Insolvency law at Allens

Happy New Year and PPSA reminder

2012-01-23T11:36:00.000+11:00

2012 is set to be a pivotal year for insolvency law and practice, with the Personal Property Securities Act 2009 (Cth) set to become fully effective on 30 January 2012.

The PPSA will substantially change many aspects of commercial practice in Australia and will have far-reaching implications for lenders and insolvency practitioners. We will be closely monitoring the PPSA's implementation and the practical ramifications of the changes in the securities landscape. Watch this space for tips and updates on the effects and operation of the PPSA.

The Allens Insolvency Team wishes you a happy and successful 2012.

The circumstances of appointment of a provisional liquidator

2011-12-21T11:33:00.000+11:00

In the matter of Colorado Products Pty Limited [2011] NSWSC 1225 demonstrates the circumstances in which a court will appoint a provisional liquidator. Briefly, this case concerned a bathroom accessories business, Colorado, whose three directors shared full ownership. At one time, all the assets of the company were sold to a third party. A stocktake found stock missing and unaccounted for (evidence pointed to removal by one director) and diversion of payment from Colorado's debtors to another company (by the same director).

The court found that the grounds for an urgent appointment of a provisional liquidator were satisfied and that the balance of convenience favoured external administration because:

There was a seriously arguable case for winding up, in that there was clear evidence of a rupture among the shareholders, that the company's substratum was gone and that the purpose for which the shareholders had come together (in this case, a bathroom acessories business) had come to an end.
On the evidence there were clear grounds for an inference that Colorado's assets were in jeopardy.
The company was not trading and so appointing a provisional liquidator would not jeopardise the company's trading reputation and there was no evidence of risk that external administration would trigger ancillary enforcement action.

Liquidators and litigation funding - confidentiality of agreement

2011-12-20T10:19:00.000+11:00

In Lion Energy Ltd v Tulloch Lodge Limited (in liq) [2011] FCA 1139, the Federal Court approved a company in liquidation's entry into a litigation funding agreement and the compromise of a claim of the company. The court agreed with the liquidator's assessment that those acts would be in the best interests of the company. However, the court refused to grant an order that the litigation funding agreement be kept confidential as such an order restricting publication was not necessary to 'prevent prejudice to the administration of justice' under the Federal Court of Australia Act 1976 (Cth).

This case is therefore a warning to liquidators contemplating entry into litigation funding agreements. Even if the court approves the decision to enter into such an agreement, it will be unlikely to grant an order to maintain the confidentiality of its terms given the high threshold set by the Federal Court of Australia Act for such a restriction.

Proposed reforms to insolvency industry regulation

2011-12-19T11:21:00.000+11:00

The way the insolvency industry is regulated could be reformed under proposals contained in a Federal Government paper. The reform is aimed at promoting a high level of practitioner professionalism and competency, and increased efficiency in insolvency administration.

Partner Michael Quinlan, Lawyer Laura Racky and Summer Clerk Nicole Meyer report.

Extension of relief by ASIC for litigation funders and proof of debt funders

2011-12-07T14:53:00.000+11:00

In July 2011, in the light of some court decisions holding litigation funded class actions to be 'managed investment schemes', which would force litigation funders to comply with the requirements for such schemes in the Corporations Act, the Government released for public consultation a draft of proposed regulations to clarify that litigation funding schemes and proof of debt funding schemes are not managed investment schemes.

In order to allow the Government time to facilitate this, ASIC recently announced that it would extend the operation of its interim class order relief (Class Order 10/333) until February 2012, which will enable those funding schemes to be temporarily exempt from the requirements of the Corporations Act (which requirements include holding a financial licence and the attendant obligations, preparing a product disclosure statement, and providing ongoing disclosure.

Director sentenced to jail for insolvent trading

2011-12-02T11:59:00.000+11:00

The County Court of Victoria has this week sentenced Ms Anula Kumari Kauye, former director of International Consulting Group Pty Ltd (ICG), to jail for three years and two months following charges brought by ASIC.

Ms Kauye had pleaded guilty to engaging in insolvent trading, theft and providing a false affidavit. In the County Court proceedings, ASIC had alleged that Ms Kauye had allowed ICG to trade whilst insolvent and had stolen funds from US companies. When a creditor issued a statutory demand in relation to ICG's debts, Ms Kauye provided an affidavit containing false details about the use of the funds in order to set aside the statutory demand.

ASIC has issued a media release about the decision in which ASIC Commissioner Michael Dwyer said that:

Directors must be aware that they breach the law if they incur debts when a company is insolvent or likely to become insolvent. The law is designed to deter directors from incurring debts to unsuspecting creditors of a company. Directors should take action early and seek appropriate advice.

This decision is a rare example of a director being sentenced to imprisonment for breaching the Australian insolvent trading laws.

Priority payments for employees in winding-up

2011-11-30T16:20:00.000+11:00

The New South Wales Court of Appeal recently considered the application of the section of the Corporations Act (s556) relating to the priority of employee entitlement payments: Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315

Under that section, an employee's retrenchment payment is prioritised over all other unsecured debts. However, the retrenchment payment is not to include any amount attributable to days where the employee had been a director in the last 12 months before the date of winding-up. The court held that the determination of entitlement to priority payment depended on the proportion of days that the person had been a director or non-director in the last 12 months, not on the position of the person at the time of winding-up.

The relevant employee in this case had been a director during the last 12 months prior to winding-up, then had resigned as director and become an employee. His entitlement to priority payment was therefore apportioned relative to the amount of time he had spent as a non-director in the last 12 months. The fact that the employee was an 'employee' and not a 'director' at the time of winding-up was not determinative.

PPS to commence operation on 30 January 2012

2011-11-25T09:36:00.000+11:00

The personal property securities (PPS) system will commence operation in Australia on 30 January 2012.

This week the Attorney-General made a determination setting the 'registration commencement date' and the 'migration date' under the PPS legislation. The registration commencement date (30 January 2012) is the date upon which the PPS system will commence operation. The Attorney-General also determined that 21 November 2011 would be the 'migration date' on which the records of security interests recorded on various existing state and federal registers would begin to be transferred onto the new centralised PPS Register.

Previously there had been concerns that the IT systems necessary to support the operation of the PPS Register would not be ready in time. In response to these concerns, the government introduced a Bill to Parliament, which was also passed this week, which enables the Attorney-General to set a commencement date after 30 January 2012 in the event that further testing of the PPS Register is required.

Liquidators prudent in seeking court approval to enter litigation funding agreement

2011-11-15T16:45:00.000+11:00

The Federal Court has recently determined that, in circumstances where a liquidator has received committee of inspection approval to enter into a litigation funding agreement by a slim margin which required the liquidator to exercise a casting vote, it is a 'prudent and proper course of action' to seek court approval for entering the funding agreement.

In Walker and Moloney, in the matter of ZYX Developmental Learning Centres Pty Limited (in liq) (Receivers and Managers Appointed) [2011] FCA 1110, the liquidators of ZYX Developmental Learning Centres applied to the court under section 511 of the Corporations Act 2001 (Cth) for orders that the liquidators were justified in entering into a litigation funding agreement and seeking court approval under s477(2B) for them to enter into the agreement (it being an agreement of more than three months duration).

Although two meetings of the committee of inspection had been held seeking approval to enter into the litigation funding agreement, approval was not obtained at the first meeting and it was only obtained at the second meeting because a liquidator exercised his casting vote as chairman. The liquidators took the view that they should not place reliance on any such approval and instead should seek approval of the court for entry into the funding agreement. The court considered that to be a prudent and proper course of action for the liquidators to take in the circumstances. The liquidators gave evidence about the proposed claim and the terms of the funding agreement. The court gave approval under s477(2B) for the liquidators to enter into the funding agreement and also made a declaration under s511 that they were justified in doing so.

Rubin v Eurofinance appeal set for hearing in May 2012

2011-11-14T14:56:00.000+11:00

The Supreme Court of the United Kingdom has set a date for the hearing of the appeal in the cross-border insolvency case Rubin & anor v Eurofinance & Anor. The appeal will be heard over two days on Tuesday 22 and Wednesday 23 May 2012.

As reported in August last year, the British High Court of Justice Court of Appeal held in Rubin and Lan (Joint Receivers and Managers of The Consumers Trust) v Eurofinance SA and others [2010] EWCA Civ 895 that a foreign proceeding to recover money from debtors could be recognised and enforced under the UNCITRAL Model Law on Cross-Border Insolvency. This was despite the fact that the foreign proceeding was technically distinct from the primary, collective insolvency proceedings.

Insolvency appointments on the rise

2011-11-11T15:03:00.000+11:00

Data released by ASIC this week shows a strong rise in the number of companies entering external administration during the July-September 2011 quarter.

Overall, the number of insolvency appointments was up 11.5 per cent compared to the previous quarter and increased 18.5 per cent compared to the same quarter last financial year. ASIC's data shows that this increase was primarily due to large numbers of creditor-initiated court liquidations and receivership appointments.

Alleged undocumented transactions held to be a 'contrivance'

2011-11-09T15:11:00.000+11:00

A recent Federal Court case concerned the liquidator of Bellpac Pty Ltd contesting the beneficial ownership of convertible bonds issued in relation to a transaction between Bellpac and several other entities. In Warner v Hung, re Bellpac Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2011] FCA 1123, Ken Hung claimed to be entitled to a beneficial interest in $2 million of convertible bonds by reason of an alleged series of undocumented transactions involving at least five intermediaries.

The court held that Hung did not acquire a beneficial interest in the convertible bonds and, accordingly, granted a declaration that Bellpac was the true owner of the bonds. The court reached its decision due to the defendant's inability to provide the court with any documentary proof evidencing the transactions. The court considered that the alleged transactions were 'no more than a contrivance pieced together in an attempt to justify a transfer of property... after Bellpac had gone into liquidation.'

Varying or setting aside a statutory demand due to unconscionability

2011-11-08T15:27:00.000+11:00

The NSW Supreme Court has recently considered an application to set aside or vary a statutory demand on the basis of unconscionability. In re Eastmark Holdings Pty Ltd [2011] NSWSC 1084, the registered owner of 45 lots in a strata scheme development in North Sydney was engaged in an ongoing argument about the payment of outstanding levies to the owners corporation. The owners corporation issued a statutory demand for payment of the outstanding levies.

The court found that there was a genuine dispute between the parties regarding the amount of the debt and ordered that the amount demanded be varied. A genuine dispute arises where the debtor raises a 'plausible contention' which requires further investigation. However, the court was not willing to set aside the statutory demand in this case because the unconscionable conduct pleaded in this case did not directly relate to the statutory demand for outstanding levies - rather it related to proposed special levies being considered by the owners corporation.

This case summarises the court's position on the circumstances in which it will set aside a statutory demand on the basis of unconscionability. Importantly, when the unconscionable conduct does not relate to the matters raised in the demand, it is unlikely that the court will exercise its power to set aside the demand.

Please explain: PPS Bill referred to Senate Committee

2011-11-07T16:00:00.000+11:00

The House of Representatives passed the Personal Property Securities (Registration Commencement) Bill 2011 on 2 November 2011.

The Bill was introduced to the Senate on 3 November 2011 where it was referred to the Legal and Constitutional Affairs Committee to ‘identify reasons for delay in the implementation of the register and likely timetable for implementation’. The Committee is due to report its findings to the Senate by 21 November 2011.

As previously reported, in October, the Attorney-General introduced the Bill which would allow the PPS system to commence at a date to be determined by the Attorney-General (which could be after 1 February 2012 if further testing of the PPS Register is required).

We will keep you updated about the passage of this Bill and any other PPS developments.

Economic reality and meaning of 'on behalf of' considered in compensation claim

2011-11-04T15:23:00.000+11:00

A recent Queensland Court of Appeal decision has considered a claim for compensation under the National Guarantee Fund in connection with the collapse of Opes Prime. The decision demonstrates that courts will look beyond the terms of an agreement to consider the 'economic reality' of the transaction when determining the nature of a transaction. In addition, in relation to claims under the National Guarantee Fund, a broad meaning will be given to the phrase 'on behalf of' as contained in the Corporations Regulations.

In Securities Exchange Guarantee Corporation Ltd v Samuel Holdings Pty Ltd [2011] QCA 228, a holder of a margin lending account with Opes Prime claimed compensation in respect of money which remained in the account at the time Opes Prime became insolvent. The court held that the account holder was entitled to compensation under the Fund because Opes Prime had received the money in the course of its securities business as demonstrated by the 'economic reality' of the transaction. The court also held that Opes Prime was holding the money 'on behalf of' the account holder at the time of its insolvency. The phrase 'on behalf of' was given a broad meaning such that it would 'extend to all situations in which a dealer receives property from a client which the dealer is not entitled to apply for its own purposes'.

Retrospective validation of defective appointment of administrators

2011-11-03T15:22:00.000+11:00

A recent decision of the Victorian Court of Appeal highlights that the court has broad powers under s447A of the Corporations Act to retrospectively validate a defective appointment of administrators, possibly even where such retrospective validation may adversely affect accrued rights of other creditors.

In National Australia Bank Ltd and Anor v Horne and Vrsecky (as administrators of Australian Property Custodian Holdings Ltd) (Administrators Appointed) (Receivers and Managers Appointed) [2011] VSCA 280, the court considered its power to retrospectively validate an invalid appointment of administrators under s447A, which permits the court to make such orders 'as it thinks appropriate about how [Part 5.3A of the Corporations Act] is to operate in relation to a particular company'.

The initial appointment of the administrators to the company had been made on the basis of s 436C, under which a person entitled to enforce a charge may appoint an administrator provided that the charge secures the whole, or substantially the whole, of a company's property. The charge in this case only extended to 68 per cent of the company's assets. This was not 'substantially the whole' of the company's property and the appointment of administrators pursuant to s436C was therefore invalid. The trial judge ordered that the purported appointment of administrators be validated under s447A and this decision was affirmed by the Victorian Court of Appeal, although on a different basis to the trial judge. In reaching its decision, the court intimated that s447A could validate an appointment notwithstanding the fact that accrued rights of other creditors might be adversely affected.

This decision highlights that the court's powers under s447A are broad and will be used flexibly by the courts with a view to achieving the objectives of Part 5.3A.

Directors disappointed at no change to Australia's insolvent trading laws

2011-10-13T11:05:00.000+11:00

At the beginning of 2010, the Australian Goverment announced a Corporate Insolvency Law Reform Package. The package included options for reform of insolvent trading laws, which had the potential to reduce directors' liability for insolvent trading while directors were trying to restructure financially troubled companies.

The proposals for reform, which would reportedly put Australia on a more equal footing with other countries, included the introduction of a business judgment rule defence to directors' liability for insolvent trading and a moratorium from the duty not to trade while insolvent. The proposals were welcomed by businesses for encouraging directors to save distressed companies, and to provide protections to allow them to do what is best in the interests of shareholders and other stakeholders.

It was recently announced that the Government had abandoned the proposed reforms, for the published reason that insufficient evidence had been provided that law reform would save more companies. It was reported that the Australian Institute of Company Directors and the Insolvency Practitioners Association were among those disappointed at the news.

Some legal commentators assert that there is much evidence to support the view that the risk of liability for insolvent trading forces directors to put companies into premature administration. Business groups are reported to be of the opinion that directors often err on the side of caution and appoint administrators rather than run the risk of serious consequences of continuing with trading.

We will report on any further developments as they may arise.

PPS commencement looks set to be deferred

2011-10-12T15:53:00.000+11:00

Today the Attorney-General has introduced a Bill to Parliament amending the Personal Property Securities Act 2009 (Cth) to allow the Personal Property Securities (PPS) system to commence at a date to be determined by the Attorney-General.

Currently, the legislation provides for a default commencement date of 1 February 2012. The PPS system was due to commence in October this year, but as previously reported, a need for further testing of the PPS Register has resulted in delays. If Parliament passes the Bill amending the legislation, it will allow the Attorney-General to set a commencement date after 1 February 2012 if it proves necessary.

The Attorney-General's Department has stated that it remains committed to implementing the PPS system as soon as possible, but that complete functionality of the system needs to be ensured.

We will keep you updated about the passage of this Bill and any other PPS developments.

Defence to unfair preference claims - 'reasonable grounds' to suspect insolvency

2011-10-10T11:00:00.000+11:00

A recent decision of the Federal Court of Australia has highlighted that to successfully maintain a defence to an unfair preference claim, a creditor must prove on both a subjective and objective basis that the creditor had no grounds for suspecting the insolvency of the company.

Roufeil v Gliderol International Pty Limited [2011] FCA 847 dealt with whether certain payments made by a company (Austech Garage Door Centre Pty Ltd) to a creditor (Gliderol International Pty Ltd) were voidable transactions within the meaning of section 588FE(2) of the Corporations Act.

The court held that the payments in question were an unfair preference as defined in section s588FA(1) of the Act, as Gliderol received more than it otherwise would have received in the winding-up of the company.

Gliderol sought to establish a defence under section 588FG of the Act and argued that at the time it received the payments, it had no reasonable grounds to suspect Austech's insolvency.

The court held that the basis of the Gliderol's defence was insufficient given that:

(a) subjectively, the basis of the credit manager's conclusions about Gliderol's lack of reasonable grounds to suspect Austech's insolvency (the credit manager's review of the files) was insufficient; and

(b) objectively, the history of Gliderol's dealings with Austech presented grounds which would have led a reasonable person in Gliderol's position to suspect Austech's insolvency (e.g Gliderol ceased its commercial relationship with Austech due to Austech's failure to pay any of its invoices since 30 September 2006 and Austech did not satisfy a statutory demand it had issued to Gliderol).

Setback for Tax Office in issuing demands on foreign companies

2011-10-06T11:59:00.001+11:00

This week the Federal Court delivered an interlocutory judgment setting aside leave for substituted service of demands made by the Australian Taxation Office on two companies registered in the Cayman Islands and Luxembourg. The ATO claims that the two companies owe approximately $750 million in taxes and penalties in relation to the 2009 Myer float.

In Australia, Part 5.7 of the Corporations Act provides a special regime where a creditor can issue demands on foreign companies and potentially rely on such a company's failure to satisfy the demand as evidence of insolvency in a later attempt to apply to have a foreign company wound up. This regime is only available if the foreign company is carrying on business in Australia or it is a registered foreign company in Australia so that it satisfies the definition of a 'Part 5.7 body'. The ATO obtained ex parte orders allowing substituted service of such demands as a creditor on the two foreign companies : a Cayman Islands' and a Luxembourg company.

In this week's hearing, the companies successfully applied for the orders to be set aside on the grounds that the ATO has not provided any evidence that the companies were Part 5.7 bodies when it obtained the ex parte orders. The Federal Court's decision highlights that it is necessary for a creditor to provide evidence that the foreign company was in fact carrying on business in Australia or that it was a registered foreign company in Australia if it seeks to obtain orders for substituted service of a demand on a foreign company under s585(a) of the Corporations Act.

Security of costs against a plaintiff - where a plaintiff is effectively a 'defendant'

2011-09-28T16:54:00.000+10:00

Oswal v Carson (No 4) [2011] VSC 434 involved a novel claim against receivers and managers of a company to prevent them from accessing 'private' emails on the company's server said to belong to the wife of the managing director of the company.

The defendants sought an order against the plaintiff for security of costs pursuant to a provision of the VIctorian rules of court that state that security for costs may be ordered where the plaintiff, as is the case with Ms Oswal, is ordinarily resident out of Victoria.

The court dismissed the application, finding that Ms Oswal was not the 'attacker' in the proceedings and that it would be unfair to require her to provide security for costs, even though the claims she brought are novel and in an emerging area of law. In reaching this decision, the court said:

There is significant authority which suggests that security for costs will not be ordered against a person out of the jurisdiction if that person is protecting their property and they are only within the jurisdiction defending themselves against attack. At the very least, the fact that the proceedings may be characterised as 'defensive', is a matter to be taken into account in the exercise of the discretion to order security for costs.
In determining which party is, in a practical sense, 'the plaintiff' in the proceeding, the real test is whether there was little practical alternative to the plaintiff taking action through court proceedings. If that is the position, then the plaintiff is properly characterised as the party attacked.

Trustee's right to reimbursement from trust property

2011-09-23T13:56:00.000+10:00

The Federal Court of Australia has recently applied the principle that a trustee is entitled to be reimbursed or indemnified from the trust property for any expenses which have been properly incurred in the management of the trust.

In Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation) (No 2) [2011] FCA 958, the responsible entity of one of the Great Southern managed investment schemes had erroneously distributed insurance proceeds in contravention of the scheme's constitution. This resulted in a shortfall which had to be covered from the responsible entity's own funds. The court found that, as the responsible entity's error was not unreasonable, dishonest or improper, the responsible entity retained its right to be reimbursed from the trust property.

Allens has prepared a more detailed Focus article on this case.

Supreme Court of WA upholds receivers' legal professional privilege

2011-09-22T15:20:00.000+10:00

In Carey v Korda & Winterbottom (No 2) [2011] WASC 220, the Supreme Court of Western Australia held that a receiver is the person entitled to claim legal professional privilege in respect of legal advice it has sought in relation to receivership.

This case confirms that receivers can seek legal advice on their own behalf, as opposed to as an agent on behalf of the company in receivership. In the event of discovery being ordered by a court, solicitors' bills and receivers' charging schedules would ordinarily be discoverable. However, legal professional privilege extends to the information contained within the bills and schedules in circumstances where that information sets out the nature or narrative of the legal advice. Further, the court held that the receivers will not waive legal professional privilege by disclosing these bills of costs and charging schedules to the company in receivership.

For more information on this case, see our Focus article.

PPS Register launch delayed

2011-09-05T18:18:00.000+10:00

The government has announced that the Personal Property Securities Register (PSS Register) has been built but the need for a final stage of testing means that the scheduled public release date of 31 October 2011 will not be achieved.

By virtue of s306 of the Personal Property Securities Act 2009 (Cth) (PPSA), the registration commencement time is to be no later than 1 February 2012. The government is therefore working towards having the PPS Register publicly available by 30 January 2012. It is possible the government will attempt to pass an amendment to the PPSA to extend the registration commencement time past 1 February 2012.

We will update you with any further changes as we become aware of them.

Implementation of pre-litigation reforms to be delayed by 18 months

2011-09-02T16:42:00.000+10:00

Last week, the NSW Attorney-General announced that the implementation of the new pre-litigation steps requirements of the Civil Procedure Act will be postponed by 18 months.

The new requirements would have necessitated that parties take reasonable steps to resolve their disputes before commencing court proceedings and was initially due to commence on 1 October 2011.

The postponement is in response to the fact that lawyers and clients already take reasonable steps to resolve civil disputes before resorting to litigation and the concerns raised by stakeholders that the provisions may have a number of unintended consequences, including increased costs to parties.

The NSW Government intends to monitor the success of similar provisions introduced in the Federal Court from 1 August this year before making a final decision on the implementation of pre-litigation steps in NSW.

Voiding scheme contracts in an unregistered managed investment scheme

2011-09-01T10:16:00.000+10:00

The Victorian Supreme Court has considered whether an investor in an unregistered managed investment scheme could void scheme contracts under section 601MB of the Corporations Act.

In Re Willmott Forests Limited (in liq) and Willmott Finance Pty Ltd (in liq) [2011] VSC 348, an investor sought to use a s601MB notice to void the scheme contracts, with the effect being that the managed investment scheme would be unable to pursue its claims against the investor for the repayment of the loan funds.

Under s601MB(4), the offeror of the scheme had 21 days to apply to the court for an order declaring the notice to have had no effect. Accordingly, Willmott Forests sought a declaration that the notice was invalid or alternatively that the notice was of no effect and subsequently sought an order for summary judgment against the investor.

The court found that an investor in an unregistered managed investment scheme could not establish the necessary foundation for a valid notice under s601MB(1) and granted summary judgment for Willmott Forests. This case indicates that an investor in a managed investment scheme must satisfy all the elements of s 601MB(1) of the Corporations Act if they are to successfully set aside their obligations in respect of the relevant scheme.

Application to set aside statutory demand

2011-08-30T15:59:00.000+10:00

In Newsnet Pty Limited v Patching [2011] NSWSC 690, the NSW Supreme Court considered an application to summarily dismiss a plaintiff's application under section 459G of the Corporations Act to set aside a statutory demand.

The court dismissed the defendant's application, holding that there was a real question to be tried that the plaintiff's application was served within the prescribed period and that the supporting affidavit raised a genuine dispute regarding the statutory demand.

The significance of this case is two-fold.

First, the decision highlights that, in interlocutory proceedings, courts will be reluctant to uphold an application to summarily dismiss an application to set aside a statutory demand in circumstances where, on its face, there is a 'real question to be tried' about whether there is a genuine dispute. Second, the decision re-iterates established case law holding that service of an application to set aside a statutory demand may be effected at the address for service stated in the statutory demand, and, depending on the circumstances, service by facsimile may be effective.

Consideration of the expediency of litigation funding required

2011-08-29T11:25:00.000+10:00

In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89, the Federal Court dealt with an application by a non-party for leave to appeal the decision to approve a liquidator's entry into a litigation funding agreement.

The court held that the orders made by the primary judge should be set aside and the proceedings should be remitted for further consideration of whether the entry into, and performance of, the obligations under the litigation funding agreement is necessary for winding up the affairs of the funding party, within the meaning of section 477(2)(m) of the Corporations Act.

This case serves as a reminder that s 477(2)(m) would not support the provision of litigation funding by a liquidator, solely on the prospect of obtaining a return that might be generated by the funding agreement. In order for the agreement to be deemed necessary within the meaning of s 477(2)(m), the agreement must enable the liquidator to do anything expedient in the beneficial pursuit of winding up the affairs of the company and the distribution of its property.

'Good faith' and 'running account' defences

2011-08-29T11:23:00.000+10:00

The Supreme Court of South Australia has recently considered the 'good faith' and 'running account' defences contained in the Corporations Act.

In Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103, the court held that the defendant had failed to establish the 'good faith' defence. However, the 'running account' defence was established in respect of two of the five payments that the liquidator had sought to impugn as unfair preferences.

The case illustrates that the 'good faith' defence is difficult to prove where any indicators of insolvency exist. However, knowledge or even actual suspicion of insolvency, though it be such to negate the 'good faith' defence, does not of itself preclude reliance upon the 'running account' defence for a payment received. The point at which a running account ceases to exist is when the mutual purpose of inducing further supply is subordinated to a predominant purpose of recovering past indebtedness.

Setting aside statutory demand for 'some other reason' under Corporations Act

2011-08-26T16:21:00.000+10:00

The court in Sebastian Builders and Developers Pty Ltd v Floruit Holdings Pty Ltd & Currency Corp Pty Ltd [2011] NSWSC 655 is useful for its references to recent judicial commentary on key issues relating to s459J(1)(b) such as when the court may choose to exercise its discretion to set aside a statutory demand for 'some other reason' and the factors relevant to establishing an abuse of process.
The court referred to the following:

For an application under s459J(1)(b) to succeed, the court must be convinced there is 'some other reason' to set the statutory demand aside.
When considering whether to set aside a statutory demand for 'some other reason' the court should be "satisfied that there is an appeal based on reasonable and arguable grounds which, if successful, would result in the existence of an offsetting claim": Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454.
When faced with a challenge to a statutory demand on the basis of an alleged abuse of process, attention should be paid to the objectives properly pursued by service of a statutory demand. A creditor serving a statutory demand aims, first and foremost, to obtain payment of the creditor's debt. The creditor may have a second or subsidiary purpose, which is to obtain the benefit of a presumption of insolvency if the primary purpose of eliciting payment is not achieved and no successful application to have the demand set aside is made. But the principal purpose is to obtain payment. See TS Recoveries Pty Ltd v Sea-Slip Marinas Australia) Pty Ltd [2007] NSWSC 1074.

Liquidator's power to sell chose in action: non-assignability clause

2011-08-24T16:46:00.000+10:00

A recent NSW Court of Appeal case, Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168, dealt with whether a liquidator can sell a chose in action arising out of a contract containing an express restriction on assignment.

The court held that s477(2)(c) of the Corporations Act does not empower a liquidator to assign a chose in action that arose under a contract containing a non-assignability clause.

This case illustrates that although s477(2)(c) empowers a liquidator to sell 'the property of the company', which includes 'a thing in action', the words of the Act do not override an express agreement to the effect that a property is not assignable.

Arbitrability of insolvency-related claims denied

2011-08-22T17:31:00.000+10:00

The Court of Appeal of Singapore recently upheld a High Court decision that insolvency-related avoidance claims are not arbitrable, as they relate to a type of dispute that only the courts can resolve.

Regarding the arbitrability of claims by, or against, an insolvent company, the court drew a distinction between:

claims that arise only upon the onset of insolvency, due to the operation of the insolvency regime; and
those that stem from a company's pre-insolvency rights and obligations.

The court considered that insolvency/bankruptcy law is an area replete with public policy considerations that are too important to be settled by parties privately through arbitration. Accordingly, it held that courts should treat disputes arising from the operation of the insolvency regime as non-arbitrable, even if the parties have expressly included them in the scope of the arbitration agreement.

Similarly, a liquidator will not be bound by an arbitration agreement where that agreement affects the rights of other creditors. However, a company in liquidation is able to resolve a dispute by way of arbitration where that dispute arose before the liquidation, and relates to a private dispute between the company and another party.

To read more about this case, go to the Allens website.

Liquidators can't sell company property subject to non-assignment clause

2011-08-12T11:41:00.002+10:00

The NSW Court of Appeal has held that a liquidator's power to sell company property does not extend to the sale or assignment of contractual rights that are subject to a non-assignment clause. This limitation also applies to receivers and voluntary administrators. Partner Michael Quinlan and Law Graduate Stephen Lloyd report.

The importance of exclusion clauses in guarantees

2011-08-02T11:42:00.000+10:00

A recent decision of the New South Wales Court of Appeal has reiterated the importance of including a clear and unequivocal exclusion clause in a guarantee that prevents the guarantor discharging its liabilities based on a breach of the creditor's obligations under the guarantee.

Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 dealt with the enforceability of a guarantee following the disclosure of confidential information by the creditor in breach of clause 22 of the Code of Banking Practice, which applied to the guarantee.

The court held that the breach of the duty of confidentiality under the Code did not constitute a discharge of the guarantors' liabilities under their respective guarantees to the creditor. While the court affirmed that a strict interpretation of clauses in favour of the guarantor is necessary when construing a guarantee, it was found that an exclusion clause in the guarantee was clear enough to deny the guarantor the right to terminate the guarantee based on the breach by the creditor.

This case serves as a reminder to creditors that:

special rules of construction apply to guarantees and, specifically, an obligation in the guarantee bearing an ambiguous contractual status will be construed as a condition in favour of the guarantor;
in light of this rule, the creditor may be required to strictly perform that obligation or the guarantor may be entitled to terminate the guarante; and
it is therefore important for creditors to ensure that guarantees include a clear and unequivocal exclusion clause that prevents the guarantor discharging its liabilities based on a breach of the creditor's obligations under the guarantee.

Extent of bare trustee's right to protect trust assets

2011-07-29T12:41:00.000+10:00

In the case of Bruton Holdings Pty Limited (in liq) v Commissioner of Taxation [2011] FCAFC 79, the Federal Court considered a bare trustee's right to indemnification for expenses incurred in litigation commenced to protect trust property.

The court found that challenging the validity of a notice issued by the Commissioner of Taxation was a proper function for Bruton Holdings Pty Limited as a bare trustee: its duties extended to protecting and vindicating the rights attaching to trust property. As such, it was entitled to indemnification from the assets of the trust for costs incurred in pursuing that course.

This decision suggests that a bare trustee has the right of indemnity for its costs of instituting and pursuing litigation, which are essentially defensive in nature, to protect trust assets.

Failure to satisfy condition precedent of extension of loan facility

2011-07-27T11:22:00.000+10:00

In ING Bank (Australia) Ltd v Leagrove Pty Ltd & Anor; ING Bank (Australia) Ltd v Stafford & Ors [2011] QCA 131, the Queensland Court of Appeal considered the effect of ING's failure to obtain the securities listed in an agreement to extend a loan facility. The principal issue was whether this failure constituted either non-compliance with a condition precedent and/or breach of an implied term with the result being that the guarantees either did not come into effect at all, or that there were no secured moneys under the mortgages.

The court held that, on the proper construction of the relevant transaction documents and taking into account the parties' intentions, there was no condition precedent or implied term vitiating the efficacy of the mortgages and guarantees. Rather the mortgages and guarantees were held to be validly secured and immediately enforceable by ING.

This decision highlights that the courts will consider and construe relevant loan agreements and guarantees by their terms and the objective intention of the parties, according to normal contractual principles. The case also indicates that a company acting in its capacity as a trustee can validly act as guarantor for the company's own indebtedness, at least whilst acting within the terms of the trust and consistently with its fiduciary duties.

Effect of appointment of receivers and administrators on lessees

2011-07-18T15:47:00.000+10:00

The Federal Court's recent decision in Lindholm, in the matter of Munday Group Pty Limited (Receivers and Managers Appointed) (In Liquidation) v Tsourlinis Distributors Pty Ltd [2011] FCA 195 considered the effect of the appointment of receivers and administrators on a commercial lease in circumstances where the landlord sought to terminate the lease relying on the appointment as a ground of termination. The court considered whether relief against forfeiture can be granted in circumstances where the lessee is in default under the terms of the lease following the appointment of receivers and administrators.

The court found that for relief against forfeiture to be granted, the lessee must show, in the face of the lessor's right to terminate the lease, that it is necessary for the court to intervene to avoid the effects of unconscionable or conscientiousness conduct by the landlord in setting up the termination. If the breach can be remedied or made good by the payment of compensation, as it was in this case, relief against forfeiture is appropriate.

This case highlights that the appointment of receivers and administrators to a lessee will not always amount to a breach of lease which cannot be remedied. Lessors should exercise care when seeking to terminate a lease following appointments of external administrators to a lessee. Careful consideration should be given as to whether the payment of damages would be sufficient compensation in each set of circumstances.

Court approves a creditors' trust

2011-07-15T11:58:00.000+10:00

The NSW Supreme Court has recently considered whether administrators would be justified in recommending that creditors approve a Deed of Company Arrangement (DOCA) and associated creditors' trust in the case of Re Bevillesta Pty Ltd (in voluntary administration) [2011] NSWSC 417.

The company, Bevillesta Pty Ltd, was the registered proprietor of the land where the Top Ryde Shopping Centre is located. The administrators sought directions from the court in relation to the DOCA and creditors' trust, which proposed to pay out unsecured creditors at or close to 100 cents in the dollar in satisfaction of their claims.

The court held that, despite the proposal of the DOCA and creditors' trust being risky for the creditors (as the creditors would relinquish all rights against the company), and despite ASIC's published objections to the use of such mechanisms by administrators, the fact that the creditors were fully informed by the administrators of the risks involved, and the fact that the creditors stood to receive a substantial return if the proposal was implemented meant that there were sound reasons for presenting the proposal to a meeting of creditors.

This decision highlights that administrators are able to present unusual and potentially risky proposals to creditors, including proposals which provide for a creditors' trust, if the creditors are fully informed of the risks involved in the proposal and the situation is one where the creditors stand little to no chance of otherwise receiving any return in the event of liquidation.

The creditors subsequently voted in favour of the DOCA and creditors' trust at the second creditors' meeting which was held on 8 July. For further information see our Focuson this case.

No adjournment of winding-up application to consider alternative proposal

2011-07-13T15:09:00.000+10:00

In the recent case of Look Property Group Pty Ltd v Gateway Developments (Vic) Pty Ltd [2011] VSC 237, the Victorian Supreme Court refused to adjourn a creditor's winding-up application at the request of an administrator. The administrator sought the adjournment to enable creditors to consider a proposed deed of company arrangement (DOCA) but the court considered the terms of the proposal to be so derisory that the DOCA had no prospect of being approved at a meeting of creditors.

The administrators claimed that the DOCA, under which creditors would obtain a return of approximately four cents in the dollar, represented a better outcome for creditors than would occur in a liquidation. Two of the largest creditors submitted to the court that, if the proposal were put to a meeting of creditors, they would use their combined vote to defeat the resolution.

Accordingly, the court found that there was no basis for finding that the adjournment of the winding-up application would result in an acceptable proposal emerging. The court was particularly reluctant to use its discretion to adjourn the application because the proposal did not seek to return the insolvent company to a financially-viable position as a trading entity.

Costs orders against receivers not secured creditors

2011-07-11T13:32:00.000+10:00

In the recent case of Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd [2011] WASCA 76, the court considered the situation where a receiver was appointed to the appellant by a secured creditor and the respondents sought an order that the receiver and secured creditor (despite not being parties to the appeal) be made jointly and severally liable for costs.

The court referred to its powers to make costs orders against non-parties and it was held that a costs order would be made against the receiver as the receiver had conduct of the appeal on behalf of the appellant. The court was satisfied that this would fully protect the interests of justice and did not extend the costs order to include the secured creditor. The court noted that this approach was consistent with section 419 of the Corporations Act which holds a receiver (not the secured creditor) liable for debts incurred in the court of the receivership.

No setting aside of statutory demand despite defect in form

2011-07-11T13:31:00.000+10:00

The Queensland Court of Appeal in McElligott v Boyce [2011] QCA 117 illustrates that the mere absence of the prescribed warning statement outlining the consequences of non-compliance with a statutory demand is not sufficient reason for the purposes of s459J(2) of the Corporations Act 2001 (Cth) to have that statutory demand set aside.

In this case, it was not disputed that the statutory demand did not contain the warning statement outlining the consequences of non-compliance which is prescribed by the statutory form. The court referred to s459J(2) of the Corporations Act which states that a statutory demand must not be set aside owing merely to a defect in its form, unless that defect will cause substantial injustice. In this case, no substantial injustice was caused.

Buzzle to remain good law

2011-07-08T12:18:00.001+10:00

The case of Buzzle v Apple was good news for lenders, indicating that they do not become shadow directors merely by virtue of placing conditions on their continued support of debtors in financial strife.

The judgement struck a commercially sensible balance between the interests of borrowers and lenders. That balance allows lenders to protect their financial interests when dealing with financially insecure debtors without then being forced to assume general liability for the acts of the debtor company.

The period for applying for special leave to appeal the decision to the High Court has now lapsed and no application has been made. The result is that the case remains good law in NSW courts and that it is likely to be followed in other courts.

For more information on this important case, see the article by Partner Michael Quinlan and Lawyer Amy Spira in this month's Law Society Journal or see our Focus article.

High Court confirms strength of statutory presumption of insolvency

2011-07-08T12:16:00.000+10:00

A recent decision of the High Court of Australia confirms that where a company is subject to a statutory presumption of insolvency for the purposes of a winding up application, the company is required to prove to the contrary of the presumption - the fact that the debtor company disputes the amount of a debt will be unlikely to be sufficient to support a stay or dismissal of the winding up proceedings.

Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2011] HCA 18 dealt with an appeal by ASIC against a decision of the Full Court of the Federal Court staying winding-up proceedings until potential proceedings to determine the amount of a debt owed by a debtor company had been determined.

The High Court allowed the appeal and held that the current statutory scheme provides no basis for an assumption in favour of a dismissal or stay of winding-up proceedings where a debtor company disputes the existence or amount of a debt.

The presumption in this case arose under section 459C(2)(c) of the Corporations Act, which provides that the court must presume that a company is insolvent if, within the three months before the application, a receiver and manager was appointed to property of the company under a power contained in an instrument relating to a floating charge on the property. In similar circumstances, if the appointment of receivers is founded upon a disputed debt, it would seem prudent for the debtor company to challenge the appointment before winding-up proceedings are commenced.

ASIC reports: Corporate insolvencies on the rise

2011-07-07T15:18:00.000+10:00

Official figures released by ASIC today show that corporate insolvencies have risen 4.4 per cent across Australia in the 2010-2011 financial year.

ASIC says the figures show that, Australia-wide, the number of court liquidations and director initiated creditors voluntary liquidations have risen, but that the number of receivership and voluntary administration appointments have fallen.

ASIC's press release, which also provides a breakdown of the figures by state and by appointment type is available on its website.

De facto directors - power to appoint administrators?

2011-07-07T12:19:00.000+10:00

Are de facto directors able to pass a resolution under section 436A of the Corporations Act appointing an administrator? According to a recent Victorian Supreme Court decision, the answer is no.

In Xie v Crisp & Ors [2011] VSC 154, the court found that although de facto directors fall within the definition of 'director' under s9 of the Act, the power to appoint administrators to a company under s436A of the Act may only be exercised by formally appointed directors. Nevertheless, the court in this case exercised its discretion under s447A of the Act to validate the administrator's appointment.

This case serves as a reminder to insolvency practitioners that they should not only consult the ASIC register, but also conduct reasonable additional inquiries to confirm that a company's directors have the requisite authority prior to accepting an appointment.

The existence of a genuine dispute - setting aside a statutory demand

2011-07-04T14:19:00.002+10:00

The New South Wales Court of Appeal recently dealt with an application for leave to appeal from a decision to set aside a statutory demand under section 459H of the Corporations Act on the ground that the primary judge had not sufficiently enquired into whether there was a genuine dispute as to the existence of the debt: Jamal Charara v Integrex Pty Ltd [2011] NSWCA 113.

The court confirmed that in determining whether there is a genuine dispute as to the existence of a debt claimed in a statutory demand the court will not embark on an extensive enquiry into the relevant facts and will not attempt to weigh the merits of the dispute.

The Centro decision

2011-07-01T16:04:00.000+10:00

This week's Federal Court decision in relation to ASIC's case against Centro's directors demonstrates how demanding a director's duties in approving financial statements are. In order to meet those demands, Boards may seek to change the ways in which financial information is presented to them and how they review it.

Read more on the Centro decision in our Focus publication on the case.

Bendigo and Adelaide Bank has significant Great Southern win

2011-06-30T17:17:00.000+10:00

Bendigo and Adelaide Bank last week successfully fended off claims made against it in the Supreme Court of NSW by aggrieved investors in Great Southern managed investment schemes in the cases of Bendigo & Adelaide Bank Ltd v Cairncross; Bendigo & Adelaide Bank Ltd v Elite Advertising Group Pty Ltd [2011] NSWSC 610.

The Great Southern group offered tax effective investments in agribusiness managed investment schemes. The group went into administration and liquidation in 2009 and the group, the group's directors and lenders who financed investors' purchases of interests in the schemes are currently defending multiple claims brought against them by unhappy investors.

In the present actions, Bendigo and Adelaide Bank was seeking to enforce loan deeds in the Supreme Court of New South Wales against two defaulting borrowers. Those borrowers had used the funds advanced by the bank to purchase interests in Great Southern managed investment schemes. The investors defended the bank's claims against them by cross-claiming that, in lending them the money to fund their investments in the Great Southern schemes, the bank had breached fiduciary duties owed to them, had acted unconscionably and was vicariously liable to them for alleged misrepresentations of the responsible entity of the schemes. The investors therefore claimed that the loan deeds entered into with the bank were unenforceable and should be set aside.

Allens Arthur Robinson, acting for the bank, brought applications to summarily dismiss the investors' cross-claims against the bank. Those applications were heard in the Supreme Court of NSW by Justice Einstein who, in a judgment handed down on 22 June 2011, found in favour of the bank on all issues, determining that:

the bank owed no fiduciary duty to the investors and the claims put forward by the investors in that respect were purely speculative and without evidentiary foundation;
similarly, the investors had not provided any adequate basis to support claims that the bank was vicariously liable for any wrongdoing of the Great Southern group simply by having been a preferred financier to people wishing to invest in the schemes; and
the investors' claim that the bank had acted unconscionably was untenable.

The court therefore granted the bank's application and summarily dismissed the investors' cross-claims against the bank. Solicitors for the investors have indicated that their clients intend to appeal the judgment.

Creditor's defence in voidable transactions

2011-06-29T11:35:00.000+10:00

A recent decision of the Victorian Supreme Court has important implications for creditors who wish to rely on the defence in section 588FG(2) of the Corporations Act to retain a benefit received from an insolvent debtor under a voidable transaction.

Metcalf Crane Services Pty Ltd v Rathner [2011] VSC 195 dealt with the application of s588FG(2) of the Act to a creditor who had received a benefit from an insolvent debtor under a voidable transaction.

In this case, the court held that it was reasonably open for the magistrate to conclude that Metcalf had not established the statutory defence under s588FG(2)(b) (an essential element of which is that the creditor and a reasonable person in the creditor's circumstances would have had no reasonable grounds for suspecting that the company was insolvent at the relevant time).

The court acknowledged that a mere failure by the debtor to pay its debts on time does not, of itself, constitute reasonable grounds for the creditor to suspect the debtor's insolvency. Rather, the court must consider the evidence as a whole in determining whether a creditor, or a reasonable person in his or her position, had reasonable grounds for suspecting the debtor's insolvency.

Therefore, in seeking to rely on this statutory defence, creditors must ensure that they consider all the circumstances of the case - a consideration of whether the debtor is paying its debts on time, in and of itself, will not be sufficient.

Extent of mortgagee's duty to consider other interests in property

2011-06-27T11:30:00.000+10:00

The Victorian Supreme Court of Appeal recently considered the extent of the duty owed by a mortgagee when selling property subject to a mortgage. In every state, mortgagees are granted the power to sell mortgaged property in the event of default, however there are a number of key differences in the respective provisions.

MBF Investments Pty Ltd v Nolan [2011] VSCA 114 dealt with the requirements under the Victorian provision, contained in section 77(1) of the Transfer of Land Act 1958 (Vic), which imposes significant duties on the mortgagee not found in other states (except Tasmania).

The case demonstrates that, when selling mortgaged property in Victoria, a mortgagee is required to act in good faith and must consider the interests of any subsequent security holders who have an interest in the mortgaged property. Further, the mortgagee cannot act for an ulterior purpose or entirely disregard the mortgagor's interests in the property. Despite this, the mortgagee is not required to consider the fact that the mortgagor has a home on the property, nor is the mortgagee required to place the interests of the mortgagor above the interests of the mortgagee.

The court also noted that, while it is not possible for a mortgagor and mortgagee to contract out of the mortgagee's obligation to act in good faith, they are entitled to remove the mortgagee's obligation to act in the best interests of the mortgagor by agreement.

Winding up applications - failure to displace presumption of insolvency

2011-06-23T18:15:00.000+10:00

A recent decision of the New South Wales Court of Appeal demonstrates the reluctance of courts to grant leave to a company that wishes to oppose a winding up application under s459S of the Corporations Act, particularly in circumstances where there is no evidence to support a finding of solvency.

In the matter of NA Investment Holdings Pty Ltd - Perpetual Nominee Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282 dealt with an application to wind up a company in insolvency in circumstances where the company had failed to comply with a statutory demand and examined an application for leave to oppose the winding up under s459S of the Act.

Section 459S provides, in effect, that:

in so far as the winding up application is based on the failure to comply with a statutory demand, the company may not oppose the application on a ground that the company relied on or could have relied on for the purposes of an application to set aside the statutory demand without leave of the court; and
the court must not grant leave unless it is satisfied that the ground is material to proving the company is solvent.

The court dismissed the application for leave to oppose the winding up of the company and held that the company's failure to comply with the statutory demand gave rise to a statutory presumption of insolvency. In the absence of any evidence to displace the presumption, the court made an order to wind up the company.

The court adopted a narrow approach to construing s459S and concluded that a ground must be 'pivotal', 'crucial' or determinative of solvency in order to be 'material'.

Termination of voluntary administration for potentially greater creditor returns

2011-06-21T09:31:00.000+10:00

The New South Wales Supreme Court has recently considered whether it would allow termination of a voluntary administration of a company (pending a winding up application) on grounds that the creditors would have access to more of the company's funds through preference recoveries if termination was ordered (Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 299 and [2011] NSWSC 379).

A point to note is that if a company is in voluntary administration with a winding up application pending, thought should be given to seeking orders winding up the company on the basis of the winding up application rather than through a creditors' voluntary winding up if there are substantial preference recoveries which may thereby become available (in this case, by virtue of an earlier relation back day).

The court ultimately held that it would not exercise its discretion to end an administration pursuant to the Corporations Act (s447A) simply because the termination would enhance the chances of more favourable returns for the general group of creditors of the company if it was subsequently wound up. The court held that there was no evidence that the imposition of the voluntary administration was effected to protect anyone who might be the subject of preference recovery proceedings by a liquidator and this weighed critically against the granting of the order. The court noted that it may intervene to terminate a voluntary administration where a company has installed the voluntary administrator based on an ulterior motive, usually resulting in the company obtaining some financial advantage.

Insolvency reform options paper - update

2011-06-17T11:39:00.000+10:00

As foreshadowed in our earlier blog, we have now published a detailed Focus on the options paper released earlier this month.

Tax compliance - extending the director penalty regime to counter phoenix activity

2011-06-16T15:26:00.000+10:00

A recent blog post highlighted the prevalence of phoenix activity in Australia.

The latest Federal Budget has also picked up the issue of fraudulent phoenix activities by company directors. The Budget stated that the Government will strengthen the tax law to counter fraudulent phoenix activity, which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.

The Budget papers provide that from 1 July 2011:

the director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for their company’s failure to pay employee superannuation;
the Australian Taxation Office (ATO) will be given the power to commence recovery against directors under the director penalty regime, without providing a 21-day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and
in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.

Allens will publish a Focus on this issue shortly and will keep an eye out for the legislation putting these measures into effect.

Court may restrain registration of caveats lodged to frustrate mortgagee sale

2011-06-09T10:06:00.000+10:00

The New South Wales Court of Appeal in Jensen v Bank of Quensland [2011] NSWCA 71 has indicated that where caveats are lodged for the purpose of frustrating the completion of sale contracts and not in aid of interests which could possibly prevail against the registered interest of the mortgagee, the court may restrain the Registrar General from registering those caveats. This offers a measure of protection to mortgagees against baseless caveats which could otherwise frustrate valid attempts to exercise powers of sale.

See also our recent blog on Bayblu Holdings Pty Ltd v Capital Finance Australia [2011] NSWCA 39, which stated that in determining whether to order the withdrawal of a caveat lodged by a mortgagor, the courts must examine whether the caveator would have been granted an interlocutory injunction to protect the interest claimed by the caveator.

Unregistered charges and unfair preference claims

2011-06-08T09:34:00.000+10:00

It is clear that lenders and other security takers will have ineffective security as against liquidators (and administrators) if they purport to charge company property and fail to register such a charge with ASIC. A recent Queensland Court of Appeal decision has considered whether non-registration will also expose such parties to preference claims they might have otherwise avoided.

Bradnam's Windows and Doors Pty Ltd v Offermans [2011] QCA 106 dealt with whether a debt secured by an unregistered (registrable) company charge is an 'unsecured debt' for the purpose of determining whether there has been an unfair preference payment under section 588FA of the Corporations Act 2001.

During the six-month 'relation back' period prior to appointment, the company paid Bradnam's Window and Doors Pty Ltd $80,000 in respect of debts owing from goods supplied. The company's liquidator commenced proceedings to recover such payments on the basis they were recoverable as unfair preferences within the meaning of s588FA of the Act.

In its defence, Bradnam alleged that it was a secured creditor pursuant to an agreement which purported to charge all the real and personal property of the company securing all moneys owing to Bradnam. The charge was never registered.

Since the relevant charge was in respect of real property (which does not require registration under s262 of the Act) and other property of the company (which does require registration), the charge was not invalid in so far as it is a charge on land. This finding meant that the Court was able to find in favour of Bradnam without having to accept either of the competing interpretations of s588FA, as the relevant debt would be secured regardless.

The court therefore did not state in general terms whether a transaction will be in respect of an 'unsecured debt' for the purposes of s588FA, if it is secured by an unregistered registrable charge. However, it is clear that the outcome in this case may well have been different if the charge only extended to personal property of the company.

Rapid Metal update

2011-06-08T09:32:00.000+10:00

On 30 May 2011, we wrote a post of the Rapid Metal case.

We have now published a detailed Focus on this case. To read, go to our Publications page.

Allens appoints 12 new partners

2011-06-03T12:27:00.000+10:00

Allens Arthur Robinson has appointed 12 new partners in its Sydney, Melbourne, Perth, Brisbane and Hanoi offices, across a range of practice groups.

The new partners are Nicholas Adkins (Banking - Sydney), Karla Fraser (Banking - Brisbane), Philip Blaxill (Litigation/Insolvency - Perth), Duncan Travis (Litigation - Melbourne), Matthew Whittle (Insolvency - Melbourne), Hop Dang (Infrastructure - Hanoi), Julian Donnan (Corporate - Sydney), Mark Malinas (Corporate - Melbourne), Penny Nikoloudis (Corporate - Sydney), Michael Graves (Projects - Melbourne), Jodi Reinmuth (Energy and Resources - Perth) and Gavin Smith (Telecommunications, Media and Technology - Sydney).

The addition of the new partners brings the total Allens partnership up to 184.

Modernising and harmonising insolvency regulation - options paper released

2011-06-03T12:25:00.000+10:00

The Attorney-General and the Parliamentary Secretary to the Treasurer yesterday released an options paper - A Modernisation and Harmonisation of the Regulatory Framework Applying to Insolvency Practitioners in Australia - which seeks views on various proposals for significant regulatory reform of Australia's insolvency industry.

The release of this paper follows last year’s Senate Economics References Committee inquiry into liquidators and administrators and is aimed at addressing concerns about possible misconduct in the insolvency profession and to "improve the value for money for recipients of insolvency services". The paper also considers the alignment of the corporate and personal insolvency regulatory frameworks in Australia.

The options paper identifies that the regulatory frameworks for insolvency practitioners should promote:

consistency for practitioners and other stakeholders operating in both the personal and corporate insolvency industries;
increased efficiency in insolvency administration;
enhanced communications with stakeholders;
market competition on price and quality; and
a high level of professionalism and competence.

The options paper will be available for comment for eight weeks and responses to the paper will inform the Government's response to the recommendations of the Senate Committee's report.

We will shortly be publishing a Focus article summarising the key reform options addressed in the paper so keep an eye on our publications for more information.

Application to set aside statutory demands - a timely reminder

2011-06-02T09:23:00.000+10:00

A recent Federal Court of Australia decision has demonstrated the importance of filing an application to set aside creditors' statutory demands well within the stipulated time period of 21 days, particularly in circumstances where it is difficult to determine the precise date on which service of the statutory demand was made.

In Gusdote Pty Limited v Ashley; In the Matter of Gusdote Pty Limited [2011] FCA 250, the court held that the requirement that an application to set aside a statutory demand be brought within 21 days after the demand is served is an essential condition of relying on the right to set aside a statutory demand under the Corporations Act. Applications brought towards the end of the 21-day period may be dismissed if the applicant is unable to prove the exact date on which the statutory demand was received. This is particularly problematic where statutory demands have been served by prepaid post during periods in which public holidays and/or industrial action disrupt the ordinary course of postal delivery.

Wife's equity - enforceability of guarantee against wife of borrower

2011-05-31T11:17:00.000+10:00

The Queensland Court of Appeal in Agripay Pty Ltd v Byrne [2011] QCA 85 considered enforcement of a guarantee against the wife of a borrower and held that it would be unconscionable to allow the guarantee to be enforced in circumstances in which the wife was a 'volunteer' and the effect of the guarantee was not fully understood by her.

The court held that it was not necessary that a guarantor positively misapprehend some matter material to the guarantee, it is enough that she did not know its details. The transaction need merely be one in which the creditor has not properly explained or ensured that the guarantor understands the effect of the transaction where the transaction is substantially for the benefit of the husband. In addition, the existence of a life insurance policy or similar arrangements calculated to cover the debts guaranteed by the wife did not prevent equity's intervention. Any benefit derived by a guarantor must be direct or immediate, not indirect and prospective. The benefit to the wife here was contingent so she was held to be a 'volunteer'.

This case reinforces the absolute necessity of providing the wife of a borrower a full and proper explanation of the nature and effect of the transaction before allowing her to sign a guarantee. This important case appears to be the first one in which an appellate court has found it would be unconscionable to enforce a guarantee where the wife was not labouring under any material misapprehension. It would not be surprising to see this case go to the High Court.

Controller's liability under s419A - Rapid Metal appeal

2011-05-30T16:02:00.000+10:00

The New South Wales Court of Appeal has recently handed down an important decision relating to a controller's liability to pay amounts in respect of property in the possession of the company to which the controller is appointed. The decision also provides guidance for controllers appointed to companies which possess large quantities of stock where the ownership of that stock is contested.

De Vries & Anor v Rapid Metal Developments (Australia) Pty Ltd [2011] NSWCA 100 dealt with the issue of whether the appellants, as agents of a mortgagee in possession of a company in the business of hiring scaffolding, were liable to the respondent for using or disposing of the respondent's scaffolding after their appointment as the mortgagee's agents.

The respondent (RMD) claimed that all of the scaffolding hired by it to the company (Rildean) was still in Rildean's possession at the date of the appellants' appointment.

The court held that RMD did not prove on the balance of probabilities that all of the scaffolding hired by it to Rildean was still in Rildean's possession at the date of the appellants' appointment. Rildean hired scaffolding from multiple suppliers and it was often impossible to identify which equipment belonged to which supplier. As possession of all of RMD's scaffolding could not be established, the controllers' appeal had to be allowed.

In the decision at first instance, the court held that the controllers were liable under s419A of the Corporations Act for certain amounts including the value of unreturned scaffolding. Although the Court of Appeal did not have to decide the point, Sackville JA commented that the language of s419A was 'not apt' to extend to a liability to make payments at the end of the period of hire. Accordingly, had RMD succeeded on the possession issue, his Honour would not have awarded judgment pursuant to s419A(2) for the value of the unreturned scaffolding (thus limiting the controllers' liability under s419A(2) to the outstanding hire charges plus interest).

However, his Honour did demonstrate support in obiter for the primary judge's finding that the controllers had committed an act of conversion by selling the scaffolding. As such, controllers still need to proceed with caution when dealing with stock where the ownership of that stock is contested.

Unfair preferences and retention of title

2011-05-27T12:05:00.000+10:00

A South Australian Supreme Court decision has considered whether certain payments made by a company were unfair preferences or whether the defendant could rely on a retention of title clause to say that the payments did not result in the decrease in the net value of the company's assets.

Dwyer and Davis v Chicago Boot Co Pty Ltd [2011] SASC 27 highlights that in invoking the 'good faith' defence in relation to voidable transactions, the court is required to look at the position of the directors in question through the eyes of the reasonable person. Evidence of the director's knowledge may be used in a limited way in applying the test and is relevant only insofar as their subjective appreciation of the circumstances are those to be expected of a reasonable person.

This case also shows that where a retention of title clause is relied upon, the court will have regard to all the circumstances which exist between the parties. The court found that despite the retention of title clause which appeared on the back of the invoice for delivery of goods, the lack of steps taken by the defendant to ensure that its goods were identifiable and that the company in liquidation could account for goods on-sold to third parties, together with the fact that money from the proceeds of sale was not kept in a separate account, deprived the clause of its purported effect. Further, the agreed terms of trade showed the relationship between the parties to be a debtor/creditor relationship. The court therefore did not consider whether there was preferential treatment because of the retention of title clause.

Test for removal of caveat when mortgagee exercises its power of sale

2011-05-26T17:59:00.002+10:00

The NSW Court of Appeal has stated that in determining whether to order the withdrawal of a caveat lodged by a mortgagor, the courts must examine whether the caveator would have been granted an interlocutory injunction to protect the interest claimed by the caveator (ie that there is a serious question to be tried and that the balance of convenience favours the granting of the injunction).

Bayblu Holdings Pty Ltd v Capital Finance Australia [2011] NSWCA 39 showed that the courts will order caveats lodged by a mortgagor to be removed in circumstances where the mortgagor seeks to delay the mortgagee exercising the power of sale because the mortgagee could obtain a better price at a later date. The fact that there will be a significant shortfall between the proceeds of sale and the debt owed will mean that the balance of convenience favours the mortgagee and it will be rare for the courts to conclude that the balance of convenience favours the mortgagor and that the caveats should remain. The fact that the mortgagor cannot give an adequate undertaking as to damages or cannot pay into court the amount sworn by the mortgagee as due and payable will also favour the mortgagee.

Winding up of insolvent insurance company upon application of judicial manager

2011-05-24T14:26:00.000+10:00

A recent decision of the Federal Court has resolved a conflict in the provisions of the Corporations Act and the Insurance Act concerning the winding up of insurance companies on the application of a judicial manager appointed under the Insurance Act. Australian Prudential Regulation Authority v ACN 000 007 491 Pty Ltd (in liq) [2011] FCA 353 confirms that the winding up provisions of the Corporations Act apply, including those provisions concerning voidable transactions.

This case dealt with the winding up of an insolvent insurance company following the recommendation of a judicial manager appointed to the company under the Insurance Act 1973 (Cth). The court held that the where the court makes a winding up order in relation to an insurance company following receipt of a report from a judicial manager recommending that course, the winding up occurs under the Corporations Act 2001 (Cth) rather than the Insurance Act. Thus, the provisions of Part 5 of the Corporations Act will apply in the winding up.

Applicant for leave to appeal against winding up order must be 'sufficiently interested'

2011-05-24T14:25:00.000+10:00

The Federal Court of Australia has recently considered the circumstances in which leave to appeal against orders for winding up by a non-party will be granted.

Binetter v Deputy Commissioner of Taxation [2011] FCA 184 dealt with an application by a former director of the two companies being wound up for leave to appeal against orders for the winding-up of those companies. The court held that the applicant did not have standing to seek leave to appeal and dismissed the application with costs.

This case demonstrates that the standing requirement for such an application is that the applicant be 'aggrieved' or 'sufficiently interested'. The fact that the applicant was a former director of the company, or that the applicant may become involved in a liquidator's investigation and the associated consequences, was not a sufficient interest.

Proceeds from preference actions

2011-05-23T10:14:00.000+10:00

Cook v Italiano Family Fruit Co Pty Ltd (in liq) [2010] FCA 1355 provided the following guidance in relation to preference actions:

Causes of action accruing to the company (eg action for breach of contract or breach of duty) and the proceeds of those actions are property of the company and caught by a charge over the company's present and future property.
Preference actions, which can only be brought by a liquidator, are not property of the company and not caught by a charge over the company's present and future property. (The judge in this case expressed reservations about the different treatment of the recovery of proceeds in preference and other actions, but was bound to follow High Court precedent in NA Kratzmann Pty Ltd (in liq) v Tucker (No 2) (1968) 123 CLR 295.)
A creditor is entitled to a right of subrogation if money to which it was entitled to is paid out by a liquidator in breach of trust.

In this case, upon winding up of the company, the liquidators realised assets subject to National Australia Bank's (NAB) floating charge. They used those proceeds to pay the claims of priority creditors and the costs of the liquidation. The liquidators then recovered funds from two unfair preference claims. After taking out their costs, the liquidators were left with a sum of money and applied for directions on whether they could pay the remaining funds to NAB rather than unsecured creditors.

The court stated that the right of liquidators to have recourse to charged assets to meet priority claims is conditional on there being insufficient property of the company available to meet those claims. Such an assessment must be made once and take into account actual and potential realisations. Here, the liquidators had made an interim assessment that did not consider potential recoveries from unfair preference actions. The liquidators had therefore paid priority creditors with money NAB was entitled to, thereby committing a breach of trust. In these circumstances, NAB was entitled to be subrogated to the company's free assets, which meant that NAB was entitled to the remaining money.

Alinta restructure ALB Insolvency and Restructuring Deal of the Year

2011-05-20T14:17:00.000+10:00

The Alinta Energy restructure has won the prestigious 2011 ALB Australasian Law Award for the insolvency and restructing deal of the year. Allens acted for the agent and security trustee on behalf of Alinta's syndicate of lenders.

The $2.8 billion restructure was effected by way of schemes of arrangement and has been described as one of the most complex restructures in Australian corporate history. Allens' insolvency team included Michael Quinlan, John Warde, Ian Wallace, Diccon Loxton, Vijay Cugati, Mark Kidston, Chris Prestwich and Przemek Kucharski.

For more information on the Alinta restructure, see our media release and our Focus.

One-Tel - the danger of 'hastening slowly'

2011-05-20T14:14:00.000+10:00

The NSW Supreme Court has handed down a decision setting aside service of the statement of claim brought by the special purpose liquidator of One.Tel Limited (in liq) and dismissing the proceedings in their entirety. The reasoning of the court is particularly relevant to liquidators who may delay the service of proceedings while they attempt to obtain litigation funding. More broadly, the decision highlights the dangers for plaintiffs who delay serving proceedings.

Allens' Malcolm Stephens, Andrea Martignoni and Chris Prestwich acted for the News Group defendants in this matter. For more information, see our Focus on this case.

Costs do not always follow the event for liquidators

2011-05-19T11:12:00.002+10:00

In Chand v Azurra Pty Ltd (in liq) [2011] NSWCA 58, the Court of Appeal confirmed that even if a party seeking leave to bring proceedings against a company in liquidation is successful in obtaining that leave, it is within the Court's discretion to order that the successful party pay the liquidator's costs of the application.

This case highlights that the exercise of the Equity Division's administrative jurisdiction, including overseeing the conduct of liquidations, involves different factors relevant to who should bear the cost of court proceedigns to those that are involved in contentious litigation. Generally, in contentious litigation, 'costs follow the event', which means that the successful party's costs are paid by the unsuccessful party.

The Court noted that it is proper that a person who needs to ask a privilege or dispensation from the court pay the costs of the other parties who need to be notified of that claim. Further, a liquidator who has limited funds, is a necessary party, and acts reasonably, is usually entititled to its costs. If a liquidator were to be ordered to pay the costs of the application for leave to proceed or to bear his own costs it would, in effect, be the other creditors of the company who would be required to pay.

Alinta Gas restructure

2011-05-11T12:38:00.000+10:00

Allens Arthur Robinson and Mallesons Stephen Jaques co-hosted a seminar on 5 May 2011 in relation to the Alinta Energy group's $2.9 billion deleveraging transaction.

The deleveraging was effected by way of schemes of arrangement in March 2011. This was one of the most complex restructures in Australian corporate history.

Throughout the process Allens acted for the agent and security trustee representing Alinta's syndicate of lenders, which ultimately acquired the operating entities in the Alinta group.

The panel of speakers included:

Ross Rolfe AO - formerly CEO, Alinta Energy
Sylvia Wiggins - former commercial adviser to Alinta Energy
Tim Bednall - Partner & Chairman of the Board, Mallesons Stephen Jaques (panel chair)
Scott Gardiner - Partner, Mallesons Stephen Jaques
Vijay Cugati - Partner, Allens Arthur Robinson
Ian Wallace- Partner, Allens Arthur Robinson
John Williamson-Noble - Partner, Gilbert + Tobin
Robert Nicholson - Partner, Freehills
David Holland - Partner, Baker & McKenzie

The slides from the presentation are now available.

For more information on the Alinta transaction, see our deal release.

Insolvency Law Bulletin April 2011

2011-05-11T12:04:00.000+10:00

The Insolvency Law Bulletin (April 2011) featured the following articles by Allens lawyers:

1. In 'Restructuring in Australia: making the most of the legal framework', Michael Quinlan and Przemek Kucharski discuss aspects of Australian insolvency law that can work as useful tools in restructuring troubled business if deployed in the right circumstances. These include:

the ability of directors to act early in appointing administrators;
the circumstances in which receivers may be able to effect a quick receivership sale;
the ability of administrators to restructure troubled businesses;
the return of creditors' schemes of arrangement as a restructuring tool; and
the use of the long-term administration.

2. In 'Back in fashion: schemes of arrangement as a restructuring tool', John Warde and Chris Prestwich discuss the recent Alinta transaction and the benefits of using creditors' schemes of arrangement as a means of restructuring companies in financial distress.

No lender liability for loss suffered by borrowers in relation to failed investments

2011-05-11T12:02:00.000+10:00

In Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 1447, the NSW Supreme Court held that a lender, Banksia Mortgages, could not be held responsible for loss suffered by a borrower in relation to failed investments.

Banksia had commenced proceedings against Mr and Mrs Croker after they had defaulted on interest payments due in respect of moneys outstanding under loans secured by a mortgage over the Crokers' property. Banksia sought judgment in respect of the debt owed and an order for possession of the secured land.

The Crokers sought to have the loans set aside or reduced, contending that the loan agreements were 'unjust'. The Crokers alleged that the loan agreements contained terms which were unreasonably difficult to comply with, had not been accurately explained by anyone to the Crokers, that unfair influence and pressure was exerted by Banksia and that Banksia had acted unconscionably in the circumstances.

The NSW Supreme Court held that none of the Crokers' arguments were made out. The court took note of the fact that Banksia had not engaged in asset lending, that the Crokers did not fully disclose their plans for the borrowed funds, and that the Crokers chose not to obtain independent financial advice in relation to investments which they knew were high-risk ventures. Further, the court considered that Banksia had not acted unconscionably as it had complied with its internal lending procedures and was entitled to rely upon the information the Crokers provided about their investments in assessing the Crokers' ability to repay their loans.

This case illustrates the importance of lenders:

complying with their lending manuals;
encouraging prospective borrowers to obtain independent financial advice;
assessing the capacity of a prospective borrower to repay; and
not engaging in the practice of asset lending.

Good news for lenders - Buzzle approved: NSW Court of Appeal clarifies shadow directorship risks

2011-05-10T16:08:00.000+10:00

On 9 May 2011, the NSW Court of Appeal handed down its decision in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109. The court has confirmed Justice White's decision and dismissed the appeal. Among other things, the case is significant for providing appellate-level guidance on the hotly debated topic of the requisite elements of shadow directorship.

Shadow directorship can be a highly relevant concern for lenders particularly in workout situations where they attempt to protect their interests by placing stringent conditions on new loans and/or standstills.

In the course of delivering its judgement, the Court of Appeal provided the following guidance:

Where a secured lender acting in its own interests exercises influence on the directors of a debtor company, it will not generally become a shadow director.
This is particularly so if the mortgagee's exercise of influence is supported by contractual rights in its mortgage documents and/or the directors of the company exercise independent judgement regarding whether to accede to the mortgagee's influence.

Although this guidance was provided in obiter, it provides some comfort to secured lenders wishing to exercise a degree of control or oversight over the activities of debtors in financial strife.

The Allens insolvency team is currently working on a more comprehensive analysis of the implications of the decision and we will issue a Focus soon. For more information, keep an eye on our publications or contact us direct.

Mutual claims and set-off in insolvency

2011-05-06T11:58:00.000+10:00

A recent decision from the Isle of Man High Court, Simpson and Spratt and Kaupthing Singer & Friedlander (Isle of Man) Limited v Light House Living Limited and Elle Macpherson (High Court of Justice of the Isle of Man, unreported 2 December 2010, Civil, Chancery Procedure) found that the insolvency set-off provisions in section 22 of the Bankruptcy Code will apply where:

a trustee/nominee has assumed liability for a debt wholly for the benefit of his/its beneficiary/principal;
the beneficiary/principal is really, in truth and substance, the party benefiting from the transfer of funds which gives rise to the debt; and
it is the beneficiary/principal who, under the mutual dealings on which the parties have agreed and engaged, is intended ultimately to return the benefit received from the legal creditor, by way of repayment through his trustee/nominee, the legal debtor.

In this case, the bank provided funds to a company to purchase property as nominee and trustee for Ms Macpherson. The bank required as security, a charge over a cash deposit in Ms Macpherson's name with the bank. The parties envisaged that Ms Macpherson would, through the company, repay the bank loan. The bank became insolvent and the court held that set-off was available between the bank loan which Ms Macpherson was beneficially entitled to and Ms Macpherson's cash deposit with the insolvent bank.

The court found that s22 was available where the beneficial entitlement and beneficial liability in respect of the countervailing credits and debits correspond. The court noted the purpose of s22 as enabling and requiring a court exercising bankruptcy jurisdiction to do substantial justice between the parties to mutual dealings upon insolvency. The court said that substantial justice would not have been achieved if Ms Macpherson was forced to pay 100 cents in the dollar through her nominee but only receive a dividend of some few cents in the dollar on the debt owed to her by the bank.

One would expect this case to be applied in Australia because it builds on the position of mutuality outlined in the Australian High Court case of Gye v McIntyre (1991) 171 CLR 609, which was relied on in the present case. Although the term 'beneficial liability' is new, the claims must still be between the same parties (ie the 'real' and 'substantial' parties) and made by parties in the same capacity (ie where the 'beneficial interests' and 'beneficial liabilities' correspond).

Beneficial ownership of securities and a trust relationship

2011-05-04T11:45:00.000+10:00

In Pearson & Ors v Lehman Brothers Finance SA & Ors [2010] EWHC 2914 (Ch), the High Court of England and Wales examined where the beneficial ownership of securities acquired by a company for the account of its affiliates lies. The court held that the affiliates had no proprietary interest in the securities held in the affiliates' accounts. The court stated that the greater the extent to which trustee duties are consensually departed from, the more likely it is that the court will not recognise the arrangement as a trust.

Administrators for Lehman Brothers International (Europe) (LBIE) sought the court's direction as to the principles governing beneficial ownership between LBIE and a number of affiliates within the Lehman Brothers Group (the Affiliates), of securities acquired by LBIE for the account of the Affiliates. LBIE acquired the securities pursuant to a 'Global Settlement Practice' for securities bought and sold in Europe, and also used them for the raising of finance by lending them to third parties. However, the concentration of the acquisition, sale and lending of securities within LBIE created problems in relation to regulatory charges, segregation of securities and the effective transfer of absolute title to third parties (for the raising of finance). In response, the Lehman Brothers Group established internal processes which allowed LBIE to remain the owner of the securities.

The court held that the Affiliates did not have a proprietary interest in the securities after they went through the internal processes. The court noted that:

The terms on which LBIE acquired securities did not give rise to a proprietary interest in favour of the Affiliates through a trustee-beneficiary relationship. LBIE had none of the characteristic obligations of a trustee, there was no mutual intention to share the securities and the court will not impose a trust where purely personal rights between the two parties sufficiently achieve their commercial objective.
The internal processes were effective in transferring the proprietary interest held by the Affiliates to LBIE, so that LBIE held absolute title to the relevant securities.

This case also considers the application of internal accounting mechanisms including daily repo transactions and stock loans. It demonstrates that such processes depend on the on-leg seller or stock lender having some form of proprietary interest in the underlying security, and establishes the circumstances in which they are effective in transferring absolute title of the security.

Directors' wilful blindness: breach of duty and insolvent trading

2011-05-02T10:58:00.000+10:00

A recent UK case, Roberts v Frohlich [2011] EWHC 257 (Ch), makes it clear that 'wilful blindness' to a company's financial situation will not be sufficient to excuse directors from liability for breach of directors' duties and insolvent trading. Directors should be wary of continuing to trade on an overly optimistic view of a company's future prospects in the hope that 'something might turn up'.

The facts concern a failed property development by Onslow Ditching Ltd (ODL). The directors of ODL were experienced professionals (an accountant and an engineer) with experience in property development. To fund the development, ODL arranged, relevantly, a facility with the Bank of Scotland (HBoS). ODL engaged a main contractor but did not resolve with them whether the contract would be on a 'fixed price' or 'cost plus' basis.

The directors failed to disclose to HBoS that there was no fixed price contract in existence with the main contractor. HBoS later required evidence of the fixed price contract before any further funding was to be provided to ODL. ODL did not communicate these difficulties in funding to the contractor. There was subsequently a dispute between ODL and the contractor regarding the costs basis of the contract. The contractor subsequently suspended further work as ODL had not paid it in full. The contractor was later awarded, by an adjudicator, monies in respect of work done but not paid for.

A short time later, the directors appointed administrators to ODL. The development site was sold and HBoS was repaid. Liquidators were then appointed and after the sale of assets, there was still a shortfall owing to unsecured creditors. The liquidators sought relief against the directors for breach of directors' duties and wrongful trading in breach of the UK Insolvency Act 1986.

The court held that from a particular date, the directors were in breach of their fiduciary duties which they owed ODL in failing: to seek to suspend performance of the unperformed parts of existing contracts; to refuse to authorise the placement of any further orders; to disclose to the contractor the funding status of the project; and to disclose to HBoS the contractual status of the project. The court also held that the directors were in breach of their common law duty to exercise reasonable care and skill in continuing with the development after a particular date. Further, it was held that the directors were liable for wrongful trading in breach of the UK Insolvency Act as they should have concluded at a particular date that there was no realistic prospect of avoiding an insolvent liquidation. The judge said that the directors were driven by 'wilfully blind optimism' and the 'reckless belief' that in continuing with the project 'something might turn up'. Such a belief was groundless in circumstances where liquidation was inevitable.

Review of compensation arrangements for consumers of financial services

2011-05-02T10:56:00.000+10:00

The Federal Government has launched a consultation paper - Review of compensation arrangements for consumers of financial services - to review the need for a compensation scheme for investors who lose their money through the misconduct of a financial services provider.

Although there are some arrangements in place to protect consumers of financial services, consumers may face problems where a financial services provider does not have professional indemnity insurance cover or does not have the financial capacity to pay compensation; for example, where the provider has ceased to trade or become insolvent. The consultation paper discusses a number of ways that existing compensation arrangements may be strengthened.

Submissions on the consultation paper are due by 1 June 2011.

Cross-border insolvency - UK court applies Australian law

2011-04-27T11:46:00.000+10:00

A recent decision of a single judge of the UK High Court has found that there is power under the UK Insolvency Act and at common law for a UK court to apply Australian law pursuant to a request by an Australian court in insolvency-related matters.

New Cap Reinsurance Corporation Limited (in liq) v AE Grant dealt with the application by New Cap Reinsurance Corporation Limited (in liq) (NCR) to have certain orders made by the UK High Court pursuant to a letter of request issued by the NSW Supreme Court.

The respondents, two Lloyd's syndicates, placed reinsurance with NCR. Three months before NCR went into administration, NCR made two payments for US$2 million and US$4 million to an agent for the respondents. Despite the existence of arbitration clauses in the reinsurance contracts providing that the seat of arbitration was to be London, NCR's liquidator brought proceedings in the NSW Supreme Court alleging that the two payments constituted unfair preferences under the Corporations Act 2001 (Cth). The respondents did not accept service of the proceedings and did not submit to the jurisdiction of the NSW Supreme Court.

The NSW Supreme Court held that the arbitration clauses did not apply; the NSW Supreme Court had jurisdiction; and each of the payments was an unfair preference and therefore a voidable transaction under the Corporations Act. The NSW Supreme Court issued a letter to the UK High Court requesting that the court make orders under s426 of the UK Insolvency Act that the respondents pay NCR the relevant amounts as set out in the orders of the NSW Supreme Court.

The UK High Court held that it could assist the NSW Supreme Court under s426 of the UK Insolvency Act and at common law in ordering the respondents to make payments as requested by the NSW Supreme Court. The High Court further held that the court to whom a request is made retains a discretion, although a limited one, whether or not to apply the insolvency law of another 'relevant country or territory' under s426 of the UK Insolvency Act; and the discretion should be exercised in favour of the foreign court 'unless it would be improper to do so'.

Leave to appeal this decision has been granted.

Phoenix activity and organised crime

2011-04-27T11:42:00.000+10:00

A report by the Australian Crime Commission, Organised Crime in Australia 2011, says that organised criminal entities are increasingly using complex business structures to enable a range of organised criminal activities and regulatory offences. One example is phoenix activity.

Phoenix activity is the evasion of tax through the deliberate, systematic and sometimes cyclical liquidation of related trading entities. It occurs when directors of a company that is about to be liquidated transfers assets to another company which they also control. This leaves no assets to pay creditors but enables the business to continue under the new company.

Such activity is being used to avoid tax and superannuation liabilities in a range of industries, in particular the private security, building and construction, entertainment, telecommunications, property development, labour hire, employment, road transport and cleaning industries.

Professionals such as insolvency practitioners, solicitors and tax agents have been identified as assisting individuals to take part in phoenix activity.

NSW Court of Appeal finds that litigation funding is a 'financial product', funders must have an AFSL

2011-04-21T09:50:00.000+10:00

In International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50, the New South Wales Court of Appeal recently held (by majority) that a litigation funding agreement constituted a 'financial product' and could be rescinded because the funder did not hold an Australian Financial Services Licence (AFSL).

The funding agreement was held to be a 'financial product' because it was a facility through which Chameleon Mining NL managed 'financial risk', one of the elements of the definition of 'financial product' in section 763A of the Corporations Act. According to Giles and Young JJA (Hodgson JA dissenting), the funding agreement managed Chameleon's financial risk by passing to the funder the risks to Chameleon associated with the financial consequences of managing expensive litigation and the possibility of an adverse costs order in that litigation.

See our Focus entitled Litigation funding hits another speed bump for further information about the Court of Appeal's decision and the implications for both funded litigants and other parties to litigation in which funding is provided by an unlicensed funder.

For insolvency practitioners, the practical implications of the Court of Appeal's decision include:

if entering into a funding agreement, practitioners should ensure that the funder is licensed (as discussed in the Focus, we think it is unlikely that the current interim exemption from holding an AFSL for funders engaged in funding representative proceedings and claims lodged with liquidators to prove in the winding up of an insolvent company will continue to apply once legislation is introduced to exclude those funding arrangements from the definition of a 'managed investment scheme');
practitioners who have entered into a funding agreement with an unlicensed funder and are unhappy with that arrangement, may want to consider the possibility of being able to rescind that arrangement having regard to the Court of Appeal's decision; and
practitioners who have an associated business that offers funding should consider whether or not they require an AFSL.

Replacement of retiring insolvency practitioners

2011-04-21T09:47:00.000+10:00

A recent decision of the Supreme Court of New South Wales usefully illustrates the mechanics for replacing a retiring practitioner with others in the firm in respect of their existing appointments as liquidator and administrator.

Free & Ors [2010] NSWSC 1079 dealt with an application to replace a retiring practitioner with other members of his firm in respect of his existing appointments as liquidator and administrator.

The court made several findings about the practical operation of the appointment and removal provisions in the Corporations Act and made orders with respect to the replacement of the retiring practitioner from the following types of appointments:

as the sole liquidator in a court-ordered winding up;
as one of two administrators of deeds of company arrangement; and
as one of two liquidators in creditors voluntary winding up.

The court also acknowledged the benefits of multiple appointments and recognised the importance of ensuring continuity in the management of insolvency processes.

Application to set aside winding up order where Registrar not advised of DOCA

2011-04-15T14:56:00.000+10:00

In the recent case of Deputy Commissioner of Taxation v Debut Developments Pty Ltd [2011] FCA 69, Justice Besanko of the Federal Court dealt with whether a winding up order should be set aside in circumstances where the Registrar who made the order was advised that no deed of company arrangement (DOCA) had been put forward but where later there arose evidence of a proposed DOCA.

The background to the case was a failure by Debut Developments Pty Ltd (Debut) to comply with a statutory demand issued by the Deputy Commissioner of Taxation. At the winding up application, the Commissioner advised the Registrar that Debut had been put into administration, that the first creditors' meeting had been held and that no DOCA had been put forward at that meeting. Neither Debut, nor the administrator were present at the hearing and the Registrar made the winding up order. Debut then applied to the court to set aside the winding up order under, amongst others, section 482(3) of the Corporations Act 2001 (Cth) and O35 r7(2)(a) of the Federal Court Rules.

Justice Besanko ordered that the winding up order be set aside under the O35 r(7)(2)(a) of the Rules, which provides the court with jurisdiction to set aside an order on the basis that it was made in the absence of a party. It was not appropriate to make orders under s 482 of the Act because, although doing so would terminate the winding up, it would not have the effect of setting aside the original order. This would have been problematic because the winding up order was likely to have brought the administration to an end under s435C(3)(g) of the Act. Accordingly, the original order had to be set aside in order to revive the administration.

Justice Besanko stated that he had reservations about setting aside the winding up order in the circumstances of this case. His Honour explained that he was particularly concerned that no details of a firm-proposed DOCA were put forward at the hearing, and that the best evidence of the proposed DOCA was an affidavit from a director of Debut which was submitted at a late stage of the proceedings and which briefly outlined the proposed terms. However, Justice Besanko ultimately granted the order on the basis that he believed that the DOCA had been put forward and considered it to be in the interests of the company's creditors that they have an opportunity to consider the proposal.

Application to set aside statutory demand - offsetting claim arising from share transfer

2011-04-14T14:47:00.000+10:00

In the recent case of Perth Freight Lines Pty Ltd v BM2008 Pty Ltd (in liq); VFS Group Pty Ltd v BM2008 Pty Ltd (in liq) [2011] VSCA 62, the Victorian Court of Appeal dealt with an application to set aside a statutory demand on the basis of a transfer of shares giving rise to an offsetting claim.

The background to the case was the sale by BM2008 Pty Ltd (BM) of its freight business to Perth Freight Lines Pty Ltd (PFL). PFL's performance was guaranteed by VFS Group Pty Ltd (VFS) and PFL's director, Mr Iliopoulos. PFL disputed its obligations under the sale agreement and the matter was arbitrated in BM's favour. Justice Hargrave gave BM leave to enforce the arbitral award as a judgment debt, and BM served statutory demands on VFS and PFL and a bankruptcy notice on Mr Iliopoulos.

VFS and PFL then commenced proceedings in the Victorian Supreme Court to set aside the statutory demands on the basis that they had an offsetting claim arising from their purchase of all of a BM shareholder's (the shareholder) shares in BM and 'right, title and interest' in all causes of action the Shareholder had against BM. BM, however, was placed into voluntary liquidation prior to the transfer of the shares and the liquidators' consent to the transfer was required under s 493A(1) of the Corporations Act 2001 (Cth). The liquidators consented to the transfer on the condition that PFL, VFS and Mr Iliopoulos pay to BM the judgment debt as ordered by Justice Hargrave. PFL, VFS and Mr Iliopoulos sought to have the condition set aside. That request was refused by Justice Davies.

A second part of the offsetting claim was that the shareholder had executed certain forms specified in the Corporations Regulations in order to authorise and request the liquidators to pay to PFL, VFS and Mr Ilioupolous, any dividends or distributable surplus of BM payable to the shareholder.

At first instance, Associate Justice Eftham accepted part of the offsetting claim and reduced the statutory demands accordingly. PFL and VFS appealed. On appeal to a single judge, Justice Davies rejected the offsetting claim argument because the liquidators' consent to the share transfer had not been obtained and consequently the transfer was void.

On appeal to the Full Court, Justice Kyrou, with whom President Maxwell agreed, held that Justice Davies was correct in finding that the effect of s 493A of the Act was to preclude the shareholder from transferring to PFL, VFS and Mr Ilioupolous either a legal or equitable interest in the shares. Therefore, PFL and VFS had no offsetting claim against the company. As to whether the forms authorising and requesting the liquidator to pay any dividends or distributable surplus to PFL and VFS created an offsetting claim, the Full Court held that the forms did not give the beneficiary any rights against the company so as to create an offsetting claim against it.

UK Supreme Court abolishes expert immunity

2011-04-07T16:20:00.000+10:00

As foreshadowed in an earlier blog post, we have now published a Focus article on the decision in Jones v Kaney [2011] UKSC 13 and its practical implications for Australian experts.

Court grants record extension of convening period in RiverCity Motorway Group's administration

2011-04-07T12:41:00.000+10:00

The Federal Court of Australia has recently granted the administrators of the RiverCity Motorway group of companies a 21-month extension of the convening period for the second creditors' meeting, making it the longest extension that has been granted by an Australian court in one application.

In Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed)(Receivers and Managers Appointed) [2011] FCA 295, the administrators of the RiverCity Motorway Group applied under s439A(6) of the Corporations Act for an order that the convening period for the second creditors' meeting be extended to 18 December 2012. The RiverCity Motorway Group operates the Clem7 Tunnel in Brisbane and associated toll collection facilities.

In granting the extension, the court noted that application for extension arose out of 'very singular circumstances' including:

the complex group structure and intercompany dealings;
evidence that an extension would allow the sale of the Group's business as a going concern and at the most opportune time;
the continued operation of the call centre (which is conducted from leased premises) is critical to the toll collection process and the business of the Group. There was a risk that the landlord would seek to terminate the lease once the administration (and the statutory moratorium created by s440C of the Corporations Act) came to an end; and
the significant time and costs involved in setting up another call centre on a different premises.

The fact that the receivers of the Group supported the administrators' application was another significant factor identified by the court in determining whether to grant the extension sought.

It will be interesting to see whether this decision will be successfully relied on to obtain similar extensions of time under s439A(6) or whether it will be confined to the 'very singular circumstances' of this case.

Allens acted for the receivers in this matter. Our team included John Warde, Alf Pappalardo, Angela Martin and Tim Robinson.

Statutory demands and trustee limitation of liability clauses

2011-04-07T12:31:00.000+10:00

Issuing statutory demands against trustee companies can raise a number of complexities. A recent decision of the New South Wales Court of Appeal highlights the necessity for trustees to discharge their onus of proving that the limitation of liability clause in the relevant agreement is enlivened in order to successfully set aside a statutory demand on the basis of a genuine dispute between the parties.

NA Investments Holdings Pty Limited v Perpetual Nominees Limited [2010] NSWCA 210 dealt with an application for leave to appeal against the court's decision not to set aside a statutory demand under s 459G of the Corporations Act 2001 (Cth).

NA Investments Holdings Pty Ltd, in its capacity as trustee of the NA Investment Trust, guaranteed the obligations of Future Fuels Australia Pty Ltd under a facility agreement. In the application for leave to appeal, NA Investments argued, amongst other things, that the primary judge erred in his construction of the trustee limitation of liability clause under the facility agreement.

The court held that, on the evidence before it, NA Investments had not discharged its onus of demonstrating that its indebtedness to the creditor was reduced by the operation of the limitation of liability clause. Therefore, the court was not satisfied that there is 'a genuine dispute' as to the existence or amount of the debt to which the statutory demand related for the purposes of section 459H of the Corporations Act.

A 'Uniq' scheme of arrangement

2011-04-06T17:38:00.000+10:00

In the recent decision in Re Uniq Plc [2011] EWHC 749, Justice David Richards of the English High Court approved a scheme of arrangement between Uniq Plc and its members under section 899 of the Companies Act 2006 (UK). The scheme formed part of a restructuring by which problems posed by Uniq's pension plan were to be solved. It was estimated that absent the scheme, Uniq and its main subsidiary would be insolvent within one year.

Under the scheme, the members were to cede 90.2 per cent of the equity in Uniq, which was to be sold for the benefit of the 'defined benefit' part of the pension plan. In return for this, and a cash payment of GBP14 million, Uniq and certain of its subsidiaries were to be released from their obligations in respect of that part of the pension plan. The restructuring had the approval of the Pensions Regulator and Pension Protection Fund (PPF), which ensured that the members of the plan did not lose PPF protection.

Like the recent Alinta schemes of arrangement in Australia, this decision shows the usefulness of schemes as a restructuring tool.

Receivers' duties owed to mortgagor

2011-04-06T17:35:00.000+10:00

The Federal Court of Australia has recently considered the nature of a receiver's statutory and general law duties and the extent to which a receiver owes duties to the mortgagor company to which he/she is appointed.

Forest Marsh Pty Ltd v Pleash [2011] FCA 134 dealt with an application to remove a receiver and manager for alleged breaches of general law and Corporations Act duties. The mortgagor company alleged that the receiver had breached his duties:

to act in good faith;
to terminate the receivership as soon as the mortgagee's interests had been satisfied; and
to account to the mortgagor for the conduct of the receivership.

The court held that the mortgagor company had failed to establish that the receiver's conduct amounted to a breach of any of the relevant duties.

Although this case turned significantly on its facts, it demonstrates that the court will not readily interfere with a receivership in progress. It also emphasises that where an appointment occasioned by a default is validly made, a receiver is under no obligation to end the receivership for so long as the company is indebted to the appointee under the relevant instrument. This is so regardless of whether the nature of, or reasons for, the indebtedness change during the course of the receivership.

Equitable doctrine of marshalling

2011-04-05T14:56:00.000+10:00

In Serious Organised Crime Agency v Szepietowski & Ors [2010] EWHC 2570 (Ch) , Justice Henderson of the English High Court dealt with the applicability of the equitable doctrine of marshalling.

One Mrs Szepietowski (the defendant) owed debts to both the National Westminster Bank Plc and the Serious Organised Crime Agency (the claimant). The bank held first charges over a group of properties know as the Claygate Properties and a second charge over a property known as Ashford House. The claimant held second charges over the Claygate Properties as a result of a settlement deed. The defendant sold the Claygate Properties between November 2009 and January 2010, and the majority of the proceeds of sale were used to pay off the sums due to the bank under its first charges. Only ₤1,324.16 was left to be paid to the claimant in respect of the ₤1.24 million secured by its second charges over the Claygate Properties. In these proceedings, the claimant sought to invoke the equitable doctrine of marshalling in relation to the charge held by the bank over the Ashford House property.

Justice Henderson referred to the decision in In re Bank of Credit and Commerce International S.A. (No 8) [1998] AC 214 where it was said that the principle of marshalling 'is a principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim'.

Hi Honour held that there was no obstacle to the claim for the equitable doctrine of marshalling, and the claimant was therefore subrogated to the bank's second charge over the Ashford House property as a security for the unsatisfied balance of the sums secured by the Claygate Properties.

Recovery of litigation costs by former court appointed receiver

2011-04-05T14:54:00.000+10:00

In Glatt v Heath Sinclair (The Former Court Appointed Receiver) [2010] EWHC 3069 (Admin), Justice Parker of the English High Court dealt with whether costs incurred by a former court appointed receiver after the discharge of the receiver could be taken out of receivership assets.

Following the making of a confiscation order, the court appointed Heath Sinclair as receiver of the estate of Louis Glatt. The confiscation order was later quashed and the receiver consequently discharged. Two years later, Mr Glatt brought an action against Mr Sinclair in relation to the receivership. The action was dismissed as having no realistic prospect of success. Mr Sinclair applied for his costs of the application and for a declaration that the costs could be recovered out of the assets of the receivership that were subject to his lien.

Justice Parker held that the former receiver's costs could be recovered out of the receivership assets that were subject to Mr Sinclair's lien.

This case highlights that costs incurred by a former court appointed receiver after a receivership has ended may still be recoverable from the receivership assets. The case also clarifies that court appointed receivers can only recover their costs out of the assets of the receivership.

Court declines to deregister commercially dormant company

2011-04-04T13:59:00.000+10:00

A recent decision of the New South Wales Supreme Court demonstrates that a court will not make orders deregistering a company in the absence of express statutory power to do so and indicates that, where a commercially dormant company remains registered, a provisional liquidator's appointment will not be terminated unless the company directors are willing and able to resume administration of the company after the liquidator is relieved of his/her duties.

Yeshiva Properties No 1 Pty Ltd & Ors; Yeshiva Properties No 7 Pty Ltd [2011] NSWSC 25 dealt with an application by a provisional liquidator for orders terminating his appointment and deregistering the company in circumstances where a deed of company arrangement had been fully effectuated but there had been no transition to a creditor's voluntary winding up.

The court held that the court's power to deregister a corporation is limited and did not apply to the facts of this case. Since the court could not order deregistration of the company, and since there was no evidence that the company directors were willing or able to take over administration of the company if the liquidator was relieved of his duties, the court declined to terminate the liquidator's appointment.

Statutory demands - strict compliance with legislative timetable required

2011-04-04T13:57:00.000+10:00

A recent decision of the New South Wales Court of Appeal highlights the importance of strict compliance with the time requirements specified in the Corporations Act when attempting to rely on the failure to comply with a statutory demand to proceed to wind up a company.

TQM Design & Construct Pty Ltd v KCL Developments Pty Ltd & Golden Plantation Pty Ltd [2011] NSWCA 7 dealt with the requirements for a valid application to set aside a statutory demand under section 459G of the Corporations Act and the consequences of filing an invalid application for creditors wishing to bring winding up proceedings.

The court held that extensions of time for compliance with a statutory demand cannot issue under section 459F(2)(a) of the Corporations Act if the foundational application to set aside the statutory demand under section 459G is invalid on its terms.

Creditors should therefore remember that:

failure to bring applications which comply with section 459G of the Corporations Act can prevent extensions of time from issuing under section 459F(2)(a) of the Act (which specifies when a company is taken to have failed to comply with a statutory demand); and
this has flow-on effects for the times at which a court will presume a company to be insolvent and the period within which a creditor can bring proceedings for winding up a debtor company.

New UK decision threatens experts' immunity from suit

2011-04-01T11:15:00.000+11:00

The UK Supreme Court (the UK equivalent now of our High Court) handed down a landmark decision on Wednesday this week finding that expert witnesses are no longer immune from being sued for negligence in relation to the evidence they give in court or the views that they express in anticipation of court proceedings.

The case of Jones v Kaney [2011] UKSC 13 held that no justification had been shown for continuing to hold expert witnesses immune from suit, and in doing so abolished the immunity that experts have enjoyed for centuries. It was not accepted by the majority that potential liability would result in reluctance on the part of experts to accept instructions, nor would it prevent them from exercising their overriding duty to the court and acting with diligence and integrity. The majority was influenced in their thinking by the fact that in the UK advocates no longer enjoy immunity from suit - that is not the case in Australia.

This decision does not affect the continuation of absolute privilege for all witnesses from claims in defamation. Two members of the Supreme Court panel dissented due to the belief that reforms should be left to Parliament. We will circulate a Focus article on this decision and its practical implications for Australian law and Australian experts shortly.

UK Financial Reporting Council - Going Concern Assessments Inquiry

2011-04-01T11:13:00.000+11:00

The FRC, the UK’s independent regulator responsible for the promotion of corporate governance and reporting to foster investment, has announced that it is going to inquire into going concern and liquidity risk issues faced by companies and auditors. The Panel of Inquiry, led by Lord Sharman of Redlynch, will ultimately recommend reporting measures and other guidance that can be used by auditors and companies to address these issues.

Details can be found in the FRC's media release.

Recent Allens articles of interest

2011-03-31T10:53:00.000+11:00

Alinta Finance restructuring

Schemes of arrangement are re-emerging as an effective tool for restructuring companies with unsustainable secured debt. The Supreme Court of New South Wales recently made orders approving four schemes of arrangement between companies in the Alinta Finance group and their scheme creditors which effected a restructure of secured debt owed by those entities and a transfer of the ownership of the companies in Alinta Finance group to a company owned by the lenders. Senior Associate Christopher Prestwich reports.

Who gets what's left?

A recent case in the NSW Court of Appeal (Residential Housing Corporation v Esber & Ors [2011] NSWCA 25) gives some important clarification on aspects of a mortgagee's obligation following the exercise of a power of sale. Partner John Gallimore and Lawyer Jacinta Dyer report on how the court dealt with the issue of contested surplus funds.

New legislation will impact on covered bonds

The Federal Government has released its exposure draft legislation relating to the issue by authorised deposit-taking institutions of covered bonds. Partners Matthew Allchurch and David Clifford outline the proposed legislative regime and comment on its implications.

Tracing issues in insolvency

2011-03-31T10:51:00.000+11:00

Senior Associate Chris Peadon has recently had an article published in the Insolvency Law Journal entitled "Tracing misappropriated funds in a liquidation: The Bishopsgate exceptions" (see (2011) Insolvency Law Journal 37).

In summary, the article concerns whether a person from whom an insolvent entity has misappropriated funds can gain priority over secured and other unsecured creditors by tracing the misappropriated funds into the assets of the insolvent entity, and the consequences of the funds being deposited in an overdrawn account.

Chris has been called to the Bar and will be leaving Allens for 7 Selborne Chambers, Sydney and available to accept briefs from 28 May 2011 in commercial (including insolvency), equity and tax matters.

Pre-litigation requirements for civil disputes

2011-03-30T16:56:00.000+11:00

Recently, there have been significant legislative developments regarding pre-litigation requirements for civil disputes federally, in New South Wales and in Victoria.

Commonwealth

On 24 March 2011, the Civil Dispute Resolution Bill 2010 (Cth) was passed through parliament.

This Act aims to 'ensure that, as far as possible, people take genuine steps to resolve the dispute before certain civil proceedings are instituted'. If efforts at dispute resolution are unsuccessful and proceedings are issued, each party must file a 'genuine steps statement' to the effect that genuine steps have been taken to resolve the dispute.

The Act does not prescribe what genuine steps must be taken but rather permits the parties to prescribe what steps are appropriate in the circumstances.

The main provisions of the Act will commence on a date to be proclaimed.

New South Wales

The pre-litigation requirements contained in Schedule 6.2 of the Courts and Crimes Legislation Further Amendment Act 2010 (NSW) have been proclaimed to commence from 1 April 2011. Schedule 6.2 will amend the Civil Procedure Act 2005 (NSW) by inserting a new Part 2A, titled 'Steps to be taken before the commencement of proceedings'.

The pre-litigation requirements include that each person to a civil dispute must take reasonable steps to resolve the dispute or clarify or narrow the issues in the dispute. Reasonable steps include:

notifying the issues
responding by communicating about the issues
exchanging correspondence, information and documents
considering and proposing options for resolving the dispute
taking part in alternative dispute resolution processes

The pre-litigation requirements do not apply to proceedings in the Supreme Court.

Victoria

On 24 March 2011, the Civil Procedure and Legal Profession Amendment Bill 2011 (Vic) was passed through parliament.

This Act repeals the pre-litigation requirements of the Civil Procedure Act 2010 (Vic) which were due to come into effect on 1 July 2011. However, the Act does provide that the court can make specific protocols for specified civil proceedings or classes of civil proceeding including mandatory or voluntary pre-litigation processes.

The Act will commence when Royal Assent is received.

Enforceability of the flawed asset - more to consider?

2011-03-25T11:48:00.000+11:00

A recent English High Court decision indicates that a divergence may be developing between English law and Australian law on the interpretation of the flawed asset under the ISDA Master Agreement.

A non-defaulting party under an ISDA Master Agreement who purports to avoid making payments to a defaulting counterparty rather than terminating their relationship should consider the decision in Lomas v JFB Firth Rixson Inc & Ors [2010] EWHC 3372 (Ch). This decision introduces conditions on relying on flawed asset clauses, particularly with respect to the ISDA Master Agreement.

Lomas v JFB Firth concerned the interpretation of s2(a)(iii) of the ISDA Master Agreement (which provides that a party's payment obligations are subject to the condition precedent that there is no continuing event of default – the 'flawed asset'). In this case, the respondents were swap counterparties of Lehman Brothers International (Europe) under five interest rate swap agreements governed by one or other of the 1992 or 2002 versions of the ISDA Master Agreement. The respondents had relied on section 2(a)(iii) of the ISDA Master Agreement to stop making payments to Lehman Brother International (Europe) that otherwise would have fallen due on subsequent payment dates.

For more information, please see our Banking and Finance group's Focus on this case.

Insured's entitlement to reinsurance recoveries of HIH entities

2011-03-25T11:47:00.000+11:00

Members of the former James Hardie Group insured by HIH have established their entitlement to payment of reinsurance recoveries held by the liquidators of HIH.

Amaca Pty Ltd and Ors v McGrath & Anor as Liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 concerned a claim for an order under section 562A(4) of the Corporations Act in respect of reinsurance monies received by the liquidators of HIH.

This case arose in relation to claims made under insurance policies providing cover against liability for asbestos injury in the business carried on by Amaca Pty Ltd (formerly James Hardie & Coy Pty Ltd) and Amaba Pty Ltd (formerly Hardie-Ferado Pty Ltd) (the plaintiffs). This insurance was issued by HIH Underwriting and Insurance (Australia) Pty Ltd and arranged by CE Heath Underwriting Agencies Australia Pty Ltd.

The plaintiffs sought recovery under the insurance policies as a result of asbestos claims made against them. Following the collapse of HIH, the liquidator of Heath Underwriting held monies received from London reinsurers. As asbestos liabilities were expected to continue to eventuate in claims for many decades yet, the plaintiffs anticipated that the liquidator of HIH Underwriting and Insurance would, in future, receive additional monies from London reinsurers.

The plaintiffs sought orders that the liquidators be permitted and required to apply amounts received from London reinsurers exclusively towards the claims of the plaintiffs. The plaintiffs also sought similar orders in respect of future recoveries under relevant reinsurance agreements but not yet received by the liquidators.

The court determined to grant the relief sought by the plaintiffs in relation to the sums actually received under reinsurance arrangements but determined that it could not grant relief in relation to reinsurance payments not yet received.

This outcome was almost certainly not intended as a matter of policy and it is anticipated that steps will be taken to amend the legislation in order to enable orders to be made with respect to future reinsurance assets coming into the hands of liquidators after the making of the court order, as well as in relation to assets currently held by liquidators as at the date of the order.

For more information, please see our Insurance and Reinsurance group's Focus on this case.