Ability of liquidators to disclaim leasehold interests

The Victorian Supreme Court has handed down a judgment which focuses on the disclaimer of property by liquidators. Re Willmott Forests Ltd [2012] VSC 29 dealt with the question of whether the liquidators of Willmott Forests Limited (WFL) could disclaim leases encumbering certain of WFL's land with the effect of extinguishing the lessees' leasehold estate or interest in the subject land.

Justice Davies held that the disclaimer of a lease under s568(1)(a) of the Corporations Act 2001 (Cth) by the liquidator of a landlord does not have the effect of extinguishing the lessees' proprietary interest in the land.

This case highlights that liquidators of landlord companies are not able to disclaim leasehold interests in the relevant land in order to effect an unencumbered sale of the asset. This is so even where an unprofitable lease has onerous conditions, because disclaimer of the lease under s568 will not extinguish the lessee's proprietary interest in the land. Therefore, any sale of leasehold land by liquidators must be on an encumbered basis.

It should also be noted that the WFL liquidators have appealed this decision to the Court of Appeal and have sought an expedited hearing, so there may be some more law on the disclaimer of leases by a landlord soon.

Applications for winding up in insolvency and on just and equitable grounds

The Queensland Supreme Court has delivered an important decision which focused on winding up in insolvency as well as what constitutes insolvency more generally. Re Bluechip Development Corporation (Cairns) Pty Ltd [2011] QSC 368 dealt with an application for the winding up of a corporation in insolvency under s459P of the Corporations Act 2001 (Cth) and the amendment of the application to include winding up on the just and equitable ground.

The court held that leave could be granted retroactively (to correct the earlier position) to bring an application for winding up in insolvency and to amend the application to include winding up on the just and equitable ground.

The case is useful as it highlights the factors considered by the court when determining whether leave should be granted to bring an application for winding up in insolvency, whether a company is insolvent and whether winding up is available on the just and equitable ground. The decision also establishes that, where a party does not apply for leave at the correct time, in the absence of prejudice to the other party, a court is likely to grant leave retroactively where leave would have otherwise been awarded.

Application by liquidator to assign causes of action

The Federal Court of Australia has delivered an important decision which centred on the application by a liquidator to assign causes of action. Cant, In the matter of Novaline Pty Ltd (in Liq) [2011] FCA 898 dealt with an application by the liquidator of Novaline Pty Ltd for an order under s479(3) of the Corporations Act 2001 (Cth) that the liquidator and the company could enter into a deed of assignment of certain causes of action to a director of the company.

The court held that the liquidator was able to assign the causes of action, including those arising under statute, to the director, and that the liquidator and the company were entitled to enter into the deed of assignment in respect of the causes of action.

This case confirms that liquidators have the power to assign statutory causes of action arising under ss180 to 184 of the Act under the specific power conferred by s477(2)(c) of the Act. It also provides some guidance as to the requirements for identification of the subject matter of an agreement which the court is asked to approve under s477(2B).

Affidavits of continuing debt in winding-up proceedings

The Full Court of the Federal Court of Australia has delivered an important decision which clarifies what is required to be stated in an affidavit of continuing debt filed in support of winding-up proceedings. In Deputy Commissioner of Taxation v National Skin Institute (Aust) Pty Ltd [2012] FCAFC 2 dealt with the admissibility of three paragraphs in the affidavit filed on behalf of the plaintiff in support of the application to wind up the defendant company.

The court held that the three paragraphs in the affidavit complied with both the Corporations Act 2001 (Cth) and the Court Rules, and therefore ordered that the defendant company be wound up in insolvency.

This case demonstrates that in order to satisfy s459Q of the Act, an affidavit is only required to formally affirm on oath that a certain amount of money is due and payable. In other words, the affidavit does not need to prove, by evidence, the existence of the debt. Additionally, this decision confirms that preparation of affidavits that are not in dissimilar terms to the form of affidavit provided in schedule 3 to the Rules will satisfy the requirements of s459Q of the Act.

Latest developments in international Lehman Brothers insolvency litigation

In the latest instalment in the long-running Lehman Brothers international insolvency litigation, the UK Supreme Court has dismissed an appeal concerned the with interpretation of the client money and distribution rules contained in Chapter 7 of the Client Assets Sourcebook (CASS7), issued by the Financial Services Authority. These provisions concern the requirement that client funds be segregated from the firm's own money.

In Re, Lehman Brothers International (Europe) [2012] UKSC 6, the 2010 decision of the Court of Appeal was upheld. A majority of the judges found that:

1. a statutory trust arises immediately on the firm's receipt of client money - the money does not have to be placed into a segregated client account for the trust to arise;
2. all client money is to be pooled on the occurrence of a 'primary pooling event' and is to be distributed pro rata in accordance with the clients' respective entitlements; and
3. the amount of money to be pooled is to include all identifiable client money, whether or not that money has been placed in a segregated client money account.

Also, recently, the Federal Court of Australia has considered a request by the liquidator of Lehman Brothers Australia Ltd that the Federal Court communicate directly with a US Court under the provisions of the Cross Border Insolvency Act in order to assist the determination of issues common to both proceedings.

In Parbery, re Lehman Brothers Australia Ltd (in liq) [2011] FCA 1449, Jacobson J refused the liquidator's request because of concerns that the communication may be seen as an unwarranted interference by an Australian court in the US proceedings. However, Jacobson J considered that it would be appropriate to enquire of the US court whether protocols could be established to facilitate future communications between the courts on these issues.

'Phoenixing' reforms introduced

The Federal Government has introduced draft laws directed at companies that engage in 'phoenix'-related activity, including imposing liabilities on the directors of those companies.

For more information, see our Focus prepared by Partner Simon Dewberry, Special Counsel Luke Gattuso and Senior Associate Matthew McCarthy.

Court denies the right to sue MF Global Australia

The Federal Court has recognised MF Global's ongoing insolvency proceedings in the United Kingdom. Under international insolvency law, this recognition means that MF Global's clients and others are barred from commencing legal proceedings in Australia against MF Global's Australian arm following the collapse of its parent last year.

MF Global and its Australian counterpart are currently engaged in negotiations over $34 million of funds currently held by the ASX which belongs to MF Global's clients. Both parties claim that this money belongs to their own clients and the ASX is refusing to release it until the matter is determined. In the event that the negotiations fail, MF Global Australia will need approval from the court to sue its parent company. The parties will reconvene in court next month to argue this point.