whether a court can restrain winding-up proceedings in another court from Citation: continuing. [2006] FCA 330, Federal Court The respondent (Brobo) served on the applicant (Gears) a statutory demand of Australia per Kenny J pursuant to s459E CA.

Gears ﬁ led an application under section 459G CA in the Federal Court seeking to Date of Judgment: have the statutory demand set aside. A registrar who heard the application did not 31 March 2006 set the demand aside, but ordered that the time for complying with it be extended. On the extended deadline day, Gears ﬁ led a motion seeking a review of the Issues: registrar’s decision and applied for a further extension of the period for compliance • Sections 459C, 459E, with the statutory demand (the statutory demand applications). 459F and 459G CA A few days later, Brobo commenced winding-up proceedings against Gears in the • Power of courts to set aside or extend time for Victorian Supreme Court. compliance with a statutory Months after the extended deadline for complying with the demand, the statutory demand demand applications were heard by Justice Kenny in the Federal Court. At the • Whether a court will enjoin hearing, Gears sought leave to apply for an order restraining Brobo from proceeding winding-up proceedings with its winding-up application against Gears in the Victorian Supreme Court on the in another court from basis that it was an abuse of process (the injunction application). continuing Justice Kenny dismissed the applications to further extend the time for compliance with the demand on the basis that the court had no power to do so. The court only had power to order further time for compliance before the current deadline for compliance. It was immaterial that the application for further time was made before the current deadline for compliance. The application for further time must be granted before the current deadline.

Gears was taken to have failed to comply with the statutory demand and was presumed to be insolvent. In the circumstances, the applications to review the registrar’s decision and to set aside the statutory demand were futile and dismissed accordingly.

The judge also dismissed Gears’ application for leave to apply for injunctive relief restraining Brobo’s winding-up proceeding against Gears in the Victorian Supreme Court. Gears sought to restrain the winding-up proceeding on the basis that it was an abuse of process in circumstances where Brobo had allegedly deliberately interfered with a commercial agreement and Gears’ intellectual property.

207 The judge held that it was inappropriate to restrain the winding-up proceedings because:

• there was doubt as to whether the court’s jurisdiction to protect its own process against abuse extend to protecting the process of another court: and • if the injunction were granted there would be a question as to whether the litigant should have presented its defence to the winding-up in the winding-up proceeding itself.

An order setting aside a statutory demand, or extending time for compliance with it, cannot be made after the current deadline for compliance with the demand has expired. This is so even if the application was made before the current deadline for compliance has expired. The appropriate forum to seek to restrain a winding-up proceeding will generally be in the winding- up proceeding itself.

208 STATUTORY DEMANDS

Principles governing statutory demands and offsetting claims

Case Name: This decision considers the principles governing the setting aside Gujarat NRE Australia v of statutory demands on the basis of an offsetting claim. In this Williams case, there were adverse costs consequences arising from the issuer’s inappropriate use of the statutory demand procedure. Citation: Williams, Continental and Billiva issued statutory demands to Gujarat under section [2006] NSWSC 518, Supreme 459E CA. The demands arose from a joint venture agreement between the parties Court of New South Wales per and were in identical terms except that each demand alleged that the debt was Austin J owed to a different entity.

Gujarat applied to have the statutory demands set aside on the ground that it had Date of Judgment: established the existence of an offsetting claim for the purpose of s459H CA. At 24 May 2006 the time of bringing this application Gujarat commenced separate proceedings in the New South Wales Supreme Court’s Commercial List seeking declaratory relief in Issues: relation to its liability for the debt that was the subject of the statutory demands. • Sections 459E, 459G, Justice Austin’s decision hinged on whether Gujarat had established an ‘offsetting 459H, 459J CA claim’ as deﬁ ned in s459H(5) for the purpose of s459H(1)(b) CA. His Honour • Application to set aside creditor’s statutory demand referred to Justice Palmer’s statement in Macleay Nominees Pty Ltd v Belle • Inappropriate use of Property East Pty Ltd [2001] NSWSC 743, that a genuine ‘offsetting claim’ for the statutory demand procedure relevant purpose: by creditor aware of genuine means a claim on a cause of action advanced in good faith, for an amount claimed in offsetting claim good faith. ‘Good faith’ means arguable on the basis of facts asserted with sufﬁ cient • Costs consequences particularity to enable the court to determine that the claim is not fanciful.

The standard that must be reached to persuade a court that there is an offsetting claim is the same as the standard required to persuade a court that there is a genuine dispute between the alleged debtor and the party claiming to be a creditor. Paraphrasing Justice McLelland in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, Justice Austin said that:

the expression ‘genuine dispute’ connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the ‘serious question to be tried’ criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat.

Once the court is satisﬁ ed that the dispute or the assertion of an offsetting claim is genuine, the statutory demand procedure is inappropriate, as the whole purpose of the reforms that introduced Part 5.4 CA in its current form ‘was to remove litigation about disputed claims from the winding up process’. Where there is ‘a dispute, asserted on behalf of the alleged debtor with sufﬁ cient plausibility to meet the relatively low threshold [described above]…issuing a statutory demand is wholly

209 inappropriate. The correct course is to have the dispute resolved by proceedings asserting the debt.’

Without resolving the merits of Gujarat’s assertions of an offsetting claim, the evidence satisfi ed Justice Austin that there was a ‘plausible contention’ of the existence of such a claim. Among other things, his Honour was of the view that the effect of relevant clauses of the joint venture agreement under which the debt was alleged to have arisen was open to further argument and that Gujarat had established a plausible contention that it had causes of action based on warranties and representations given by the defendants. In addition, Gujarat’s solicitor had signed a certifi cate in the commercial list proceedings as required by the court’s rules and the Legal Profession Act 2004 (NSW) certifying that there are reasonable grounds for believing that Gujarat’s claim for damages in those proceedings has reasonable prospects of success. In Justice Austin’s view this certifi cate supported the conclusion that there was a genuine offsetting claim.

In the circumstances, Justice Austin ordered that the statutory demands be set aside. Further, having regard to the history of the development of the dispute between the parties and the existence of correspondence that had put the defendants clearly on notice that there was an offsetting claim before the statutory demands were issued, his Honour was of the view that the issuing of the statutory demands was ‘wholly inappropriate’ and accordingly ordered the defendants to pay Gujarat’s costs on an indemnity basis. In doing so, his Honour observed:

This is not the ﬁ rst time that a court has been persuaded to order costs on the indemnity basis, where a statutory demand has been issued wholly inappropriately in circumstances where the party issuing the demand has reason to believe that there is a genuine dispute or genuine offsetting claim. It is important for the courts to convey to the commercial community the message that the statutory demand procedure is not to be used in circumstances of that kind.

It is inappropriate to issue a statutory demand where there is a plausible contention that there is a genuine dispute between the parties about the existence or amount of the debt or that an offsetting claim exists. In those circumstances, the appropriate course is to commence proceedings asserting the debt. Courts will look unkindly on a deviation from this course, which may result in serious costs consequences for the issuer of the statutory demand.

210 STATUTORY DEMANDS

Grounds for subpoenaing documents to prove solvency

Case Name: When a winding-up application relies on failure to comply with a ASIC v Eastlands Pty Ltd statutory demand and the relevant company seeks to subpoena documents to prove its solvency, it cannot rely on any argument Citation: that it brought, or could have brought, to have the statutory demand set aside. [2006] FCA 1193, Federal Court of Australia per French J Section 459S CA provides that where a winding-up application relies on a failure to comply with a statutory demand, the company cannot oppose the application on Date of Judgment: the grounds that it: 16 August 2006 • relied on; or • could have relied on Issues: in an application to have the statutory demand set aside, except with the leave of • Section 459S CA • Winding-up based on failure the court. to comply with statutory Eastlands Pty Ltd (Eastlands) was one of 13 companies in the Westpoint Property demand and Finance Group (Westpoint Group) which ASIC sought to wind up based on non- • Documents subpoenaed to compliance with statutory demands. The demands were for the repayment of debts establish solvency shown as owing in the books and records of the Westpoint Corporation.

The Westpoint Group did not apply to have the statutory demands set aside because its director had not received them, although there was evidence that the demands had been properly served.

ASIC had seized documents during its investigations of the Westpoint Group and Eastlands sought leave to subpoena the documents from ASIC.

Justice French said that Eastlands’ application appeared to rest on two bases.

• The debts relied upon to ground the statutory demands were loans between the companies in the Westpoint Group which were in reality not true loans and were not intended to become payable on strict terms. • Where directors have not seen a statutory demand within 21 days of its service but would have applied to set it aside if they had, the question of the existence of the debt can be considered.

Justice French said that any circumstances which might mitigate the Westpoint Group’s failure to apply to set aside the statutory demands did not affect this case because the position was governed by s459S CA.

211 He said that s459S CA precluded Eastlands from relying on an argument that the debts set out in the statutory demand were not due and payable in order to obtain leave to issue the subpoenas because the argument could have been raised to challenge the statutory demands.

Justice French said that solvency can be demonstrated by means other than challenging the debt set out in a statutory demand. Therefore, the subpoenas could be used to prove the solvency of the Westpoint Group, provided the requested documents were relevant to its solvency. Justice French refused to grant leave to issue the subpoenas because the width of the proposed subpoenas suggested to him that the Westpoint Group was looking for some basis on which to establish its own solvency. He said that the director and the ofﬁ cers of the Westpoint Group should be capable of identifying, in a relatively focused way, the basis on which to assert the Westpoint Group’s solvency.

ASIC offered to provide Eastland with a list of ﬁ les in its possession that it considered relevant to determining solvency. The court made that order and ordered that the question of which documents could properly be produced to show solvency would be determined at mediation.

Steps to set aside a statutory demand should be taken immediately upon service of the demand. Once an application for winding-up is made on the basis of non-compliance with a statutory demand, a company cannot apply to issue subpoenas to establish its solvency based on arguments it could have raised to have the statutory demand set aside.

212 STATUTORY DEMANDS

Winding-up after failure to comply with statutory demand

Case Name: Assessing the solvency of a non-trading company for the Shakespeares Pie Co v Multipye purposes of a winding-up may require a detailed analysis of the company’s assets and liabilities. Citation: Shakespeares Pie Co made a statutory demand for payment against Multipye. [2006] NSWSC 930, Supreme Multipye’s application to set aside the demand was rejected. Multipye’s failure to Court of New South Wales, comply with the demand lead to a presumption of insolvency under section Equity Division per Austin J 459C(2)(a) CA. Shakespeares Pie Co then sought to have the company wound up under ss 459A and 459P CA. The question before the court was whether Multipye Date of Judgment: could rebut the presumption of insolvency and resist winding-up. 12 September 2006 At the time of the hearing, Multipye was no longer trading. Its only activity was pursuing an action in the New South Wales Supreme Court’s Commercial List Issues: against Shakespeares Pie Co and its sister company Shakespeares Systems. • Section 459S CA Multipye’s grounds for opposing winding-up were limited by s459S CA. Section • Solvency of non-trading 459S(1) CA provides that a company cannot, without the leave of the court, oppose company winding-up on any ground that the company relied on, or could have relied on, in opposing the statutory demand. Multipye’s application for leave had been rejected by Justice Barrett in previous proceedings. The effect of s459S CA was that Multipye was not able to challenge various debts owing to Shakespeares Pie Co and Shakespeares Systems. In particular, a set-off claim which Multipye only became aware of after issuing subpoenas in the Commercial List proceedings was caught by s459S(1) CA because Multipye did not establish that it could not have ascertained the facts on which the set-off claim was based at, or prior to, the time it applied to set the statutory demand aside.

In assessing whether Multipye was insolvent, it was relevant for the court to examine the ‘value and liquidity of [Multipye’s] assets and the rights and attitude to payment of the company’s creditors’. After conducting a detailed analysis of the facts, the court found that the presumption of insolvency had not been rebutted. A number of points may be drawn from the court’s analysis:

• the ongoing litigation in the Commercial List was too uncertain to be regarded as a ‘contingent asset’ of Multipye; • a company which owes large related-party debts that are legally due and payable may nevertheless be solvent where the creditors are the owners of the company who want the company to survive for collateral beneﬁ t; and • the court has a discretion not to wind up a company in insolvency. Factors relevant in exercising this discretion may include whether a majority of creditors oppose winding up and whether a liquidator is better placed to objectively assess the company’s prospects in litigation than the directors and shareholders.

213 This case is an example of the court’s willingness to conduct a detailed analysis of a company’s assets and liabilities in order to determine whether a company is solvent.

214 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Identifying the ‘transaction’ for the purposes of the uncommercial transactions provisions

Case Name: This decision considers the scope of the ‘transaction’ for the Lifestyle Earls Court Pty Ltd (in purpose of the uncommercial transactions provisions of the CA liquidation) & Ors v Mentone and confi rms that the courts will look broadly at the whole Mansions Pty Ltd transaction rather than individual transactions in isolation. The fi rst and second plaintiffs each sold a property to Mentone Mansions Pty Ltd Citation: (Mentone) and subsequently went into liquidation. A third related company sold a [2006] VSC 2, Supreme Court third property to Mentone. Each of the three properties formed part of a parcel of of Victoria per Mandie J vacant land in a large residential development. The sale contract for each property was substantially identical and was stated to be collateral to, and conditional upon, Date of Judgment: each of the other two sale contracts. The fi rst and second plaintiffs and their liquidator (the plaintiffs) applied to have the sale of the fi rst two properties set 3 February 2006 aside on the grounds that they were both insolvent and uncommercial transactions pursuant to section 558FB CA and therefore were voidable transactions under Issues: s588FE(3) CA. • Alleged uncommercial transactions After examining considerable valuation evidence, the court accepted that the fi rst • Identifi cation of the two properties were sold to Mentone at a price less than their full value and that transaction the third property was sold to Mentone at a price well above its true value. • Sections 588FB, 588FC, 588FE, 588FF & 588FG CA One issue was whether the under-valued property sales were ‘transactions’ for the purpose of s558FB, or whether the transaction should be viewed more broadly to include the sale of the third property. Justice Mandie confi rmed the broad view that one should look at the whole or entire transaction or the ‘totality of the dealings’ when identifying the ‘transaction’. He found that, as a matter of commercial reality, the transaction was between Mentone and all three companies. Viewing the three contracts as one transaction, Mentone in fact paid more than the full value of the three properties and therefore it could not be said that that transaction was uncommercial.

In any event, Justice Mandie found that the under-valued property sales were not uncommercial, even when viewed in isolation. Although the properties were sold at less than market value, the ﬁ rst and second plaintiffs obtained other beneﬁ ts from the transactions, including that their secured debts were discharged.

This case conﬁ rms that the courts take a broad approach which recognises the commercial realities, when identifying the ‘transaction’ for the purposes of applying the uncommercial transactions provisions. An individual transaction is not uncommercial if it forms part of a broader transaction which is not uncommercial as a whole.

215 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

When a reasonable person would suspect insolvency

Case Name: In this case, an unsecured creditor who had been paid by a Sheldrake & Anor v Paltoglou company under an ‘insolvent transaction’ was ordered to repay the sum to the liquidators. The court rejected the creditor’s Citation: attempt to prevent the transaction from being voided, holding that a reasonable person in her position would have suspected [2006] QCA 52, Court of that the company was insolvent. Appeal of Queensland per de Jersey CJ, McMurdo P and The appellants were the liquidators of Going Bananas Restaurant (Qld) Pty Ltd Muir J (GBR). The respondent was the owner of the restaurant premises. Mr and Mrs Casaretto were the shareholders of GBR and Mr Casaretto leased the restaurant Date of Judgment: premises from the respondent.

3 March 2006 Mr Casaretto had accrued a substantial debt to the respondent in respect of unpaid rent. In March 2003, the respondent granted GBR a lease backdated to Issues: 1 March 2002 (the date from which rent owed by Mr Casaretto remained unpaid). • Sections 588FA, 588FB, Mr Casaretto then sold the restaurant business and, from the proceeds, GBR paid 588FC, 588FE, 588FF, the respondent $67,985 for rent and legal fees. 588FG of the CA • Whether a transaction is The Court of Appeal upheld the trial judge’s ﬁ nding that this payment was an ‘uncommercial’ or an ‘unfair ‘insolvent transaction’ under s588FC CA as the payment of the debts accrued prior preference’ to 1 March 2002 was an ‘uncommercial transaction’ (s588FB CA) and the • Whether grounds exist for payment of the debts accrued thereafter amounted to an ‘unfair preference’ a ‘reasonable’ person to (s588FA CA). The court held that the trial judge’s ﬁ nding that the transaction was suspect that a company is ‘uncommercial’ as a reasonable person in the company’s position would not have insolvent entered into it given the extent of its indebtedness was ‘open.’ The payment of the later debts was an ‘unfair preference’ essentially because the respondent received more than she would have received in a winding up. It followed that the transaction was voidable (s588FE CA) and the court could order the respondent to repay the sum to the company (s588FF CA).

The trial judge did not, however, order the respondent to repay the amount because, in terms of s588FG CA, she had demonstrated that she had become a party to the transaction in good faith, she had no reasonable grounds for suspecting the company was then insolvent, a reasonable person in her circumstances would not have had ground for such a suspicion, and she had provided valuable consideration for the payments made. This ﬁ nding was overturned by the Court of Appeal.

The Court of Appeal found that the aggregation of the concessions made by the respondent under cross-examination clearly indicated that, at the time the respondent entered the transaction, she had reasonable grounds to suspect that GBR was insolvent and a reasonable person in her position would have had such a suspicion. These concessions included the respondent’s statements that she knew

216 In appropriate circumstances, the court may grant an exemption from the operation of regulations that would otherwise prohibit liquidators, as chairmen of a creditors’ meeting, from voting proxies that have been granted to them by creditors.

217 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Insolvency transactions at an undervalue

Case Name: The borrower took out a number of loans from the trustees of a Hill (as trustee in bankruptcy trust to which he had gifted land for tax purposes and granted of Nurkowski) v Spread Trustee security over those loans to the trustees. After being declared Company Limited bankrupt, the trustee in bankruptcy brought an action under the Insolvency Act 1986 (UK) to the effect that the granting of the Citation: security was prohibited as a transaction at an undervalue. [2006] EWCA 542, Court of The borrower gave property to an accumulation and maintenance settlement in Appeal of England and Wales favour of his daughter for the purpose of minimising capital gains tax on the per Waller, Arden and Nourse JJ eventual sale of the property. Following the sale, the borrower obtained secured loans from the trustees of the settlement funded from the sale proceeds. Date of Judgment: The trustees of the settlement requested from the borrower additional security due 12 May 2006 to their concerns about a large claim by HM Revenue and Customs for capital gains tax against both the borrower and the trustees. The borrower granted the additional Issue: security, but then became bankrupt. The trustee in bankruptcy brought an action • Section 423 of the under section 423 of the Insolvency Act 1986 (UK) to set aside the additional Insolvency Act 1986 (UK) security on the basis that it was a transaction at an undervalue entered into for the • Setting aside grant of purpose of prejudicing the interests of the borrower’s creditors. The trustee in security bankruptcy succeeded at ﬁ rst instance. The trustees of the settlement appealed. • Transaction at undervalue • Prejudice to creditors The trustees of the settlement had given the owner no consideration for the granting of additional security because there was no actual pressure on the owner to repay the loans. Forbearance from exercising rights under the loans was not valuable consideration for the borrower’s granting of additional security since the trustees did not threaten to enforce the rights in the ﬁ rst place. Accordingly, the granting of additional security was a transaction at an undervalue under s423 of the Insolvency Act and set aside.

The trustees had relied on the principle established in Re M C Bacon [1990] BCLC 324 that the granting of security by a borrower could not constitute a transaction at an undervalue, because the rights granted by the security could not diminish the borrower’s assets. However, the court held that the granting of security which provides the lender with recourse to property is valuable consideration requiring the lender to provide consideration in return. There was sufﬁ cient purpose (to defeat creditors) as there was concern that there may be a large tax bill. The appeal was dismissed.

218 This case has important implications concerning transactions conducted in accordance with the laws of the United Kingdom. It is necessary to consider whether a grant of security could, in a subsequent bankruptcy, be caught by the provisions prohibiting transactions at an undervalue. This will be the case where no or insufﬁ cient consideration is given for the granting of the security.

219 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Please sign the deed! Voidable transactions, good faith and estoppel by convention

Case Name: The Queensland Court of Appeal upheld the validity of a bank Mulherin v Bank of Western guarantee, secured by a company now in liquidation, but for the Australia Ltd; McCann & Ors v apparent benefi t of a director, where the respondent bank acted Bank of Western Australia Ltd in good faith. The court dismissed a concurrent appeal asserting a tripartite deed of priority gave rise to an estoppel by Citation: convention because one of the three parties had not executed [2006] QCA 175, Queensland the deed. Court of Appeal per McMurdo P, Under Division 2 of Part 5.7B CA, a liquidator can apply to the court to set aside Jerrard JA and Muir J certain transactions entered into prior to the administration of the company. The voidable transactions include ‘uncommercial transactions’ which, for the purposes Date of Judgment: of section 588FE(3), must also qualify as ‘insolvent transactions’ entered into, or 26 May 2006 given effect to, within two years of the commencement of the administration. In this case, the respondent, the Bank of Western Australia Ltd (Bank West), Issues: offered United (T & C) Bretts Wharf Pty Ltd (UTC) a $2 million bank guarantee • Division 2 Part 5.7B CA facility for the apparent purpose of providing a deposit for a property purchase in – whether an undertaking Hong Kong. The guarantee was provided to a director of UTC but secured against for the apparent benefi t existing charges to Bank West over UTC’s assets. In addition, UTC agreed to of a company director was indemnify Bank West for the $2 million guarantee in the event it was called upon. voidable Notably, the agreement did not mention the purposes for which the funds were to • Estoppel by convention be used. – whether a priority deed improperly executed gave Justice Muir, in the leading judgment and with whom President McMurdo agreed, rise to an estoppel by concluded that the transaction was uncommercial. UTC derived little or no benefi t convention from the bank guarantee, whilst Bank West received interest and fees. Moreover, given that the transaction apparently procured a benefi t for a company director in breach of his fi duciary duties, a reasonable person in UTC’s circumstances would have been aware of the diffi culties UTC might face in recovering its losses if the transaction was found to be unlawful. In short, he concluded, ‘there is little about the subject transaction which accords with normal commercial practice’.

Justice Muir also determined that entry into the bank guarantee facility was one of the reasons why UTC became insolvent. As such, the transaction was voidable under s588FB CA.

Nonetheless, as Bank West had entered into the transaction in good faith, without any reasonable grounds for suspecting UTC’s existing or impending insolvency, Bank West was protected by s588FG, which precludes an order materially prejudicing the interests of a third party who receives the beneﬁ t from an otherwise voidable transaction in good faith.

220 In contrast, Justice Jerrard, while agreeing with the judgment of their Honours, disagreed with their reasoning. In short, evidence indicated that all parties expected that UTC would ultimately acquire title to the Hong Kong property and would receive a beneﬁ t from the transaction. Accordingly, Justice Jerrard held the transaction was not uncommercial.

The priority deed UTC’s venture was ﬁ nanced by Bank West and two other ﬁ nanciers, Dr Mulherin and Mr Li, all of whom agreed to enter into a deed of priority. However, whilst Dr Mulherin and Bank West signed the deed, it remained unexecuted by Mr Li.

Although Bank West and Dr Mulherin believed that the priority deed was duly executed by all parties and legally enforceable, without Mr Li’s signature the document remained an unenforceable tripartite agreement. Accordingly, there could be no common understanding as to the ordering of the priorities between the parties. As a result, ‘it was not unjust or unconscionable for the respondent to decline to act in accordance with the terms of the Priority Deed’ and no estoppel by convention as to its terms had arisen.

Although the bank ultimately succeeded against the liquidator in this case, it provides a warning to banks to ensure that guarantees, secured against the assets of a company, also beneﬁ t the company. A failure to do so could result in the transaction being set aside.

221 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Recovering payments made by a director with company money

Case Name: In this case, the New South Wales Supreme Court considered an Kalls Enterprises Pty Ltd (in application by a liquidator to recover monies paid to a third party liquidation) & Ors v Baloglow on the basis either that it was an uncommercial transaction or & Anor that it was a payment made in breach of trust or breach of fi duciary duty. The court had to consider the correct Citation: characterisation of the payment and the knowledge of the (2006) 58 ACSR 63, Supreme recipient. Court of New South Wales per Con Kalls was the director and controller of Kalls Enterprises Pty Ltd (in Hamilton J liquidation) (KE) and AA Australian Commercial Laundries Pty Ltd (in liquidation) (AA). KE sold its laundry business to AA and then KE and Swanhill Pty Ltd became Date of Judgment: equal shareholders of AA and Theo Baloglow became a director of AA. 21 June 2006 AA did not trade successfully and Mr Baloglow resigned from AA alleging that, before the sale, Mr Kalls made misrepresentations to him concerning the fi nancial Issues: status of the laundry business. The parties entered into a deed of release whereby • Sections 588FB, 588FG CA in return for his resignation as a director Mr Baloglow would receive payment of • Meaning of ‘transaction’ in $700,000. Mr Baloglow did not receive this payment and obtained a judgement uncommercial transaction against Mr Kalls for that amount. claims • Recipient’s knowledge KE then sold the laundry business to a third-party purchaser. Out of the proceeds of the breach of trust or of the sale, KE paid to Mr Kalls who paid to Mr Baloglow $555,000 to settle the fi duciary duty judgment debt. After the sale AA was wound up and Mr Kalls was made bankrupt.

KE, AA, and their liquidators (the plaintiffs) issued proceedings against Mr Baloglow and claimed that:

• the payment to Mr Balaglow was an uncommercial transaction within the meaning of s588FB CA and Mr Baloglow should repay this sum to KE or AA; or alternatively • Mr Baloglow should repay the sum to KE and AA under the ﬁ rst limb of Barnes v Addy (1874) LR 9 Ch App 244 as a recipient of moneys paid away in breach of trust or breach of ﬁ duciary duty.

Justice Hamilton considered what constitutes a ‘transaction’ for the purposes of the CA’s uncommercial transaction provisions. The plaintiffs had to establish that there was a transaction and that it was a transaction of the company. The plaintiffs sought to contend that the payment by Mr Kalls to Mr Baloglow should be comprehended as one step in a larger composite transaction to which the company was a party. Justice Hamilton accepted that a series of transactions may constitute a single transaction, but concluded that it was impossible to characterise the payment by Mr Kalls to Mr Baloglow as part of a transaction by KE or AA. The correct characterization was that Mr Kalls made the payment to Mr Baloglow.

222 Justice Hamilton relied on the fact that the origin of this payment was in the claim by Mr Baloglow against Mr Kalls for misrepresentations, and on the fact that the plaintiffs’ allegation was in terms that the payment was made to Mr Baloglow by Mr Kalls and not by KE.

The plaintiffs’ second contention, that the moneys held by Mr Kalls after the completion of the sale of the laundry business were held by him on trust for KE and were paid to Mr Baloglow in breach of trust, was also rejected by the court. As Justice Hamilton accepted that Mr Kalls acted in breach of his ﬁ duciary duty, the question arose as to Mr Baloglow’s knowledge of that breach for the purposes of the bona ﬁ de purchaser defence.

Justice Hamilton approved the test applied by Justice Anderson in Hancock Family Memorial Foundation Ld v Porteous (1999) 151 FLR 191:

It is not necessary for the recipient to have acted dishonestly or with want of probity. Recipient liability may be established if the defendant had actual or constructive knowledge at the time he received the relevant property that (a) it was trust property and (b) it was being misapplied. The defendant will be taken to have constructive knowledge if it is proved that he wilfully shut his eyes to the obvious; that he wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make in the circumstances; and that he knew of circumstances which would indicate the true facts to an honest and reasonable man on inquiry.

Justice Hamilton found on the evidence that Mr Baloglow did not have the requisite knowledge and, therefore, the defence of bona ﬁ de purchaser for value without notice was made out.

This case provides further guidance on the meaning of ‘transaction’ for the purposes of the uncommercial transaction provisions of the CA. It also clariﬁ es the level of knowledge required to establish liability of a recipient of monies paid in breach of trust or ﬁ duciary duty. As the knowledge threshold is low, third parties should take particular care when receiving payments from a company for debts due by its director.

223 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Death and taxes: s588FF(1) threatens certainty of the latter, but s588FGA saves the Tax Commissioner’s day

Case Name: A liquidator sought orders for recovery of certain tax payments Duncan v Commissioner of made by two companies on the basis that they were unfair Taxation: in the matter of Trader preferences or uncommercial transactions. The tax commissioner Systems International Pty Ltd settled the claims between it and the liquidator but sought an (in liquidation) order indemnifying him against some of the repayments from the companies’ directors under section 588FGA CA. In upholding the Citation: liquidator’s and tax commissioner’s claims, the judge gave a (2006) 58 ACSR 885; [2006] useful summary of established legal principles relating to FCA 885, Federal Court of establishing solvency, and rejected a novel argument from the Australia per Young J directors. The liquidator of two related companies, Trader Systems International Pty Ltd (TSI) Date of Judgment: and TSI Australia Limited (TSIA), claimed that certain payments made by the 12 July 2006 companies to the Commissioner of Taxation (the Commissioner) were unfair preferences under section 588FA CA and that others were uncommercial Issues: transactions under s588FB CA. The liquidator sought to avoid the payments under s588FF CA. The Commissioner sought indemnities under s588FGA CA against the • Unfair preferences and directors for so much of the money received by the Commissioner as represented uncommercial transactions income tax withholding liabilities. • Claim for indemnity from directors under s588FGA The liquidator and the Commissioner settled the dispute between themselves and CA agreed on the sums to be repaid to the liquidator. However, two of the directors • Reasonable grounds for defended the Commissioner’s claim for an indemnity against them. Their principal expecting solvency and onus defence was that neither TSI nor TSIA was insolvent at the time the payments were of proof made to the Commissioner and that they could, and did, reasonably rely on another • Unfair preferences repaid company in the same group (Swift Malaysia) to repay their debts as and when they by tax commissioner to fell due. In particular, they relied on an agreement between the companies’ parent liquidator resulted in a ‘loss’ company TSI Inc and Swift Malaysia, under which Swift Malaysia agreed to be to commissioner responsible for and take over the liabilities owed by TSI and TSIA (the Swift Agreement).

Justice Young extensively canvassed established principles relating to the determination of a company’s solvency for CA purposes, including:

• the use of a cash ﬂ ow rather than a balance sheet approach; • the consideration of the company’s ﬁ nancial position taken as a whole, having regard to commercial realities; • a contract debt is payable at the time stipulated for payment in the contract, unless a person asserting otherwise can prove it; • the importance of not confusing insolvency with the temporary lack of liquidity.

224 Justice Young concluded that there was overwhelming evidence that TSI and TSIA were insolvent at the relevant times. In the case of TSI, there was evidence that (among other things) its operating revenue had been insufﬁ cient to meet costs and expenses; it had consistently made losses; it had had net asset deﬁ ciencies; it had failed to meet tax liabilities and had received penalty notices and entered into successive payment arrangements that it had also failed to meet; it had failed to make superannuation payments and had large outstanding debts to creditors, who had made demands for payment; and its largest debtors pertained to related party loans from companies without any evidence that those debtors were willing or able to repay the loans. The evidence in relation to TSIA was similar. The directors tendered no substantial written evidence as to solvency, but relied almost completely on unsubstantiated assertions from the witness box.

In the circumstances, the judge had no diffi culty fi nding that the companies were insolvent at the relevant time and, in circumstances where the liquidator had given evidence that he expected there to be no distribution in the winding-up to creditors, no diffi culty in fi nding that the relevant transactions were unfair preferences and uncommercial transactions respectively. He made the orders sought by the liquidator.

Justice Young rejected the directors’ evidence that they had a reasonable expectation that TSI and TSIA would be able to pay its debts as and when they fell due based on the Swift Agreement. In particular, his Honour noted that neither TSI nor TSIA was a party to the agreement (it was between their parent company and Swift) and that the crux of the agreement was that TSI Inc agree to sell and Swift agreed to purchase all of its shares in TSI and TSIA, in consideration of which Swift agreed to take over TSI and TSIA’s liabilities. It was clear that this meant the liabilities as they stood at the time of the sale, not before, and that in critical respects the agreement was never performed. Accordingly, the agreement did not confer any reasonable expectation of TSI and TSIA’s ongoing solvency.

In respect of the Commissioner’s claim for an indemnity from the directors, the directors made the novel argument that no indemniﬁ cation order should be made pursuant to s588FGA(2) because the Commissioner had not suffered ‘any loss or damage’ resulting from an order that he repay tax payments to the liquidator. This, they argued, was because the repayments to the liquidator ‘would simply involve unwinding preferential payments that the Commissioner had no entitlement to receive’. The judge rejected that argument, holding that by having to repay the tax payments to the liquidator and having to prove in the winding-up as an unsecured creditor, the Commissioner would suffer loss, particularly in circumstances where the liquidator had given evidence that there would be no distribution to unsecured creditors in the winding-up.

225 The courts will examine as a question of fact, as part of a wider consideration of a company’s ﬁ nancial position taken as a whole, whether a voluntary arrangement with a third party to provide funds is a sufﬁ cient basis for concluding that a company is solvent. In this case, an expectation of solvency based on third- party funding was found not to be reasonable. This court held that a repayment by the tax commissioner of tax payments under s588FF did constitute a ‘loss’ under s588FGA(2) and grounds a claim for indemnity under that section.

226 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Out of time: exclusive regime for bringing application to set aside voidable transactions

Case Name: The liquidators brought proceedings claiming that certain Davies and Anor v Chicago Boot transactions were voidable under section 588FF CA. The Co Pty Ltd liquidators sought leave to amend their claim by adding transactions that fell outside the three-year time limit provided Citation: under s588FF(3). This case illustrates the exclusive regime for extending time periods in which liquidators may exercise their [2006] SASC 241, Supreme Court of South Australia per right to make applications to set aside voidable transactions. Debelle J The liquidators of Harris Scarfe Limited (HSL) applied under section 588FF(1) CA to set aside ﬁ ve payments made by HSL to Chicago Boot Company Pty Ltd Date of Judgment: (Chicago) on the basis that the payments were voidable transactions. The 18 August 2006 liquidators of Harris Scarfe Wholesale (HSW) applied to set aside one payment made by HSW to Chicago on the same grounds. The HSL and HSW applications were made in the Supreme and District courts respectively and were not pleaded in Issues: the alternative. • Section 588FF CA • Section 588FF(3) CA The original applications were made in accordance with the time limits imposed by establishes an exclusive s588FF(3) CA, which provides that an application under s588FF(1) CA ‘may only regime for making orders be made’: extending time period • within three years of the relation-back day; or • within any such longer period provided an application for extension is made within those three years.

Chicago applied to amend its defence. The liquidators argued the amendment should only be allowed on the following terms:

• the HSW application be transferred back to the Supreme Court; • they be granted leave to amend their applications and plead in the alternative; and • Chicago be prevented from pleading the time limit defence under s588FF(3) CA.

Master Lunn dismissed Chicago’s application to amend its defence. On appeal, Justice Debelle allowed Chicago’s amendment. Justice Debelle then considered the amendments to the application proposed by the liquidators and directed that the liquidators prepare amended applications to clarify the claims they were seeking to make against HSL and HSW.

The proposed amendments provided that:

• the claims be pleaded in the alternative; • that the HSW claim be transferred back to the Supreme Court; and

227 • that the claim by the liquidators of HSW be added to the ﬁ ve claims by the liquidators of HSL and, conversely, the ﬁ ve claims by the liquidators of HSL be added to the claim by the liquidators of HSW.

The liquidators argued that the proposed amendments did not create new applications, but were amendments to the existing applications. Justice Debelle found that the amendments created fresh applications which were being made outside the three-year time limit in s588FF(3) CA. His Honour said that s588F(3)(a) states that an application to set aside a voidable transaction ‘may only be made’ within three years of the relation-back day. Further, the only means by which that period may be extended is by following the exclusive regime prescribed by s588FF(3)(b) CA and by applying for an extension before the three-year period expires.

The liquidators unsuccessfully sought to rely on Rule 53.03 of the South Australian Supreme Court Rules which provides that the court may grant leave to extend any relevant period of limitation. The court held that in circumstances where it was hearing and determining applications under federal legislation, it was exercising its federal jurisdiction and the Supreme Court Rules were inapplicable. Rule 53.03 would only have been applicable in circumstances where a Commonwealth law did not cover the ﬁ eld. Accordingly, the liquidators’ fresh applications were out of time and they were not entitled to amend.

This case highlights the fact that the essential element of any application under s588FF(1) CA is that it must be commenced within three years of the relation-back day. Where that is not possible, the exclusive regime prescribed in s588FF(3) CA must be followed and any extension must be applied for within the three-year period. Failure to do so precludes the liquidator from exercising its rights under s588FF CA.

228 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Solvent or insolvent: a question of commercial reality

Case Name: In a voidable transaction claim, the court considered the factors Wily v Terra Cresta Business to be taken into account when assessing whether a company is Solutions Pty Ltd able to meet its debts as and when they fell due. The liquidator of Business Australia Capital Mortgage Pty Ltd (BACM) brought Citation: proceedings claiming that a charge granted by BACM in the six months before its [2006] NSWSC 1042, Supreme winding-up was a voidable transaction. The principal issue at trial was whether Court of New South Wales, BACM was insolvent at the time it granted the charge being challenged. Applying Equity Division per Young CJ section 95A CA, the question was whether BACM was able to pay its debts as and when they fell due. Date of Judgment: The liquidator gave evidence that BACM was insolvent at the time the charge was 21 September 2006 granted. This evidence was challenged on a number of grounds. Chief Justice Young commented: Issues: • independent expert evidence as to solvency is desirable but not necessary; • Insolvency of company • Granting of a charge an • the court must look at the commercial reality in determining whether a company insolvent transaction is able to meet its debts as and when they fall due; • it cannot be assumed that creditors who are not pressing for payment will never do so; • possible ﬁ nancial support from a holding company or associated company can only be taken into account if there are reasonable grounds for believing that the company will be supported. Reasonable grounds, usually based on an agreement or estoppel, are something that would be accepted by reasonable persons of business as being reliable; • past ﬁ nancial support from a holding company or associated company will not in itself provide reasonable grounds for believing that further support will be provided; and • there may be some cases in which the possibility of obtaining loan funds to meet debts as and when they fall due can be taken into account, but it is not appropriate where there is no binding agreement that the funds be provided and the terms on offer were a loan for 90 days with an interest rate of 30 per cent.

On the facts, Chief Justice Young held that the company was insolvent on 18 March 2005. The principal reasons were that BACM had to borrow to pay its wages, had problems collecting its debts and had no cash. The charge was therefore voidable.

229 In assessing whether or not a company is able to meet its debts as and when they fall due, the court will look at all the relevant facts and the commercial realities of the case. Possible ﬁ nancial support from holding or associated companies will only be taken into account if there are reasonable grounds for believing that such support would be provided.

230 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

Severance of a joint tenancy is not void against a trustee in bankruptcy

Case Name: A transfer of property by a person who later becomes bankrupt Peldan v Anderson may be void against a trustee in bankruptcy. However, while a ‘transfer of property’ will be construed broadly, the trustee in Citation: bankruptcy must show that the property would have become part of the transferor’s estate or available to the creditors if the [2006] HCA 48 High Court of transfer had not taken place. Australia per Gummow ACJ, Kirby, Hayne, Callinan and Section 121(1) of the Bankruptcy Act 1966 (Cth) provides that a transfer of Crennan JJ property is void against the trustee in the transferor’s bankruptcy if:

• the property would probably have become part of the bankrupt estate or would Date of Judgment: have been available to creditors if the property had not been transferred; and 4 October 2006 • the main purpose for the transfer was to prevent the property becoming available to the creditors. Issues: • Section 121 of the Mr Pinna unilaterally severed the joint tenancy of his home prior to his wife’s death Bankruptcy Act 1966 (Cth) and subsequently became bankrupt. The trustees in bankruptcy brought an action • Unilateral severance of against the executors of his dead wife’s estate claiming that the unilateral joint tenancy constitutes a severance of the joint tenancy was void because the main purpose of the severance ‘transfer of property’ was to keep part of the value of the property from Mr Pinna’s creditors and the full • Circumstances in which amount of the sale of the property would otherwise have passed to the trustees. The transfer of property is executors of Mrs Pinna’s estate argued that, as the couple held their shares in the voidable house as tenants in common at the time of Mrs Pinna’s death, the trustee in bankruptcy was only entitled to half of the value of the house.

The High Court held that severance of a joint tenancy was capable of amounting to a ‘transfer of property’ for the purposes of s121. That, however, left the question of whether the property would have been available to the bankrupt’s creditors if the joint tenancy had not been severed. The High Court held that Mrs Pinna’s share would not have become part of the bankrupt estate as the onset of bankruptcy works as a severance of a joint tenancy. The wife’s half interest in the property as tenant in common would not have been available to the trustees in any event. The transfer was therefore not void against the trustees in bankruptcy.

The severance of a joint tenancy will not be void against a trustee bankruptcy, even if it is made with the intention of keeping the property away from creditors.

231 UNCOMMERCIAL TRANSACTIONS, PREFERENCE PAYMENTS AND DISCLAIMER OF ONEROUS PROPERTY

A good deed? Directions for payment and assignment

Case Name: This case concerns the hearing of a cross-claim brought by a Universal Financial Group v company, MES, in liquidation against its former directors and a Mortgage Elimination Services number of parties with whom it had contractual relations. MES sought declarations that entering into deeds of assignment and Citation: directions to make payment to third parties were voidable transactions. [2006] NSWSC 1132, Supreme Court of New South Wales MES conducted its mortgage management business by advising its clients on – Equity Division per Austin J strategies for reducing their mortgages debts and obtaining refi nancing for mortgage loans. MES operated through a network of consultants, who operated Date of Judgment: through their own companies and on a commission basis. Where clients opted to 31 October 2006 accept advice on refi nancing, an application would be made to one of the mortgage facilitators with whom MES had a contractual relationship. The mortgage facilitator would organise fi nance and commissions would be shared between MES and the Issues: consultants in agreed proportions. • Sections 588E, 88FB, 588FC, 588FDA CA MES subsequently went into liquidation and the court made an order for the • Uncommercial transactions, winding-up of MES. After reviewing the affairs of MES, the liquidator brought a insolvent transactions and cross-claim in the name of MES alleging that certain transactions entered into by unreasonable director- former directors were uncommercial transactions and voidable under the CA. related transactions In particular, MES alleged:

• the ﬁ rst cross-defendant and former director of MES, Warren Turner, together with his son Matthew Turner and former director Lorraine Hilton, caused various third parties to pay commissions that were truly owing to MES to another entity contrary to ss 588FB, F88F and 588DA CA; and • Warren Turner, by a separate uncommercial, insolvent and unreasonable director-related transaction, caused MES to assign to him all its interest in a legal proceeding, for no or minimal consideration.

Directions to pay commissions to other entity In February 2004, Matthew Turner wrote to third parties directing that all commissions be paid into the bank account of an entity (Smarter) owned by him (the directions).

Mr Turner and Smarter both challenged the proposition that the directions were ‘transactions’ for the purposes of Part 5.7B CA. However Justice Austin stated that a direction which causes payment to be made to B which was otherwise owing to A is a transaction (at least when acted upon).

232 The court held that the directions resulted in commission payments being made to Smarter instead of MES. It held that the primary purpose of the directions was to deprive MES of substantial income streams and that the directions therefore lacked any proper commercial justiﬁ cation.

Further, the directions were detrimental to MES, which was deprived of the commission income that it would have continued to receive if the directions had not been made. On that basis, it was held that the transactions were uncommercial and voidable under section 588(2) and (3) CA.

Deed of assignment On 20 July 2005 MES and Warren Turner entered into a deed of assignment pursuant to which MES assigned to Warren Turner the whole of its rights to recover any debt or amount owing in a legal proceeding (the deed).

In concluding that the deed was an uncommercial transaction, the court had regard to the following factors:

• the deed was unlikely to result in any fi nancial benefi t to MES; • the deed had limited benefi ts to MES; and • the deed would likely have detrimental effects on MES and its creditors.

The court held that the deed was an uncommercial transaction and voidable under s588(2) and (3) CA.

Director-related transactions Although it was not necessary to decide, the court also held that the directions and the deed constituted unreasonable director-related transactions within s588FE(6A). Justice Austin stated that the deed was a conveyance by the company of its property to the director of the company, and therefore fell within s588FDA(1)(a)(ii) and (b)(i) CA. He characterised the directions as dispositions by the company of its property made to a person for the beneﬁ t of a close associate of the company within s588FDA(1)(a)(ii) and (b)(i) CA.

Directions made on behalf of a company for payments to be made to a third party may constitute uncommercial and therefore voidable transactions where those directions are acted upon. Where a company assigns its rights to legal action without proper consideration, the assignment may also be uncommercial and therefore voidable.

233 DEVELOPMENTS IN AUSTRALIA

Insolvency reform package released

The draft Corporations Amendment (Insolvency) Bill 2007 and Corporations and ASIC Amendment Regulations 2007 were released on 13 November 2006 by the Parliamentary Secretary to the Treasurer, Chris Pearce, for public comment. The draft legislation embodies the reforms originally announced in October 2005 and addresses four main areas of concern.

Improving outcomes for creditors The reform package introduces some key changes to the current law relating to outcomes for creditors.

Protecting employee entitlements

Under the law as it currently stands, a creditor may challenge in court a DOCA on the basis that it is oppressive or unfairly prejudicial or discriminatory because it does not reﬂ ect the statutory priority requirements and results in a return which is worse than would be the case in a liquidation.

The draft legislation requires that a DOCA must adhere to the priority requirements of the CA unless a majority in value and number of creditors affected by any proposed changes to those requirements agree to such changes. The court may approve a DOCA which does not preserve the statutory priority requirements if this would result in the same or better outcome for the affected creditors. The administrator, an affected creditor or another interested party may make an application to the court for such an order.

In effect, this amendment will place the burden on the administrator, rather than on the affected creditor, to bring an action to a DOCA which does not comply with the statutory requirements.

The draft legislation also improves the protection of employees’ superannuation entitlements.

Informing creditors

Administrators must now provide a statement of independence, listing any potential conﬂ icts of interest, to creditors at the time of giving notice of the ﬁ rst creditors’ meeting. Although this practice has already been endorsed by the Insolvency Practitioners Association of Australia as best practice,1 it will be enshrined in law if the draft legislation is enacted.

1 IPAA Statements of Best Practice – Independence on the Appointment of an Administrator (1 July 2003) and Calling and Conducting Creditors’ Meetings (1 July 2005).

234 Regarding the remuneration of administrators, the draft legislation responds to the 2004 Federal Court decision in Stockford2 which identiﬁ ed gaps in, and some practical difﬁ culties with, the existing law, by:

• giving ASIC power to seek a court review of an administrator’s fees; • outlining factors a court should consider in setting an administrator’s fees; • requiring an administrator to provide adequate information to creditors to enable them to assess whether the administrator’s fees are reasonable; and • allowing an administrator to apply to court to have its fees set in situations where creditors have not yet met.

Streamlining external administration

The draft legislation also includes provisions aimed at streamlining external administration, including provisions relating to:

• Advertising requirements. The requirement to publish notices is removed except where there are strong policy reasons for publication eg the creditors and the public have not been informed about important facts. • Electronic communication of notices of creditors’ meetings. It will be permissible for notices to be sent by email, fax, or other electronic means, such as an internet site, provided that the recipient of the notice has nominated a particular mode of communication and has provided their relevant contact details, such as an email address or fax number. • Transfers of shares in a company during liquidation or administration. The amendments address the current inconsistency in the law by giving both liquidators and administrators the ability to consent to the transfer of shares if satisﬁ ed that such a transfer is in the best interests of the creditors. • Changes to a company name in administration. For example, any company which changes its name during, or within six months prior to, administration, must disclose its former and current company name on any public documents, unless the court orders otherwise.

Pooling

Although there is currently no legislation in place providing for ‘pooling’ in an administration context, it has always been possible for administrators to pool the administration of companies in the same group. This has been done by proposing DOCAs in each group company providing for pooling. Such DOCAs to date have been effective if approved in the usual way, that is by a majority in value and number of creditors in each company to be pooled. The draft legislation will make the preconditions for pooling during administrations of company groups and the procedures which should apply much clearer and protect the rights of objectors.

The draft legislation provides that during voluntary administration, a pooling decision may be made by the administrator with the unanimous consent of creditors. If any creditor objects, the administrator may approach the court to obtain approval for the pooling decision. The court may make a pooling order

2 Korda in the Matter of Stockford Limited (subject to DOCA) [2004] FCA 1682.

235 despite any objections from creditors. The model proposed by the draft legislation allows DOCAs to include pooling arrangements or to confer authority on the administrator to prepare a pooling proposal.

A pooling decision will have the effect of:

• making each company jointly and severally liable for the debts of all other companies in the pooled group; and • extinguishing any debts between companies in the group.

The recent decisions in Black Stump3 showed the present difﬁ culties with pooling in liquidations.4

The draft legislation provides a method for pooling during liquidation which differs from the method during voluntary administration outlined above in that a pooling decision may be made either:

• by the liquidator with the unanimous consent of eligible unsecured creditors; or • by the liquidator approaching the court for a pooling order without ﬁ rst seeking the creditors’ consent (the court may make such an order despite any objections from creditors).

Only those companies in a group which have entered administration or liquidation may be pooled.

Deterring corporate misconduct The reforms include a number of provisions which are intended to punish and deter corporate misconduct by:

• empowering ASIC to investigate liquidators’ conduct generally; • allowing applications to be made to a court where a court-ordered condition or alteration of a company scheme of compromise or arrangement is breached and loss or damage is suffered as a result; • giving ASIC the power to apply for a court order preventing a company offi cer from avoiding liability by, for example, sending funds out of or leaving the jurisdiction; • removing the privilege against exposure to penalty for certain ASIC investigations, such as investigations concerning disqualifi cation, banning, suspension or cancellation orders. This amendment is stated to reverse the practical effect of the High Court’s decision in Rich v ASIC;5 and • imposing a time limit of six months for the lodgment of liquidators’ reports relating to any possible offences committed by company offi cers or members.

In most cases, these reforms are designed to overcome limitations on, and practical difﬁ culties associated with, powers and enforcement mechanisms already available to ASIC.

3 Tayeh; Re Black Stump Enterprises Ltd [2005] NSWSC 475; Re Blackstump Enterprises Ltd [2005] NSWCA 480; Re Blackstump Enterprises Ltd (No 2) [2006] NSWCA 60.

4 See also the recent decision in Whittingham, Re; Hunter Valley Gravel Supplies Ltd [2006] NSWSC 1070.

5 [2004] HCA 42.

236 Improving regulation of insolvency practitioners Insolvency practitioners in Australia are already heavily regulated. The reforms include a number of changes aimed at improving the regulatory systems already in place.

The Companies Auditors and Liquidators Disciplinary Board (the CALDB) has been given more power and ﬂ exibility in disciplinary proceedings against insolvency practitioners. For example, the draft legislation gives the chairman of the CALDB the option to convene pre-hearing conferences in order to ﬁ x hearing dates or give directions concerning the timetable for the making of submissions or evidence. The CALDB may admonish or reprimand anyone who breaches such directions.

Other relevant changes covered in the draft legislation include that:

• liquidators must maintain adequate professional indemnity and ﬁ delity insurance; • liquidators must submit annual, rather than triennial, statements regarding their practice and any relevant offences; and • ASIC, without reference to the CALDB, has the power to cancel the registration of a liquidator.

Finetuning voluntary administration Although it is generally acknowledged that voluntary administration procedures currently in place are effective, the draft legislation includes amendments aimed at addressing several technical issues that have been identiﬁ ed, including:

• narrowing the circumstances in which creditors will be entitled to terminate a DOCA. This will only be possible in situations where there has been an unrectifi ed material breach of the deed; • slightly extending the timing for the holding of creditors’ meetings. The fi rst creditors’ meeting, which currently must be held within fi ve business days of the commencement of the administration, will instead need to be held within eight business days of the commencement of the administration. The period for the holding of the second creditors’ meeting will be extended from 21 or 28 days (depending on whether or not the administration commenced in December or the month before Good Friday) to 20 or 25 business days. Five business days’ notice must be given to creditors for both the fi rst and second creditors’ meetings; and • a company under a DOCA may seek a court order that it need not indicate on public documents that it is subject to a DOCA. It has been acknowledged that there may be circumstances in which it may be appropriate for a court to make this kind of order where there is little risk to creditors, for example where a DOCA is still to be terminated because of an administrator’s inability to pay creditors due to unresolved disputes over proofs of debt.

Certain provisions in the draft legislation are also aimed at streamlining the transitions from:

237 • liquidation to administration (for example, liquidators will be able to appoint themselves as administrators without obtaining the leave of the court as long as the appointment is supported by creditors); and • administration to liquidation (for example, the deﬁ nition of ‘relation-back period’ will be expanded so that the relation-back day is the date of the application for winding-up where an administration preceded the liquidation).

The draft legislation also aims to improve the ability of companies in voluntary administration to borrow by including borrowings by administrators without the liabilities for which they are personally liable and entitled to from the assets of the company.

Amendments not included in the reform package Adoption of the UNCITRAL Model Law on cross-border insolvency

In the Federal Government’s announcement of October 2005, it was indicated that the UNCITRAL Model Law on cross-border insolvency would be adopted. This decision has not been implemented in the current reform package, but the Parliamentary Secretary to the Treasurer has stated that it will occur through a separate Bill. The Government is currently seeking any further comments from the public on the UNCITRAL Model Law.

Provision of recourse for future personal injury claimants

As part of his announcement in October 2005, the Parliamentary Secretary to the Treasurer referred to the Corporations and Markets Advisory Committee (CAMAC) a set of proposed changes to the CA relating to protections for personal injury claimants who have not yet suffered an injury and who do not have a provable debt at the commencement of an administration or liquidation. The Federal Government recognised the balance that needed to be struck between protecting potential personal injury claimants and avoiding the creation of signiﬁ cant business uncertainty. CAMAC has not yet issued a report on this issue, nor does the draft legislation address it.

Personal property security law

Reforms in this area are currently on the Government’s agenda but are not included in the draft legislation.

How does it affect you? • The Government intends to pass draft legislation amending existing insolvency laws in 2007. • The amendments aim to streamline the processes involved in insolvent external administration by increasing their ﬂ exibility, removing unnecessary regulatory burdens and reﬂ ecting the practices which are already in use. • While none of the changes are ‘groundbreaking’, they will impact on most insolvencies even if only in a minor way. • The draft legislation is open for public comment until 23 February 2007.

238 DEVELOPMENTS IN AUSTRALIA

Extending corporate responsibilities

In response to the HIH Royal Commission Report, the federal Corporations and Markets Advisory Committee has recommended that certain duties and obligations currently conﬁ ned to company directors be extended to apply to managers, contractors and consultants.

In April 2003, Justice Owen handed down his report on the HIH Royal Commission. One of his Honour’s recommendations was that the deﬁ nition of the class of personnel on whom duties are imposed under the CA be amended to focus on the function performed by the person, as opposed to the classiﬁ cation of their legal relationship to the corporation.

In May 2004, the Parliamentary Secretary to the Treasurer asked the Corporations and Markets Advisory Committee (CAMAC) to prepare a report on the duties and liabilities of corporate ofﬁ cers, employees and other individuals below board level, under the CA. CAMAC released a discussion paper a year later (the Discussion Paper), inviting submissions on whether the classes of persons subject to obligations under the CA should be widened.

The current regime under the CA requires directors and ofﬁ cers to exercise care and diligence, act in good faith in the best interests of the corporation and act for a proper purpose. It also requires that ofﬁ cers and employees not misuse their positions, or corporate information, to gain an advantage for themselves or someone else, or to cause detriment to the corporation.

Submissions Submissions received in response to the Discussion Paper varied in their support for the various proposals. Some submissions recognised that today’s complex managerial structures require the imposition of obligations and duties on a wider range of persons. Other submissions raised concerns that managers and other such employees may be inadvertently involved in a breach of duty where they were not in a position to access all of the information relevant to the performance of the action constituting a breach. There were also concerns that:

• directors’ responsibilities under the CA would be diluted; • there would be an adverse impact on middle management remuneration; • there would be less incentive to appoint middle managers; and • the costs of implementing and accommodating the changes would be signiﬁ cant.

The CAMAC report In April 2006, CAMAC published its report Corporate Duties Below Board Level (the Report). The Report recognises the realities of modern corporate structures and the fact that many signiﬁ cant decisions are made by managers without

239 reference to the board. The Report recommends that the relevant provisions of the CA be applied to individuals by reference to the functions they perform, rather than the classiﬁ cation of their relationship with the corporation.

The recommendations seek to broaden the application of certain provisions, so as to apply to persons who do not fall within the categories of directors, ofﬁ cers or employees. In some cases, provisions could apply even to contractors, consultants and ofﬁ cers of other corporate entities within a group of companies, in circumstances where those individuals were involved in the management or the carrying-out of the business of the company.

The primary rationale behind many of the Report recommendations was to overcome any inadvertent narrowing of the class of persons to whom the provisions of the CA applies, which occurred as a result of the amendments to the statutory provisions made in 2000 (the 2000 Amendments). Those amendments had removed from the defi nition of ‘offi cer’ reference to an ‘executive offi cer’, being ‘a person who is concerned in, or takes part in, the management of’ the body’ a corporation.

The Report recommends that:

• The following obligations should be extended to any person who takes part, or is concerned, in the management of a corporation: (i) application of the duty of care and diligence, and the duties to act in good faith and for a proper purpose (sections 180(1), 181 and 184(1)) – currently only applies to directors and other offi cers of a corporation; and (ii) the restrictions on indemnifi cation and insurance (ss 199A and 199B) – currently only applies to an offi cer or auditor of a company; • The following protections should be extended to any person who takes part, or is concerned, in the management of a corporation: (i) the business judgment defence (s180(2)); (ii) the protection currently afforded to directors of a wholly owned subsidiary who are taken to have acted in good faith and in the best interests of that subsidiary, if they have acted in good faith and in the best interests of the holding company (s187); and (iii) the protection currently afforded to directors where, in certain circumstances, they may rely on the information or advice provided by another person (s189); • The following should be extended to any person who ‘performs functions or otherwise acts for, or on behalf of’, a corporation: (i) obligations regarding the improper use of corporate position (ss 182 – civil liability and 184(2) – criminal liability) and corporate information (ss 183 – civil liability and 184(3) – criminal liability) – currently only applies to directors, offi cers and employees of a corporation (including past and present directors, offi cers and employees with reference to use of corporate information); (ii) obligations regarding the provision of false or misleading information to certain classes of persons such as directors and auditors (s1309(1)) – currently only applies to offi cers and employees;

240 (iii) the requirement to take reasonable steps to ensure that information provided to certain classes of persons, relating to the affairs of that corporation, is not materially false or misleading (s1309(2)) – currently only applies to ofﬁ cers and employees; and (iv) the offence committed by any current or former ofﬁ cer, employee or shareholder of a company involving misconduct concerning corporate books (s1307(1) – corresponding defence in s1307(3)).

What recommendations were not made CAMAC declined to recommend that the defi nition of ‘offi cer’ be changed, or a defi nition of ‘employee’ be included in s9, on the basis that those terms are used throughout the CA and in sections which were not addressed by the Report. CAMAC also did not adopt its earlier proposal regarding a general ‘dishonesty offence’ of wide application, in part because it would be diffi cult to gauge the implications of such an amendment. Further, CAMAC did not take up its original proposal that additional obligations be imposed upon corporate groups, partly because recent judicial decisions had indicated that the courts could manage such issues effectively.

The Report’s response to concerns raised in submissions In response to the concerns raised in several of the submissions, CAMAC notes that their recommendations would reverse the effects of the 2000 Amendments. CAMAC argues that this recommended step is not aimed at diluting or shifting the responsibility of directors, but at re-establishing the applicability of liabilities and obligations to persons who were always intended to be subject to the relevant provisions of the CA.

Some of the submissions had contended that the duties of contractors and consultants should remain regulated by contract. CAMAC responds in the Report that the considerable penalties, both civil and criminal which apply under ss 181 and 182, would create signiﬁ cant and undesirable inconsistencies in the consequences of breaches which would occur under the CA as opposed to breaches of analogous obligations under contract. In other words, if a manager, on behalf of the company, and a contractor entered into an agreement that stood in breach of duties owed under both the CA and the contract, the manager would be liable for penalties imposed by the CA while the manager would be liable under the contract. This could readily produce an inconsistency between the types of consequences imposed even though both parties performed the same conduct.

Key issues If CAMAC’s recommendations are adopted by the Federal Government, managers (and, in some cases, contractors and consultants) could be exposed to both civil and criminal liability. A breach of a civil penalty provision can result in a fi ne of up to $200,000 and/or disqualifi cation from managing a corporation or compensation orders, while potential criminal penalties include up to fi ve years’ imprisonment.

241 The Report emphasises that the recommendations are relevant only to persons involved in some aspect of ‘management’. CAMAC recommends, however, that the question of what constitutes ‘management’ activities should be left to the courts.

The Report refers to a decision of the New South Wales Supreme Court in ASIC v Vines (2005) 55 ACSR 617, in which Justice Austin held that being concerned in ‘management’ covers activities involving policy and decision-making related to the business affairs of the corporation, not conﬁ ned to central management of the affairs of a corporation but extending to the management of a segment of a corporation’s overall business. Justice Austin considered that the following activities did not constitute ‘management’:

• the execution of instructions by an agent while obeying orders; • mere administrative work of the kind performed by a company secretary or accountant; or • carrying out day-to-day routine functions in accordance with predetermined policies.

In the absence of a clear deﬁ nition of the expression, ‘concerned in the management of a corporation’, it is unclear how widely the relevant provisions might be applied.

The recommendations concerning ss 1307(1) and 1309(1) may aid auditors or trustees of a corporation by imposing obligations on persons who may have held company information but who were not employees of the company in question. Such information may be held, for example, by employees of a related company.

Conclusion Whilst CAMAC has emphasised that their recommendations are not intended to impose obligations on new classes of individuals, the Report clearly suggests that obligations and duties under the CA should apply to persons who, since 2000, have not been liable under the relevant provisions.

Corporations will need to ensure that persons ‘concerned in the management’ of the corporation, including persons involved in policy and decision-making in any segment of a corporation’s overall business, are aware of their obligations and potential liability under the CA. Consideration would have to be given to any insurance or indemnity afforded to middle managers who perform functions which would bring them within the ambit of the relevant provisions. Corporations will also need to assess potential implications when dealing with contractors, consultants and advisers.

Corporations should also advise directors and ofﬁ cers that, notwithstanding CAMAC’s recommendations about extending the applicability of duties owed under the CA, the Report does not propose that the existing responsibilities of directors or ofﬁ cers be diluted or altered.

242 DEVELOPMENTS IN AUSTRALIA

A simpler regulatory system – corporate and ﬁ nancial services

The 16 November 2006 release of the Corporate and Financial Services Regulation Review Proposals Paper is the Federal Government’s latest strategy to improve and simplify the regulatory system in Australia’s corporate and ﬁ nancial services sectors.

In short, the paper addresses concerns previously raised about unnecessary consequences arising from ﬁ nancial services reform and other CA requirements.

The proposals are broadly consistent with what was included in the earlier consultation paper, although there are some new proposals and concepts. For example, representatives can be either advisers or sales representatives – not both; registered managed investment schemes will be able to invest in unregistered foreign managed investment schemes and electronic distribution of annual reports will be permitted.

Superannuation is excluded from the statement of advice relief provisions. Some forms of fundraising will be easier. For example, rights issues for quoted securities or quoted ﬁ nancial products will not require a prospectus or product disclosure statement; more ‘small-scale’ offerings will be able to be made under an offer information statement; unlisted company employee share schemes will generally be exempt from licensing, advertising and hawking restrictions and subject to simpler disclosure requirements.

Some proposals effectively create more regulation, such as the Financial Product Activity Report, which will be a signiﬁ cant compliance burden. In practical terms, regulation could be more complex because it will be necessary to know, and understand the scope of, the new exceptions.

Background In April 2006 the Federal Government released a consultation paper concerning a corporate and ﬁ nancial services regulation review. The Government received feedback on the consultation paper and then issued the proposals paper.

The proposals paper The Corporate and Financial Services Regulation Review Proposals Paper (the proposals paper) contains details of the issues which, once ﬁ nalised, the Government will implement through legislation. It contains 35 issues that fall into two broad categories: ﬁ nancial services regulation (FSR) and corporate.

For the most part, the issues in the proposals paper are broadly consistent with the objectives identiﬁ ed in the consultation paper and it has been generally well received by industry. However:

243 • new issues have been included which, in some cases, develop recommendations made by the Banks Taskforce in its report Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business1; • the focus of some issues has changed from the consultation paper; and • the Government has identiﬁ ed some issues that are no longer being pursued.

Below is a summary of the main issues in the proposals paper.

Key proposals The key proposed FSR-related changes are as follows.

• Financial product providers and their representatives would be able to recommend fi nancial products (except for superannuation-related products) based on a client’s objectives, fi nancial situation and needs without that recommendation constituting fi nancial advice (either personal or general). This would be defi ned as a ‘fi nancial product sales recommendation’ and would be subject to its own specifi c regulatory requirements. This would be distinguished from the provision of fi nancial services advice. They would be mutually exclusive streams of activity so that an individual representative could do one but not both. This is a new approach to defi ning fi nancial services advice under FSR. • Financial advisers providing general advice would not have to provide a statement of advice (SOA) when the advice does not involve recommending a product and no remuneration is received for it. The adviser would, however, need to keep a record of advice (to be provided to the client if requested). • There would be a threshold limit triggering the requirement to provide an SOA to a client. SOAs would no longer be required where the advice given relates to an investment worth less than $10,000 (although it is not proposed that the exemption apply to superannuation-related products2, some insurance products (life risk, sickness and accident and consumer credit) and derivatives). • There would be an ‘opt-out’ mechanism for retail clients who want to be treated as wholesale/sophisticated investors (but do not satisfy the relevant tests), provided that the licensee was satisfi ed that it was appropriate to treat the investor as wholesale and the investor acknowledged this designation of wholesale status by signing a written statement from the licensee. • The laws on cross-endorsement of authorised representatives of insurers would be changed so that licensees would only be jointly and severally liable for their representatives’ conduct where those representatives provided fi nancial services in relation to the same sub-class of fi nancial product. (This proposal seems to be restricted to life risk and general insurance.) • ASIC has agreed to review the training standards contained in ASIC policy statement 146 Training of fi nancial product advisers to ensure they are adequate (and also to take account of any changes that arise from the proposals

1 The Banks Taskforce report contained 178 recommendations. It was presented to the Government on 12 October 2005. The Government issued its ﬁ nal response to the report on 15 August 2006.

2 The Government has defended this approach (in response to criticism from the superannuation industry) saying that including superannuation would confl ict with the Government’s Super Choice education campaign, which emphasised the importance of getting fi nancial advice. The Government has actively encouraged consumers to ask their adviser to set out clear answers to their questions in the SOA, especially as the choice of a superannuation fund has very signifi cant long-term fi nancial consequences even from the fi rst time contributions are made.

244 paper (for example, the fi nancial product sales recommendation proposal, referred to above)). • The product disclosure statement (PDS) ‘in-use’ notice regime would be replaced with a new standardised reporting method which would require PDS issuers to complete a ‘Financial Product Activity Report’ within fi ve days of preparing or modifying a PDS, or withdrawing or closing a fi nancial product. • The licensing exemption for dealing services provided by trustees of pooled superannuation trusts (PSTs) would be extended to the product disclosure rules applying to PSTs. • The restriction in the CA on registered managed investment schemes (MISs) being able to invest in unregistered foreign MISs (subject to ASIC relief) would be amended to permit investment in unregistered MISs that operated predominantly outside Australia and were not operated by the responsible entity of the MIS or any of its associates.

The main corporate (non–FSR) proposals are as follows. • Shareholders of public companies would have to request a hard copy of the company’s annual report, with companies only being required to post a copy on their website for people to access. (Companies would however have to write to shareholders to let them know they may still receive a hard copy if required, and that copy would have to be provided free of charge.) This proposal would also apply to registered MISs and disclosing entities. • The thresholds for determining whether a proprietary company is ‘large’ (and, therefore, required to prepare and lodge an audited fi nancial report) would be increased and the application of the tests would change. (This is intended to ensure that only companies which are economically signifi cant would be caught by this requirement.) • The fundraising requirements would, in some cases, be simplifi ed (including, by aligning relevant requirements in Chapters 6D and 7): • a prospectus or PDS would not be required for rights issues for quoted securities and quoted fi nancial products, although a ‘cleansing notice’ (based on the notice currently required for secondary sales) would need to be provided to the Australian Stock Exchange; • the scope of the relevant fundraising provisions applying to ‘small-scale’ offerings would be widened to make the relevant requirements for securities and fi nancial products more consistent and also to enable more fundraisings to take advantage of less onerous disclosure obligations under an offer information statement; • unlisted company employee share schemes would generally be exempt from licensing, advertising and hawking restrictions and subject to simpler disclosure requirements; • the secondary sales disclosure provisions would be extended so that controllers would be covered (and would no longer need to seek specifi c ASIC relief); and • the replacement prospectus provisions would apply in relation to stapled securities to facilitate more consistent functioning of the disclosure provisions for these securities.

245 • The timeframes for breach reporting obligations under prudential legislation and the CA would be changed to allow more time for reporting some breaches (although breaches currently required to be reported immediately would still need to comply with that requirement). The consistency of reporting requirements is to be considered in a separate proposals paper. • Licensees would not have to cite their licence number in disclosure documents and other relevant documents but would only be required to cite their ABN and state that they are an Australian ﬁ nancial services licensee. (This proposal would be implemented once the required changes were made to the ABN database to allow customers to trace the licence number using that database.)

Other matters Other matters included are:

• streamlining the disclosure requirements applying to all non-cash payment facilities not related to basic deposit products; • reﬁ nement of other company reporting obligations (including removing duplication in the executive remuneration disclosure requirements); • measures to clarify and simplify auditor independence obligations under the CA; • measures to ensure appropriate overseeing of market operators who were, or are, related to licensed participants; • a limited review of the related party approval process; • removal of telephone monitoring during takeover bids and a new proposal to remove the requirement to disclose a holding of 85 per cent (or more) in a company (ie deletion of sections 665D and 665E CA notice provisions); and • facilitation of electronic registration of charges over company property and associated documents.

What is no longer being considered Two topics canvassed in the consultation paper will now no longer be part of the consultation process.

• The consultation paper considered whether it would be appropriate to reduce the length of concise reports required under the CA for distribution to shareholders (in place of the full annual report) and, if so, what summary information should be included in the concise report. Given the Government is now proposing to introduce electronic distribution of annual reports (proposal 2.8 – refer to our table for more details) allowing companies, registered schemes and disclosing entities to make their annual reports available on their website and only send hard copies to shareholders who request them, the Government considers it unnecessary to proceed with the earlier proposal. • The consultation paper raised whether to allow lodgment of summary fi nancial information relating to the parent entity when a corporate group lodges consolidated fi nancial statements. The Government has decided not to proceed with this issue because the consultation process did not show that the costs of preparing this information outweighed the existing benefi ts to users.

246 The consultation paper and proposed categories list also identifi ed a specifi c topic on how best to enhance communication between business, consumers and ASIC. It has not been separately addressed as a specifi c proposal in the proposals paper. It is however an objective of some of the proposals outlined in the proposals paper (particularly the compliance proposals).

Further, the proposals do not really address a major current area of concern – to ensure that consumers receive appropriate and independent advice. (The Government believes that the new ‘fi nancial product sales recommendation’ distinction could help in this regard. However, there are several related issues that need to be considered in more detail, for example, remuneration of advisers and management of confl icts of interest. These are much bigger challenges for the Government and the regulators and probably do not have easy answers. Perhaps it is better that the Government has not really tried to tackle these more diffi cult issues.)

Consultation process and timetable The Government had invited written submissions on its proposals by 22 December 2006 and extended that date to 19 January 2007. Following this short consultation period, the Government intends to release the proposed legislation in draft by February 2007, with the aim of it being passed before the next federal election.

In the meantime, we understand that the Government will shortly be releasing draft Regulations dealing with issues not covered by the proposals paper.

247 DEVELOPMENTS IN AUSTRALIA

Corporate responsibility parliamentary inquiry

A parliamentary inquiry into corporate responsibility in Australia, concluded in June 2006, has attracted little attention despite several recent high-proﬁ le corporate collapses and scandals. The Corporate responsibility: Managing risk and creating value report that surfaced from the inquiry found that no major changes to the law were necessary.

The Parliamentary Joint Committee on Corporations and Financial Services (the Committee) handed down the Corporate responsibility: Managing risk and creating value report (the Report) on 21 June 2006. The Report is based on 146 submissions from corporations, individuals and non-government organisations. The Committee found no major changes to the law were necessary and advised against mandatory triple-bottom-line reporting (ie sustainability reporting) and amending directors’ duties to expressly require consideration of corporate social responsibility (CSR) issues in making corporate decisions.

Many of our clients made submissions to the inquiry, detailing their experiences incorporating CSR into their practices and publishing voluntary CSR reports. Indeed, many of our clients were publicly lauded for their CSR records. Most clients, and most other corporate submitters, were of the view that any mandatory regime would stiﬂ e ingenuity and could lead to a lowest-common-denominator effect.

The Report contained 29 recommendations for the way corporate responsibility should progress in Australia. The message was clear that continuing to improve CSR practices is of critical importance.

Directors’ duties The Committee concluded that the ‘enlightened self-interest’ interpretation of directors’ duties in the CA already allows directors to have regard for broader community issues. This approach holds that directors may consider and act on the legitimate interests of stakeholders other than shareholders, to the extent that these interests are relevant to the corporation. The tremendous importance of a company’s name and reputation makes this interpretation of the CA a powerful concept. It was preferred to the contrary view that a director would be failing their duties if consideration was given to any factors other than proﬁ t.

Given this ‘enlightened self-interest’ approach, the Committee recommends that amendment to the directors’ duties provisions of the CA, to encourage or even expressly require the consideration of CSR issues, is not required. Most of our clients, and the corporate community in general, are of the opinion that additional prescriptive legislation is not needed.

248 The role of institutional investors The Committee acknowledges institutional investors are demonstrating increased recognition of the non-fi nancial factors in risk analysis and the important infl uence they can have on corporate behaviour. Sustainable investment managed funds grew about 70 per cent in the 2004/05 fi nancial year. This trend is likely to continue as institutional investors are exposed to long-term risks for the duration of their characteristically long-term investments, making them more conscious of sustainability issues.

As these amounts of money continue to grow, these funds will exert direct and substantial inﬂ uence over listed corporations. The Committee considered whether the ‘sole-purpose’ test in the Superannuation Industry Supervision Act 1993 (Cth) limits ‘responsible investment’ and concluded that it did not. However, it recommends the Australian Prudential Regulation Authority issue detailed guidelines on the sole purpose test to clarify this position. The Committee also recommends institutional investors in Australia, and the Future Fund, become signatories to the United Nations Principles for Responsible Investment. The UN set of principles, released in April 2006, serve to incorporate and promote CSR considerations into investment analysis and practices.

Sustainability reporting Sustainability reporting, or triple-bottom-line reporting, measures and publicly reports on the social and environmental performance and prospects of a company, as well as its economic performance and prospects. The Committee recommends sustainability reporting should remain voluntary, but strongly encouraged. It is of the view that mandatory reporting would create a ‘tick-the-box’ culture of compliance, which is a position advocated by many of the inquiry submissions. The Committee also notes that, although Australian companies are currently lagging dramatically on the sustainability reporting front, numbers are increasing rapidly.

The Committee expresses strong support for the Global Reporting Initiative, an international reporting framework, which it recommends as a standardised sustainability reporting framework in Australia. The Committee, however, did not propose any guidelines regarding the content of sustainability reports – an omission that has attracted criticism. The Committee further notes the impending review of the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations and encourages the inclusion of the top ﬁ ve sustainability risks as part of the recommended non-ﬁ nancial risk disclosure given by ASX-listed companies.

Encouraging corporate social responsibility The Committee made several further recommendations aimed at developing corporate responsibility in Australia. A recommendation that has garnered some attention in the corporate world is the proposal for longer-term incentives in remuneration packages for company directors and executives – thereby ensuring company bosses are rewarded for planning for the future, and not just their own tenure.

249 Other suggestions include:

• best practice leadership from government agencies, including sustainability reporting and disclosure; • government funding for establishing the Australian Corporate Responsibility Network, an organisation based on the UK Business in the Community, a network that works with business to develop practical and sustainable approaches to CSR and promote best practice in their fi eld; • an ASX-driven central web-based tool for disseminating sustainability information, based on the London Stock Exchange’s Corporate Responsibility Exchange; and • providing regulatory relief, or even fi nancial incentives, for corporate responsibility practices. For example, infl ated write-off arrangements for the year-one costs of initiating sustainability reports.

Reaction The Report has been well received by business groups. Australian Institute of Company Directors chief executive, Ralph Evans said, ‘It’s a win for the community and business. It encourages business to act in a socially responsible, environmentally responsible way, without making some heavy handed judgements’ (AAP Newsfeed, 22 June 2006). Other commentators and corporate social responsibility interest groups, however, have expressed the opinion that, while the Report is a positive step, it does not go far enough.

Conclusion The Report essentially recommends that corporate responsibility in Australia should continue to follow existing trends. It found that amendment to the Act is unnecessary. It promotes voluntary reporting without instituting an overarching reporting framework, and recommends against any future adoption of mandatory reporting provided the voluntary trend continues.

It is expected that leading companies and government agencies will continue to incorporate corporate responsibility agendas and practices as an aspect of corporate governance driven partially by the market and ‘peer pressure’. The report’s message is: the major companies are moving in the right direction, but they need to keep moving in that direction by progressing and engaging with CSR issues, or a mandatory regime may have to be introduced.

250 DEVELOPMENTS IN AUSTRALIA

Amendments to Federal Court Rules

In 2006, the Federal Court (Corporations) Amendment Rules 2006 (No 1) amended Schedule 2 to the Federal Court (Corporations) Rules 2000 by inserting:

• the power to extend the period for an administrator to convene a meeting pursuant to section 439A(6) CA; and • the power under s482 CA to make an order staying the winding-up of a corporation either indeﬁ nitely or for a limited time or terminating the winding- up on a day speciﬁ ed in the order.

The Federal Court (Corporations) Amendment Rules 2006 (No 1) were registered on the Federal Register of Legislative Instruments on 31 July 2006. The Amendment Rules commenced on 1 August 2006 (being the day after registration).

251 DEVELOPMENTS IN ASIA

Hong Kong SAR and PRC mutual recognition of judgments

The governments of the Hong Kong Special Administrative Region and the Peoples’ Republic of China have recently signed an agreement to implement laws which will recognise the judgments of each other’s courts.

The arrangement, when fully implemented, will allow parties to access the Hong Kong court system and subsequently enforce a Hong Kong judgment in China. Similarly, a Peoples’ Republic of China (PRC) judgment will become registrable and enforceable in Hong Kong. This is a very positive development for parties entering into transactions with PRC entities because it will facilitate direct enforcement of a Hong Kong judgment against assets in PRC, without the need to relitigate in the PRC courts or litigate the dispute in the PRC in the ﬁ rst place. How the arrangement is implemented and operates in practice is, however, subject to some uncertainty.

The context The court judgments of many jurisdictions are already registrable and enforceable in Hong Kong under the Foreign Judgments (Reciprocal Enforcement) Ordinance. However, PRC judgments do not fall within the scope of this Ordinance because Hong Kong is not regarded as a ‘foreign’ jurisdiction within the terms of the Ordinance. By contrast, arbitral awards made in Hong Kong and the PRC have been enforceable in either jurisdiction since 1999 because Hong Kong and the PRC are both signatories to the New York Convention on the Recognition of Foreign Arbitral Awards. As a result, many PRC-related commercial transactions incorporate clauses referring disputes to arbitration rather than to the Hong Kong or PRC courts.

Since 2002, the Hong Kong and PRC governments have been negotiating an arrangement by which judgments of Hong Kong courts are able to be enforced in the PRC, and vice versa. An Arrangement on Reciprocal Enforcement of Judgments in Commercial Matters (the Arrangement) was recently signed by the two jurisdictions, although a copy of the full terms of the Arrangement is not yet available. The detail of the Arrangement which is publicly known is drawn from a preliminary note issued in February 2006 and, more recently, from press releases issued by the relevant bodies.

The primary terms of the Arrangement The Arrangement is designed only to cover judgments which:

• require payment of money in ‘business-to-business’ cases; • relate to disputes arising from, or in connection with, written agreements or documents in which the parties have agreed to specify either Hong Kong or PRC

252 courts as the forum for the sole or exclusive jurisdiction for resolving such disputes; and • are ﬁ nal and conclusive.

Important aspects of the Arrangement therefore include the following:

Laws and Regulations need to be introduced before the Arrangement is operative

A brieﬁ ng paper recently provided by the Hong Kong Government to the relevant Hong Kong Legislative Council panel emphasises that the Arrangement will not become operative until relevant legislation is introduced in Hong Kong and the Supreme People’s Court has promulgated a judicial interpretation to render the Arrangement operational (the Judicial Interpretation). There is no current indication as to the likely timing of such steps.

No retrospective effect

Although it is not speciﬁ ed in the information currently released regarding the Arrangement, under the terms of the Hague Convention on Choice of Court Agreements the Arrangement cannot have retrospective effect. The Arrangement will therefore only be validly utilised by commercial parties that enter into agreements after the relevant laws have been introduced in both jurisdictions.

Choice of courts clause

To take advantage of the Arrangement, commercial agreements must specify that the parties agree to refer any disputes arising in relation to the relevant agreements exclusively to the courts of either Hong Kong or PRC.

Judgments must be ﬁ nal and conclusive

The Judicial Interpretation to be issued by China’s Supreme People’s Court will address particular aspects of PRC law which currently render the fi nality of a PRC judgment less certain than under Hong Kong’s common law system. Under the PRC trial supervision system, either a party to litigation, the court itself or the People’s Procuratorate may commence a ‘review’ of a PRC judgment. A retrial may result from such a review, which would usually take place before the original trial court. To prevent the original trial court from altering the terms of the judgment, the Judicial Interpretation will require that any retrial (in a matter in which a PRC judgment is sought to be enforced in Hong Kong) must come before a higher PRC court. In addition, a certifi cate of ‘fi nal judgment’ issued by the PRC courts must also be submitted to the Hong Court by the party seeking to enforce the PRC judgment in Hong Kong.

Designated courts

Not all Hong Kong and PRC court judgments will be recognised and enforced in the respective jurisdictions. For Hong Kong litigants, the PRC will enforce judgments of the District Court, High Court (Court of First Instance and Court of Appeal) and the Court of Final Appeal. In respect of PRC courts, judgments of the following will be enforceable in Hong Kong: the Supreme People’s Court, 32 Higher People’s Courts, 389 Intermediate People’s Courts and 47 Basic Level People’s Courts.

253 Safeguards

The Arrangement speciﬁ es a number of grounds entitling the courts of either jurisdiction to refuse the enforce a judgment of the other. These include:

• the choice of court clause/agreement being invalid under the laws of the forum chosen by the parties to have exclusive jurisdiction over disputes; • the judgment is fully satisﬁ ed; • the judgment debtor/losing party had not been given sufﬁ cient time to defend itself; and • the judgment has been obtained by fraud.

Consistent with developed common law concepts, a Hong Kong court may also refuse to enforce a PRC court judgment if it is ‘contrary to public policy’. Importantly though, a PRC court may refuse to enforce a Hong Kong court judgment if it is ‘contrary to the social and public interests of the Mainland’. It will be very interesting to monitor how the PRC courts apply the concepts of social and public ‘interests’.

Conclusion Although the Arrangement is a signiﬁ cant development, it will be necessary for parties to make a determination prior to ﬁ nalisation of contractual documentation as to whether access to the courts of Hong Kong or the PRC is preferable (facilitating enforcement of any judgment in the other) or whether arbitration is a more appropriate dispute resolution process in all the relevant circumstances.

Whichever route is chosen, taking into account commercial considerations, enforcement of any judgment (arising from litigation or registration of an arbitral award) will continue to be subject to the usual legal and practical considerations and difﬁ culties.

254 DEVELOPMENTS IN ASIA

The use of provisional liquidation as a corporate rescue tool frowned on by Hong Kong Court of Appeal – the Legend Story

Unlike Australia, the United Kingdom and the United States, Hong Kong does not have a speciﬁ c statutory corporate rescue mechanism. It was previously thought that the courts had inherent power to appoint provisional liquidators for the purpose of working out a corporate rescue.

The Hong Kong Court of Appeal in its recent decision in Re Legend International Resorts Ltd 1 has rejected the role of provisional liquidators in restructuring or rescue proposals.

Before turning to the decision of the Court of Appeal on provisional liquidation, it is useful to ﬁ rst consider the relevance of schemes of arrangement in Hong Kong in the context of corporate rescue or restructuring.

Schemes of arrangement in Hong Kong Section 166 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) provides a procedure for the court to sanction a scheme of arrangement and to bind the creditors and members of a company, as well as the company itself.

To be binding on all the creditors, meetings of creditors (who may need to be divided into separate classes) must be summoned, the scheme of arrangement must be voted on and accepted by each different classes of creditors (by a majority in number representing three-fourths in value of the creditors or where there are separate classes of each class of creditors present and voting at the relevant meetings) and the scheme must subsequently be approved by the court. This procedure is seen by creditors proposing a corporate rescue as cumbersome, ineffectual, lengthy and costly.

Another reason why a scheme of arrangement may not be an effective corporate rescue tool is that a pending application under s166 does not trigger a moratorium on creditor actions. A dissenting creditor is not prevented from issuing proceedings against the company or presenting a winding-up petition while the scheme process proceeds up to the ﬁ nal court approval. It is not unusual for an individual creditor to pursue such actions as a means of putting pressure on the majority creditors to pay it off in settlement.

As a result of difﬁ culties with using schemes as a turnaround mechanism in Hong Kong, provisional liquidation has been considered as a possible corporate rescue tool.2 Although provisional liquidation has not traditionally been considered in other

1 [2006] 2 HKLRD 192.

2 See, for example, Re Keview Technology (BUI) Ltd [2002] HKEC 625 and Re Luen Cheong Tai International Holdings Ltd [2003] HKEC 90; also see the discussion of those cases in the article Hong Kong: the emerging role of provisional liquidators on pg 221 of the Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law 2003 at www.aar.com.au/pubs/arir/2003/arirmain.htm.

255 jurisdictions as an effective turnaround tool, we note that it was successfully utilised for that purpose in Australia in United Medical Protection.3

The background to the Legend decision Legend International Resort Limited (the company) is a company incorporated in Hong Kong. The company’s business consists of the operation of a casino in the Philippines. The company entered into a facility agreement in the form of a syndicated loan with a number of ﬁ nancial institutions. The facility agreement provided for a revolving credit facility. The company subsequently defaulted on the repayment of advances under the facility agreement. A written demand for payment was served on the company.

The petitioner, Morgan Stanley Emerging Markets Inc. as part of its ordinary business in investment banking, acquired a debt which was part of the syndicated loan. It then presented a winding-up petition against the company and in the petition sought the appointment of provisional liquidators. The petitioner based the application for the appointment of provisional liquidators on the ground that the petitioner should have the power to explore a restructuring scheme for the company and that it was not in the best interests of the creditors to have the restructuring process handled by the then current management. It was not, however, the petitioner’s case that the assets of the company were in jeopardy.

The Legend decision The application was dismissed by the court at ﬁ rst instance.4 In dismissing the appeal, the Court of Appeal held that the power to appoint liquidators is contained in s192 of the Companies Ordinance and the following sections. Sections 192 says:

For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the court may impose, the court may appoint a liquidator or liquidators, provisionally or otherwise, in accordance with sections 193 and 194.

Section 193 relates to the appointment and powers of provisional liquidators and s194(1) relates to the appointment of liquidators where a winding-up order is made. The Court of Appeal held that it was clear on the wording of those sections that the appointment of a provisional liquidator must be for the purpose of the winding-up. Rogers observed in the judgment:

Provided that [the purposes of winding up] exist there is no objection to extra powers being given to the provisional liquidator(s), for example those that would enable the presentation of an application under section 166. There is, nevertheless, a signiﬁ cant difference between the appointment of provisional liquidators on the basis that the company is insolvent and that the assets are in jeopardy and the appointment of the provisional liquidators solely for the purpose of enabling a corporate rescue to take place. The difference, may, in most cases, be merely a matter of emphasis, but in the ﬁ nal analysis the difference exists.

3 Re United Medical Protection & Ors [2004] NSWSC 1031; see discussion in paragraph 8.5 of Michael Quinlan’s paper Spinning around – Formal Reorganisation in Australia at www.aar.com/pubs/insol/pap15mar05.htm.

4 [2005] 3 HKLRD 16.

256 Conclusion The law in Hong Kong on corporate rescue is unsatisfactory. The courts are reluctant to extend the power of provisional liquidators to facilitate a restructuring proposal, although there is no jurisprudential objection in doing so under s193.

The introduction of a corporate rescue regime involves policy considerations such as the rights of secured creditors of both ﬁ xed and ﬂ oating charges, as well as the position of directors and issues of insolvent trading. These considerations are matters for the legislature. Presently, a corporate rescue regime is not high on the agenda for the legislature in Hong Kong. Unless and until legislative reform occurs, in light of the Legend decision creditors in Hong Kong will have to seek to restructure and turnaround businesses without the use of provisional liquidation. The only formal restructuring mechanism in Hong Kong presently remains the unwieldy and costly process provided by s166 involving the approval of the court to sanction a scheme of arrangement that is binding on the company and its creditors.

257 DEVELOPMENTS IN ASIA

New PRC bankruptcy law

A new PRC Enterprise Bankruptcy Law (the New Bankruptcy Law) was promulgated by the Standing Committee of the National People’s Congress on 27 August 2006. The New Bankruptcy Law will come into effect on 1 June 2007 and replace the current bankruptcy rules, which were promulgated in 1986 on a test basis.

The New Bankruptcy Law has been heralded as the most important law for the market economy and as a very important step for further market economic reforms in PRC.1

To understand the ‘revolutionary’ nature of the New Bankruptcy Law, it would be relevant to look at the current bankruptcy rules and the recent social changes to the economy of PRC.

Changes to the current bankruptcy rules The New Bankruptcy Law is based on a draft submitted to the National People’s Congress in 2004. That version would have applied the international practice of paying off the creditors’ claims out of the insolvent estate.

The New Bankruptcy Law, as promulgated, is a compromise between the current bankruptcy rules and the ‘creditors – ﬁ rst’ formula originally submitted to the National People’s Congress.

The current bankruptcy rules apply to State-owned enterprises only. They do not confer much protection to creditors, whether secured or unsecured. The purpose of the current bankruptcy rules is to protect laid-off workers of insolvent state-owned enterprises.

The New Bankruptcy Law applies to all enterprises with legal person status, irrespective of whether they are State-owned. To accord with international practice, the New Bankruptcy Law widens the grounds for applying for bankruptcy to include inability to pay debts when due and insufﬁ ciency of assets to repay all debts. It provides for an administrator to be appointed by the court to supervise the bankruptcy process and take charge of the property of the insolvent enterprise. The New Bankruptcy Law recognises the ranking in priority of secured creditors’ claims over secured assets. It puts in place a new order of priorities of claims, namely, bankruptcy expenses, community debts, secured debts, employee wages and beneﬁ ts, outstanding taxes and, lastly, unsecured debts.

1 Li Shuguang, director of the Bankruptcy Law and Restructuring Centre at the China University of Political Science and Law, Beijing.

258 The New Bankruptcy Law will impose quasi-criminal and criminal regimes to regulate the responsibility of senior executives. The senior executives of an insolvent enterprise could be banned from taking senior positions in other enterprises for three years following the declaration of insolvency.

The New Bankruptcy Law is, in some respects, in line with modern international trends. It underlies the ambition of PRC to achieve international standards and develop a mature market-driven economy. For instance, the New Bankruptcy Law provides a bankruptcy restructuring system, complete with liquidators, as well as rules to ensure fairness during the bankruptcy process.

State-owned enterprises The New Bankruptcy Law marks a move in the PRC from a predominantly State-owned economy to what is now a thriving market-driven economy in the past two decades. With these signifi cant changes over such a short time period taking place in major cities only, the gap between wealth and poverty widens and social unrest, particularly in the less affl uent rural areas, intensifi es. These are challenges presently facing the PRC Government.

Xinhua has recently said that 2000 old State-owned enterprises are planning bankruptcy and that the central government had set aside 33.8 billion yuan (US$4.2 billion) last year to help these enterprises settle the claims of the laid-off workers. These staggering ﬁ gures do not take into account the government aid previously given to the 3658 State-owned enterprises that went bankrupt between 1994 and 2005.

In the circumstances, the New Bankruptcy Law is designed to protect the workers and creditors of insolvent enterprises, and at the same time to introduce a mechanism for corporate reorganisations that could allow some troubled enterprises to avoid bankruptcy.

259 DEVELOPMENTS IN NEW ZEALAND

Insolvency law reforms enacted

In late 2006, the New Zealand Parliament passed legislation to reform the New Zealand insolvency laws. The laws will come into effect in 2007. The new insolvency regime is contained in the:

• Insolvency Act 2006; • Companies Amendment Act 2006; and • Insolvency (Cross-Border) Act 2006.

Insolvency Act 2006 This Act substantially changes the law dealing with personal insolvency. The most signiﬁ cant of these measures is the introduction of a ‘No-Asset Procedure’, the purpose of which is to remove some of the punitive restrictions of bankruptcy on individuals who have few or no assets and to allow them a better opportunity for a fresh start. The No-Asset Procedure will not be available to bankrupts whose debts exceed a statutory maximum amount of NZ$40,000.

Companies Amendment Act 2006 Under the new Part 15A of the Companies Act, corporate entities in New Zealand are now able to enter into voluntary administration arrangements very similar to the Australian voluntary administration regime. The reforms in this area are designed to encourage business rehabilitation and to enhance business conﬁ dence, encourage overseas investors, ensure New Zealand law adopts best practice and harmonise trans-Tasman insolvency laws.

There are two further grounds of liquidator disqualiﬁ cation to those currently existing where a person or person’s ﬁ rm:

• provided professional services; or • has had a continuing business relationship with the company in liquidation, within two years immediately before liquidation.

The new legislation provides for the adoption of a voidable preference regime, by replacing the ‘ordinary course of business test’ for preferences with the ‘running account test’ similar to that used in Australian law.

New penalties have been introduced to restrict the use of phoenix company structures. The director of a failed company cannot be the director of a company or take part in the business activities of a company that has the same or a similar name as the failed company. A director who contravenes this restriction may be personally liable for the debts of the phoenix company. The Act also introduces criminal penalties for directors who act in bad faith in a manner that detrimentally affects the legitimate interests of creditors.

260 Insolvency (Cross-Border) Act 2006 This Act adopts the United Nations Commission on International Trade Law model law in relation to cross-border insolvencies in New Zealand.

The model law provides a framework for conducting insolvency proceedings when a person who is subject to insolvency proceedings has assets outside New Zealand or is also the subject of insolvency proceedings in another country.

The Act allows the New Zealand High Court to assist the court of another country that has jurisdiction in an insolvency proceeding.

261 DEVELOPMENTS IN EUROPE

Reforms to Italian bankruptcy law

The Italian Government has passed general reforms to the country’s Bankruptcy Law. The reforms are intended to promote the conservation of the organisational set up of the company for the beneﬁ t of both the company and its creditors.

Signiﬁ cant to the reforms is the extent to which they have redesigned the functions of the liquidator and the creditors’ committee.

• The liquidator now administers the bankruptcy assets and performs all operations related to the bankruptcy procedure. The liquidator is responsible for carrying out abatements of debt, compositions, compromises, waiver of claim, acknowledgement of third-party rights, cancellation of mortgages, return of pledges and release of guarantees. The liquidator is also responsible for accepting inheritance and gifts and performing acts of extraordinary administration. Furthermore, when setting up the liquidation program, the liquidator may authorise temporary ﬁ nancial management of the company (or single branches of it). The liquidator also has the power to authorise rental of the company or of its branches. • The liquidator’s functions are carried out under the supervision of both the deputy judge for the bankruptcy proceedings and the creditors’ committee. • The creditor’s committee is appointed by the deputy judge within thirty days from the bankruptcy declaration. The committee comprises several members chosen from among the creditors. • The creditor’s committee is responsible for supervising and authorising the acts of the liquidator. If there is a desire to remove or substitute the liquidator, it is the creditors’ committee that must present the name of a new liquidator to the appointed court, together with the reasons for the request. • The creditors’ committee is also responsible for auditing the accounts and documents relating to the bankruptcy procedure.

Agricultural entrepreneurs and public bodies (in addition to small commercial enterprises) do not fall within the ambit of the new law. An entrepreneur will be deemed ‘small’ if:

• investments made within the company do not exceed 300,000 euros in value; and • gross incomes calculated on the average of the last three years (or since the beginning of the activity if this is less than three years), for a total amount per year do not exceed 200,000 euros.

262 DEVELOPMENTS IN EUROPE

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. 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 2 May 2006 the European Court of Justice (the ECJ) handed down its decision in the Eurofood IFSC Limited case. The court held that Eurofood IFSC (Eurofood), a ﬁ nance vehicle which is a subsidiary of Parmalat, was correctly liquidated in Ireland because its COMI was in Ireland.

The background to Eurofood is set out in our Annual Review of Insolvency & Restructuring Law 2004 (p224). The ECJ ruled as follows.

• The presumption set out in Article 3(1) of the Regulation is that the COMI of a subsidiary is situated in the Member State where its registered offi ce is situated. Where a debtor is a subsidiary company and the registered offi ces of the subsidiary and the parent company are in two different Member States, the presumption of Article 3(1) can only be rebutted if factors that are objective and ascertainable by third parties indicate that a different situations exists. • Article 16(1) of the Regulation dictates that the main insolvency proceedings commenced by a court of a Member State must be recognised by the courts of other Member States, without the latter being able to review the jurisdiction of the court of the opening state. • Under the Annexes to the Regulation, the appointment of a provisional liquidator by the Irish High Court resulted in a decision to open insolvency proceedings. The criteria required to open insolvency proceedings were met. Following an application based on the debtor’s insolvency seeking the opening of collective proceedings, a liquidator was appointed divesting the debtor such that it loses the power of management that it has over assets. • Article 26 of the Regulation enables a Member State to refuse to recognise insolvency proceedings opened in another Member State if the decision was taken in fl agrant breach of the fundamental right to be heard.

This decision has various implications. It endorses the mutual trust principle and clearly indicates that once main proceedings are opened in one Member State then any challenge to that decision must be put before the court that opened the proceedings. Furthermore, it makes it more difﬁ cult to rebut the presumption that COMI is in the jurisdiction of the company’s registered ofﬁ ce. This latter implication should serve to reassure debt issuers at the outset of a transaction that it is improbable that the borrower’s COMI will move without their consent.

263 DEVELOPMENTS IN EUROPE

New Czech Insolvency Act

In 2006, the Czech Republic enacted the Czech Insolvency Act to take effect on 1 July 2007. The Act contains a number of changes to the old Bankruptcy and Composition Act 1991 and is aimed at modernising insolvency law in the Czech Republic.

New test of insolvency Currently, under Czech law a body is insolvent if

• it is unable to pay its debts as they fall due; or • its current debts exceed its assets (ie it is over-indebted).

Under the new Insolvency Act, an entity will be insolvent if there is a reasonable expectation that it will be unable to pay the majority of its debts as they fall due. With regard to being over-indebted, under the reforms all potential debts, not just current debts, must be taken into account in assessing whether an entity’s debts exceed its liabilities.

Procedural reforms The new legislation modernises the way insolvency proceedings take place. The ﬁ rst step involves either the debtor or creditor ﬁ ling a petition for insolvency. Within 15 days the court determines whether a declaration of insolvency should be made. After the declaration is issued, separate court proceedings occur where the fate of the insolvent entity is determined. There are three possible proceedings which may be ordered:

• bankruptcy proceedings; • restructuring; or • debt clearance.

In restructuring proceedings, the debtor’s business is maintained and operated under a restructuring plan supervised by creditors. Restructuring is only permitted for entities whose last annual turnover was at least CZK 100,000,000 (about $6 million) or which have at least 100 employees. In contrast, debt clearance is only available for small scale debtors and involves creditors settling their debts by accepting a reduced proportion of the amounts owed to them.

Other reforms include:

• secured creditors are now entitled to 100 per cent of the proceeds of the sale of assets serving as security, whereas previously they were only entitled to 70 per cent with unsecured creditors receiving a pro rata share of the balance;

264 • unsecured creditors have a much greater role in the outcome of insolvency proceedings, for example, creditors may select at their ﬁ rst meeting the type of proceeding to be instituted against the insolvent company; • the new legislation allows for the set-off of a creditor’s claim against a debtor’s counterclaim even after the declaration of insolvency; and • penalties exist for creditors where it is found that their actual claims are less than 50 per cent of their registered claims.

265 DEVELOPMENTS IN EUROPE

Introduction of ﬂ oating charges into Danish corporations law

New Danish legislation effective from 1 January 2006 has made it possible for fl oating charges to be used by Danish companies when defi ning types of costs. Previously, Danish law had allowed for charges to be placed over specifi c assets of a company (fi xed charges), but had not allowed for charges to be placed over classes of assets (fl oating charges).

Under the new Danish law, ﬂ oating charges are divided into:

• fl oating company charges, which can be placed on the following assets: • unsecured claims relating to the sale of goods and services; • inventories of raw materials and semi-manufactured and manufactured goods; • new motor vehicles; • tools and equipment; • fuel; • livestock; and • goodwill, domain names and intellectual property rights; and • fl oating charges on claims (except for unsecured claims relating to the sale of goods and services which, as noted above, must be the subject of fl oating company charges).

There are several differences between the effect of a fl oating company charge and the effect of a fl oating charge on claims, including that the mortgagee of a fl oating company charge is liable to pay the costs of any insolvency proceedings brought against the mortgagor up to DKK50,000 (about A$11,000). This is not the case for the mortgagee of a fl oating charge on claims.

Floating company charges cannot be placed on certain assets, including fi xtures and fi ttings, pharmaceutical equipment and goods, ships of fi ve gross tons or more and aircraft. A fl oating charge (whether a company charge or a charge on claims) cannot be given to an entity which is closely related to the mortgagor.

Floating charges must be registered with the Danish registry ofﬁ ce for a fee of DKK1400 (about $300) plus 1.5 per cent of the value of the assets over which the charge is to be placed. The new law also allows for the registration of a pledge by an entity that it will not place a ﬂ oating charge over certain assets (a negative pledge).

Since the law’s inception, 1500 ﬂ oating charges (the vast majority of which are ﬂ oating company charges) and 1900 negative pledges have been registered.

266 DEVELOPMENTS IN EUROPE

Changes to Dutch insolvency law

Dutch insolvency law (the Faillissementswet) looks set to undergo some changes following the recommendations of the special Commission which was established in 2003 to advise the Dutch Government on insolvency reforms. The principal recommendations of the Commission, set out in a preliminary Bill, are:

• any reforms in the area of insolvency law should not have unnecessary differences with insolvency law in other EU member states. Where there are insolvencies occurring outside the EU which impact on the Netherlands, a foreign administrator should be appointed within the Netherlands; • the primary interest of the new Bill should be the promotion of creditors’ interests; • uniformity of insolvency laws. At present, the Faillissementswet regulates three areas of insolvency law: actual bankruptcy; suspension of payment; and specifi c debt reorganisation of natural persons. The Commission has recommended that these separate regimes be amalgamated in one uniform insolvency procedure; • reducing the large group of preferences. This will be achieved by abolishing the privileged position of certain claims and the fi scal privileged ground right of the Dutch tax authorities and denying the admission of new preferences; • concentration of insolvency cases at fi ve courts; and • enhanced scope for ‘informal reorganisation’ and the appointment of an ‘informal administrator’.

It remains to be seen whether, and to what extent, these recommendations will be incorporated into Dutch insolvency law.

267 DEVELOPMENTS IN EUROPE

Hungary’s new insolvency laws

Hungary’s Government accepted an amendment to their Bankruptcy Act in September 2005. The previous Act, which regulated bankruptcy, liquidation and voluntary dissolution, came into effect on 1 January 1992 and was amended numerous times. The amendment was intended to introduce greater clarity into business and to increase the protection of creditors’ interests. Hungary has had increasing numbers of insolvency proceedings since 1999. In many instances, debtors frequently attempt to evade creditors’ claims by commencing bankruptcy proceedings and transferring assets to newly established enterprises.

The major changes are as follows.

Commencement of insolvency proceedings Under the old rules, insolvency was established by the court if the debtor failed to settle its undisputed or acknowledged debt within 60 days of the due date. Pursuant to the new rules, the court can determine insolvency if the debtor fails to settle in this situation within 15 days following the receipt of request for payment. This request will include the creditor’s notice on the commencement of insolvency proceedings.

Amendments to liability rules The amendment includes the establishment of direct liability of executive ofﬁ cers who fail to act in the interests of the creditors following the development of the threat of insolvency.

The 2005 amendment also establishes unlimited liability of members for any company share transfers conducted in bad faith. The creditor or liquidator may bring an action against members that transfer shares within three years prior to the commencement of liquidation (where the debtor’s total debts exceed 50 per cent of the company’s equity).

Secured creditors Under the previous rules, secured creditors were entitled to 50 per cent of the sale of property pledged as security, decreased by the costs of sale. However, the new rules enable secured creditors to get 100 per cent of the sale price, less the costs of sale and the practitioner’s fee. The new rules create the right for additional satisfaction of claims in the case of creditors raising claims collateralised by liens.

268 Insolvency practitioners’ conﬂ ict of interests The new regulations also seek to address the conﬂ ict of interests related to insolvency practitioners. Companies listed on the Register of Insolvency Practitioner Companies must:

• not have unpaid public dues; • possess the established guarantee; • not be a member of an unlimited company; • agree to the publication of their data; and • not engage in activities that would conﬂ ict with their duties as insolvency professionals.

269 DEVELOPMENTS IN GREAT BRITAIN

The UNCITRAL Model Law on cross-border insolvency in Great Britain – working towards a common approach in global insolvencies

The United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency was introduced in Great Britain on 6 April 2006. It applies to corporate and personal debtors wherever:

• a foreign representative seeks assistance from the English court in a foreign insolvency; • there are concurrent insolvency proceedings in England and elsewhere; and • foreign creditors want to start, or join in, an English insolvency.

Background UNCITRAL formally adopted a Model Law on cross-border insolvency in May 1997. The model was drafted by a working group and other professional bodies over a two- year period and member states were requested to enact the model as part of their own domestic legislation.

In Great Britain, the Cross-Border Insolvency Regulations 2006 implemented the Model Law. The Model Law, Council Regulation (EC) 1346/2000 on Insolvency Proceedings (the EU Regulation) and section 426 of the Insolvency Act 1986 (UK) will operate together.

The Model Law should engender cooperation between jurisdictions in foreign insolvency proceedings and provide a foreign insolvency representative with a choice of insolvency regimes when seeking assistance from the courts in Great Britain. The main provisions and effect of the regulations in Great Britain are summarised below.

Scope of the regulation There are number of exclusions to the regulations.

• The regulations do not apply to Northern Ireland, only Great Britain. • They do not currently apply to organisations such as insurance companies, building societies, credit institutions and utility companies. (This is perhaps regrettable given the recent activity in the area of insurance insolvency following cases such as Re HIH Casualty and General Insurance Limited.1) • It is understood that statutory instruments will, in future, be introduced to make the Model Law applicable to both credit institutions and insurance companies.

1 [2205] EWHC 2125 (Ch).

270 The Model Law applies to ‘foreign proceedings’ which are deﬁ ned as:

A collective judicial or administrative proceeding in a foreign state, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign Court, for the purpose of a reorganisation or a liquidation.

On this basis it would appear that, in regard to Australian external administrating, the Model Law applies to voluntary administrations (at least where the directors have concluded that the company is insolvent rather than likely to become insolvent at some future time2), liquidations (both compulsory, except on ‘just and equitable’ grounds and creditors’ voluntary, but not members’ voluntary), bankruptcy estates and possibly court-appointed receiverships. However, the Model Law will not apply to administrative receiverships since the receiver is appointed privately under a ﬁ xed and ﬂ oating charge.

In the event of conﬂ ict between the Model Law and Great Britain’s obligations under the EU Regulation, the latter will take precedence. Notwithstanding any conﬂ ict, section 426 of the Insolvency Act will continue to provide assistance in cross-border insolvency matters.

However, the decision to decline to accede to a letter of request in foreign insolvency proceedings in the HIH case by the English High Court in October 2005 demonstrates the limitations of the use of this particular provision.

Regulation 2 provides that the UNCITRAL Model Law in the form set out in Schedule 1 to the regulations shall have the force of law in Great Britain. Regulation 3 provides that British insolvency law is to apply with any modiﬁ cations necessary for the purpose of giving effect to the Model Law. Accordingly, the British Government’s approach has been to ‘graft’ the Model Law onto British insolvency law.

Foreign representative The Model Law entitles a foreign representative to apply directly to the courts in Great Britain to commence insolvency proceedings and to participate in such a proceeding once commenced.

For a ‘foreign representative’ to participate, they must be authorised in a ‘foreign proceeding’ to administer the reorganisation or liquidation of the debtor’s assets or affairs or to act as a representative.

The deﬁ nition of ‘foreign representative’ includes the requirement of being authorised in the foreign proceeding to administer the reorganisation or the liquidation of the debtor’s assets or affairs.

2 This was an issue in a letter of request case (Re AFG Insurances Ltd [2002] 20 ACLC 1588) and may remain an issue under the new legislation.

271 Recognition of foreign insolvency proceeding The Model Law entitles a foreign insolvency representative to apply directly to a British court and, provided evidence such as the existence of the foreign insolvency proceedings and appointment of a foreign representative in the foreign insolvency proceeding are produced, the British court is required to recognise the foreign proceeding.

Proceedings will be recognised as main proceedings or non-main proceedings depending on where the debtor’s centre of main interests (COMI) is located. A foreign main proceeding is a foreign proceeding taking place in the state where the debtor has its COMI, whereas a foreign non-main proceeding is a foreign proceeding taking place in a state where the debtor merely has an establishment.

A debtor’s COMI is usually deﬁ ned as the location of habitual residence or registered ofﬁ ce, but may depend on factors such as the whereabouts of the main trading presence or business, or where the main administrative functions are carried out.

This was recently clariﬁ ed by the European Court of Justice in Re Eurofood IFSC 3 where the court said that the starting point is that each company is ‘a distinct legal entity subject to its own court jurisdiction’. In this case, the court held that Eurofood IFSC Ltd, a subsidiary of Parmalat SpA, was correctly liquidated in Ireland because its COMI was in Ireland.

The court further found that the fact that a parent company in one member state controls the economic choices of a subsidiary carrying on business and with its registered ofﬁ ce based in another member state is not sufﬁ cient to rebut the presumption of COMI laid down in Article 3(1) of the EC Insolvency Regulation.

The COMI must be identifi ed by reference to criteria that are ‘both objective and ascertainable by third parties’. The consequences of this decision are that it will be more diffi cult, in future cases, to rebut the presumption that COMI is in the jurisdiction of the company’s registered offi ce.

‘Establishment’ is deﬁ ned as a place of operations where the debtor carries out a non-transitory economic activity with human means and assets or services.

Once a British court has recognised a foreign main proceeding, a number of matters are automatically stayed or suspended. These include:

• execution against the debtor’s assets; • commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities; and • the right to transfer, encumber or otherwise dispose of any assets of a debtor.

3 Case C-341/04.

272 However, a creditor’s right to enforce security over the debtor’s property – to repossess goods in the debtor’s possession under a hire-purchase agreement and to exercise set-off (provided it is a right that would have been exercisable if the debtor had been adjudged bankrupt or been made the subject of a winding up order) – still applies.

Once a foreign non-main proceeding is recognised by the British courts, the court may, at the request of the foreign representative, order any appropriate relief that is available and covered by the automatic stay arising from the recognition of foreign main proceedings where it is essential to protect the assets of the debtor or the interests of the creditors.

Other forms of relief are also available depending on the circumstances of the case. These include providing for the examination of witnesses; entrusting the administration or realisation of all or part of the debtor’s assets located in Great Britain to the foreign representative or another person designated by the court; and any additional relief that may be available to a British insolvency ofﬁ ceholder under British insolvency law.

A foreign insolvency representative is also entitled to participate in British insolvency law proceedings where they wish to intervene in any proceedings in which the debtor is a party and to make an application to the court to avoid antecedent transactions such as preferences and transactions at an undervalue.

Cooperation with foreign courts and foreign insolvency representatives The Model Law authorises and mandates cooperation and direct communication between the British courts and foreign courts or foreign representatives either directly or through a British insolvency ofﬁ ceholder. The British insolvency ofﬁ ceholder is in turn entitled to communicate directly with foreign courts or representatives.

The types of cooperation envisaged include appointing a person to act at the direction of the court; coordinating the administration and supervision of the debtor’s assets and affairs; communicating information by any means considered appropriate by the court; and the approval or implementation by courts of agreements concerning the coordination of proceedings and coordination of concurrent proceedings regarding the same debtor.

Creditor protection The Model Law introduces equal rights for creditors wherever they are based. For example, foreign creditors have the same rights with regard to the commencement of, and participation in, a proceeding under British insolvency law as creditors in Great Britain. In cases where creditors in Great Britain are to be notiﬁ ed of a British insolvency proceeding, this notiﬁ cation will also be given to known foreign creditors.

273 In addition, the Model Law enacts the ‘hotchpot’ rule. This rule provides that where a creditor who has received part payment for its claim in a proceeding under a law relating to insolvency in a foreign state, it may not receive a payment for the same claim in a proceeding under British insolvency law regarding the same debtor, as long as payment to the other creditors of the same class is proportionately less than the payment that creditor has already received.

The impact of the Model Law in Great Britain It is hoped the Model Law in Great Britain will provide effective mechanisms for dealing with the increasing number of cases of cross-border insolvency. The implications of introducing the Model Law are:

• the Model Law should make the procedures for an application to British courts much simpler and increase access to British justice for those affected by global insolvency; • the cooperation between courts and offi ceholders in different jurisdictions may reduce the need to rely on letters of request which, as demonstrated by the HIH case in the UK, sometimes prove to be of limited use; • there is the potential for the impact of the Model Law to be watered down because when it confl icts with Great Britain’s obligations under the EU Regulation, the latter will prevail. This in turn may mean that local realisation of assets for the benefi t of local creditors is not prevented; and • since the Model Law is not dependent on reciprocity, an Australian representative can seek assistance under the Model Law despite the fact that Australia has not yet adopted it.

Other major trading nations have recently, or will shortly, follow suit. In Australia, the Federal Government has indicated that the Model Law will be adopted and draft legislation incorporating the Model Law is expected in 2007. In the USA, Chapter 15 of the US Bankruptcy Code, which adopts the Model Law, came into effect on 17 October 2005.

274 DEVELOPMENTS IN GREAT BRITAIN

Changes to UK company law

The Companies Act 2006 came into force on 8 November 2006. It holds the dubious distinction of being the longest piece of legislation ever to be passed in the UK.

Its preamble describes the Companies Act as one to reform company law and restate the greater part of the enactments relating to companies; to make other provision relating to companies and other forms of business organisation; to make provision about directors’ disqualiﬁ cation, business names, auditors and actuaries; to amend Part 9 of the Enterprise Act 2002; and for connected purposes.

The Companies Act provides for a single company law regime to apply to the whole of the UK, so that companies will be UK companies rather than GB companies or Northern Irish companies as at present. However, Northern Ireland retains legislative competence over company law and theoretically the Companies Act could be amended or repealed in Northern Ireland if that were so desired.

Directors’ duties Sections 170 to 181 of the Companies Act codify the duties of company directors, which until now were found in the common law, including (at s172) the duty to promote the success of the company for the beneﬁ t of its members as a whole after giving due consideration to the following factors:

• the likely long-term consequence of a decision; • the interests of the company’s employees; • the need to foster business relationships with suppliers, customers and others; • the impact of the operations of the company on the community and environment; • the maintenance of a reputation for high standards of business conduct; and • the need to act fairly between company members.

The duty in s172 is subject to any provision providing for directors to consider the interests of creditors in certain circumstances.

Derivative actions Part 11 of the Companies Act outlines a two-stage procedure for company members to seek leave to bring a claim on behalf of the company (a derivative claim). The ﬁ rst stage is an application to the court for permission to continue the derivative claim. If the claimant does not establish a prima facie case for permission to be given, the court must dismiss the application. If the court gives permission for the application to continue, the second stage is that the court will hear the application. At that stage, the court may consider the evidence of the claimant and also of

275 shareholders who may not have any personal interest in the claim. The court will also have regard to whether the member seeking leave has acted in good faith.

The aim of this two-stage proposal is to ensure that applications lacking merit may be dismissed by the courts at an early stage. It remains to be seen whether this aim will be realised or whether the provisions will simply increase the administrative burden on the judicial system.

Company reporting The directors of a company must prepare a directors’ report each ﬁ nancial year. Except in the case of ‘small companies’, the directors’ report must contain a business review. The purpose of the business review is to inform shareholders and allow them to assess how the directors have performed their duty to promote the success of the company.

The business review must contain:

• a fair review of the business of the company; and • a description of the principal risks and uncertainties facing the company, and must be a balanced and comprehensive analysis of the company’s development, performance and position at the end of the ﬁ nancial year.

In addition, quoted companies must include in their business review:

• the main trends and factors likely to affect the future development, performance and position of the company’s business; and • information about: • environmental matters; • the employees of the company; and • social and community issues. Companies are exempt from disclosing information about impending developments or matters in the course of negotiation if the directors consider that disclosure would be ‘seriously prejudicial to the interests of the company’.

Companies remain subject to provisions relating to the ﬁ ling of directors’ reports and accounts with the Registrar of Companies. The requirements vary according to a company’s classiﬁ cation as small or medium sized, quoted or unquoted.

Shareholder approval of substantial property transactions Section 320 of the Companies Act 1985 (which is mirrored in s190 of the new Companies Act) required a company director, or a person connected with that director, to gain shareholder approval before entering into a substantial property transaction of more than £100,000 or 10 per cent of the company’s net assets. Under the old legislation, only liquidators were exempt from this requirement to obtain shareholder approval.

276 Section 193 of the new Act introduces a provision that shareholder approval of a substantial property transaction is not required by a company that is being wound up (unless the winding-up is a members’ voluntary winding-up) or in administration. The Companies Act therefore exempts administrators, as well as liquidators, from the operation of s190 of the Act. In line with the English High Court’s decision in Demite Ltd v Protec Health Ltd [1998] BCC 638, the amendment does not refer to administrative receivers, who will not always be licensed insolvency practitioners and must still obtain shareholder approval before entering into substantial property transactions.

277 DEVELOPMENTS IN THE BRITISH VIRGIN ISLANDS

New insolvency regime now in operation

A new insolvency regime is in place in the British Virgin Islands (BVI). The arrival of the Insolvency Act 2003 brought an end to the practice of relying on English law; in particular, Insolvency Rules 1985, SI 1925/1985. The Insolvency Act came into operation on 16 August 2004, although it was not until the following year that the Insolvency Rules 2005 (the Rules) were actually ﬁ nalised.

Not surprisingly, the Insolvency Act and Rules are based upon their English forebears. There are some differences nonetheless, one being that the Act has created the ofﬁ ce of an Ofﬁ cial Receiver.

Some provisions in the Insolvency Act have not yet been activated. These include the administration regime, contained in Part III of the Act, and certain provisions relating to cross-border insolvency. Part XVIII of the Act mirrors the approach to cross-border insolvency under the United Nations Commission on International Trade Law (UNICITRAL) provisions. At present, the BVI does not intend to bring these provisions into effect. Cross-border insolvency is also the subject of Part XIX of the Insolvency Act. The BVI has compiled a list of countries from which bankruptcy appointments could be brought before the BVI courts seeking assistance in carrying out their functions

2004 also saw the enactment of the BVI Business Companies Act 2004 (the BVIBC Act). All new companies registered in BVI must be registered and comply with the BVIBC Act. From 1 January 2007 all existing companies which do not re-register under the new BVIBC Act will be automatically re-registered. The BVIBC Act impacts upon insolvency in two key areas.

Firstly, the BVIBC Act deals with the voluntary liquidation of companies. Such liquidations are restricted to solvent companies.

Secondly, the BVIBC Act recognises derivative actions and introduces the concept of relief for prejudiced members. This relief is available where a company’s affairs are, or are likely to be, performed in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to a shareholder. This new remedy is available where the only other effective remedy was the winding-up of a company on just and equitable grounds.

278 DEVELOPMENTS IN THE UNITED STATES

Limiting the scope of liability for ‘deepening insolvency’

The ‘deepening insolvency’ theory allows an entity to hold other parties liable for injuries to a debtor’s corporate property caused by the fraudulent expansion of the corporate debt and improper prolongation of its corporate life. In Lafferty1, the US Court of Appeals for the Third Circuit determined that the deepening insolvency theory is a valid cause of action under Pennsylvania law. Subsequent cases have relied on Lafferty as a basis to bring actions against investment bankers, lenders and outside counsels for their alleged role in expanding the debt of the company and as such for driving it into insolvency.

In 2006, the Third Circuit in In re CitX Corp 2 had to decide whether deepening insolvency theory was a viable theory of damages for negligence as opposed to a viable cause of action of its own. The action was brought by a bankruptcy trustee for an insolvent company against an accountant and his employer. The deepening insolvency claim failed because the trustee could not establish a genuine factual issue to support an allegation that the defendant engaged in fraudulent conduct. In other words, the court held that negligent conduct, as opposed to fraud, is not a basis for a claim of deepening insolvency. The Third Circuit also cautioned against reading Lafferty as a basis for recognising deepening insolvency in any state other than Pennsylvania.

It is now more difﬁ cult to rely on Lafferty within the Third Circuit and in other jurisdictions.

1 Ofﬁ cial Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001).

2 Seitz v. Detweiler, Hershey & Assoc. (In re CitX Corp.), No. 05-2760, 2006 WL 1453117 (3d. Cir. May 2006).

279 DEVELOPMENTS IN THE UNITED STATES

Extraterritorial application of the US Bankruptcy Code’s fraudulent provisions

In the absence of a decision from the US Supreme Court, a number of lower courts have developed a trend to enforce key US Bankruptcy Code1 provisions extraterritorially.

Following this trend, the US Court of Appeal for the Fourth Circuit held in In re French 2 that a debtor’s pre-petition transfer of foreign real property may be set aside as a constructively fraudulent transfer under section 548 of the Bankruptcy Code.

Prior to bankruptcy, the debtor had transferred certain real property located in the Bahamas by a deed of gift to her children (the transferees). The transferees argued that s548 should not apply to a transfer of foreign property because of the presumption against extraterritoriality and because principles of international comity warranted the application of Bahamian, rather than US law, which allegedly allows them to retain the property. According to the presumption, legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the US.

The court determined that, even if the presumption applied at all in the circumstances of the case, it did not preclude the trustee from recovering real property under s548 as the court found several indicia of congressional intent which rebutted the presumption.

As to the second argument, comity recognises that in some circumstances the application of foreign law is more appropriate than the application of national law. However, in view of all the important components of the transfer, the doctrine of international comity did not warrant the application of Bahamian, but rather US law.

It should be noted that this decision does not suggest that every portion of the Bankruptcy Code should apply abroad.

1 11 U.S.C. §§ 101, et seq.

2 French v. Liebmann (in re French), 440 F.3d 145 (4th Cir.2006), petition for cert. ﬁ led, 75 U.S.L.W. 3020 (US 15 May 2006) (No. 05-1459).

280 DEVELOPMENTS IN UNITED STATES

Settlement providing for a carve-out to unsecured creditors before priority creditors are paid in full not prohibited

In In re World Health Alternatives, Inc.1, the debtors, the creditors committee and the lender entered into a settlement which allowed the lender to cap its secured claim and make available a US $1.6 million collateral carve-out for the beneﬁ t of unsecured creditors. The Trustee relying upon In re Armstrong World Indus., Inc.,2 objected to this settlement.

The US Bankruptcy Court for the District of Delaware distinguished this case as the settlement did not arise in the context of a Chapter 11 plan. Accordingly, the absolute priority rule, which prohibits a class junior in priority to receive any property under a plan if the allowed value of the claim is not paid in full, did not apply in this case.

The court concluded that a secured creditor carve-out outside of a plan of reorganization, to the exclusive beneﬁ t of general unsecured creditors, did not violate the Bankruptcy Code because the property belonged to the secured creditor, as opposed to belonging to the debtors’ estate. The creditor’s perfected security interest was not subject to distribution under the Bankruptcy Code’s priority scheme.

The court however, noted that even if the absolute priority rule were applied, an ordinary carve-out that allows a secured creditor to give up a portion of its lien for the beneﬁ t of a junior creditor would not offend the rule.

1 Case No. 06-10166 (July 7, 2006).

2 432 F.3d 507 (3d Cir. 2005).

281 DEVELOPMENTS IN SOUTH AFRICA

New policy for appointment of liquidators and trustees in South Africa

The South African insolvency regime continues to undergo transformation, particularly with the appointment of liquidators and trustees in insolvent estates. The current insolvency regime comprises a number of overlapping and sometimes inconsistent statutes administered by a variety of government departments. There is no statutory regulation of the insolvency profession or the procedures for the appointment of liquidators and trustees.

In 2000, the Department of Justice and Constitutional Development created a policy aimed at increasing the appointments of previously disadvantaged individuals (PDIs) as liquidators and trustees of insolvent estates. PDIs are those people who were previously excluded from the insolvency profession because of the effects of apartheid, gender or disability. The policy recommends that the Masters of the High Court of South Africa, who are responsible for the appointment of liquidators and trustees in the provinces over which they have jurisdiction, appoint at least one PDI in each insolvent estate.

Since 2000, the policy has had some affect and a growing number of PDIs have been appointed each year as liquidators and trustees. Unfortunately, a number of negative consequences have been observed, including:

• many PDIs without adequate qualiﬁ cations, experience and skills are being appointed as liquidators; • the administrative burden on insolvent estates and the appointment process has dramatically increased; and • numerous cases of ‘fronting’, where an appointed PDI will act as a ‘front’ for another non-disadvantaged insolvency practitioner, have occurred.

These consequences highlight the need for statutory regulation of the insolvency profession and for clear guidelines relating to the appointment of liquidators and trustees. Currently, an inter-departmental task force is reviewing the insolvency regime and is expected to make recommendations to the South African government concerning the consolidation of the existing insolvency legislation and the regulation of the insolvency industry.

282 INDEX

Adams v Lambert 153

Akai Pty Ltd (in liquidation) v Ho 155

Albarran v Pascoe 30

Albarran v The Members of the Companies, Auditors and Liquidators Disciplinary Board 135

Ansett Australia Holdings Ltd & Ors v International Air Transport Association 48

Application of Whitton (as liquidator of Global Gossip Group of Companies) 93

Ariff v Fong 145

ASIC, Re Richstar Enterprises Pty Ltd ACN 099 071 968 (No 9) v Carey 161

ASIC; Re Lanepoint Enterprises Pty Ltd 177

ASIC v Australian Foods Company Pty Limited & Anor 165

ASIC v Carey (No 6) 173

ASIC v Eastlands Pty Ltd 211

ASIC v Edwards 59

ASIC v Karl Suleman Enterprizes Pty Ltd 91

ASIC v McDougall 105

ASIC v Neolido Holdings Pty Ltd 121

ASIC v Primelife Corporation Ltd 123

AssetInsure Pty Limited v New Cap Reinsurance Corporation Limited (in liquidation) 100

Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd 112

Australian Steel Company (Operations) Pty Ltd v EPS Group Pty Ltd 128

Bassoak Pty Ltd (receivers and managers appointed) v Rellgrove Pty Ltd 95

Black Stump Enterprises Pty Ltd 78

Blue Ring Pty Ltd v Landshore Pty Ltd (subject to DOCA) & Anor 46

Box Valley Pty Ltd v Kidd & Anor 88

Brandrill v Newmont Yandal 44

Burton v Arcus 108

C & E Pty Ltd v Andrew Corrigan 205

Cadence Asset Management Pty Ltd v Concept Sports Ltd 195

Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd 196

Cassegrain v Cassegrain 86

CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd 50

Cheerine Group (International) Pty Ltd v Yeung 65

Compustore Limited (in voluntary liquidation) v Companies Act 84

Davies and Anor v Chicago Boot Co Pty Ltd 227

Dean-Willcocks v Companies Auditors & Liquidators Disciplinary Board 147

Deangrove Pty Ltd (receivers and managers appointed) v Buckby 163

Deputy Commissioner of Taxation v Dick 63 Duncan v Commissioner of Taxation: in the matter of Trader Systems International Pty Ltd (in liquidation) 224

Environmental & Earth Sciences Pty Ltd v Vouris 33

G & J Gears Australia Pty Ltd v Brobo Group Pty Ltd 207

Gidley, in the matter of Aliance Motor Body Pty Ltd (subject to DOCA) 23

Gujarat NRE Australia v Williams 209

Handberg in the matter of Greight Pty Ltd (in liquidation) 80

Harris Scarfe Ltd (in liquidation) 143

Harpley Nominees Pty Ltd & Anor v Jeans & Anor 75

Highwater Nominees Pty Ltd v Mead & Ors 69

HIH Casualty and General Insurance Ltd & Ors 132

HIH Casualty and General Insurance Ltd & Ors 191

Hill (as trustee in bankruptcy of Nurkowski) v Spread Trustee Company Limited 218

Honest Remark Pty Limited v Allstate Explorations NL & Ors 37

Hong Kong Housing Authority v Hsin Yieh Architects & Associates Limited & Ors 149

In the matter of Ansett Australia Limited 27

In the matter of HIH Casualty and General Insurance Limited 114

In the matter of Southland Coal Pty Ltd (receivers & mortgagors appointed) (In liquidation) 119

Jefferson & Joiner v Shirlaw & Ors 171

J Aron Corporation v Newmont Yandal Operations 157

Kalls Enterprises Pty Ltd (in liquidation) & Ors v Baloglow & Anor 222

Krejci as liquidator of Eaton Electrical Services 39

Lavercombe v Auscott Ltd 159

Leigh re King Bros 193

Lifestyle Earls Court Pty Ltd (in liquidation) & Ors v Mentone Mansions Pty Ltd 215

Linknarf Management Services (in liquidation); Scarcella & Ors v Davies 137

Lombe v Wagga Leagues Club Ltd 19

McGrath & Anor Re HIH Insurance Ltd & Ors 134

McMaster v Eznut Pty Ltd (administrators appointed) 35

Melbourne University Student Union Inc (in liquidation) v Ray & Ors 139

Meteyard & Ors v Love & Ors (in their capacity as receivers and managers of Southland Coal Pty Ltd (in liquidation)) 130

Mulherin v Bank of Western Australia Ltd; McCann & Ors v Bank of Western Australia Ltd 220

Natarajan v ACIB Acumulus Pty Ltd (in administration) 21

Nicholas James Crouch & Anor v Lynne Adams & Ors 125

NRG London Reinsurance Company Ltd, Re NRG Victory Aust Ltd and the Corporations Act 2001 188

Onefone Australia Pty Ltd v One.Tel Ltd 141

Ozone Manufacturing P/L v Deputy Commissioner of Taxation (Cth) 203 Peldan v Anderson 231

Perpetual Trustee Company Limited v Albert and Rose Khoshaba 73

Phosphate Resources Ltd (ACN 009 396 543) 184

Piccoli Tesori Pty Ltd (deregistered); Ex parte Bertuol 52

Pilarinos and Ors v ASIC 56

Purchas; in the matter of Estore Pty Ltd (in liquidation) 43

Rambal v Oswal & Ors 179

Ravenswood Resort Pty Ltd (in liquidation) v Kammal 199

Regis Towers Real Estate Pty Ltd 77

Richstar Enterprises Pty Ltd (ACN 099 071 968) and Others; ASIC v Carey (No 3) 167

Richmond Sales Pty Ltd (In liquidation) v Robert McDermott 82

Roseville Estate Pty Ltd v Bouris 71

Roy v Riverland Fruit Co-operative Limited (In liquidation) 107

Shakespeares Pie Co v Multipye 213

Sheldrake & Anor v Paltoglou 216

Shivnani v Australian Foods Co Pty Ltd (receiver & manager appointed) (In liquidation) 31

Sims, in the matter of Huon Corporation Pty Limited (administrators appointed) 41

Sims in his capacity as liquidator of Classic Cedar Venetians Pty Ltd (in liquidation) v Deputy Commissioner of Taxation 57

Singh v Shah & Ors 175

Sons of Gwalia Limited v Margaretic 201

SSSL Realisations (2002) Ltd v AIG Europe (UK) Ltd 67

T&N Limited and Others 186

The Black Stump Enterprises Pty Ltd and Associated Companies (No 2) 151

The Home Insurance Company 182

The J Aron Corporation and The Goldman Sachs Group Inc v Newmont Yandal Operations Pty Ltd & Ors 25

Tru Floor Service Pty Ltd v Jenkins (No 2) 61

Universal Financial Group v Mortgage Elimination Services 232

Vero Workers Compensation v Ferretti 103

Warne v GDK Financial Solutions; Peridon Village Nominees, application of Billingham 110

Warne v GDK Financial Solutions Pty Ltd; Billingham v Parbery 97

WebCentral Group Ltd (No 2) 190

White v Baycorp Advantage Business Information Services Ltd 54

White v Huxtable, Re Lake Federation Pty Ltd (receivers and managers appointed) 169

Whittingham re Hunter Valley Gravel Supplies Ltd & Ors 127

Wily v Terra Cresta Business Solutions Pty Ltd 229

Zhuang PP Holdings Limited 118 ANNUAL REVIEW OF INSOLVENCY & RESTRUCTURING LAW

2006 ANNUAL REVIEW OF INSOLVENCY &RESTRUCTURING LAW 2006

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