Keay's Insolvency : personal and corporate law and practice [Tenth edition.] 9780455239811, 0455239819

Citation preview

Keay’sInsolvency PersonalandCorporateLawand Practice

Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 [email protected] legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only)

INTERNATIONAL AGENTS & DISTRIBUTORS

NORTH AMERICA Thomson Reuters Eagan United States of America

ASIA PACIFIC Thomson Reuters Sydney Australia

LATIN AMERICA Thomson Reuters São Paulo Brazil

EUROPE Thomson Reuters London United Kingdom

Keay’sInsolvency:Personal andCorporateLawand Practice

MICHAEL MURRAY LLB, Dip Crim (Syd), FAAL

Visiting Fellow QUT Faculty of Law

JASON HARRIS BA LLB (UWS), LLM (ANU), FCIS

Associate Professor UTS Faculty of Law

TENTH EDITION

LAWBOOK CO. 2018

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW

First edition ......................... 1993 Second edition ......................... 1994 Third edition ......................... 1998 Fourth edition ......................... 2002 Fifth edition ......................... 2005

Sixth edition ......................... 2008 Seventh edition ......................... 2011 Eighth edition ......................... 2014 Ninth edition ......................... 2016

ISBN 978 0 455 23981 1 (pbk). © 2018 Thomson Reuters (Professional) Australia Limited This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. All legislative material herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. For reproduction or publication beyond that permitted by the Copyright Act 1968, permission should be sought in writing from the current Commonwealth Government agency with the relevant policy responsibility. Editor: Lara Weeks Product Developer: Lucas Frederick Printed by Ligare Pty Ltd, Riverwood, NSW

PEFC/21-31-17

This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests.

Foreword Richard Fisher AM Adjunct Professor, Faculty of Law, The University of Sydney Commissioner, Australian Law Reform Commission, 1986 – 1989 This year marks the 30th anniversary of the publication by the Australian Law Reform Commission of its report on the General Insolvency Inquiry; ALRC 45, otherwise generally known as the “Harmer Report”. The reference to the Commission which led to the production of that Report provided, for the first time, the opportunity for a comprehensive review of the law of insolvency in Australia. That was the case, notwithstanding, as the Commission recorded: “A significant part of contemporary commerce is conducted by persons who have more credit than money. Individuals and business organisations engage in commerce in this way, as do agencies of government and even nations. Central to modern commerce is the ability to honour the promise to pay (whether from assets or income) in the future. Most eventually pay their way. Inevitability, however, for some, the promise to pay cannot be honoured. It is then that insolvency law becomes of critical concern.”

It is as a consequence of this consideration that an understanding of insolvency law is not only important for those who have to deal with or manage the consequences of such impecuniosity, but also anticipate it as a possibility. For them, this book is a necessary, indeed vital, addition to their library. The publication of its 10th edition is timely. Ever since the publication of the Harmer Report and the enactment of its suggested reforms, the Parliament has not been able to resist the temptation to tinker with Australia’s insolvency laws, if its various legislative efforts might be so described. Indeed, those various piecemeal efforts lend weight to the call by the authors for a further general review of our insolvency laws. In recent times, though, there have been a number of significant amendments. First, there has been the enactment of detailed provisions concerning both the conduct of insolvency administrations and the oversight of the conduct of insolvency administrators. Even more recently, the Corporations Act has been amended to provide for what is described as a “safe harbour” defence to claims against directors for insolvent trading. Provision was also made for the invalidation of clauses (called ipso facto clauses) which operate to terminate contractual and other arrangements merely because of the appointment of an external administrator These most recent legislative initiatives will facilitate corporate restructuring. In particular, though, and as the authors explore in Chapter 21; “Restructuring and Workouts”, the “safe harbour” defence will be of great significance for directors of companies and their advisors

vi

Foreword

who wish to pursue a workout or restructuring informally and outside the framework of one of the forms of external administration for which the Corporations Act provides. “Restructuring” and “workouts” have long been part of the lexicon of insolvency practitioners. The authors are to be congratulated, therefore, for the inclusion of this new chapter in the book. Hopefully, the legislative initiative which it considers will herald a new era in Australian insolvency practice. Moreover, also hopefully, that era will fortify the observation of the Law Reform Commission, when commenting on the voluntary administration regime, that; “constructive or creative insolvency is not a myth”. I commend the authors for their work on the 10th edition. May 2018

Preface In the last few prefaces, going back to the 2010 edition, we foreshadowed what we thought were then pending insolvency law reforms. It was not until shortly before this, the 2018 10th edition, that these reforms have become law, under the Insolvency Law Reform Act 2016, involving substantial change to the structure and content of insolvency law and its practice. The changes involved a staged deferral, with some commencing on 1 March 2017, and the remainder, the bulk, commencing on 1 September 2017. In addition, shortly before that September date, the long awaiting “safe harbour” reforms in relation to insolvent trading commenced. Reforms limiting the exercise of ipso facto termination rights in insolvency also became law, but with their commencement delayed until 1 July 2018, with the extent of their coverage still, as at the date of publication, under review. Then, in personal insolvency, reforms to reduce the period of bankruptcy to one year, and to extend and improve the regulation of debt agreements, were introduced into parliament in late 2017 and early 2018. Their passage was diverted through a 2018 Senate committee inquiry which, while endorsing the Bills, has left them yet to progress into law. For the purposes of what became a delayed publication of the 10th edition, initially due soon after 1 September 2017, we had to draw a line in the sand at the introduction of the bankruptcy and debt agreement reforms into parliament. In the chapters affected, we have referred to the changes as only being proposed law, although it is anticipated that the respective Bills will remain largely unchanged. Similar tentative coverage is given to the pending ipso facto changes. This the 10th edition is therefore as current as the legislature has allowed as at May 2018. The delay in publication to account for law reform has also brought the benefit in allowing coverage of the recent significant developments in case law in 2018 in relation to the liability of liquidators for environmental clean-up costs in Linc Energy and the complex intersection between trusts and corporations law in the decisions in Amerind and in Killarnee. The first two are the subject of special leave applications to the High Court of Australia. We should be and are gratified that some long-awaited law reform has eventuated, even if it has coincided with the 10th edition, and resulted in some major re-writing of the text. In fact, the safe harbour and ipso facto reforms have prompted us to cover what is an increasing trend in insolvency, to seek to manage the financial difficulties of a business through developing discipline and skills involved in corporate turnaround. We provide an overview of turnaround and restructuring in a new Chapter 21, which is, we would like to think, a contribution to that growing discipline in Australia. As we said in the preface to the 9th edition, the impetus for these reforms has come from a recognition that attending to business distress and failure, and more so anticipating it, needs a more significant focus. That is not to say that this development is new, or that many

viii

Preface

businesses have not been salvaged or reconstructed through many a commercially agreed process in the past. But with the latest safe harbour and ipso facto reforms, there is now some legislative recognition that a more flexible approach, with some legislative direction, and control, is desirable. How the results of supporting an innovative and entrepreneurial business environment and of trying to preserve value in failing businesses will be assessed is problematic. We commend the government for requiring a review of the safe harbour laws after two years, but by what process and standard the assessment is to be made is difficult to anticipate. None of this means that the formal processes of insolvency, which comprise the bulk of this text, will become redundant. Corporate restructuring always involves a best endeavours approach, and the formal regime can either be a fail-safe or a means of implementing an agreed outcome. There will always be those companies that become insolvent and little if anything but the formal liquidation processes are needed to deal with them. It is there, and in the area of personal insolvency, that we make many criticisms, and suggest ideas for reform. Our view remains, as we said in the 9th edition, that legislative inattention to some of the inflexibilities of the present corporate insolvency regime, along with greater regulatory requirements imposed, may well be a reason for the move towards informal restructuring. This is not an unhealthy trend, but it is an unsatisfactory way to promote it. Nevertheless, we consider that, while Australia’s insolvency laws could be much improved, they generally operate to an acceptable standard, and rate reasonably well internationally. In view of the limited data, in corporate insolvency, we, or anyone, can only make this assessment based on informed intuitive analysis, and individual case outcomes, but the assessment is valid nevertheless. What was our concluding chapter to the last editions of the text – a critical review of the operation of the insolvency regime – has now been incorporated into our opening chapter, chapter 1. While the chapter assumes some knowledge of the law and practice, we consider it is important to put it first, so that succeeding chapters can be critically read in its context. We continue to see the best approach to explaining insolvency as that originally adopted by Professor Andrew Keay in the first edition in 1993. We remain in contact with Professor Keay, now in Leeds, England, and continue to acknowledge his scholarship throughout this edition of the text. We are pleased and honoured to have an insightful foreword from Richard Fisher AM, who, among other distinguished positions, was a commissioner on the 1988 ALRC report headed by the late Ron Harmer. Mr Fisher reminds us of the focus on corporate restructuring in the Harmer Report, in support of our re-focus of the book, and at the same time acknowledges that, with thirty years now having passed since that Report, it is time for a further review of insolvency law to be conducted. We would like to thank readers who have made suggestions for inclusions in the book, in particular Peter Agardy, Christopher Athanassios, Associate Professor David Brown,

Preface ix

Amanda Coneyworth, Associate Professor Anil Hargovan, Jim Johnson, Morgan Kelly, Kane Kersaitis, Nicholas Mirzai, Catherine Nguyen, Renee Stevens, Allison Silink, Geoff Green, Professor Christopher Symes and Mark Wellard. We are pleased to see that Lara Weeks has returned as editor for this edition. Michael Murray has continued to focus mainly on the personal insolvency chapters, and Jason Harris on the corporate, but we both reviewed and contributed to the whole of the text. Jason made the major contribution to the restructuring chapter. Jason would like to thank his undergraduate and postgraduate insolvency students at UTS over the past fourteen years whose probing questions and enthusiasm for the topic have greatly contributed to his understanding of insolvency law. Most importantly, Jason thanks his family, Kathy, Ciaran, Erin and Katie, for their continuing love and support. We have stated the law and law reform as available to us as at May 2018.

MICHAEL MURRAY JASON HARRIS Sydney May 2018

Table of Contents Foreword ................................................................................................................................. v Preface

.............................................................................................................................. vii

Glossary

........................................................................................................................... xiii

Table of Cases Table of Statutes

................................................................................................................... xv ............................................................................................................. lxxi

PART I: INTRODUCTION ................................................................................................ 1 Chapter 1: Introduction to Insolvency – the Law, Policy and Current Issues ........ 3 PART II: PERSONAL INSOLVENCY – BANKRUPTCY ARRANGEMENTS FOR INDIVIDUALS ........................................................................................................... 45 Chapter 2: Introduction to Bankruptcy and its Administration .............................. 47 Chapter 3: Going Bankrupt – Voluntary and Compulsory Bankruptcy ................ 99 Chapter 4: Impact of Bankruptcy .............................................................................. 147 Chapter 5: Recovery of Assets for Creditors ............................................................ 185 Chapter 6: Administration of the Bankruptcy

......................................................... 219

Chapter 7: End of a Bankruptcy and Beyond

......................................................... 289

PART III: PERSONAL INSOLVENCY – NON-BANKRUPTCY ARRANGEMENTS FOR INDIVIDUALS ................................................................................................ 317 Chapter 8: Personal Insolvency Agreements ............................................................ 319 Chapter 9: Debt Agreements ....................................................................................... 355 PART IV: CORPORATE INSOLVENCY – LIQUIDATION ..................................... 377 Chapter 10: Introduction to Liquidation and Its Administration ......................... 379 Chapter 11: Voluntary and Compulsory Winding Up ............................................. 439 Chapter 12: Provisional Liquidation ......................................................................... 485 Chapter 13: Effects of Winding Up ............................................................................ 497 Chapter 14: Assets Available to the Liquidator ....................................................... 513 Chapter 15: Administration of the Winding Up ...................................................... 563 Chapter 16: Criminal Offences and Civil Actions Against Company Directors .. 625 Chapter 17: Termination of the Winding Up: Deregistration and Reinstatement ........................................................................................................ 657

xii

Table of Contents

PART V: CORPORATE INSOLVENCY – NON-LIQUIDATION ARRANGEMENTS .................................................................................................. Chapter 18: Receivership ............................................................................................ Chapter 19: Voluntary Administration ...................................................................... Chapter 20: Deeds of Company Arrangement ......................................................... Chapter 21: Restructuring and Workouts ................................................................

675 677 751 835 881

Index ................................................................................................................................... 919

Glossary AFSA AIIP APES 110 APES 330 ARITA ARITA Code

Australian Financial Security Authority Association of Independent Insolvency Practitioners Code of Ethics of Professional Accountants Accounting Professional and Ethical Standard APES 330 – Insolvency Services Australian Restructuring Insolvency & Turnaround Association ARITA Code of Professional Practice for Insolvency Practitioners, 3rd ed,

2014 ASIC ASIC Act ATO, or DCT Bankruptcy (Estate Charges) Act Bankruptcy Act Clyne Report

Australian Securities and Investments Commission Australian Securities and Investments Commission Act 2001 (Cth) Australian Taxation Office, or Deputy Commissioner of Taxation Bankruptcy (Estate Charges) Act 1997 (Cth)

Courts’ Corporations Rules

Being the Federal Court (Corporations) Rules 2000 (Cth); Supreme Court

Bankruptcy Act 1966 (Cth) Report of the Committee appointed by the Commonwealth AttorneyGeneral to Review the Bankruptcy Law of the Commonwealth, chaired by Sir Thomas Clyne, 1962 Corporations Act Corporations Act 2001 (Cth) Courts’ Federal Court (Bankruptcy) Rules 2016 and the Federal Circuit Court Bankruptcy Rules (Bankruptcy) Rules 2016 (which are largely identical).

Cross-Border Insolvency Act DIRRI DOCA, or deed Family Law Act FSI Report Harmer Report IGPD IGPG IGPS ILRA

(Corporations) Rules 1999 (NSW); Supreme Court (Corporations) Rules 2003 (Vic); Supreme Court (Corporations) (WA) Rules 2004 (WA); Corporations Rules 2003 (SA), Corporations Supplementary Rules 2015 (SA); Supreme Court (Corporations) Rules 2008 (Tas); Corporations Law Rules (NT); Court Procedures Rules 2006 (ACT), as applicable in any given case. Cross-Border Insolvency Act 2008 (Cth) Declaration of Independence, Relevant Relationships and Indemnities Deed of company arrangement Family Law Act 1975 (Cth) Financial System Inquiry Report, December 2014 The Law Reform Commission, Report No 45, General Insolvency Inquiry, ALRC 45, Commissioner, Ron Harmer Inspector-General Practice Direction Inspector-General Practice Guideline Inspector-General Practice Statement Insolvency Law Reform Act 2016 (Cth)

xiv

Glossary

Innovation Agenda Liquidator NPII PIA, or agreement PIPA PPSA PPSR, or Register PPS Registrar Pre-pack 2015 Productivity Commission Report RDAA, or administrator RATA Regulatory Guide, or RG Standards SOA TMA Trustee, registered trustee

The National Innovation & Science Agenda, December 2015 Registered liquidator National Personal Insolvency Index Personal insolvency agreement Personal Insolvency Professionals Association Personal Property Securities Act 2009 (Cth) Personal Property Securities Register Registrar of Personal Property Securities Pre-packaged insolvency Business Set-up, Transfer and Closure, Report No 75, 30 September 2015

Registered debt agreement administrator Report as to affairs ASIC Regulatory Guides Insolvency Practice Rules (Bankruptcy) Division 42 Statement of affairs (personal insolvency) Turnaround Management Association Registered trustee in bankruptcy

Table of Cases A AAA Financial Intelligence Ltd, Re [2014] NSWSC 1004 ......................................................... 10.460 AAA Financial Intelligence Ltd (No 2), Re [2014] NSWSC 1270 ............................... 10.455, 10.460 ABC Learning Centres Ltd, Re; Application by Walker (No 8) [2009] FCA 994; (2009) 73 ACSR 478 ............................................................................................................................ 19.310 ABL Nominees Pty Ltd v Trinick [2016] FCA 996 ....................................................................... 6.110 ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1 .......................................................................................................................................... 18.45 ACCC v ABB Power Transmission Pty Ltd [2004] FCA 819; [2004] ATPR 42-011 .................. 17.85 ACCC v ASIC [2000] NSWSC 316; (2000) 34 ACSR 232 ...................... 17.85, 17.90, 17.95, 17.100 ACCC v ASIC, in the matter of SensaSlim Australia Pty Ltd (in liq) [2015] FCA 258 .. 17.85, 17.90 ACCC v Black on White Pty Ltd [2004] FCA 363; (2004) 138 FCR 314; (2004) 2 ABC (NS) 183 ............................................................................................................................ 6.465 ACCC v Dataline.net.au Pty Ltd [2007] FCAFC 146; (2007) 161 FCR 513 ............................... 13.65 ACCC v Get Qualified Australia Pty Ltd (in liq) (No 3) [2017] FCA 1018 ................................ 13.65 ACCC v Hartwich [2002] FCA 273 ............................................................................................... 4.220 ACCC v Morild Pty Ltd [2017] FCA 1308 ................................................................................. 15.275 ACCC v Phoenix Institute of Australia Pty Ltd (Subject to DOCA) [2016] FCA 1246 ........... 15.250, 20.175 ACCC v The Bio Enviro Plan Pty Ltd (2004) 2 ABC (NS) 130; [2004] FCA 415 .................... 4.150 ACES Sogutlu Holdings Pty Ltd (in liq) v Commonwealth Bank of Australia [2014] NSWCA 402 ............................................................................................................................. 18.260 ACM Group Ltd v Achram [2017] FCCA 2558 ............................................................................ 3.445 ACN 002 408 040 Pty Ltd, Re [2013] NSWSC 470; (2013) 94 ACSR 485 ............................... 17.50 ACN 078 272 867 Pty Ltd v DCT; Binetter v DCT [2011] HCA 46; (2011) 282 ALR 607 ............................................................................................................................................... 17.70 ACN 078 272 867 Pty Ltd v DCT; Binetter v DCT [2011] HCA 46; (2011) 85 ACSR 247 ............................................................................................................................... 17.100, 17.110 ACN 151 726 224 Pty Ltd (in liq), Re [2016] NSWSC 1801 .................................................... 10.295 ACN NPD 008 144 536 Ltd, Re [2004] NSWSC 450; (2004) 49 ACSR 527 ........................... 19.135 AE&E Australia Pty Ltd (in liq), Re [2017] NSWSC 950 .......................................................... 15.350 AGL Victoria Pty Ltd v Lockwood [2003] VSC 453; (2003) 10 VR 596 ................................. 18.440 AIDC v Co-operative Farmers & Graziers Direct Meat Supply Ltd [1978] VR 633 ................ 18.425 ANZ Banking Group Limited, in the matter of James v James [2016] FCA 332 ............ 3.225, 3.345 ASC v Cooke (1997) 15 ACLC 435 ............................................................................................. 18.135 ASC v Forem-Freeway Enterprises Pty Ltd [1999] FCA 179; 30 ACSR 339 .............................. 4.220 ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 ....................................................... 20.125 ASC v Solomon (1996) 19 ACSR 73 ...................................................................... 12.30, 12.35, 12.60 ASIC v ActiveSuper Pty Ltd (in liq) [2015] FCA 342 ................................................................ 14.239 ASIC v Activesuper Pty Ltd (No 2) [2013] FCA 234; (2013) 93 ACSR 189 .............................. 12.35 ASIC v Ariff [2009] NSWSC 829 ................................................................................... 10.435, 10.445 ASIC v Australian Investors Forum Pty Ltd (2003) 44 ACSR 503 ............................................ 18.150 ASIC v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267 ...................................... 7.95 ASIC v Burnard [2007] NSWSC 1217; (2007) 25 ACLC 1505 ................................................. 18.130 ASIC v Diploma Group Ltd (No 5) [2017] FCA 1147 ................................................................. 19.35

xvi

Table of Cases

ASIC v Edge [2007] VSC 170; (2007) 211 FLR 137 ........................... 2.225, 10.205, 10.250, 10.330 ASIC v Edwards [2009] NSWCA 424; (2009) 76 ACSR 369 ............................................... 1.65, 1.80 ASIC v Forestview Nominees Pty Ltd [2006] FCA 1530; (2006) 24 ACLC 1567 ...... 18.422, 18.423 ASIC v Forge [2003] FCAFC 274; (2003) 133 FCR 487 ........................... 3.215, 3.280, 3.335, 3.380 ASIC v Franklin; Re Walton Constructions Pty Ltd [2014] FCAFC 85; (2014) 223 FCR 204 ............................................................................................ 10.210, 10.445, 19.140, 19.145 ASIC v Gognos Holdings Ltd [2017] QSC 207 ............................................................................. 11.55 ASIC v Healey [2011] FCA 717; (2011) 196 FCR 291 ................................................................ 16.35 ASIC v Karl Suleman Enterprises Pty Ltd [2003] NSWSC 400; (2003) 45 ACSR 401 ........... 10.300 ASIC v Krecichwost [2007] NSWSC 1458 ................................................................................. 18.130 ASIC v Lanepoint Enterprises Pty Ltd [2011] HCA 18; (2011) 244 CLR 1 ................. 11.270, 11.305 ASIC v Lawrenson Light Metal Die Casting Pty Ltd (1999) 158 FLR 307 .............................. 18.470 ASIC v Lee [2007] FCA 918 ........................................................................................................ 18.130 ASIC v Letten (No 13) [2011] FCA 1151; (2011) 86 ACSR 174 ................................. 18.430, 18.440 ASIC v Loiterton [2004] NSWSC 897; (2004) 50 ACSR 693 ..................................................... 4.150 ASIC v Macdonald (No 11) [2009] NSWSC 287; (2009) 230 FLR 1 ......................................... 16.35 ASIC v McKenney Consulting Pty Ltd [2003] VSC 527; (2003) 21 ACLC 314 ...................... 19.230 ASIC v Midland Highway Pty Ltd (Admin apptd) [2015] FCA 1360; (2015) 110 ACSR 203 ...................................................................................................... 10.280, 15.110, 20.270 ASIC v Neolido Holdings Pty Ltd [2006] QCA 266 ................................................................... 16.175 ASIC v Oceanic Asset Management Pty Ltd [2015] FCA 966 ........................................ 12.05, 18.130 ASIC v Planet Platinum Ltd (in liq) [2016] VSC 120; (2016) 112 ACSR 570 ................ 19.40, 19.42 ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126 ............................. 1.60, 16.90, 16.95, 16.100 ASIC v Radisson Maine Property Group (Aust) Pty Ltd [2004] NSWSC 949; (2004) 51 ACSR 420 ................................................................................................................................ 1.40 ASIC v Rich [2003] NSWSC 85; (2003) 21 ACLC 450 ............................................................... 16.20 ASIC v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 ............................................................... 16.42 ASIC v Samson [1997] FCA 739; (1997) 24 ACSR 555 .............................................................. 15.15 ASIC v Sigalla [2009] NSWSC 1205; (2009) 74 ACSR 710 ..................................................... 18.130 ASIC v Somerville [2009] NSWSC 934; (2009) 77 NSWLR 110 ............................................... 16.70 ASIC v Storm Financial Ltd [2009] FCA 269; (2009) 71 ACSR 81 .......................................... 19.425 ASIC v Tax Returns Australia Dot Com Pty Ltd [2010] FCA 715 ............................................... 12.05 ASIC v Uglii Corporation Ltd [2016] FCA 1099 .......................................................................... 12.35 ASIC v Westpoint [2006] FCA 135; (2006) 56 ACSR 646 ......................................................... 10.220 ASIC, Re; Sino Australia Oil and Gas Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 1488 ........................................................................................... 15.275 ASP Holdings Ltd v Pan Australia Shipping Pty Ltd [2006] FCA 1379; (2006) 235 ALR 554 ................................................................................................................................... 19.250 Abignano v Wenkart [1998] FCA 1468 .......................................................................................... 3.305 Access Elevators Australia Pty Ltd, Re [2016] NSWSC 739 ...................................................... 11.185 Accord Pacific Holdings Pty Ltd v Gleeson [2011] NSWSC 1021 ............................................ 10.215 Aced Kang Investments Pty Ltd, Re [2017] FCA 476 .................................................................. 14.15 Active Adult Management Pty Ltd v Milstern Retirement Living Pty Ltd [2017] NSWSC 1238 ............................................................................................................................. 13.55 Actwane Pty Ltd, Re [2002] NSWSC 572; (2002) 42 ACSR 307 .............................................. 18.425 Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409 ............................................................. 3.285 Adler v Qintex Group Management Services Pty Ltd [1996] QCA 464; (1996) 22 ACSR 446 ................................................................................................................................. 15.145 Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201 .... 2.225, 2.235, 2.275, 4.115, 6.300, 10.450 Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 12 ACLC 701; 14 ACSR 230 ..................................................................................... 10.210, 19.140 Ah Toy v Registrar of Companies (1986) 10 FCR 356 ....................... 10.240, 10.250, 10.330, 10.440

Table of Cases

xvii

Ahern v DCT [1987] FCA 312; (1987) 76 ALR 137 ........................................................... 2.08, 3.390 Air Services Australia v Ferrier [1996] HCA 54; (1996) 185 CLR 483 ......................... 5.240, 14.120 Airlines Airspares Ltd v Handly Page Ltd [1970] 1 Ch 193 ....................................................... 18.550 Akers v DCT [2014] FCAFC 57; (2014) 223 FCR 8 ......................................... 13.60, 14.235, 15.435 Akers v Saad Investments Co Ltd [2010] FCA 1221; (2010) 190 FCR 285 ................................ 13.60 Akron Roads Pty Ltd (in liq) (No 3), Re [2016] VSC 657 ............................................... 6.500, 16.15 Alabama, New Orleans, Texas and Pacific Junction Railway Co, Re [1891] 1 Ch 213 ............ 20.125 Alafaci, Re (1976) 9 ALR 262 ........................................................................................................ 6.255 Alati v Wei Sheung [2000] NSWSC 601; (2000) 34 ACSR 489 ................................................ 11.210 Albert v Namba Pty Ltd (1997) 15 ACLC 1242; 24 ACSR 577 ................................................ 19.265 Alexander’s Securities (No 2), Re [1983] 2 Qd R 597 ................................................................ 11.215 Alfaro v Crown Commercial Cleaning Pty Ltd [2012] FMCA 478 ............................................ 10.190 Alia v Pattison [2006] FMCA 690; (2006) 231 ALR 656 ............................................................. 7.125 Alice Alderson, In re; Ex parte Jackson [1895] 1 QB 183 ............................................................ 3.180 Aliferis v Kyriacou (2000) 1 VR 447 ............................................................................................. 6.465 All Saints v Tahatos [2004] FMCA 477 ......................................................................................... 3.340 Allatech Pty Ltd v Construction Management Group Pty Ltd [2002] NSWSC 293; (2002) 41 ACSR 587 ................................................................................................................ 20.245 Allchurch, Re [1993] FCA 392; (1993) 44 FCR 182 .................................................................... 7.180 Alleasing Pty Ltd; Re OneSteel Manufacturing Pty Ltd [2017] FCA 656 ................................... 14.20 Allebart Pty Ltd, Re [1971] 1 NSWLR 24 ................................................................................... 15.110 Allen v Feather Products Pty Ltd [2008] NSWSC 259; (2008) 72 NSWLR 597 ...................... 15.320 Allied Mills Pty Ltd v Kiriakidis [2006] FMCA 1164 .................................................................. 9.115 Almassy, Re [1999] FCA 1004; (1999) 92 FCR 597 ....................................................................... 7.85 Aloridge Pty Ltd v Christianos [1994] FCA 972 ........................................................................... 12.70 Alsafe Security Products Pty Ltd (in liq), Re [2016] NSWSC 428 ............................................ 14.205 Ambrose v Poumako [2012] FCA 889 ............................................................................................. 5.35 Ambrose (Trustee) in the matter of Poumako (Bankrupt) v Poumako (No 3) [2013] FCA 22 ........................................................................................................................................ 5.240 American Express Australia Ltd v Michaels [2010] FMCA 103 .................................................. 3.225 American Express International Inc v Held [1999] FCA 321; (1999) 87 FCR 583 ......... 3.220, 3.365 Amerind Pty Ltd (recs and mgrs apptd) (in liq), Re [2017] VSC 127; (2017) 121 ACSR 206 ................................................................................................................................. 15.350 Ames v Birkenhead Docks Trustees [1855] Eng R 373 .............................................................. 18.565 Amorin Constructions Pty Ltd v Kamtech Electrical Services Pty Ltd [2008] NSWSC 285; (2008) 73 NSWLR 627 ........................................................................................ 3.350, 11.230 Amos v Brisbane TV Ltd (2000) 100 FCR 82; [2000] FCA 825 ................................................. 3.325 Anasis, Re (1985) 11 FCR 127; [1985] FCA 458 ............................................................................ 7.80 Andersen v Lennon [2017] FCCA 2452 ........................................................... 1.15, 1.25, 2.195, 2.350 Andersens Home Furnishing Co Pty Ltd, Re (1996) 14 ACLC 1,710 ............................ 19.85, 20.130 Anderson Formrite Pty Ltd v CASC Hire Pty Ltd [2005] FCA 1424; (2005) 147 FCR 379 ............................................................................................................................................... 11.95 Anderson Rice v Bride [1995] FCA 1627; (1995) 61 FCR 529 ................................................... 3.340 Andrew v Zant Pty Ltd [2004] FCA 1716 .............................................................................. 5.70, 5.95 Andrews, Re (1958) 18 ABC 181 ................................................................................................... 6.250 Anglican Development Fund Diocese of Bathurst (receivers & managers appointed), In the matter of [2015] NSWSC 440 ........................................................................................... 15.285 Anglican Development Fund Diocese of Bathurst Board, Re [2015] NSWSC 6 ....................... 18.535 Anglican Development Fund Diocese of Bathurst Board (rec and man Apptd), Re [2017] NSWSC 967 ................................................................................................................. 18.495 Anglo Coal (Drayton Management) Pty Ltd [2004] NSWSC 604; (2005) 23 ACLC 82 .......... 17.100 Anmi Pty Ltd v Williams [1981] 2 NSWLR 138; 52 FLR 309 .................................................... 6.320

xviii

Table of Cases

Anne v Ask Funding Ltd [2015] FCA 1111 ........................................................................ 3.200, 3.220 Anscor Pty Ltd v Clout [2004] FCAFC 71; (2004) 135 FCR 469; 1 ABC (NS) 558 ......... 2.95, 4.25, 5.30, 5.15, 5.35, 5.55, 5.240 Ansett, Re; Ex parte Ansett v Pattison [1995] FCA 1173; (1995) 56 FCR 526 ........................... 7.125 Ansett Australia, Re [2002] FCA 90; (2002) 20 ACLC 1,187 ...................................................... 19.10 Ansett Australia, Re; Rappas v Ansett [2001] FCA 1348; (2001) 39 ACSR 296 .......... 19.90, 19.155, 19.170, 19.390 Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2002] VSCA 117; (2002) 176 FLR 576 ................................................................................. 15.400 Ansett Australia Ltd v Ansett Australia Ground Staff Superannuation Plan Pty Ltd [2002] VSC 114; (2002) 41 ACSR 598 .................................................................................. 20.220 Ansett Australia Ltd, Re [2006] FCA 277; (2006) 151 FCR 41 ................................................... 20.15 Ansett Australia Ltd (No 1), Re [2001] FCA 1806; (2001) 115 FCR 376 ................................. 19.390 Ansett Australia Ltd (No 3), Re [2002] FCA 90; (2002) 115 FCR 409 ..................................... 19.170 Apostolou v VA Corporation Aust Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 ....................... 14.15 Appleyard Capital Pty Ltd, Re [2014] NSWSC 782; (2014) 101 ACSR 629 ..... 13.70, 14.20, 14.270 Application in the matter of Kelly (No 2) [2015] FCCA 3036 ..................................................... 6.530 Application of Tsantis (in the Matter of Bauer) [2010] FMCA 112 ............................................. 6.530 Aprais Pty Ltd, Re [2003] QSC 329; [2004] 1 Qd R 450 ............................................................. 11.10 Aquaqueen International Pty Ltd, Re [2014] NSWSC 527 ........................................................... 11.60 Aquila Resources Ltd v Pasminco Ltd [2002] WASC 53 ............................................................ 19.250 Arafura Finance Corporation Pty Ltd v Kooba Pty Ltd (No 2) [1987] NTSC 64; 12 ACLR 331 ................................................................................................................................... 17.20 Aravanis & Roy v Destanovic [2016] FCA 388 ............................................................................ 5.265 Arcabi Pty Ltd, Re; Ex parte Theobald [2014] WASC 310; (2014) 288 FLR 236 ....... 18.325, 19.110 Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3; 157 ACTR 22 ......................................................................................................... 11.190 Arcfab Pty Ltd v Boral Ltd [2002] NSWSC 1188; (2002) 43 ACSR 573 ................................. 20.200 Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1992) 11 ACSR 1 ........................ 11.250 Ariff v Fong [2007] NSWCA 183; (2007) 25 ACLC 1079 ......................................................... 15.180 Ariff v Fong [2010] NSWSC 696; (2010) 240 FLR 300 ............................................................ 20.150 Arnold World Trading Pty Ltd v ACN 133 427 335 Pty Ltd [2010] NSWSC 1369; (2010) 80 ACSR 670 ...................................................................................................... 17.50, 17.85 Arogen v Leighton [2013] NSWSC 1099 .................................................................................... 19.250 Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 ............. 18.260 Arundell and Inspector-General in Bankruptcy [2006] AATA 88; 3 ABC (NS) 620 ................... 7.130 Asden Developments Pty Ltd v Dinoris (No 3) [2016] FCA 788; (2016) 114 ACSR 347 ............................................................................................................................................. 10.245 Asden Developments Pty Ltd (in liq) v Dinoris [2017] FCAFC 117 ......................................... 10.245 Asfar & Co v Blundell [1896] 1 QB 123 ..................................................................................... 19.275 Ashington Bayswater Pty Ltd, Re [2013] NSWSC 1008 ................................................. 14.85, 14.135 AssetInsure Pty Ltd v New Cap Reinsurance Corp Ltd [2004] NSWCA 225; (2004) 61 NSWLR 451 ............................................................................................................................. 15.250 AssetInsure Pty Ltd v New Cap Reinsurance Corp Ltd [2006] HCA 13; (2006) 225 CLR 331 ................................................................................................................................... 15.250 Associated Dominions Assurance Society Ltd, Re (1962) 109 CLR 516 ..................................... 13.80 Athans, Re; Ex parte Athans (1991) 29 FCR 302 .......................................................................... 3.325 Atlas Iron Ltd, Re [2016] FCA 366; (2016) 112 ACSR 554 ...................................................... 21.120 Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585 .................. 19.120, 19.250 Atwell & Co Pty Ltd (in liq), Re [2017] VSC 683 ..................................................................... 10.455 Auburn Council v Austin Australia Pty Ltd [2004] NSWSC 141; (2004) 22 ACLC 766 ......... 19.250

Table of Cases

xix

Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 182; (2007) 61 ACSR 524 ................................................................................................................................. 20.100 Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 289; (2007) 25 ACLC 415 ................................................................................................................................. 19.345 Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2008] HCA 9; (2008) 232 CLR 314 ................................................................................................................ 11.110 Austar Finance Group v Campbell [2007] NSWSC 1493; (2007) 25 ACLC 1834 .................... 11.100 Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 ........................................................................................................................ 6.430 Austral Brick Co Pty Ltd v Tome Daskalovski [1998] FCA 782 ................................................. 7.165 Austral Family Homes Pty Ltd, Re (1992) 28 NSWLR 247 ......................................................... 17.55 Australasian Barrister Chambers Pty Ltd (in liq), Re [2017] NSWSC 597 ................................ 18.265 Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 ............. 19.385, 19.395 Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane (a Bankrupt) [2017] FCA 696 ................................................................. 6.285 Australia and New Zealand Banking Group Ltd v Elferkh [1999] FCA 1049; (2000) 92 FCR 195 ...................................................................................................................................... 3.385 Australia and New Zealand Banking Group Ltd v Foyster [2000] FCA 400 ............................... 3.395 Australia and New Zealand Banking Group Ltd v Shilton [2015] FCCA 1783 ............................. 7.60 Australia and New Zealand Banking Group Ltd v TJF/EBC Pty Ltd [2006] NSWSC 25; (2006) 24 ACLC 327 ......................................................................................................... 15.410 Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374 .......................................................................... 11.250 Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd (2007) 213 FLR 450; [2007] NSWSC 966 ......................................................................................................... 11.275 Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2008] NSWSC 3; (2008) 26 ACLC 74 .................................................................................................... 11.215, 11.280 Australian Consolidated Investments Ltd v Woodings (1996) 16 WAR 388 .............................. 15.300 Australian Guarantee Corporation v Lawrence (1999) 17 ACLC 1,226 ........................ 20.250, 20.255 Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95; (2015) 106 ACSR 79 ............................................................................ 15.305, 19.10, 20.95, 20.120 Australian Industry Development Corp v Co-op Farmers & Graziers Direct Meat Supply Ltd [1978] VR 633 ...................................................................................................... 18.565 Australian Kitchen Industries Pty Ltd v Albarran [2005] NSWSC 1047; (2005) 51 ACSR 604 ................................................................................................................................... 14.80 Australian Liquor, Hospitality & Miscellaneous Workers Union v Home Care Transport Pty Ltd [2002] FCA 497; (2002) 117 FCR 87 .......................................................................... 13.55 Australian Property Custodian Holdings Ltd, Re [2010] VSC 492 ............................................... 19.30 Australian Prudential Regulation Authority v Rural & General Insurance Ltd [2004] FCA 185; (2004) 136 FCR 149 ............................................................................................... 19.255 Australian Resources Ltd, Re (2004) 52 ACSR 452 .................................................................... 11.300 Australian Solar Electrics Pty Ltd v IPD Group Ltd [2012] FCA 786 ....................................... 11.100 Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33 ............................ 3.295 Australian Workers’ Union v Bowen (No 1) [1946] HCA 24; (1946) 72 CLR 575 ......... 3.135, 3.210 Autodom Ltd, Re [2012] FCA 1393 ............................................................................................. 19.310 Autron Pty Ltd v Benk [2011] FCAFC 93; (2011) 195 FCR 404 .......................... 3.155, 3.205, 3.340 Avonwick Holdings Ltd v Shlosberg [2016] EWCA Civ 1138 ....................................................... 4.50 Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319; (2010) 183 FCR 521 ............................................................................................................................................... 3.320 Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal [2017] FCA 599 .............. 3.445 Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal (No 2) [2017] FCA 1186 ........................................................................................................................ 6.425, 6.555

xx

Table of Cases

Ayerst v C & K (Constructions) Ltd [1976] AC 167 ............................................ 13.10, 13.25, 15.295 Ayoub, Re; ex parte Silvia [1983] FCA 112; (1983) 67 FLR 144 ................................................ 2.250 Ayres v Evans (1981) 56 FLR 235; [1981] FCA 213 .................................................................... 6.182

B B&M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1995) 15 ACSR 433 ............................................................................................................................................... 11.95 B Johnson & Co (Builders) Ltd, Re [1955] Ch 634 .................................................................... 18.195 B Pty Ltd v Sykes [2013] FamCA 359 .......................................................................................... 4.120 B Pty Ltd v Sykes [2014] FamCA 451 .......................................................................................... 4.120 BBC Hardware Ltd v GT Homes Pty Ltd (1997) 15 ACLC 431 .................................... 19.85, 19.250 BDT Holdings Pty Ltd v Piscopo [2009] FCA 151 ....................................................................... 6.520 BE Australia WD Pty Ltd v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 .... 20.165, 20.175, 20.245 BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 ........................................................... 19.215, 19.395 BGC Contracting Pty Ltd v Kimberly Gold Pty Ltd (2000) 35 ACSR 633 ............................... 20.260 BMW Australia Finance Ltd v Geraerts [2004] FMCA 1028 ........................................................ 9.110 BNY Corporate Trustee Services v Eurostar-UK [2013] UKSC 28 ................................................ 1.55 BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 ................................. 14.175 BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 ...................................................................... 13.55 BPTC Ltd (No 2), Re (1992) 10 ACLC 1431 .............................................................................. 15.185 BTS Bearings Pty Ltd v Transmission Supplies Pty Ltd (1983) 1 ACLC 923 .......................... 21.145 BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611; [2004] 3 ABC (NS) 70 ....... 3.120, 7.85 Bacchus Distillery Pty Ltd, Re [2014] VSC 111; (2014) 98 ACSR 539 ....................... 19.180, 19.185 Bacnet Pty Ltd v Lift Capital Partners Pty Ltd [2010] FCAFC 36; (2010) 183 FCR 384 ............................................................................................................................................. 19.365 Bairnsdale Food Products Ltd, Re (1948) VLR 264 .................................................................... 10.335 Baker v Landon [2010] FMCAfam 280 ......................................................................................... 4.135 Ballieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 3597 ........................................................................................................................... 11.275 Bank of Australasia v Hall (1907) 4 CLR 1514 .............................................................................. 1.40 Bank of Baroda Ltd v Panessar [1987] Ch 335 ............................................................................. 18.85 Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86 ......................... 18.215 Bank of Western Australia Ltd v Abdul [2012] VSC 222 ........................................................... 18.160 Bank of Western Australia Ltd v Clift [2010] QSC 366; (2010) 80 ACSR 163 .......................... 19.85 Bankruptcy, Treason and Other Crimes [2001] 1 INSLB 138 ......................................................... 2.08 Banksia Securities Limited (in liq) (rec and man apptd), In the matter of [2016] NSWSC 357 ............................................................................................................................. 18.495 Banksia Securities Ltd (No 2), Re [2015] NSWSC 1449 .............................................................. 18.90 Banksia Securities Ltd (in liq) (rec and man apptd), Re [2017] NSWSC 540 ............. 18.240, 18.495 Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235 ........ 11.160, 11.190 Barclays Bank Ltd v Quistclose Investments Limited [1970] AC 567 ......................................... 5.150 Barclays Bank plc, Re [2012] NSWSC 1095 ............................................................................... 14.270 Barnes v Addy (1874) LR 9 Ch App 244 ...................................................................................... 16.45 Barnet v Zhang [2017] FCA 924 .................................................................................................... 6.530 Bartercard v Wily [2001] NSWCA 262; (2001) 39 ACSR 94 ...................................................... 14.80 Bartex Fabrics Pty Ltd v Phillips Fox (1994) 12 ACLC 462 ........................................................ 11.80 Barton v Malcolm Johns Legal Pty Ltd (No 2) [2015] FCA 166 ................................................. 3.335 Barton v Official Receiver (1986) 161 CLR 75 ........................................................................... 14.220

Table of Cases

xxi

Baseline Constructions Pty Ltd (Subject to DOCA), Re [2017] NSWSC 1018 ............ 20.55, 20.125, 20.175 Bassoak Pty Ltd v Rellgrove Pty Ltd [2006] NSWSC 262; (2006) 57 ACSR 86 ....................... 15.15 Bastion v Gideon Investments Pty Ltd (No 2) [2000] NSWSC 959 ............................................. 4.110 Bathurst City Council v Events Management Specialist Pty Ltd [2001] NSWSC 34; (2001) 36 ACSR 732 ................................................................................................................ 20.375 Batrouney v Forster [2015] VSC 541 .............................................................................. 18.205, 18.500 Battenberg v Restom [2007] FCAFC 195; 5 ABC (NS) 533 ........................................................ 3.160 Bayswood Pty Ltd, Re (1981) 6 ACLR 107 .................................................................................. 12.65 Bcode Pty Ltd, Re [2012] NSWSC 1530 ..................................................................................... 15.360 Beach Petroleum NL v Johnson (1992) 9 ACSR 404 .................................................... 18.130, 18.135 Beaman v Bond [2013] FCA 534 ................................................................................................... 2.370 Beaman v Bond [2017] FCAFC 142 ............................................................................. 7.65, 7.75, 7.85 Beatty v Brashs Pty Ltd (1998) 79 FCR 551 ................................................................... 19.42, 20.300 Bechrose Pty Ltd v Jefferson (Trustee) [1999] FCA 1153 ............................................................. 6.110 Beechworth Land Estates Pty Ltd, Re [2015] NSWSC 733; (2015) 106 ACSR 495 ... 19.165, 19.390 Behan, Re (1995) 13 ACLC 1644 .................................................................................................. 19.85 Bele & Company Pty Ltd, In the matter of [2017] NSWSC 1824 ............................................. 17.110 Bell Group Ltd, The v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1 ........................................................................................................ 1.75, 16.30, 16.70, 16.75 Bell Group Ltd, The v Westpac Banking Corporation (1997) 18 WAR 21 ................................ 15.420 Bell Group Ltd (in liq) v DCT [2015] FCA 1056 ....................................................................... 14.260 Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1 .......................................................................................................................................... 1.30 Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38; [2012] 1 AC 383 ......................................................................................... 13.72, 20.180 Benbow v Scales [2002] NSWCIMC 184 ....................................................................... 15.235, 18.345 Benda, Re [1985] FCA 143; (1985) 6 FCR 346 ............................................................................ 4.235 Bendel, Re; Ex parte Bendel v Pattison [1997] FCA 1295; (1997) 80 FCR 123 ........................... 7.45 Bendigo & Adelaide Bank Ltd v Feldman [2013] FCCA 241 ...................................................... 3.460 Benton, in the matter of Mackay Rural Pty Ltd [2014] FCA 1285 ............................................ 18.215 Berkeley Applegate (Investment Consultants) Ltd (in liq), Re [1989] Ch 32 ............... 10.460, 15.350 Bernsteen Pty Ltd (No 2), Re [2007] FCA 48; (2007) 25 ACLC 129 ........................................ 15.180 Bevillesta Pty Ltd, Re [2011] NSWSC 417 ...................................................................... 10.130, 20.80 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 ................................................................................................................ 20.255 Bilios and Inspector-General in Bankruptcy [2012] AATA 873 .................................................... 6.365 Bill Express Ltd, Re; Di Donato v Crosbie [2010] VSC 101; (2010) 77 ACSR 556 ... 15.160, 15.180 Biposo Pty Ltd, Re (1995) 120 FLR 399 ............................................. 10.205, 10.355, 10.445, 19.420 Bird, Re; Ex parte Azzopardi [1979] FCA 95; (1979) 39 FLR 277 ............................................. 4.210 Bird, Re; Ex parte Gregoriades [1979] FCA 96; (1979) 39 FLR 295 .......................................... 4.210 Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181 ..................................................... 11.135 Blackjack Executive Car Services Pty Ltd v Koulax [2002] VSC 380 ........................................ 13.35 Blackshaw Services Pty Ltd v Cureton (2003) 1 ABC (NS) 453 ................................................. 3.295 Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391 ............................................................................... 19.10, 19.255, 20.270 Blue Ridge WA Pty Ltd (in liq), Re [2015] FCA 567 ................................................................. 15.160 Bluebrook Ltd, Re [2009] EWHC 2114 ....................................................................................... 21.115 Bluenergy Group Ltd, Re [2015] NSWSC 977; (2015) 107 ACSR 373 . 19.10, 19.30, 19.42, 19.190, 19.390, 19.395, 20.20, 20.95, 20.120 Blundell v Macrocom Pty Ltd [2004] NSWSC 895; (2004) 50 ACSR 549 ............................... 19.255 Boart Longyear Ltd, Re [2017] NSWSC 567 .............................................................................. 20.125

xxii

Table of Cases

Boart Longyear Ltd (No 2), Re [2017] NSWSC 1105 ...................................... 20.125, 21.115, 21.120 Body Corporate Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSC 435 .......... 11.95, 11.175, 11.190 Boensch v Pascoe [2007] FCA 1977; (2007) 5 ABC (NS) 480 .................. 2.205, 2.240, 2.255, 6.450 Bolton & Downs Building Co Ltd v Darling Downs Building Society [1935] St R Qd 237 ............................................................................................................................................. 18.205 Bonberra Pty Ltd v Hawksford (Administrator), in the matter of the Estate of Hawksford [2013] FCA 838 ....................................................................................................... 3.450 Bond v Hong Kong Bank of Australia Ltd (1991) 25 NSWLR 286 ............................................ 18.85 Bond v Rozenes (1995) 67 FCR 122; [1995] FCA 1231 ................................................................ 7.95 Bond v Trustee of Property of Bond (1994) 52 FCR 304 ............................................................. 6.355 Bond v Tuohy [1995] FCA 1085; (1995) 56 FCR 92 ................................................................... 6.225 Bond Corporation Holdings Ltd, Re [1990] 1 WAR 465; 8 ACLC 153 .............. 1.90, 11.165, 11.170 Boné v Smith [2015] FCA 870 ..................................................................................................... 10.320 Boral Bricks Pty Ltd v Davey [2010] QSC 131; [2011] 2 Qd R 301 ........................................ 20.130 Boral Montoro Pty Ltd v McLachlan [2007] FMCA 533 ............................................................. 2.235 Bosnjac Holdings, Re [2005] FCA 275; (2005) 53 ACSR 8 ....................................................... 19.390 Boumelhem v Commonwealth Bank of Australia [2008] FCA 1568; (2008) 171 FCR 462 ............................................................................................................................................... 3.350 Bovis Lend Lease v Wily [2003] NSWSC 467; (2003) 45 ACSR 612 ............ 10.210, 10.240, 20.245 Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471 ............................ 1.65, 16.100 Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325 ........ 18.195, 18.260, 18.265, 18.270 Bradbrook v Farrow Mortgage Services Pty Ltd [1994] FCA 896 ............................................... 3.320 Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 .......................... 19.90, 19.350, 20.130, 20.165 Brashs Holdings Ltd v Shafir (1994) 14 ACSR 192 .................................................................... 19.185 Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 ................................................ 10.240, 19.140 Brentwood Village Ltd, Re [2015] NSWSC 1342 ....................................................................... 15.185 Brian Rochford (admin apptd) Ltd v Textile Clothing & Footwear Union of NSW (1998) 47 NSWLR 47 .............................................................................................................. 19.250 Brien v P&E Phontos Pty Ltd [1999] FCA 1072; (1999) 91 FCR 209 ........................................ 4.115 Briggs, Re (1986) 12 FCR 310 ....................................................................................................... 3.280 Briginshaw v Briginshaw (1938) 60 CLR 336 ............................................................................... 16.90 Brinhaven Pty Ltd v Roticil Pty Ltd (1988) 6 ACLC 503 .......................................................... 14.255 Brink, Re; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 .......... 3.310, 3.320 Britax Childcare Pty Ltd, Re [2016] FCA 848 ............................................................................ 20.255 British Eagle International Airlines v Compagnie Nationale Air France [1975] 2 All ER 390 ................................................................................................................................. 13.72, 20.180 British Investments, Re; Consolidated Entertainments Ltd v Taylor [1937] 4 All ER 432 ............................................................................................................................................. 18.430 British Investments & Development Co Pty Ltd, Re (1979) ACLC 32,100 ... 18.430, 18.440, 18.460, 18.550 Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344 ............................................................................................................................................. 11.175 Brook v Reed [2011] EWCA Civ 331; [2011] 3 All ER 743 ........................................................ 2.205 Brooke v No 5 Lorac Avenue Pty Ltd (1994) 14 ACSR 717 ........................................................ 20.10 Brott v Grey [2000] FCA 1727 ................................................................................ 8.250, 8.285, 8.325 Brown v Carpet Design Group Pty Ltd [1994] FCA 1118; (1994) 50 FCR 526 ....................... 19.420 Brown v Mikulski [2016] FCA 1037 ................................................................................................ 5.75 Brown, Re [1987] FCA 236; (1987) 16 FCR 378 ......................................................................... 8.155 Browne v DCT [1998] FCA 187; (1998) 82 FCR 1 ......................................... 16.145, 16.150, 16.165

Table of Cases

xxiii

Brunninghausen v Glavanics [1998] FCA 230 ............................................................................... 3.330 Bruton Holdings Pty Ltd v Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346 ...................................................................................................................... 14.240, 14.260 Buccaneer Energy Ltd v Buccaneer [2014] FCA 711 .................................................................... 13.60 Buckland Products Pty Ltd v DCT [2003] VSCA 85 .................................................................... 13.25 Buere v Commonwealth Bank of Australia [2014] FCCA 164 ..................................................... 3.200 Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111 ........................................................ 6.315 Bulic v Commonwealth Bank of Australia Ltd [2007] FCA 307; (2007) ABC(NS) 122 .............. 7.65 Buloke Shire Council, Re [2005] FMCA 793 ................................................................................ 6.285 Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491 ..................... 18.85 Bunnings Forest Products Pty Ltd v Bullen [1994] FCA 1460; (1994) 53 FCR 438 ....... 8.120, 8.170 Burlock v Commissioner of Taxation [1994] FCA 1072; (1994) 49 FCR 522 ................. 8.105, 8.275 Burlock, Re [1993] FCA 424 .......................................................................................................... 8.105 Burnells Pty Ltd, Re [1979] Qd R 440; (1979) 4 ACLR 213 ........................................ 10.240, 10.440 Burns v Commissioner of Inland Revenue [2011] NZHC 1363 ................................................... 2.250 Burns v Stapleton (1959) 102 CLR 97 ............................................................................... 5.160, 5.175 Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280 .............................. 10.460 Burns Philp Investments Pty Ltd v Dickens (1993) 11 ACLC 272 ............................................ 10.435 Burns and Geroff v Lorac Mining Pty Ltd (1985) 4 FCR 301 ..................................................... 8.200 Burrell v Connell [1998] FCA 829; (1998) 84 FCR 383 .............................................................. 3.385 Burt, Boulton & Hayward v Ball [1895] 1 QB 276 .................................................................... 18.425 Butterell v Docker Smith Pty Ltd (1999) 41 NSWLR 129 ......................................................... 10.335 Buzzle v Apple Computer [2007] NSWSC 930; [2007] 5 ABC (NS) 322 ................................... 6.465 Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410 .................................................................................................................. 16.15 Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47 ............................................................. 14.135, 14.190, 14.220, 16.15, 21.50 Byron v Southern Star Pty Ltd [1997] FCA 151; (1997) 73 FCR 264 ........................... 3.260, 16.105

C C&E Pty Ltd v CMC Brisbane Pty Ltd [2004] QSC 416; (2005) 51 ACSR 583 ...................... 20.255 C2C Investments Pty Ltd, Re [2012] NSWSC 1443 ................................................................... 11.310 CAC v Harvey [1980] VR 669 ..................................................................................................... 10.205 CBA v Robson [2013] FCA 1430 ................................................................................................... 8.235 CBA Corporate Services (NSW) Pty Ltd v Walker and Moloney, in the matter of ZYX Learning Centres Ltd [2013] FCAFC 74; (2013) 212 FCR 444 ........ 10.90, 11.215, 14.40, 14.165 CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 ............................................................... 11.165 CGU Workers Compensation (NSW) v Rockwall Interiors Pty Ltd (2006) 201 FLR 296 ............................................................................................................................................. 17.105 CK Nominees Australia Pty Ltd v Official Receiver (WA) [2007] FCAFC 118; (2007) 160 FCR 524 ................................................................................................................... 2.125, 6.225 CMI Industrial Pty Ltd, Re; Byrnes v CMI Ltd [2015] QSC 96; (2015) 105 ACSR 635 ........ 18.370, 18.465 CSR Ltd, Re [2010] FCAFC 34; (2010) 183 FCR 358 ............................................................... 20.125 CVC Investments Pty Ltd v PT Aviation (1989) 18 NSWLR 295; 7 ACLC 1218 ........... 1.90, 11.170 Caddy v McInnes [1995] FCA 1464; (1995) 58 FCR 570 ................................................. 5.270, 5.275 Calabretta v Redpen Developments Pty Ltd [2010] FCA 81; (2010) 183 FCR 47 ...................... 19.42 Calgary & Edmonton Land Co Ltd, Re [1975] 1 WLR 355 ......................................................... 17.10 Calia v Cicio [2010] FMCA 385 .................................................................................................... 7.170 Callegher v ASIC [2007] FCA 482; (2007) 218 FCR 81 ................................................... 17.85, 17.90

xxiv Table of Cases

Callender, Sykes and Co v Lagos Colonial Secretary and Davies [1891] AC 460 ......... 6.175, 15.425 Calverley v Green (1984) 155 CLR 242 ........................................................................................ 4.142 Cameron v Cole (1944) 68 CLR 571 ............................................................................................... 7.65 Camm v Linke Nominees Pty Ltd (2010) 190 FCR 193 ................................................................. 5.45 Campbell v Compagnie Générale de Bellegarde (1876) 2 Ch 181 ................................ 18.425, 18.620 Campbell v Metway Leasing Ltd [2002] FCAFC 394; (2002) 126 FCR 14 ................................ 4.115 Campbell Street Theatre Pty Ltd v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 ............................................................................................................................. 14.135 Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; (2006) 229 CLR 386 ................................................................................................................................... 4.120, 6.430 Canadian Solar v ACN 138 535 832 Pty Ltd [2014] FCA 783 .................................................. 20.265 Canberra Advance Bank Ltd v Benny [1992] FCA 530; (1992) 38 FCR 427 .................. 18.70, 18.80 Cannuli Holdings Pty Ltd (in liq) (Court-appt’d receiver acting), In the matter of [2017] NSWSC 1562 ............................................................................................................... 18.495 Cape v Redarb Pty Ltd [1992] FCA 31; (1992) 107 FLR 362 ................................................... 18.500 Cape Breton Company v Fenn (1881) 17 Ch D 198 ..................................................................... 13.75 Capel, Re (1994) 48 FCR 195 ........................................................................................................ 6.305 Capel, Re; Ex parte Caram Finance Australia Ltd [1998] FCA 372 ................................. 3.395, 3.420 Capita Financial Group Ltd v Rothwells Ltd (No 2) (1989) 7 ACLC 634 .................................. 13.55 Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83 ......... 14.75, 14.80, 14.95, 14.135 Capital General Corporation Ltd, Re [2001] VSC 570; (2001) 19 ACLC 848 .......................... 19.250 Cardinal Group Pty Ltd (in liq), Re [2015] NSWSC 1761 ......................................................... 10.455 Cardinia Nominees Pty Ltd, Re [2013] NSWSC 32 .................................................................... 14.270 Carello v Perrine Architecture Pty Ltd [2016] WASC 145 .......................................................... 14.120 Carpenter International Pty Ltd, Re [2016] VSC 118 .................................................................... 14.20 Carrafa v Doka Formwork Pty Ltd [2014] VSC 570; (2014) 104 ACSR 163 ............................. 13.70 Carson; Re Hastie Group Ltd [2012] FCA 626 ........................................................................... 19.300 Carson; Re Hastie Group Ltd (No 3) [2012] FCA 719 ............................................................... 19.170 Carter v New Tel Ltd [2003] NSWSC 128; (2003) 44 ACSR 661 ...... 11.215, 11.300, 13.10, 14.165, 14.265 Carton Ltd, Re (1923) 39 TLR 194; [1923] ALL ER Rep 622 ................................................... 10.460 Casali v Crisp [2001] NSWSC 860; (2001) 165 FLR 79 .............................................................. 17.85 Case of The Bankrupts, The (1592) 2 Co Rep 25; 76 ER 441 ....................................................... 2.25 Cassaniti v Alam [2006] FMCA 1320 ............................................................................................ 3.320 Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 ........................ 14.15 Cavoli v Etl [2007] FCA 1191 ............................................................................................. 3.215, 3.330 Central Commodities Services Pty Ltd, Re [1984] 1 NSWLR 25 .............................................. 18.495 Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd [2015] FCAFC 63; (2015) 231 FCR 17 .............................................................................................. 20.165 Central Queensland Earthmoving Pty Ltd, Re (1984) 2 ACLC 481 ............................................. 12.55 Central Spring Works Australia Pty Ltd, Re; Tubemakers of Australia Ltd v McLellan [2000] VSC 144; (2000) 34 ACSR 164 .................................................................................. 19.150 Centro Properties Ltd, Re [2011] NSWSC 1465; (2011) 86 ACSR 584 .................................... 20.125 Cervantes Pty Ltd v Moutidis (2004) 212 ALR 619; [2004] FMCA 1023 ..................................... 8.75 Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 ...................................................................................................................... 11.155, 11.175 Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 227 FLR 43 ....................................... 13.25 Challen, Re [1996] FCA 1414 ............................................................................................. 2.240, 2.350 Chamberlain v Tilbrook [2017] FCA 1586 ..................................................................................... 5.275 Chapel House Colliery Co, Re (1883) 24 Ch D 259 ...................................................... 11.285, 11.295 Charleville Aboriginal Housing Co Ltd v Mercantile Credits Ltd (1989) 7 ACLC 355 .............. 18.90

Table of Cases

xxv

Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd (1995) 17 ACSR 128 ............................ 11.175 Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd (1992) 28 NSWLR 338 ........ 18.335 Cheeseman v Waters (1997) 77 FCR 221 ...................................................................................... 6.250 Chesson v Smith [1992] FCA 64; (1992) 35 FCR 594 ................................................................. 3.320 Chicago Boot Co Pty Ltd v Davies [2011] SASCFC 92; (2011) 85 ACSR 309 ......... 14.205, 14.210, 14.215 Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15; (1999) 17 ACLC 467 ................................................................................................................................. 11.100 Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 889; (1999) 47 NSWLR 382 ........................................................................................................................ 11.305 Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd [2008] NSWSC 452; (2008) 66 ACSR 199 ................................................ 10.100, 19.230, 19.395, 20.270 Chilia Properties Pty Ltd, Re (1997) 73 FCR 171 ....................................................................... 10.220 Chippendale Printing Co Pty Ltd v DCT (1995) 55 FCR 562 ....................................... 11.180, 11.190 Chow Cho Poon (Private) Ltd, Re [2011] NSWSC 300 .............................................................. 15.435 Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 ................... 4.120, 6.305 City & Suburban v Smith [1998] FCA 822; (1998) 28 ACSR 328 ..................... 10.245, 15.35, 15.40 City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407 ............................................................. 16.35 Civcrush Pty Ltd v Yeo & Co Pty Ltd (admin apptd) [2017] QSC 225 ..................................... 19.250 Civic Video Pty Ltd v Warburton [2013] FCA 934; (2013) 216 FCR 61 .................................... 3.405 Civitareale v Secretary, Department of Family and Community Services (1999) 57 ALD 451 ..................................................................................................................................... 7.160 Clamms Seafood Pty Ltd v Lowe Lippmann Pty Ltd [2015] VCAT 146 ................................... 19.225 Clapham v Commonwealth Bank of Australia [2013] FCAFC 84 ................................................ 3.410 Clasquin SA v AAR International Pty Ltd (1989) 7 ACLC 284 ................................................. 10.295 Classic Ceramic Importers (1994) 13 ACSR 263 ......................................................................... 11.175 Claughton v Charalamabous [1998] BPIR 558 .............................................................................. 4.132 Cleland and Teesdale Smith [1960] SASR 199 .............................................................................. 6.285 Clifton v CSR Building Products Pty Ltd [2011] SASC 103 ...................................................... 14.120 Clifton v Kerry J Investment Pty Ltd trading as Clenergy [2017] FCA 1379 ................................ 1.55 Clonan, Re (1963) 20 ABC 245 ...................................................................................................... 8.235 Clout v Anscor Pty Ltd (2003) 1 ABC (NS) 44 ............................................................................. 4.110 Clout v Markwell [2001] QSC 91; (2001) 1 ABC (NS) 177 ............................................. 4.110, 4.142 Clout v Sing [2005] FCA 1058; 3 ABC (NS) 121 ............................................................. 5.220, 5.230 Club Mediterranean Pty Ltd, Re (1975) 11 SASR 481 ................................................................. 12.35 Club Superstores Australia Pty Ltd, Re (1993) 11 ACLC 751; 10 ACSR 730 ............. 10.210, 19.140 Clutha Ltd v Millar (No 5) [2002] NSWSC 833; (2002) 43 ACSR 295 .................................... 10.325 Clyne v DCT (1984) 154 CLR 589 ......................................................................... 3.125, 3.200, 4.145 Clyne v DCT [1985] FCA 3; (1985) 5 FCR 1 ............................................................................... 3.400 Co-operative Farmers’ & Graziers’ Direct Meat Supply Ltd v Smart [1977] VR 386 .............. 18.205 Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68; (2009) 40 WAR 53 ................................ 19.230 Coates, Re [1993] FCA 14 .............................................................................................................. 8.105 Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 ......................... 1.70 Coates Hire Operations Pty Ltd v McNaughton [2006] NSWSC 841; (2006) 24 ACLC 765 ............................................................................................................................................... 19.85 Coats v Southern Cross Airlines Holdings Ltd [2000] 1 Qd R 84 .............................................. 10.345 Cobar Mines Pty Ltd, Re (1998) 30 ACSR 125 ............................................................................ 19.35 Cobbs Hill (Tasmania) Meat Supplies Pty Ltd v El Moustafa [1998] FCA 838; (1998) 83 FCR 403 ................................................................................................................................ 8.100 Codisco Pty Ltd, Re [1974] CLC 40-126 ....................................................................................... 12.65 Cole v Challenge Bank Ltd [2002] FCAFC 200 ............................................................................ 4.115 Coleman v Lazy Days Investments Pty Ltd [1994] FCA 1442 ..................................................... 3.430

xxvi Table of Cases

Collett v DCT [2001] FCA 426 ...................................................................................................... 3.420 Colquhoun v Graffione [2000] FCA 325; (2000) 97 FCR 376 ...................................................... 3.460 Combe v Inspector-General in Bankruptcy [2004] AATA 1324 (AAT); (2005) 4 ABC NS 26 ............................................................................................................................... 7.130, 7.145 Combis v Harding [2014] FCA 1391 ............................................................................................. 6.355 Combis v Jensen [2009] FCA 778; (2009) 179 FCR 150; 7 ABC (NS) 189 ........................ 4.70, 5.80 Combis v Jensen (No 2) [2009] FCA 1383; (2009) 181 FCR 178; 7 ABC (NS) 465 ................... 5.37 Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240 .......................................... 5.30, 5.37, 5.240 Commercial Indemnity Pty Ltd, Re [2016] NSWSC 1125 ............................................................ 13.45 Commercial and General Acceptance Ltd v Nixon [1981] HCA 70; (1981) 38 ALR 225 .......... 2.230 Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246) ................. 1.185, 14.15, 14.165, 15.35018.370 Commonwealth v Irving (1996) 65 FCR 291 ................................................................. 10.210, 19.142 Commonwealth v Leahy Petroleum-Retail Pty Ltd [2005] FCA 1422; (2005) 55 ACSR 353 ............................................................................................................................................. 15.275 Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; (2005) 145 FCR 220 ............................................................................................................................... 20.245, 20.260 Commonwealth v Sheahan [2004] FCA 1301 .............................................................................. 15.165 Commonwealth Bank of Australia v Begonia [1993] VicSC 516; (1993) 11 ACLC 1075 ............................................................................................................................................. 17.10 Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64 ........................................ 19.230 Commonwealth Bank of Australia v C2C Developments Pty Ltd [2013] NSWSC 724 ............ 20.255 Commonwealth Bank of Australia v Fernandez [2010] FCA 1487; (2010) 81 ACSR 262 ............................................................................................................................... 19.140, 19.345 Commonwealth Bank of Australia v Oswal [2012] WASC 128 .................................................... 18.40 Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1309 ............................. 11.85 Commonwealth Bank of Australia v Prentice [2016] FCA 53 ...................................................... 4.150 Commonwealth of Australia v Emanuel Projects Pty Ltd (1996) 14 ACLC 1351 ..................... 11.300 Commonwealth of Australia v Irving (1996) 65 FCR 291; 19 ACSR 459 ................................. 19.140 Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 ............. 11.215 Compass Airlines Pty Ltd, Re (1992) 109 ALR 119 ................................................................... 15.195 Compton v Ramsay Health Care Australia Pty Ltd [2016] FCAFC 106 ...................................... 3.390 Concrete Pipes & Cement Products Ltd, Re [1926] VLR 34 ......................................... 11.285, 11.295 Condobolin Bila CDEP Ltd, Re [2006] FCA 1330; (2006) 59 ACSR 682 ................................ 15.225 Condon v Watson (2009) 174 FCR 314 ......................................................................................... 2.185 Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139; (2005) 56 ACSR 223 ............................................................................................................................ 11.185 Condor Blanco Mines Ltd, Re [2016] NSWSC 1196 ......................................................... 19.40, 19.42 Conlan v Adams [2008] WASCA 61; (2008) 65 ACSR 521 .......................................... 10.450, 10.460 Conlan v Pratt [2013] FCA 19 ........................................................................................................ 13.10 Conn v Hanks [2001] FMCA 62 ..................................................................................................... 3.192 Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 ............................................. 12.05, 12.30 Conway v Jackson [2001] FCA 230; (2001) 107 FCR 201 .......................................................... 3.260 Cook v Benson [2003] HCA 36; (2003) 214 CLR 370 ..................................... 1.25, 4.95, 5.35, 5.105 Cooloola Dairys Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12 ................................................................................................................................................. 11.90 Cooper Street Property Trust, Re [2016] VSC 756 ........................................................................ 17.60 Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Philips [2011] SASC 139 ....... 18.10, 18.260 Corney v Brien (1951) 84 CLR 343 .................................................................................. 3.390, 11.200 Cornish, Re [1984] FCA 348; (1984) 6 FCR 257 ................................................................ 3.125, 7.85 Corporate Affairs, Commissioner for v Harvey [1980] VR 669 .................................... 10.240, 10.250 Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310 ...... 19.42, 19.165, 19.175, 19.395

Table of Cases

xxvii

Correa v Whittingham (No 3) (2012) 267 FLR 120 .................................................................... 19.175 Cosgrove and Cosgrove, Re; Ex parte Nogueira and Lane [2013] FCCA 1110 ........................... 6.320 Coshott v Barry [2015] NSWCA 257 ............................................................................................. 4.150 Coshott v Burke [2012] FCA 517 ..................................................................................................... 7.30 Coshott v Burke [2013] FCA 553 ................................................................................................... 2.375 Coshott v Coshott (No 2) [2010] FCA 819 .................................................................................. 17.110 Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450 ............................................ 2.370, 4.132 Coshott v Prentice (No 2) [2016] FCA 1531 ................................................................................. 3.265 Coshott v Principal Strategic Options Pty Ltd [2004] FCAFC 50; (2004) 2 ABC (NS) 104 ............................................................................................................................................... 3.445 Coshott v Spencer [2017] NSWCA 118; [2018] HCA Trans 81 ................................................... 2.275 Council of the City of Sydney v Obeid [2013] FCA 149 ............................................................. 3.260 Court v Hewett [1982] WAR 151; (1983) 1 ACLC 768 .................................................... 5.160, 5.235 Coventry v Charter Pacific Corporation Ltd [2005] HCA 67; (2005) 227 CLR 234; 3 ABC (NS) 354 ............................................................................................................................ 6.465 Cox v Journeaux (No 2) (1935) 52 CLR 713 ................................................................................ 4.125 Cox v T-D Joint Venture Pty Ltd [2010] WASC 116 .................................................................... 12.55 Crawford v Sellars (Trustee) in the matter of Hussen (Bankrupt) [2000] FCA 162 .................... 6.265 Crawford, Re; Ex parte Adcock v Tanalaw Pty Ltd [1992] FCA 611 .......................................... 5.250 Crawford, Re North Queensland Heavy Haulage Services Pty Ltd (admin apptd) [2017] FCA 723 ........................................................................................................................ 19.225 Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300 ..................................................................... 11.155 Creative Memories Australia Pty Ltd, Re [2013] NSWSC 732 .................................................. 19.300 Credit Corp Pty Ltd v Atkins [1999] FCA 335; 17 ACLC 756 .................................................. 16.100 Creevey v DCT (1996) 19 ACSR 456 .......................................................................................... 19.255 Crema Pty Ltd v Land Mark Property Developments Pty Ltd [2006] VSC 338; (2006) 24 ACLC 889; 58 ACSR 631 ................................................................................ 1.55, 10.80, 11.85 Re Crest Realty Pty Ltd [1977] 1 NSWLR 664 ............................................................................ 14.15 Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd [2001] NSWSC 89; (2001) 37 ACSR 394; 19 ACLC 659 ......................................... 19.80, 19.215, 19.345, 20.90, 20.255, 21.150 Crigglestone Coal Co, Re [1906] 2 Ch 327 ....................................................... 11.285, 11.290, 11.295 Cripps (Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944 ....................................... 18.80, 18.85 Crisafulli, Re; Ex parte National Commercial Banking Corporation of Australia Ltd (1985) 11 FCR 272 ..................................................................................................................... 3.295 Crisp, in the matter of Buchanan Group Holdings Pty Ltd v Iliopoulos [2011] FCA 1527 ............................................................................................................................................. 15.15 Croker v Commissioner of Taxation [2005] FCA 127; (2005) 145 FCR 150 .............................. 3.300 Crosbie v McLachlan [2013] FCA 1101; (2013) 217 FCR 211 .................................................. 15.195 Crouch, Re [2007] NSWSC 1055; (2007) 214 FLR 244 ............................................................ 15.235 Crowe-Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414 ....................................... 14.155 Crowe and Committee Convened by the Inspector-General in Bankruptcy [1999] AATA 200 ............................................................................................................................................... 2.140 Cryne v Barclays Bank plc [1987] BCLC 548 .............................................................................. 18.70 Csidei, Re (1979) 39 FLR 387 ........................................................................................................ 6.250 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 .................................................. 18.255 Cufari, Re (1992) 33 FCR 544; [1992] FCA 95 ............................................................................ 8.245 Cullen v CAC (NSW) (1988) 14 ACLR 789 ............................................................................... 16.165 Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8 ................. 2.370, 3.360, 3.390, 3.395, 3.430 Cummeragunga Pty Ltd v ATSIC [2004] FCA 1098; (2004) 139 FCR 73 ................................ 10.335 Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 ........................... 4.115 Cummings v Macks [2000] FCA 55; (2000) 96 FCR 345 .............................................................. 6.90 Cummins, Re [1985] FCA 374 ....................................................................................................... 5.230

xxviii Table of Cases

Cunningham, Re Australasian Liquid Storage Pty Ltd (In Liq) [2017] FCA 559 ...................... 15.155 Curry, Re [1992] FCA 619; (1992) 40 FCR 32 .................................................................... 3.190, 8.85 Curtis v Singtel Optus Pty Ltd [2014] FCAFC 144 ...................................................................... 3.220 Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 22 ACLC 1,528 ... 14.200, 14.210, 16.95 Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496 ....................................... 14.135, 14.200 Cuthbertson & Richardson Sawmills Pty Ltd v Thomas [1999] FCA 315; (1999) 93 FCR 141 .................................................................................................................................... 14.165 Cvitanovic v Marsdens Law Group [2012] NSWSC 205 ............................................................ 10.315

D D S Millard & Son Pty Ltd, Re [1997] NSWSC 201; (1997) 24 ACSR 71 .............................. 15.440 DAG International Pty Ltd v DAG International Group Pty Ltd [2005] NSWSC 1036 ........... 11.305 DCT v A & S Services Australia Pty Ltd [2017] FCA 437 .......................................................... 12.30 DCT v Action Workwear Pty Ltd (1996) 33 ATR 61 .................................................................... 17.85 DCT v All Suburbs Car Repairs Pty Ltd [1994] FCA 1393; (1994) 14 ACSR 753 .................. 20.185 DCT v Applied Design Development Pty Ltd [2002] FCA 205; (2002) 117 FCR 336 ............. 15.405 DCT v Austin (1998) 28 ACSR 565; [1998] FCA 1034 ............................................................... 16.15 DCT v B&G Plant Hire Pty Ltd [1994] FCA 1257; (1994) 52 FCR 257 ..................... 20.185, 20.265 DCT v BE100 Property Investments Pty Ltd [2016] FCA 597 ................................................... 20.230 DCT v Bayeh [1999] FCA 1223; (1999) 100 FCR 144 ................................................................ 3.380 DCT v Blaikie (2006) 4 ABC (NS) 409; [2006] FCA 1695 ......................................................... 8.235 DCT v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 ............ 11.160, 11.190 DCT v Broadbeach Properties Pty Ltd [2008] HCATrans 244 ........................................................ 1.90 DCT v Casualife Furniture International Pty Ltd [2004] VSC 157; (2004) 9 VR 549 ................ 11.55 DCT v Clark [2003] NSWCA 91; 57 NSWLR 113 ....................................................... 16.105, 16.155 DCT v Clout [2004] FMCA 195; (2004) 2 ABC (NS) 120 ............................................... 6.465, 8.145 DCT v Clyne (1983) 50 ALR 118 .................................................................................................. 3.445 DCT v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616 ... 19.215, 19.325, 20.40, 20.255 DCT v Concrete Contractors (NSW) Pty Ltd [2008] FCA 1339 ................................................ 11.300 DCT v Currockbilly [2002] NSWSC 1061 .................................................................................. 15.420 DCT v Dexcam [2003] FCAFC 148; (2003) 129 FCR 582 ............................................................ 4.45 DCT v Dick [2007] NSWCA 190; (2007) 242 ALR 152 .............................................................. 16.60 DCT v Distinctive Enterprises Pty Ltd [2007] FCA 2074 ........................................................... 19.255 DCT v Eskdale South Cattle Company Pty Ltd [2013] FCA 740 ................................................ 12.60 DCT v Foodcorp Pty Ltd (1994) 13 ACSR 796 .......................................................................... 19.415 DCT v Guy Holdings Pty Ltd (1994) 12 ACLC 966 ................................................................... 11.265 DCT v Johns (2005) 144 FCR 112; [2005] FCA 1143 .................................................................... 8.70 DCT v Johns [2005] FCA 1143; (2005) 144 FCR 112 .................................................................... 8.60 DCT v K J Consulting Pty Ltd [2005] FCA 1827 ....................................................................... 19.255 DCT v Kavich [1996] FCA 1686; (1996) 68 FCR 519 ................................................................... 4.45 DCT v King [2016] FCA 1281 ............................................................................................ 8.235, 8.270 DCT v Laguna Australia Airport Pty Ltd [2013] FCA 1271 ....................................................... 19.255 DCT v Lanstel Pty Ltd [1996] NSWSC 572; (1997) 15 ACLC 25 ................................. 11.215, 17.85 DCT v Meredith [2007] NSWCA 354; (2007) 229 FLR 243 ..................................................... 16.160 DCT v Pddam Pty Ltd [1996] FCA 1386; (1996) 14 ACLC 659; 19 ACSR 498 ....... 19.210, 19.215, 20.255 DCT v Pejkovic [2000] NSWSC 1176 ......................................................................................... 16.165 DCT v Perpetual Nominees Ltd [2013] FCCA 930 ....................................................................... 3.370 DCT v Peter Sleiman Investments Pty Ltd [2016] NSWSC 1657 .............................................. 11.250

Table of Cases

xxix

DCT v Portinex (No 1) [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 ....... 16.165, 19.42, 19.390, 20.375 DCT v Portinex (No 2) [2000] NSWSC 557; (2000) 34 ACSR 422 ............................................ 19.40 DCT v Portinex Pty Ltd (No 1) [2000] NSWSC 99; (2000) 156 FLR 453 .................. 19.215, 20.260 DCT v Soiland Pty Ltd [2010] FCA 168 ....................................................................................... 13.25 DCT v Solomon [2003] NSWCA 62; (2003) 52 ATR 729 .......................................................... 16.165 DCT v Statewide Contracting Qld Pty Ltd (No 2) [2015] FCA 690 .......................................... 10.195 DCT v Sydney Concrete Steel Fixing Pty Ltd (1999) 17 ACLC 972 .......................................... 17.10 DCT v TMPL Pty Ltd (No 3) [2011] FCA 1403; (2011) 289 ALR 69 ...................................... 20.255 DCT v Tideturn Pty Ltd [2001] NSWSC 217; (2001) 37 ACSR 152 ............................ 15.235, 17.40, DCT v Trigo-Contillo [2005] FMCA 1856 ..................................................................................... 9.110 DCT v Trio Site Services Pty Ltd [2007] FCA 776 ..................................................................... 11.100 DCT v Tull Reinforcing Pty Ltd [2006] FCA 810; (2006) 153 FCR 394 .................................. 11.215 DCT v VFS Employment Services Pty Ltd [2016] FCA 1054 .................................................... 11.300 DCT v Vintage Gold Investments Pty Ltd [2009] FCA 967 ....................................................... 15.420 DCT v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232 ............................... 15.105, 19.345 DCT v Winterburn Trading Pty Ltd (1993) 27 ATR 189 ............................................................ 20.185 DCT v Woodings (1995) 13 WAR 189 ................................................ 19.390, 20.255, 20.265, 20.270 DCT v Yeo (2007) 66 ATR 428; [2007] VSC 29 .......................................................................... 4.155 DCT v Yeo [2007] VSC 29; (2007) 66 ATR 428 ............................................................................ 5.95 DCT, in the matter of Opalarch Pty Ltd [2010] FCA 607 ........................................................... 15.440 DDB Needham Sydney Pty Ltd v Elyard Corp Pty Ltd (1995) 61 FCR 385 ............................ 11.230 DG Haulage Pty Ltd, Re [2017] VSC 780 ..................................................................................... 11.70 DH International Pty Ltd (in liq), In the matter of [2017] NSWSC 870 .................................... 15.300 DH International Pty Ltd (in liq) (No 2), Re [2017] NSWSC 871 ............................................. 15.420 DJG Securities Pty Ltd, Re [2013] NSWSC 588 ......................................................................... 11.255 DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 86 NSWLR 293; 99 ACSR 121 .................................................................. 13.55, 17.10, 19.345, 20.20 Daemar v Industrial Commission (NSW) (No 2) (1990) 22 NSWLR 178 ................................... 4.120 Daevys v Official Trustee in Bankruptcy; in the matter of Daevys [2011] FCA 398 ....... 6.520, 7.160 Daewoo Australia v Suncorp Metway [2000] NSWSC 35; (2000) 48 NSWLR 692 ................. 11.185 Daimler Chrysler Financial Services Australia Pty Ltd v McKillop [2007] FMCA 1118 ........... 8.135, 8.295 Daintree Rain Forest Resort Pty Ltd, Re (1999) 17 ACLC 585 .................................................. 11.210 Dallhold Investments Pty Ltd, Re (1994) 53 FCR 339 ............................................................... 10.335 Dalma No 1 Pty Ltd, Re [2013] NSWSC 1335; (2013) 95 ACSR 641 ...................................... 15.410 Daniel Efrat Consulting Services Pty Ltd, Re (1999) 91 FCR 154 ............................................ 18.215 Darcey, Re [1988] FCA 165 ............................................................................................................ 3.420 Data Homes Pty Ltd, Re [1971] 1 NSWLR 338 ........................................................................... 17.10 Data Homes Pty Ltd, Re [1972] 2 NSWLR 22 .................................................................. 17.10, 17.15 Davey v Dessco Pty Ltd & Anor (Bankruptcy) [2017] VSC 744 ................................................. 4.125 David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265 ................. 11.130, 11.250 David Lambourne Yacht Rigging v Perry Catamarans [2006] FCA 887; (2006) 58 ACSR 155 ................................................................................................................................. 19.255 Davidson v Global Investments International Ltd (1995) 14 ACLC 208 ................................... 14.239 Day and Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85 ....................................................................................................................................... 6.485 De Robillard v Carver [2007] FCAFC 73; (2007) 159 FCR 38 ................... 3.345, 3.430, 7.85, 7.170 Dealquip Australia Pty Ltd v 33 Electra Pty Ltd (No 2) [2013] NSWSC 1382 .......................... 13.55 Dean v QUF Industries Ltd [1981] FCA 71; (1981) 51 FLR 317 ................................................ 3.370 Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525; (2002) 55 NSWLR 64 ............................................................................................................................... 14.115

xxx Table of Cases

Dean-Willcocks v CALDB [2006] FCA 1438 .............................................................................. 21.165 Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113; (2008) 73 ATR 801 ............................................................................................................................................. 14.210 Dean-Willcocks v Nothintoohard Pty Ltd [2006] NSWCA 311; (2007) 25 ACLC 109 ............ 18.470 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 ........ 10.45, 10.50, 19.390, 20.15 Dean-Willcocks, Re [2004] NSWSC 1209 ................................................................................... 11.215 Deangrove Pty Ltd v Commonwealth Bank of Australia [2001] FCA 173; (2001) 108 FCR 77 ...................................................................................................................................... 11.245 Debis Financial Services (Aust) Pty Ltd v Allied Bellambi Collieries Pty Ltd (1999) 17 ACLC 1,636; [1999] NSWSC 935 ............................................................................. 19.126, 19.270 Debis Financial Services (Australia) Pty Ltd v Allied Bellambi Collieries Pty Ltd (2000) 35 ACSR 371 ................................................................................................................ 19.270 Debrossard v Official Trustee in Bankruptcy [2011] FamCA 648 ................................................. 4.135 Deceased Bankrupt Estate of Laurie Connell [2001] FCA 51 ....................................................... 6.425 Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 ............................................... 14.135 Dennehy v Reasonable Endeavours Pty Ltd [2003] FCAFC 158 ................................................. 3.205 Dennis v Cranitch [2005] FMCA 168 ............................................................................................ 3.260 Dennis v McMartin (1989) 7 ACLC 283 ....................................................................................... 17.85 Derby Motorplus Pty Ltd v Swan Building Society (1990) 2 ACSR 239 .................................. 11.270 Derrygarrif Investments Pty Ltd, Re (1982) 6 ACLR 751 .......................................................... 11.265 Dewina Trading Sdn Bhd v Ion International Pty Ltd (1996) 14 ACLC 1603 ........................... 11.300 Dewina Trading Sdn Bhd v Ion International Pty Ltd (1997) 15 ACLC 21 ............................... 11.300 Di Cioccio v Official Trustee in Bankruptcy [2015] FCAFC 30 ..................................................... 4.60 Diamond Hill International Pty Ltd v Xu (2001) 19 ACLC 1139 .............................................. 17.110 Dick v McIntosh [2001] FCA 1008 ................................................................................................ 6.182 Dickson v Reidy [2004] NSWSC 1200 ............................................................................................ 5.45 Diesels & Components Pty Ltd, Re [1985] 2 Qd R 456 .................................................. 18.550, 19.95 Dimasi v Nangiloc Colignan Farms Pty Ltd [2007] FCA 308; (2007) 157 FCR 387 ...... 3.210, 3.285 Dingle, Re (1993) 47 FCR 478; [1993] FCA 619 ......................................................................... 8.145 Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA, Board of v Rizzo-Bottiglieri-De Carlini Armatori SpA [2017] FCA 331 ................................................. 14.237 Distinctive FX 9 Pty Ltd v Statewide Developments Pty Ltd [2012] NSWCA 393 .................... 13.55 Divitkos, Re ExDVD Pty Ltd [2014] FCA 696; (2014) 223 FCR 409 ............ 18.170, 18.370, 18.465 Dobson v QBCC [2015] QCAT 243 ................................................................................................. 4.15 Doherty and Inspector-General in Bankruptcy [2012] AATA 635; upheld in [2013] FCA 1122 .................................................................................................................................... 9.125 Doherty and Inspector-General in Bankruptcy [2012] AATA 635; upheld on appeal [2013] FCA 1122 ........................................................................................................................ 9.148 Dolvelle Pty Ltd v Australian Macfarms Pty Ltd (1998) 43 NSWLR 717 ................................. 11.185 Dominion Insurance Company of Australia Ltd, Re [2013] NSWSC 898 ................................. 18.240 Domino Hire Pty Ltd v Pioneer Park Pty Ltd [2000] NSWSC 1046; (2000) 18 ACLC 13 ................................................................................................................................. 10.445, 19.140 Donmastry Pty Ltd v Albarran [2004] NSWSC 632; (2004) 49 ACSR 745 ....... 17.85, 17.90, 17.110, 17.120 Donnelly v Edelsten [1994] FCA 992 ............................................................................................ 5.250 Donnelly v McIntyre [1999] FCA 450 ............................................................................................. 4.55 Donnelly, Re Advance Finances Pty Ltd [2013] FCA 514 .......................................................... 15.430 Donnelly (Trustee), in the matter of Keddie (Bankrupt) [2012] FCA 1485 ...................... 6.315, 6.320 Donnelly (as liquidator), in the matter of Advance Finances Pty Ltd (in liq) [2013] FCA 514 .................................................................................................................................... 15.430 Doolan v Dare [2004] FCA 682; (2004) 2 ABC (NS) 16 ............................................................. 2.240

Table of Cases

xxxi

Doran Constructions Pty Ltd, Re [2002] NSWSC 215; (2002) 20 ACLC 909 .......................... 15.110 Dorman Long & Co Ltd, Re [1934] Ch 635 ................................................................................ 20.125 Douglas-Brown v Furzer (1994) 11 WAR 400 ............................................................... 15.160, 15.185 Doulman v ACT Electronic Solutions Pty Ltd (No 2) [2015] FCCA 1664 .................................. 7.100 Downey v Aira Pty Ltd [1996] VicSC 228; (1996) 14 ACLC 1068 ........................................... 14.200 Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182 ..................................................... 19.42 Downey v Stewart [2014] FCA 792 ............................................................................................. 10.320 Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463 ........................................................................................................................ 4.210, 5.220, 5.230 Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) [1948] HCA 14; (1948) 76 CLR 463 .................................................................................................... 5.230 Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 ..................... 18.245, 18.250 Drake v Jones [2009] FMCA 298 ..................................................................................................... 3.65 Draper v Official Trustee in Bankruptcy [2006] FCAFC 157; (2006) 156 FCR 53 ..................... 4.142 Driver v DCT [2000] NSWCA 247 ................................................................................................ 14.80 Dubow v Official Receiver [2013] FMCA 217 ................................................................................ 3.65 Duckworth v Water Corporation [2012] WASC 30; 261 FLR 185 ............................................... 4.110 Duckworth v Water Corporation (No 2) [2015] WASC 411 .......................................................... 4.110 Dudley v White [2009] FMCA 1329 ................................................................................................ 6.85 Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382 ............................... 18.25, 18.205 Dunn, in the matter of Dunn v Vangsnes [2000] FCA 1051 ......................................................... 3.395 Dwyer v Canon Australia Pty Ltd [2007] SASC 100 .................................................................. 11.100 Dynamics Co Pty Ltd v G and M Nicholas Pty Ltd [2012] NSWSC 206 ................................. 11.165

E ET Family Pty Ltd (in liq) [2014] FCA 542 ................................................................................ 18.140 Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 .................................................... 10.210 Ebner v Official Trustee in Bankruptcy (2003) 126 FCR 281 ....................................................... 2.250 Edelsten, Re [1988] FCA 395 ........................................................................................................... 2.95 Edenden v Bignell [2007] NSWSC 1122 ..................................................................................... 16.110 Edge Technology v Wang [2000] FCA 1586 .................................................................................. 3.180 Edge Technology Pty Ltd v Lite-on Technology Corp [2000] NSWSC 471; (2000) 18 ACLC 576 ................................................................................................................................. 11.175 Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141 ................................................... 19.170 Edward Gem Pty Ltd, Re [2005] FCA 74; (2005) 141 FCR 408 ................................................. 20.55 Edwards v A-G (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667 ........................................ 16.60 Edwards v ASIC [2009] NSWCA 424; (2009) 76 ACSR 369 ...................................................... 11.90 Edwards, Re (1987) 14 FCR 113 ...................................................................................................... 7.35 Edwards & Co v Picard [1909] 2 KB 903 ................................................................................... 18.135 Eisa Ltd, Re [2000] NSWSC 940; (2000) 35 ACSR 394 .............................................. 19.170, 19.185 El-Fahkri, in the matter of Elfah Pty Ltd [2002] FCA 1469 ......................................................... 17.10 Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No 6) [2007] FCA 1030; (2007) 160 FCR 423 ................................................................................................................ 10.315 Elgar Heights, Re (1985) 9 ACLR 846 ........................................................................................ 11.265 Elgar Heights Pty Ltd (No 1), Re [1985] VR 657 ......................................................................... 11.90 Elliott v ASIC [2004] VSCA 54; 10 VR 369 ........................................................ 16.85, 16.90, 16.140 Elsworthy v ASIC [2016] VSC 14 .................................................................................... 17.85, 17.110 Elyard Corp Pty Ltd v DDB Needham Sydney Pty Ltd (1995) 61 FCR 385 .............................. 3.350 Emanuel (No 14) Pty Ltd, Re; Macks v Blacklaw [1997] FCA 667; (1997) 147 ALR 281 ................................................................................................................................... 5.165, 14.80 Emanuele v Australian Securities Commission (1997) 188 CLR 114 ................ 13.55, 15.195, 20.255

xxxii Table of Cases

Emerson v Wreckair Pty Limited [1992] FCA 16; (1992) 33 FCR 581 ....................................... 3.155 Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167 .................. 10.320 Employ (No 96) Pty Ltd, Re [2013] NSWSC 61; (2013) 93 ACSR 48 ............. 14.75, 14.80, 14.120, 14.135, 14.170, 14.190 Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450 ....................................................................................... 20.250, 20.260 Endeavour Energy Network Management Pty Limited, In the matter of [2017] NSWSC 1825 ................................................................................................................................... 2.105, 4.15 Endresz v ASIC [2014] FCA 1139 ................................................................................................. 3.430 Energy & Resource Conservation Co Ltd v Abigroup Contractors Pty Ltd (1997) 41 NSWLR 169 ................................................................................................................ 19.225, 19.420 Enhill Pty Ltd, Re [1983] 1 VR 561 ............................................................................................ 15.350 Enviro Systems Renewable Resources Ltd v Westpac Banking Corp [2015] SASC 59 ............ 18.260 Equititrust Ltd v Bosiljevac [2007] FCA 323 ................................................................................ 3.230 Equititrust Ltd v Willaire Pty Ltd [2012] QSC 206 ....................................................................... 11.70 Equity Funds of Australia, Re (1976) 2 ACLR 238 .................................................................... 10.440 Equus Corporation Pty Ltd v Perpetual Trustees WA Ltd [1997] FCA 468; (1997) 80 FCR 296 .................................................................................................................................... 11.175 Erb International Pty Ltd (Deregistered), Re [2014] NSWSC 200; (2014) 98 ACSR 124 ............................................................................................................................................. 17.110 Ernst & Young (Reg) v Tynski Pty Ltd [2003] FCAFC 233; (2003) 47 ACSR 433 ................... 18.40 Erol v Cavus [2012] QSC 371 ...................................................................................................... 20.220 Essendon Apartment Developments Pty Ltd (No 2), Re [2013] VSC 210 ................................. 14.150 Euphron Pty Ltd v Hunter Valley Piggery Pty Ltd [2003] NSWSC 543 ...................................... 17.85 Evans v Mullumbimby News Pty Ltd [2008] NSWSC 240 ........................................................ 19.255 Evans v Wainter Pty Ltd [2005] FCAFC 114; (2005) 145 FCR 176 ............... 15.140, 15.160, 15.165 Evans, Re (1995) 61 FCR 556 .......................................................................................................... 4.45 Evcorp Grains Pty Ltd (No 2), Re [2014] NSWSC 155 ............................................................. 14.265 Evolvebuilt Pty Ltd, Re [2017] NSWSC 901 ................................................................................ 14.80 Excel Finance Corp, Re (1993) 41 FCR 346 ............................................................................... 15.180 Excel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69 ................................... 15.180 Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2002] NSWSC 851; (2002) 194 ALR 138 ............................................................................................................................................. 11.225 Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711 ............................................. 17.10 Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 ...... 1.75, 18.245, 18.250, 18.255, 18.270, 18.345, 18.430 Eyles v Curved Plywood [2004] NSWSC 257 ............................................................................. 17.105 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 ............................................................... 11.155 Ezyclad Pty Ltd, Re [2014] VSC 66; (2014) 98 ACSR 38 ........................................................... 15.15

F FAI Car Owners Mutual Insurance Co Pty Ltd, Re [2009] NSWSC 1350; (2009) 76 ACSR 164 ................................................................................................................................. 15.440 FAI Workers’ Compensation (NSW) Ltd v Philkor Builders Pty Ltd (1996) 14 ACLC 1059 ........................................................................................................................................... 20.100 FCT v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616 ............................ 19.220, 20.250 FCT v Moodie [2014] NSWCA 59; (2014) 98 ACSR 274 ......................................................... 16.150 FCT v Official Receiver (1956) 95 CLR 300 ................................................................................... 4.45 FCT v Prescribing Biochemists Pty Ltd (1994) 12 ACLC 905 ................................................... 19.200 FF (R & D) Pty Ltd v ASIC [2017] VSC 482 ............................................................................. 17.105

Table of Cases

xxxiii

FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 ............................................................................................................................................... 20.125 Facade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247; (2016) 116 ACSR 493 ................................................................ 15.285 Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 .............................................................. 11.100 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 ... 4.142, 16.45 Farrow Finance Co Ltd v ANZ Executors and Trustees Co Ltd [1998] 1 VR 50 ..................... 10.315 Farrow Mortgage Services Pty Ltd v Webb (1996) 39 NSWLR 601 ......................................... 15.110 Featherstone v Ashala Model Agency Pty Ltd (in liq) [2017] QCA 260 ...................... 14.135, 14.140 Fekala Pty Ltd v Cenbond Pty Ltd [2001] NSWSC 340; (2001) 37 ACSR 613 ....................... 19.270 Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607 ......................................... 11.165 Felkro Nominees Pty Ltd v DCT (1996) 21 ACSR 391 .............................................................. 11.250 Ferella v Official Trustee [2010] FCA 766 ..................................................................................... 2.350 Ferrier v Civil Aviation Authority (1994) 48 FCR 163 ................................................................. 5.185 Ferrier and Knight v Civil Aviation Authority (1994) 55 FCR 28 ................................................ 5.125 Field, Re [1977] 3 WLR 937 .......................................................................................................... 3.420 Fielding v Dushas [2013] QCA 55 .................................................................................. 14.155, 14.170 Fifty-First RH Nominees v Rice [2003] FMCA 213 ..................................................................... 9.115 Filipowski v ASIC [2004] FCA 1129 ............................................................................................. 17.85 Fincorp Group Holdings Pty Ltd, Re [2007] NSWSC 628 ......................................................... 19.170 Finnigan v Ellis [2017] NZCA 488 .............................................................................................. 15.165 First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd [2013] FCAFC 108 ............. 11.155 First Netcom Pty Ltd, Re [2000] NSWSC 1045; (2000) 35 ACSR 615 ..................................... 19.255 First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116 .................................... 21.130 First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939 .................................................. 11.175 Fisher v Transport for NSW [2016] NSWSC 1888 ............................................................ 4.115, 4.125 Fitness First Australia Pty Ltd v Dubow [2011] NSWSC 531; (2011) 84 ACSR 296 ............... 11.170 Fitzpatrick v Keelty (2008) 5 ABC (NS) 560 ................................................................................ 4.125 Flanders v Beatty (1995) 16 ACSR 324 ......................................................................... 15.165, 20.150 Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598 ................................................................................................................ 20.260 Fleet Motor & General Insurance Co (Aust) Pty Ltd v Tickle [1984] 1 NSWLR 210 ................ 12.55 Fletcher v Anderson [2014] NSWCA 450; (2014) 103 ACSR 236 ............................................. 16.150 Fletcher v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2013] AATA 633 ........................................................................................ 7.160 Fleur De Lys Pty Ltd v Jarrett [2005] NSWSC 1357; (2005) 51 ACSR 238 ............................. 11.175 Flexible Manufacturing Systems v Fernandez [2003] FCA 1491; (2004) 22 ACLC 47 ............ 18.240 Flint v Richard Busuttil & Co Pty Limited [2013] FCAFC 131 ................................................... 3.350 Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54 ........... 18.255, 18.265, 18.270, 18.275, 18.280 Flynn v Theobald [2008] WASC 263 ........................................................................................... 19.142 Fodare Pty Ltd v Shearn [2010] NSWSC 737 ............................................................................... 6.215 Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52; 5 ABC (NS) 419 .................................................................................................................. 6.470 For The Good Times Pty Ltd v Boyle [2009] FMCA 512 ................................................. 8.235, 8.275 Forbes, Re (1974) 24 FLR 87 ......................................................................................................... 8.155 Fordyce v Ryan [2016] QSC 307 ..................................................................................................... 4.50 Forge Group Construction Pty Ltd, Re; Ex Parte Jones and Johnson [2015] WASC 184 ......... 15.180 Forge Group Power Pty Ltd (in liq) (rec & man appt) v General Electric Int Inc [2016] NSWSC 52 ............................................................................................................................... 19.100 Forsayth NL v Juno Securities Ltd (1991) 4 ACSR 281; 4 WAR 376 .......................... 11.265, 11.275 Forshaw v Thompson (1992) 35 FCR 329 ..................................................................................... 8.145

xxxiv Table of Cases

Fortress Credit Corp (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85; (2015) 105 ACSR 581 ..................................................................................................................... 6.490, 10.335 Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; (2015) 106 ACSR 38 ............................................................................................................................ 14.175 Fortson Pty Ltd v Commonwealth Bank of Australia [2008] SASC 49; (2008) 100 SASR 162 ................................................................................................................................. 18.265 Foster, Re; Ex parte Foster v Duus (1994) 49 FCR 309 ............................................................... 6.115 Fowler v Lindholm [2009] FCAFC 125; (2009) 178 FCR 563 ......................... 15.345, 20.90, 21.120 Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203 ............................................................ 19.250 Foxman v Credex [2007] NSWSC 1422; 26 ACLC 167 ............................................................. 17.110 Foyster v Prentice [2008] FMCA 757; (2008) 6 ABC (NS) 103 .................................................. 4.100 Franbridge Pty Ltd v Société & Générale Finance Corporation Pty Ltd (1994) 14 ACSR 304 ................................................................................................................................. 18.235 Francis v Eggleston Mitchell Lawyers Pty Ltd [2013] FCA 564 .................................................... 7.80 Francis v Eggleston Mitchell Lawyers Pty Ltd [2014] FCAFC 18; (2014) 12 ABC(NS) 25 ................................................................................................................................................... 7.65 Fraser v ASIC [2007] FCAFC 85; (2007) 159 FCR 424 ............................................... 18.195, 18.422 Fraser v DCT (1996) 69 FCR 99 .................................................................................................... 4.150 Free Wesleyan Church of Tonga in Australia Inc, Re [2012] NSWSC 214; (2012) 260 FLR 348 ....................................................................................................................... 19.345, 19.365 Freeman v Joiner [2005] FCAFC 149; (2005) 3 ABC (NS) 332 ........................... 2.255, 4.120, 6.305 Freeman v National Australia Bank Ltd (2003) 2 ABC (NS) 51 .................................................. 4.115 Freeman v National Australia Bank Ltd [2003] FCA 1233; (2004) 2 ABC (NS) 32 ................... 4.115 French Caledonia Travel Service Pty Ltd, Re (2003) 59 NSWLR 361 ...................................... 10.460 Friedrich v Herald & Weekly Times Ltd [1990] VR 995; (1990) 1 ACSR 277 ........... 15.160, 15.185 Frigger v Kitay (No 2) [2017] WASCA 139 ................................................................................ 10.205 Frost v Sheahan [2005] FCA 1014 ................................................................................................. 7.150 Frost v Sheahan [2009] FCAFC 20; (2009) 6 ABC (NS) 786 ...................................................... 7.150 Fryer v Powell [2001] SASC 59; 159 FLR 433 .......................................................................... 16.100 Fuji Xerox v Tolcher [2004] NSWCA 284; (2004) 60 NSWLR 696 ......................................... 15.420 Fuller v Wily [1996] FCA 1593 ...................................................................................................... 2.225 Fuller, in the matter of Alford v Alford [2017] FCA 782 .................................................. 3.225, 3.285

G G & M Aldridge Pty Ltd v Walsh [2001] HCA 27; (2001) 203 CLR 662 ........... 5.125, 5.175, 14.85, 14.105 GB Nathan & Co Pty Ltd, Re (1991) 24 NSWLR 674 ................................................. 10.345, 10.460 GDK Projects Pty Ltd v Umberto Pty Ltd (in liq) [2018] FCA 541 .......................................... 10.225 GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 .................. 18.260, 18.275 GE Commercial Australasia Pty Ltd v Tinkler, in the matter of Nathan Tinkler [2016] FCA 55 ........................................................................................................................................ 3.155 GIGA Investments Pty Ltd, Re (1995) 17 ACSR 547 ................................................................. 20.220 GIS Electrical Pty Ltd v Melsom (2002) 21 ACLR 26 ................................................................. 17.85 GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd (1997) 15 ACLC 109 ....... 20.65, 20.180 GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888 .............. 15.285, 20.65 GPJ Investments Pty Ltd, Re [2016] NSWSC 1173 .................................................................... 10.340 Gainsford v Tannenbaum [2012] FCA 904; (2012) 216 FCR 543 ................................................ 6.182 Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (No 4) (1984) 2 ACLC 682 ................................................................................................................................... 12.30, 12.60 Gardiner v Gardiner [1992] FCA 328; (1992) 39 FCR 259 .......................................................... 3.205 Garreffa Holdings Pty Ltd v Damen Pty Ltd [1998] WASC 147 .................................................. 10.80

Table of Cases

xxxv

Garrett v Commissioner of Taxation [2015] FCA 665 ....................................................... 4.115, 4.125 Gartner v Ernst & Young [2003] FCA 152; (2003) 21 ACLC 560 ............................................. 18.535 Gasbourne Pty Ltd, Re [1984] VR 801 ........................................................................................ 11.215 Gaskell v Gosling [1896] 1 QB 669 ............................................................................................. 18.160 Gasweld Pty Ltd, Re (1986) 5 NSWLR 494 ................................................................................ 21.145 Gee v Schmutter (1971) 123 CLR 503 ........................................................................................... 8.235 Geia v Palm Island Aboriginal Council [2001] 1 Qd R 245 ......................................................... 4.125 Gem Sapphires (Aust) Pty Ltd, Re (1983) 8 ACLR 225 ............................................................. 11.210 Gematech Pty Ltd v Bardi Investments Pty Ltd [2008] NSWSC 196 .......................................... 17.10 Gemmell v Le Roi Homestyle Cookies Pty Ltd [2014] VSCA 182; (2014) 102 ACSR 367 ............................................................................................................................................. 15.190 Genasys II Pty Ltd, Re (1996) 14 ACLC 729 .................................................................. 18.535, 19.42 General Rolling Stock Co, Re (1866) 1 Eq 346 ............................................................................ 13.80 Geneva Finance Ltd v Resource & Industry Ltd (2002) 20 ACLC 1427 ..................................... 16.70 Geneva Finance Ltd, Re (1992) 7 WAR 496; 10 ACLC 668 ............................. 18.45, 18.235, 18.535 Genoa Resources and Investment Limited (in liq), Re [2005] NSWSC 1145 .............................. 15.40 George v DCT [2004] FCA 1433 ........................................................................................ 6.465, 8.275 George v Fletcher [2012] FCAFC 148 ............................................................................................. 4.80 George Barker (Transport) Ltd v Eynon [1973] 1 WLR 1461 .................................................... 18.530 George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462 ...................................................... 18.550 Gerah Imports Pty Ltd v Duke Group Ltd (1994) 12 ACLC 220 ............................................... 15.170 Giant Resources Ltd, Re [1991] 1 Qd R 107 ................................................................................. 12.55 Gibbons v LibertyOne [2002] NSWSC 274; (2002) 167 FLR 310 ............................................ 19.390 Gibbs v Triscott [1995] FCA 1723;(1995) 65 FCR 80 .................................................................. 3.205 Giga Investments Pty Ltd, Re (1995) 58 FCR 106; 13 ACLC 1185 ............................... 19.40, 19.390 Gillies, Re; Ex parte Official Trustee [1993] FCA 289; (1993) 42 FCR 571 ...................... 4.60, 6.355 Ginnane v Diners Club Ltd [1993] FCA 167; (1993) 42 FCR 90 ................................................ 3.230 Gippsreal Ltd v Ross [2017] VSCA 257 ...................................................................................... 18.240 Girgis v Gells Lawyers Pty Ltd [2012] FMCA 669 ...................................................................... 3.285 Glacier Ceiling Battens Pty Ltd (in liq), In the matter of [2017] NSWSC 1832 ....................... 15.305 Glass Recycling Pty Ltd, Re [2014] NSWSC 489 ......................................................................... 17.10 Gleadell Pty Ltd, Re (1991) 9 ACLC 1014 .................................................................................. 15.420 Glendale Land Developments Ltd, Re [1982] 2 NSWLR 563 .................................................... 21.120 Glengrant Civil Pty Ltd (in liq), Re [2017] NSWSC 843 ........................................................... 15.440 Glew v Harrowell [2003] FCA 373 ..................................................................................... 3.310, 3.320 Global Partners Fund Ltd v Babcock & Brown Ltd [2010] NSWCA 196; (2010) 79 ACSR 383 ................................................................................................................................... 13.55 Global Television Pty Ltd v Sportsvision Australia Pty Ltd [2000] NSWSC 960; (2000) 35 ACSR 484 ............................................................................................................................ 15.205 Glowbind Pty Ltd, Re; Takchi v Parbery [2004] NSWSC 1190; (2004) 22 ACLC 642 ........... 15.280 Godden v Banwell Pty Ltd [2003] WASC 217 ............................................................................ 19.250 Goldana Investments Pty Ltd (recs & mgrs apptd) v National Mutual Life Nominees [2011] NSWSC 1134 ................................................................................................................ 18.580 Goldburg (No 2), Re [1912] 1 KB 606 ........................................................................... 18.430, 18.510 Golden Heritage Golf Pty Ltd (in liq) (recs and mgrs apptd) v Sun [2016] VSC 167; (2016) 113 ACSR 550 .............................................................................................................. 14.155 Golden Mile Property Investments Pty Ltd v Cudgegong Australia Pty Ltd [2015] NSWCA 100; (2015) 105 ACSR 605 ...................................................................................... 18.250 Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456 .................... 11.175 Gollant, in the matter of ACN 065 229 831 Pty Ltd [2017] FCA 1158 ..................................... 10.445 Gordon v Leon Plant Hire Pty Ltd [2015] NSWSC 397 ................................................ 14.115, 14.155 Gordon Grant and Grant Pty Ltd, Re [1983] 2 Qd R 314 ............................................................. 13.55

xxxvi Table of Cases

Gore v Australian Goldfields NL [2001] WASC 242 .................................................................. 15.260 Gorkowski v Turner [2014] VSC 200 ............................................................................................ 6.185 Gosden v Dixon (1992) 107 ALR 329 ........................................................................................... 7.160 Gosling v Gaskell [1897] AC 575 .................................................................................................. 13.95 Gothard, Re Sherwin Iron Ltd (No 2) [2015] FCA 401 .............................................................. 19.310 Gould v FCT (1998) 40 ATR 245 ................................................................................................. 16.165 Goyal, in the matter of Tiaro Coal Limited (In Liq) [2017] FCA 1252 ..................................... 10.320 Grace v Grace (No 5) [2013] NSWSC 601 ...................................................................... 12.30, 12.100 Graham v Graham (1871) 2 AJR 104 ........................................................................................... 18.625 Grainger & Bloomfield [2015] FamCAFC 221 .................................................................... 4.135, 5.15 Grandsky Pty Ltd v Horne [2014] FCA 119 .................................................................................. 6.425 Grant v Baker [2016] EWHC 1782 ................................................................................................ 4.132 Grant Samuel Corporate Finance Pty Ltd v Fletcher [2015] HCA 8; (2015) 106 ACSR 31 ............................................................................................................................................... 14.175 Grapecorp Management Pty Ltd v Grape Exchange Management Euston Pty Ltd [2012] VSC 112; (2012) 93 ACSR 1 ......................................................................... 15.285, 15.355 Gray v Bridgestone Aust Ltd (1986) 4 ACLC 330 ...................................................................... 10.245 Gray v Clout (1990) 27 FCR 141 ................................................................................................... 4.115 Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452 ..................................................................................................... 11.125, 11.150 Great Australian Operations Pty Ltd v Washington H Soul Pattinson & Co Ltd [2012] NSWSC 1134 ............................................................................................................................ 18.200 Great Eastern Cleaning Services Pty Ltd, Re (1978) 3 ACLR 886 ............................................ 17.100 Great Investments Ltd v Warner [2016] FCAFC 85; (2016) 243 FCR 516 .................. 14.135, 14.170 Great Southern Ltd, Re; Ex parte Thackray [2012] WASC 59; (2012) 260 FLR 362 ............... 18.385 Great Southern Managers Australia Ltd v Clarke [2012] VSCA 207; (2012) 36 VR 308 ......... 15.110 Great Wall Resources Pty Ltd, Re [2013] NSWSC 354 .............................................................. 14.155 Greater Building Society Ltd v Hill [2012] FMCA 431 ................................................................ 3.110 Green v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 ................................... 14.60 Green v Giljohann [1995] VicSC 310; (1995) 17 ACSR 518 ....................................................... 19.90 Green v Official Trustee in Bankruptcy, in the matter of Schneller (Bankrupt) [2001] FCA 1644 .......................................................................................................................... 4.155, 5.95 Green v Schneller [2002] NSWSC 671; (2002) 29 Fam LR 346 ................................................... 5.95 Greenhills Securities Pty Ltd v Loire Consultants Pty Ltd [2015] NSWSC 13 ......................... 11.120 Greenmint Pty Ltd v O’Keefe [2015] VSC 326 ........................................................................... 11.100 Greenzan Pty Ltd (in liq) (dereg’d), Re [2017] NSWSC 489 ..................................................... 17.100 Grey, Re (1900) 26 VLR 214 .......................................................................................................... 4.110 Griffin v Pantzer [2004] FCAFC 113; (2004) 137 FCR 209; 1 ABC (NS) 265 .......... 4.50,6.20, 6.25, 6.245, 6.250 Griffin v Triscott (2004) 183 FLR 1 ............................................................................................... 2.235 Griffin & Khatri v Milne [2009] FMCA 680 ................................................................................. 5.250 Griffiths v Boral Resources (Qld) Pty Ltd [2006] FCAFC 149; (2006) 154 FCR 554 ................ 3.350 Griffiths v Secretary of State for Social Services [1974] QB 468 .............................................. 18.555 Griffiths, Re [2004] FCAFC 102; (2004) 139 FCR 185 ................................................................ 6.470 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 ................... 16.15 Grosvenor Hill (Qld) Pty Ltd v Barber [1994] FCA 921; (1994) 48 FCR 301 ........... 15.155, 15.160, 15.165, 15.170 Grove v Flavel (1986) 43 SASR 410; 11 ACLR 161 .................................................................... 16.70 Growden and Committee Under Part VIII of the Bankruptcy Act [2008] AATA 604 ...... 2.140, 2.160 Grundy Organisation Pty Ltd, Re [2010] NSWSC 1432 ............................................................... 11.10 Gunns Finance Pty Ltd (R & M Apptd) (in Liq) v Moss [2017] FCCA 1773 ............................. 8.235 Gunns Finance Pty Ltd (recs and mgrs apptd) (in liq) v Correy [2015] VSC 385 ...................... 13.55

Table of Cases

xxxvii

Gunns Plantations Ltd (No 1), Re [2012] VSC 655 .................................................................... 19.390 Guo v Song [2018] NSWSC 12 .................................................................................................... 19.345 Guss v Johnstone [2000] HCA 26; (2000) 74 ALJR 884 ................................................... 3.265, 3.320 Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 ....................................... 6.490, 6.495, 15.285

H HIH v Building Insurers’ Guarantee Corporation [2004] NSWSC 910; (2004) 51 ACSR 21 ................................................................................................................................... 10.345 HIH Casualty and General Insurance Ltd, Re [2006] NSWSC 485; (2006) 24 ACLC 545; 57 ACSR 791 ...................................................................................................... 15.105, 20.125 HIH Insurance Ltd, Re [2004] NSWSC 454 ................................................................................ 15.430 HPI Australia Pty Ltd, Re [2008] NSWSC 1106 ........................................................................... 19.42 HVAC Construction (Qld) v Energy Equipment (2003) 21 ACLC 163 ........................................ 17.20 Hacker v Weston [2015] FCA 363 ........................................................................................ 2.230, 7.65 Hacker v Weston (No 2) [2015] FCA 521 ..................................................................................... 2.320 Hadley v Bethq Pty Ltd [2016] FCA 1263 ................................................................................... 11.305 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 ........................................................ 15.105 Haig v Aitken [2000] 3 WLR 1117 .................................................................................................. 4.50 Haley Construction Limited v Evolving Projects Limited [2015] NZHC 2490 ......................... 11.170 Hall v Mercury Information Technology (South Australia) Pty Ltd [2002] FCA 272; (2002) 20 ACLC 496 ............................................................................................................... 19.250 Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 ..... 1.75, 14.130, 15.285, 16.60, 16.105 Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99 ................ 6.450, 10.260, 10.455, 14.130 Hall, Re (1994) 14 ACSR 488; [1994] FCA 1319 ............................................................. 7.120, 7.150 Halse v Norton [1997] FCA 673; (1997) 76 FCR 389 .................................................................. 5.270 Halstead v CTS Quality Building Products Pty Ltd [2006] NSWSC 1022 ................................ 17.110 Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] WASC 152; (2017) 320 FLR 259 ....... 6.495, 14.165, 15.285, 20.180 Hamilton v National Australia Bank (1996) 66 FCR 12; 14 ACLC 1,202 ...... 20.120, 20.220, 20.260 Hamilton v Oades (1989) 166 CLR 486 .............................................................. 6.255, 15.160, 15.165 Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 ..... 10.45, 10.50 Handberg v MIG Property Services Pty Ltd [2012] VSC 551; (2012) 92 ACSR 38 ... 10.315, 10.345 Hansen, Re (1985) 4 FCR 590 ........................................................................................................ 3.285 Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd (2007) 61 ACSR 321 ..................... 11.125 Hanson Construction Materials Pty Ltd v Davey [2010] QCA 246; (2010) 79 ACSR 668 .................................................................................................................... 20.65, 20.130, 20.260 Harding v Deputy Commissioner of Taxation [2008] FCA 1403 .................................................. 2.370 Hardman, Re (1932) 4 ABC 207 .................................................................................................... 5.160 Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 .............................................. 4.210, 5.230 Harris & Lewin Pty Ltd v Harris & Lewin Agents Pty Ltd (1975-76) CLC 40-216 ................. 18.115 Harris Scarfe Ltd, Re; Dwyer v R-Jay Pty Ltd [2007] SASC 115; (2007) 97 SASR 377 ........ 14.115 Harrisons Pharmacy Pty Ltd, Re [2013] FCA 458 ...................................................................... 19.312 Harry Goudias Pty Ltd v Port Adelaide Freezers Pty Ltd (1992) 7 ACSR 303 ........................... 6.530 Haskins v Official Trustee in Bankruptcy [1996] FCA 242 ........................................................... 4.115 Haskins v Official Trustee in Bankruptcy [2000] FCA 691 ............................................................. 6.85 Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609 ........................... 16.45 Hasler, Re (1974) 23 FLR 139; 3 ALR 61 ..................................................................................... 4.215 Hausman v Smith [2006] NSWSC 682 ........................................................................................ 15.240 Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481 ....................................................... 1.25 Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 2 NSWR 782; (1970) 92 WN (NSW) 199 ......................................................................................... 18.200, 18.535

xxxviii Table of Cases

Hawkins v Bank of China (1992) 26 NSWLR 562 ............................................................ 1.65, 16.100 Hayes v Doran (No 2) [2012] WASC 486 ................. 19.385, 19.390, 20.245, 20.255, 20.260, 20.270 Hayes Steel Framing Systems Pty Ltd (Admins Apptd), Re [2017] NSWSC 385 ..................... 19.390 Hayward v Scott as Trustee of the Debtor Estate of Hayward [2013] FCA 421; (2013) 212 FCR 430 .......................................................................................................... 7.160, 8.45, 8.205 Healey v Prentice (No 2) [2000] FCA 1598 ................................................................................... 4.115 Health Insurance Commission v Alekozoglou (2003) 1 ABC (NS) 365; [2003] FCA 848 ............................................................................................................................................... 6.475 Healy, Re; Falaren Pty Ltd v ASIC [2012] FCA 368 .................................................................. 10.210 Heard, in the matter of GEBIE Services Pty Ltd (in liq) [2017] FCA 323 ................................ 15.165 Heenan, Re [1992] FCA 544; (1992) 39 FCR 428 ........................................................................ 3.120 Helmar Pty Ltd, Re (1992) 8 ACSR 301 ..................................................................................... 14.155 Henaford Pty Ltd v Strathfield Group Ltd [2009] NSWSC 539; (2009) 72 ACSR 240 ........... 20.120, 20.125 Henderson, Re [1985] FCA 209; (1985) 9 FCR 353 ....................................................................... 3.95 Hewitt v Court (1983) 149 CLR 639 ........................................................................................... 18.205 Hi-Fi Sydney Pty Ltd, Re [2015] NSWSC 1312 ......................................................................... 20.125 Hi-Fi Sydney Pty Ltd (admin apptd), Re [2015] NSWSC 781 ..................................................... 20.55 Hide, Re (1871) 7 Ch App 28 ......................................................................................................... 6.460 Hill v David Hill Electrical Discounts Pty Ltd [2001] NSWSC 271; (2001) 37 ACSR 617 ............................................................................................................................... 20.135, 20.300 Hill v Venning (1979) 4 ACLR 555 ............................................................................................. 18.470 Hill, in the matter of Fisher & Paykel Australia Pty Ltd v Hill [2001] FCA 800 ....................... 8.285 Hill and Official Receiver [2007] AATA 1420; (2007) 95 ALD 498 .............................................. 9.35 Hingston v Westpac Banking Corporation [2012] FCAFC 41; (2012) 200 FCR 493 ......... 7.60, 8.05, 8.230, 8.250 Hoare, Re [1972-1973] ALR 1134 .................................................................................................. 4.210 Hoare Bros Pty Ltd v DCT (1996) 62 FCR 302 .......................................................................... 11.190 Hoath v Comcen Pty Ltd (2005) 53 ACSR 708; [2005] NSWSC 477 ....................................... 19.345 Hodder, Re (1965) 7 FLR 436 ........................................................................................................ 6.255 Hodgkinson, in the matter of Kupang Resources Ltd (Subject to Deed of Company Arrangement) [2017] FCA 1342 .............................................................................................. 15.195 Holbrook v Muntz [2010] FMCA 105 ............................................................................................ 8.195 Holli v ASC [1998] FCA 1657 ....................................................................................................... 17.90 Home v Walsh [1978] VR 688 ...................................................................................................... 18.225 Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 201 FLR 456 ....................................................................................................................... 19.175, 19.185 Honeysett, Re; Saxon Building Projects Pty Ltd v Donnelly [1998] FCA 1398 .......................... 3.120 Hong Kong Bank of Australia v Murphy (1992) 28 NSWLR 512 ............................................. 15.165 Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343; (2011) 87 ACSR 1 .................................................................................................................... 11.125 Horne v Concore Australia Pty Ltd [1997] FCA 503 .................................................................... 5.250 Horne v Retirement Guide Management Pty Ltd [2017] VSCA 47 ............................................ 14.175 Horne v Tebb [2013] FCA 585 ....................................................................................................... 2.370 Hornet Aviation Pty Ltd v Ansett International Air Freight [1994] FCA 1533; (1995) 13 ACLC 613 ............................................................................................................................ 11.185 House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527 ............................................... 11.250 Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 ................................................................................................................................. 15.420 Houvardas v Zaravinos (2003) 202 ALR 535 .................................................................................. 5.15 Howship Holdings Pty Ltd v Leslie (1996) 41 NSWLR 542 ...................................................... 11.100 Hudson v Whalan [1998] FCA 189; (1998) 5 ABC (NS) 1 .......................................................... 7.170

Table of Cases

xxxix

Huen v Official Trustee in Bankruptcy (2008) 248 ALR 1; [2008] FCAFC 117 ......................... 4.130 Hugh J Roberts Pty Ltd, Re [1970] 2 NSWR 582; (1970) 91 WN (NSW) 537 ........... 15.160, 15.165 Hughes v Receivers and Managers of Westgem Investments Pty Ltd (No 3) [2012] WASC 360 ..................................................................................................... 10.205, 19.140, 20.135 Hughes, Re [1996] FCA 1286 ......................................................................................................... 8.295 Hughes, in the matter of Sales Express Pty Ltd (in Liq) [2016] FCA 423 ................................ 10.320 Huon Foam Pty Ltd, Re [2000] TASSC 99 ...................................................................... 10.80, 11.290 Hur v Samsun Logix Corp [2009] FCA 372 .................................................................................. 18.05 Hurt v Ausroc Metals Ltd [2017] WASC 169 ................................................................................ 20.55 Hurt, Re (1988) 80 ALR 236 .......................................................................................................... 2.235 Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62 ..... 1.60, 14.85, 14.130, 14.205, 15.285 Hutchings v ASIC [2017] FCA 858 .................................................................................................. 4.10 Huxtable, Re; P Hindle & Co (WA) Pty Ltd [2013] FCA 1105 ................................................. 10.450 Huynh v Pascoe [2002] FCA 309; (2002) 120 FCR 354 ............................................................... 6.115 Hyatt of Australia Ltd v Coolum Resort Pty Ltd [2012] QSC 49 .............................................. 19.180 Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321; (1977) 2 ACLR 559 .................... 1.55, 1.75 Hypec Electronics Pty Ltd v Mead [2004] NSWSC 731; (2004) 61 NSWLR 169 ................... 10.325

I IFX Markets Ltd v Rappaport [2009] FMCA 893 ......................................................................... 8.230 IND Energy Inc v Langdon [2014] WASC 364 ........................................................................... 19.175 ING Bank (Australia) Limited v State of Queensland, in the matter of Watson [2017] FCA 411 .......................................................................................................................... 6.280, 6.285 IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417 .......................... 11.265, 11.275 IR Services (Qld) Pty Ltd, Re [2017] NSWSC 1823 .................................................................. 11.215 Ibbco Trading Pty Ltd v HIH Casualty and General Insurance Ltd [2001] NSWSC 346; (2001) 19 ACLC 1093 .................................................................................................... 12.50, 13.55 Ide v Ide [2004] NSWSC 751; (2004) 50 ACSR 324 ................................................................. 18.495 Idylic Solutions Pty Ltd, Re [2016] NSWSC 1292 ..................................................................... 10.455 Imagebuild Group Pty Ltd v Fokust Pty Ltd [2017] VSCA 131 ................................................. 11.125 Immunosearch Pty Ltd, Re (1990) 2 ACSR 455 ............................................................................ 17.95 Imobridge Pty Ltd, Re [2000] 2 Qd R 280 .................................................................................... 15.40 Imperial Hydropathic Hotel Co, Re (1882) 49 LT 147 ................................................................ 11.270 Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2), Re [2016] NSWSC 106; (2016) 305 FLR 222 ............................................................................. 10.455, 15.350, 15.390 Infratel Networks Pty Ltd v Gundry’s Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 .................................................................................................................. 11.125 Inspector-General v Nelson (1998) 86 FCR 67 .............................................................................. 7.120 Inspector-General in Bankruptcy v McGushin (2009) 178 FCR 27; 7 ABC (NS) 178; [2009] FCA 662 .......................................................................................................................... 6.365 Insurance Commissioner v Associate Dominions Assurance Society Pty Ltd (1953) 89 CLR 78 ......................................................................................................................................... 1.40 Interchase Corporation Ltd, Re (1994) 12 ACSR 405 ................................................................. 15.170 Intercorp Estate Pty Ltd, Re [2016] NSWSC 1953 ...................................................................... 11.100 Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 14 ACLC 1234 ............................................................................................................................... 11.170 International Air Transport Association (IATA) v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 ....................................................................................... 13.72, 20.180 International Cat Manufacturing Pty Ltd v Rodrick [2013] QCA 372; (2013) 97 ACSR 200 .......................................................................................................................... 1.55, 14.55, 16.95

xl

Table of Cases

International Cat Manufacturing Pty Ltd v Rodrick [2013] QSC 91 ................................. 14.55, 16.95 International Greetings UK Ltd v Stansfield [2010] NSWSC 1357; 79 NSWLR 464 ... 16.120, 17.50 International Harvester Export Co v International Harvester Australia Ltd [1983] 1 VR 539 ............................................................................................................................................. 18.555 International Materials & Technologies Pty Ltd, Re [2013] NSWSC 787 ................................... 11.85 International Skin Care Suppliers v Whyte [2011] NSWSC 463 ................................................ 14.142 Investec Bank (Australia) Ltd v Globdale Pty Ltd [2009] VSCA 97; (2009) 71 ACSR 615 ............................................................................................................................................. 18.270 Isbester v Knox City Council [2015] HCA 20 ............................................................................... 2.305 Iskenderian, Re [1989] FCA 184; (1989) 21 FCR 363 .................................................................. 4.100 Iso Lilodw’ Aliphumeleli Pty Ltd v Commissioner of Taxation (2002) 42 ACSR 561 .... 1.55, 16.105 Italo-Australian Centre, Re [2002] 1 Qd R 254 ........................................................................... 20.150

J J & B Records Ltd v Brashs Pty Ltd (1994) 13 ACSR 680 ....................................................... 19.250 J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172 ......................... 20.105, 20.120, 20.125 JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691 ..... 19.205, 20.255, 20.270, 20.375 JJ Weeks Construction Pty Ltd, Re (1982) 1 ACLC 425 .............................................................. 17.85 JKB Constructions Pty Ltd, Re [2006] NSWSC 1040 ....................................................... 17.10, 17.25 JLF Bakeries Pty Ltd v Baker’s Delight Holdings Ltd [2007] NSWSC 894; (2007) 25 ACLC 1164 ............................................................................................................................... 15.285 JN Taylor Holdings Ltd, Re (1991) 9 ACLC 1 .............................................................................. 12.15 JP Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu [2008] FCA 433; (2008) 167 FCR 212 ............................................................................................................................ 17.110 Jack James as administrator of ZYL Ltd [2015] WASC 57 .......................................................... 19.42 Jacka Nominees Pty Ltd, Re (1996) 14 ACLC 633 ..................................................................... 15.420 Jackson v Health Services Union [2015] FCAFC 188 ................................................................... 4.115 Jambrecina v Official Trustee in Bankruptcy [2003] FCA 1352; (2003) 2 ABC (NS) 58 ........... 4.115 James v Abrahams (1981) 34 ALR 657 ......................................................................................... 3.320 James v Andrews [2001] NSWSC 1149; (2001) 166 FLR 11 ....................................................... 16.85 James v Bank of WA [2004] WASCA 234; (2004) 51 ACSR 325 ............................................. 18.160 James v Commonwealth Bank of Australia [1992] FCA 420; (1992) 37 FCR 445 ....... 18.30, 18.245, 18.470 James v DCT (1988) 6 ACLC 1118 ............................................................................................. 21.135 James v DCT (No 2) [2010] FCA 677 ........................................................................................... 3.300 James v Woodgate [2012] FMCA 1214; (2012) 273 FLR 22 ............................................ 6.470, 6.515 James, Ex parte; In re Condon (1874) LR 9 Ch App 609 ............................................... 2.250, 15.295 James, Re (1994) 51 FCR 14 .......................................................................................................... 3.410 James, Re [2015] WASC 57 .......................................................................................................... 19.390 James Miller Holdings Ltd v Graham (1978) 3 ACLR 604 ........................................................ 18.555 James: Re Autolook Pty Ltd, Ex parte (1983) 1 ACLC 1,211 .................................................... 15.295 Jaques McAskell Advertising Freeth Division Pty Ltd, Re [1984] 1 NSWLR 249 ..................... 14.75 Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd [1984] FCA 247; (1984) 3 FCR 311 ...................................................................................................................................... 13.10 Jarena Pty Ltd v Sholl Nicholson Pty Ltd (1996) 14 ACLC 531 ................................................. 11.85 Java 452, Re [1999] VSC 252; (1999) 32 ACSR 507 ................................................................. 19.120 Jay-O-Bees, Re; Rosseau Pty Ltd v Jay-O-Bees [2004] NSWSC 818; (2004) 50 ACSR 565 ............................................................................................................................... 15.295, 15.300 Jefferson v Shirlaw [2006] QSC 153; [2007] 1 Qd R 162 .......................................................... 18.470 Jemielita, Re [1996] FCA 1208; (1996) 63 FCR 141 .................................................................... 4.100

Table of Cases

xli

Jenkins v Jonkay Pty Ltd [2007] FCA 858 ..................................................................... 10.295, 10.325 Jenkins v National Australia Bank [1999] FCA 1758 .................................................................... 3.260 Jenner v Selmoore Pty Ltd (1997) 74 FCR 526 .................................................. 18.85, 18.105, 18.115 Jet Corp of Australia Pty Ltd, Re [1985] VR 716 ....................................................................... 18.225 Jetaway Logistics Pty Ltd v DCT [2009] VSCA 319; (2009) 26 VR 657 ........................ 1.60, 15.285 Jian Xing Knitting Factory v SCASA Pty Ltd [2004] SASC 152 ............................................... 11.125 Jick Holdings, Re [2009] NSWSC 574; (2009) 234 FLR 22 ...................................................... 20.145 Joan Freedom Rogers Pty Ltd v Prasad [2000] FCA 1049 ........................................................... 3.385 Joe & Joe Developments Pty Ltd, Re [2014] NSWSC 1444 ...................................................... 19.175 John Plunkett Consolidated Pty Ltd, Re (1978) 3 ACLR 279 ....................................................... 11.35 Joiner v Bailey [2004] FCA 1411 ................................................................................................... 8.195 Jones v Arcuri [1999] FCA 46 ........................................................................................................ 5.160 Jones (Liquidator) v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 ......................... 1.185, 4.50, 14.15, 15.350, 18.370 Jonson, Re; Ex parte Prentice [1997] FCA 868 ............................................................................. 6.225 Jordanlane Pty Ltd v Kitching [2008] VSC 426; (2008) 222 FLR 14 ........................................ 14.250 Jovanovic v ASIC [2001] TASSC 6; (2001) 19 ACLC 510 .......................................................... 13.30 Jovanovic v Commonwealth Bank of Australia [2004] SASC 61; (2004) 87 SASR 570 .......... 18.280 Jovanovski v Official Receiver [2018] FCCA 1193 ....................................................................... 7.115 Joyce Rural Pty Ltd v Harris [2000] WASC 14 ............................................................................. 17.85

K K L Tractors Ltd, Re [1954] VLR 505 ......................................................................................... 11.270 KJ Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd [2017] FCA 325; (2017) 120 ACSR 117 ................................................................................. 14.20, 14.270 KP Wee Investments Pty Ltd, Re (1994) 12 ACLC 157 ............................................................... 17.85 Kala Capital Pty Ltd, Re [2012] NSWSC 1073 ........................................................................... 10.215 Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd (1994) 51 FCR 446 ............................................................................................................................................... 11.85 Kalfus v Cassis [2005] FMCA 143; (2005) 3 ABC (NS) 649 ...................................................... 3.260 Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 ...... 14.80, 14.135, 16.45, 16.75 Kalon Pty Ltd v Sydney Land Corp Pty Ltd (No 2) (1998) 26 ACSR 593 .................. 20.260, 20.265 Kanedale Pty Ltd, Re (1987) 12 ACLR 449; (1988) 6 ACLC 359 ............................................... 13.80 Kanovics v Lean [2002] FCA 803; (2002) 122 FCR 195 ............................................................. 4.175 Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687 .......................... 15.105, 19.370 Kapila, Re Edelsten [2014] FCA 1112 ........................................................................................... 6.180 Karounos v Official Trustee [1988] FCA 180; (1988) 19 FCR 330 ............ 4.130, 6.245, 6.250, 6.255 Kassab, Re [1994] FCA 1545; (1994) 55 FCR 305 ....................................................................... 3.200 Katoa Pty Ltd v Dartnall (1983) 74 FLR 202 ................................................................................ 4.210 Kattirtzis v Zaravinos [2001] FCA 1158 ........................................................................................ 4.150 Kavich, Re (1995) 58 FCR 82 ........................................................................................................ 7.160 Kazur v Duus (1998) 29 ACSR 321 ............................................................................................... 19.40 Kekatos v Holmark Construction Company Pty Ltd (1995) 13 ACLC 1581 ............................. 11.305 Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587 ...................................... 13.95 Keldane Pty Ltd, Re [2011] VSC 385 ............................................................................................ 19.35 Ken Godfrey Pty Ltd, Re (1994) 14 ACSR 610 .......................................................................... 15.420 Keneally, Re [2015] NSWSC 937; (2015) 107 ACSR 172 ................................... 19.40, 19.42, 19.390 Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183 ............................................................ 16.90 Kerr (Trustee), in the matter of Cross (Bankrupt) v Bechara (No 2) [2015] FCA 444 ............... 6.575 Kevin McNamara & Son Pty Ltd, Re [2014] VSC 337 ................................................................ 11.85

xlii

Table of Cases

Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11 ............... 11.190 Khatri and Lane v McDonald, in the matter of Wilkie [2018] FCA 543 ....................................... 2.97 Khera v National Australia Bank Ltd (1997) 71 FCR 133; [1996] FCA 1050 ............................ 8.285 Khoury v Pascoe [2009] FMCA 676 .............................................................................................. 7.120 Khoury v Rosemist Holdings Pty Ltd (1999) 17 ACLC 1013 .................................................... 11.170 Khoury v Zambena Pty Ltd (1997) 15 ACLC 620 ...................................................................... 19.305 Kiem Dang Investment Pty Ltd v Mansfield [2017] FCCA 725; (2017) 320 FLR 14 ..... 5.270, 6.220 Kijurina v Taouk: Re ET Family Pty Ltd (in liq) [2015] FCA 424 ...... 14.155, 18.05, 18.140, 18.150 Kim v Daebo International Shipping Co Ltd [2015] FCA 684; (2015) 232 FCR 275 ................ 13.60 Kimber v The Owners Strata Plan No 48216 [2017] FCAFC 226 .................................... 3.133, 3.420 Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 ................................................. 16.75, 16.78 Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262 ................................... 11.95 Kitay v Strathfield Holdings Pty Ltd (1998) 27 ACSR 716 ........................................................ 14.135 Kitchen Dimensions Pty Ltd, Re [2012] VSC 280 ........................................................................ 17.10 Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34 .............................................................. 4.10 Kleiss, Re (1968) 15 FLR 281 ........................................................................................................ 8.240 Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (in liq) (rec & mgrs apptd) [2017] FCA 866 ........................................................................................................................ 18.215 Knight v FP Special Assets Ltd (1992) 174 CLR 178 ....................................................... 4.120, 6.310 Kolback Group Ltd, Re (1991) 4 ACSR 165 .................................................................. 11.265, 11.275 Kongonis, Re (1963) 19 ABC 96 .................................................................................................... 6.470 Korda v Silkchime Pty Ltd [2010] WASC 155; (2010) 78 ACSR 675 ...................................... 18.235 Korda, Ten Network Holdings Ltd (Administrators Apptd) (Recs and Mgrs Apptd), Re [2017] FCA 914 .......................................... 10.210, 10.230, 19.140, 19.142, 19.145, 19.185, 21.25 Kotses, Re (1995) 59 FCR 597; [1995] FCA 1608 ....................................................................... 7.140 Kozlowski v JSBG Developments Pty Ltd [2010] NSWSC 1022 .............................................. 11.255 Krebs v Pika Wiya Health Service Aboriginal Corporation [2015] FMWC 1232 ........................ 13.55 Krejci as liquidator of Eaton Electrical Services [2006] NSWSC 782; (2006) 58 ACSR 403 ............................................................................................................................... 10.450, 19.185 Krextile Holdings Pty Ltd v Widdows [1974] VR 689 ................................................................. 17.10 Kritharas, Re; ACCC v Kritharas [2000] FCA 1442; (2000) 105 FCR 444 ................................. 6.465 Kukler, Re; Ex parte National Australia Bank Ltd v Kukler [1998] FCA 1165; (1998) 87 FCR 352 ................................................................................................................................ 8.250 Kukulovski, Re [2013] FCA 697 .................................................................................................... 19.35 Kukulovski, in the matter of Corrimal Leagues Club Ltd [2013] FCA 697 ............................... 19.300 Kupang Resources Ltd, Re [2016] NSWSC 1895 ....................................................................... 21.150 Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490; (2004) 138 FCR 324 .... 2.08, 3.280, 3.285 Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 ................................................ 7.170

L L & D Audio Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536 ................................................................................................................................. 11.275 L & H Group v Milton [2015] FCCA 3572 ................................................................................... 3.110 La Pegna v Commissioner of Taxation [2006] FMCA 1643; (2006) 204 FLR 364 ..................... 3.260 Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154 ............................................. 4.10, 7.35 Ladyman, Re (1981) 38 ALR 631 .................................................................................................. 2.235 Lake Johnston Pty Ltd, Re [2013] FCA 915 .................................................................................. 11.85 Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 ..... 19.220, 20.120, 20.125, 20.170, 20.260, 20.265, 21.20 Lamb v Registrar in Bankruptcy (1984) 56 ALR 521 ................................................................... 2.235 Lancaster v Downes [2002] FMCA 40 ........................................................................................... 3.340

Table of Cases

xliii

Land Enviro Corp Pty Ltd (in liq) v HTT Huntley Heritage Pty Ltd [2017] NSWCA 207 ............................................................................................................................................. 18.165 Land Enviro Corp Pty Ltd (in liq) v Hickie [2015] FCA 766 ...................................................... 13.25 Landmark Corporation Ltd (in liq), Re [1968] 1 NSWR 705 ....................................................... 13.70 Lane (Trustee), in the matter of Lee (Bankrupt) v DCT [2017] FCA 953 ............ 4.50, 6.315, 15.350 Lanepoint Enterprises Pty Ltd v ASIC [2010] FCAFC 49; (2010) 78 ACSR 487 ..................... 11.275 Langdon, Re Forge Group Ltd (rec and man apptd) (in liq) [2017] FCA 170; (2017) 118 ACSR 434 .......................................................................................................................... 18.370 Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305; (2011) 285 ALR 207 ................................................................................................................................... 19.250 Lasic & Lasic [2007] FamCA 837; 5 ABC (NS) 584 .................................................................... 6.450 Laucke Flour Mills (Stockwell) Pty Ltd v Fresjac Pty Ltd (1992) 8 ACSR 59 ......................... 11.285 Laurence v Mulroney [1987] FCA 326; (1987) 15 FCR 268 .......................................................... 8.95 Lawrence, Re (1985) 9 FCR 9; [1985] FCA 343 .......................................................................... 8.200 Lawry v Mitrou [2009] FMCA 258 ................................................................................................ 3.192 Le Meilleur Pty Ltd v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115; (2011) 256 FLR 240 ................................................................................................................... 20.40 Leac Engineering Pty Ltd, Re [1991] FCA 937; (1991) 10 ACLC 74 ......................................... 11.95 Lee (dec), Re [2012] FCA 1046; 10 ABC (NS) 243 ....................................................................... 4.45 Lee (dec), Re [2012] FCA 1046; 10 ABC (NS) 243 ....................................................................... 4.45 Leeds v Lemos [2017] EWHC 1825 (Ch) ........................................................................................ 4.50 Legend International Holdings Inc (in liq) v Indian Farmers Fertiliser Co-op Ltd [2016] VSCA 151 ..................................................................................................................... 15.435 Legrande Enterprises Pty Limited v ASIC [2009] FCA 718Shaw .............................................. 17.100 Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509 . 20.50, 20.90, 20.130, 20.165, 20.250, 21.120 Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741 ................................................................ 16.100 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344 ............ 14.15 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 548 ............ 19.255 Lenin v Albarran [2003] NSWSC 1066; (2003) 21 ACLC 132 .................................................. 19.130 Leon v York-O-Matic [1966] 3 All ER 277 ................................................................................. 15.240 Leondaris v KGB Design & Construction Pty Ltd [1998] FCA 1354 .......................................... 3.445 Lerinda Pty Ltd v Thornton [2015] FCCA 1436 ............................................................................ 8.230 Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 ......................................................... 11.245 Leslie Homes (Aust) Pty Ltd, Re (1984) 8 ACLR 1020 ................................................ 18.160, 18.165 Letizia v Australian Music Group T/A Allans Billy Hyde Music [2012] FWA 9609 ................ 19.250 Levene v IRC [1928] AC 217 ......................................................................................................... 3.160 Levi v Guerlini (1997) 24 ACSR 159 .......................................................................................... 14.185 Levy v Reddy [2009] FCA 63 ........................................................................................................ 6.182 Lewis v Condon [2013] NSWCA 204 ............................................................................................ 4.110 Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385 .......................................... 1.40, 1.60, 1.80 Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 ................................................ 1.75, 14.55 Lewis v LG Electronics Australia Pty Ltd (No 2) [2016] VSC 63; (2016) 48 VR 450 ............ 15.355 Lewis v Lamb [2012] FMCA 392 .................................................................................................. 3.185 Lewis v Nortex Pty Ltd [2013] FCAFC 56 ................................................................................... 3.215 Lewis, Diverse Barrel Solutions Pty Ltd, Re [2014] FCA 53 ..................................................... 20.150 Lillas & Loel Lawyers Pty Ltd v Smits [2016] FCA 11 ...................................................... 8.60, 8.130 Linc Energy, Re [2017] QSC 53; (2017) 120 ACSR 86 ............................................................. 15.205 Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260 .................................................... 3.330 Lindholm, Re; Munday Group Pty Ltd v Tsourlinis Distributors Pty Ltd [2011] FCA 195 ............................................................................................................................................. 20.125 Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 74 FCR 19 ........................................ 3.380, 3.410

xliv

Table of Cases

Ling, Re (1996) 142 ALR 87 .......................................................................................................... 3.410 Linker v Nilant [2003] FCA 1576; (2004) 48 ACSR 178 ........................................................... 15.180 Liprini v Pascoe [2012] FCA 886 ................................................................................................... 2.325 Liprini v Pascoe (No 2) [2012] FCA 1024 ..................................................................................... 2.275 Litigation Insurance Pty Ltd, In the matter of [2017] NSWSC 334 ........................................... 11.155 Liverpool Cement Renderers Pty Ltd v Landmarks Constructions Pty Ltd (1996) 19 ACSR 411 ................................................................................................................................. 11.170 Llenruk Pty Ltd, Re [2013] NSWSC 1430 .................................................................................... 17.85 Lloyd’s Bank Ltd v Marcan [1973] 1 WLR 1317 ....................................................................... 14.140 Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division [1993] 2 VR 506 ........................................................................................................................ 6.495 Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407; (2008) 26 ACLC 497 ................................................................................................................................. 10.225 Lo Pilato v Kamy Saeedi Lawyers Pty Ltd [2017] FCA 34; (2017) 249 FCR 69 ..... 5.45, 5.65, 5.70, 5.90 Lockwood v White [2005] VSCA 30; (2005) 11 VR 402 ........................................................... 19.230 Loeskow v Avokah Irrigation Pty Ltd and Commonwealth Bank of Australia [1996] FCA 1420 .................................................................................................................................... 6.485 Lofthouse v Environmental Consultants International Pty Ltd [2012] VSC 416 ....................... 15.320 Lofthouse v Stirling [2008] FCA 1936; 173 FCR 574 .................................................................. 8.310 Lofthouse, Re [2001] FCA 25; (2001) 107 FCR 151 ......................................................... 4.115, 6.315 Lofthouse, in the matter of Riverside Nursing Care Pty Ltd [2004] FCA 93; (2004) 22 ACLC 215 ................................................................................................................................. 15.355 Loi (Administrator) v Homeland Furniture Wollongong Pty Limited (Admin Apptd) [2016] FCA 1036 ...................................................................................................................... 19.300 Lollback v Brakepower Pty Ltd [2010] NSWSC 1457 .................................................................. 13.45 Lombe v Pollak [2004] FCA 264 ................................................................................................... 6.260 Lombe, Re [2011] NSWSC 1536; (2011) 87 ACSR 84 .............................................................. 15.320 Lombe, Re Babcock and Brown Ltd [2012] FCA 107 ................................................................ 15.420 London Scottish Benefit Society v Chorley (1884) 13 QBD 87 ................................................... 2.275 London and Caledonian Marine Insurance Co, Re (1879) 11 Ch D 140 ...................................... 17.50 Longley v Chief Executive, Dept of Environment and Heritage Protection [2018] QCA 32 ............................................................................................................................................... 15.205 Longo, Re (1995) 57 FCR 523 ....................................................................................................... 3.390 Lorie Najjar and Sons Pty Ltd, Re [2013] NSWSC 798 ............................................................... 17.10 Loteka Pty Ltd, Re [1990] 1 Qd R 322; (1989) 7 ACLC 998 .................................................... 14.255 Low v Barnet (Trustee) [2017] FCAFC 60 .................................................................................... 6.425 Lucas v Currie [2013] FCA 1404 ................................................................................................. 14.165 Lucera, Re; Ex parte Official Receiver v Lucera [1994] FCA 1380; (1994) 53 FCR 329 ......... 5.265, 5.270 Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd [2001] NSWCA 479 ...................... 6.485 Lumsden v Long [1998] FCA 1304; (1998) 16 ACLC 1743 ......................................... 18.170, 18.465 Luxtrend Pty Ltd, Re [1997] 2 Qd R 86 ...................................................................................... 10.315 Lympne Investments Pty Ltd, Re [1972] 1 WLR 523; 2 All ER 387 ............................... 1.90, 11.170 Lyons, Re; Ex parte Official Trustee in Bankruptcy [2000] FCA 1428; (2000) 104 FCR 486 ............................................................................................................................................... 6.182

M M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (1996) 19 ACSR 27 ............................ 19.300 M & S Butler Investments Pty Ltd v Granny May’s Franchising Pty Ltd (1997) 15 ACLC 1501; 24 ACSR 695 ............................................................................. 19.325, 20.90, 20.260

Table of Cases

xlv

M Hoffman Nominees Pty Ltd v Cosmas Fish Processors International Pty [1983] 1 VR 349 ...................................................................................................................................... 14.165 MCG Quarries Pty Ltd v Offermans [2015] QCA 103 ...................................................... 14.90, 16.90 MF Global Australia Ltd, Re [2013] NSWSC 779 ...................................................................... 19.390 MF Global Limited (in liq) (No 2), Re [2012] NSWSC 1426 ....................................... 10.460, 15.350 MG Corrosion Consultants Pty Ltd v Gilmour [2012] FCA 383; (2012) 202 FCR 354 ........... 19.250 MGT Samorr Knitting Pty Ltd, Re [2000] VSC 93; (2000) 18 ACLC 333 ................................. 14.60 MI Design Pty Ltd v Dunecar Pty Ltd [2000] NSWSC 995; (2000) 35 ACSR 551 ................. 19.310 MK Builders Pty Ltd v 36 Warrigal Road Pty Ltd [2014] VSC 149 .......................................... 20.180 MNWA Pty Ltd v DCT [2016] FCAFC 154; (2016) 117 ACSR 446 ............................ 11.120, 11.190 MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24; (1999) 195 CLR 636 ... 20.55, 20.250 Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101 ................................................................. 2.350 MacDonald v Official Trustee in Bankruptcy [2001] FCA 140; (2001) 107 FCR 72 .................. 3.385 Mack Trucks (Britain) Ltd, Re [1967] 1 WLR 780 ..................................................................... 18.555 Macks v House [2002] FCA 1540 .................................................................................................. 2.275 Macks v Valamios Produce (No 2) [2003] NSWSC 1044 ............................................................. 2.275 Macks v Vandenberg [2011] FMCA 325 ............................................................................. 8.275, 8.325 Macks v Viscariello [2017] SASCFC 172 .............................. 10.240, 10.245, 15.240, 19.140, 19.185 Macleay Nominees v Belle Property East Pty Ltd [2001] NSWSC 743 .................................... 11.175 Macquarie Health Corporation Ltd v Commissioner of Taxation [1999] FCA 1819; (1999) 96 FCR 238 ........................................................................................ 14.255, 14.260, 19.230 Macquarie University v Macquarie University Union Ltd (No 2) [2007] FCA 844 .................... 11.55 Macro Constructions Pty Ltd, Re [1994] 2 Qd R 31 ..................................................................... 11.95 Madden v Official Trustee in Bankruptcy [2014] FCA 446 ................................................. 4.65, 6.330 Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303 ............................................................ 3.410 Magarditch v ANZ Banking Group Ltd (1999) 17 ACLC 1275 ................................................. 10.325 Magic Aust Pty Ltd, Re (1992) 10 ACLC 929 ............................................................................ 10.205 Magney v Greatlands General Insurance Co Ltd (1998) 28 ACSR 249 ....................................... 10.25 Maiden Civil (P&E) Pty Ltd, Re; Albarran and Pleash v Queensland Excavation Services Pty Ltd [2013] NSWSC 852; (2013) 277 FLR 337 ........................ 13.70, 18.325, 19.100 Mal Bower’s Macquarie Electrical Centre Pty Ltd (in liq), Re (1974) CLC ¶40-109; (1974) 1 NSWLR 254 ................................................................................................. 14.250, 14.255 Mala Pty Ltd v Johnston (1994) 13 ACLC 100 ........................................................................... 11.275 Malanos v Trovas [2012] FMCA 897 ............................................................................................. 2.320 Malcolm Slater Pty Ltd v Thompson [2010] FMCA 120 .............................................................. 3.445 Malek v Macquarie Leasing Pty Ltd [2007] FCAFC 14; (2007) 156 FCR 552 .......................... 3.285 Malhotra v Tiwari [2007] VSCA 101; (2007) 25 ACLC 917 ...................................................... 10.445 Mamouney v Soliman (1992) 9 ACSR 63 ...................................................................................... 11.35 Manchester & Milford Rly Co, Re; Ex parte Cambria Rly Co (1880) 14 Ch D 645 .................. 18.25 Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169 .................................................... 7.120, 7.125 Mango Media Pty Ltd v Velingos [2008] NSWSC 202; (2008) 216 FLR 176 ............................ 4.150 Mann v Condon [2016] FCA 532 ................................................................................................... 7.145 Mann v Goldstein [1968] 1 WLR 1091; [1968] 2 All ER 769 .......................................... 1.90, 11.270 Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 .......................................... 14.80 Mannigel v Aitken (1983) 77 FLR 406 ............................................................................... 2.235, 6.300 Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330; (2002) 20 ACLC 1304 .... 1.70, 16.105 Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546 ................................................ 5.95, 14.142 Maria’s Farm Veggies Pty Ltd (admins apptd), Re [2016] NSWSC 1899 ......... 19.30, 19.390, 19.395 Mariconte v Batiste [2000] NSWSC 288; (2000) 48 NSWLR 724 ............................................ 18.505 Marshall v Clarke [2003] FMCA 473 ............................................................................................. 8.240 Martco Engineering Pty Ltd, Re (1999) 32 ACSR 487 ............................................................... 19.345 Maryvell Investments Pty Ltd, Re [2009] VSC 61 ........................................................................ 17.10

xlvi

Table of Cases

Mascot Home Furnishers Pty Ltd, Re [1970] VR 593 .................................................................. 17.10 Masri Apartments Pty Ltd v Perpetual Nominees Ltd [2004] NSWCA 471; (2004) 52 ACSR 136 .................................................................................................................... 11.210, 11.215 Masri Apartments Pty Ltd v Perpetual Nominees Ltd [2004] NSWSC 255; 22 ACLC 1,411 ............................................................................................................................................ 17.20 Massih v Esber [2008] FCA 1452 .................................................................................................. 3.320 Mathai v Kwee [2005] FCA 932 .................................................................................................... 3.160 Mathai v Nelson [2012] FCA 1448; (2012) 208 FCR 165 .............................................................. 5.70 Mathai v Nelson [2013] HCASL 115 ............................................................................................... 5.70 Mathers v Commonwealth [2004] FCA 217; (2004) 134 FCR 135 ................................ 6.465, 15.275 Matlic Pty Ltd, Re [2014] NSWSC 1342; (2014) 102 ACSR 602 ............................................. 16.105 Matter of Vau (aka Vaimomoana Atu, Faasavalu) [2016] FCCA 2038 ......................................... 9.110 Matteucci v Gollant [2013] FCA 6 ................................................................................................. 7.115 Matthew Ellis Ltd, Re [1933] Ch 458 .......................................................................................... 14.165 Matthews v Geraghty (1986) 43 SASR 576 ................................................................................. 14.145 Matthews v The Tap Inn Pty Ltd [2015] SADC 108 ..................................................................... 14.85 Matthews v Tomasetti Paper Pty Ltd [1987] FCA 359 .................................................................. 4.210 Maurice Blackburn Cashman Pty Ltd v Grizonic (2005) 4 ABC (NS) 79; [2005] FMCA 1541 ......................................................................................................................... 8.80, 8.95 Mavridis v Andronescu [2018] VSC 227 ....................................................................................... 4.125 Maxwell-Smith v Donnelly [2006] FCAFC 150; (2006) 4 ABC (NS) 621 .................................. 2.350 Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825 ................................................................ 3.330 McAusland v DCT (1994) 12 ACLC 78 ...................................................................................... 17.110 McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41; (2013) 210 FCR 149 ............................................................................................ 3.155, 3.165, 3.275, 3.370 McDonald v DCT [2005] NSWSC 2; (2005) 23 ACLC 324 ...................................................... 11.315 McDonald v Young [2012] FCAFC 137; 10 ABC (NS) 254 ........................................................ 6.590 McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503 ....... 13.25, 13.80, 15.400, 18.385, 18.425, 18.440, 18.555, 18.565 McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690 ......................................... 15.400 McGrath, Re [2008] NSWSC 881; (2008) 26 ACLC 921 ............................................. 10.225, 15.430 McGrath, Re; HIH Insurance Ltd [2010] NSWSC 404; (2010) 78 ACSR 405 ........... 10.200, 10.335, 10.445 McGrath and Inspector-General in Bankruptcy [2011] AATA 27 ................................................. 9.125 McIntosh v Shashoua (1931) 46 CLR 494 ..................................................................................... 3.415 McKee, Re; Ex parte Laroar Holdings Pty Ltd v Ross (1996) 71 FCR 156; [1996] FCA 1170 ........................................................................................................................ 6.215, 6.225 McKerlie v Drillsearch Energy Ltd [2009] NSWSC 488; (2009) 74 NSWLR 673 ..................... 15.95 McKern v Minister Administering Mining Act 1978 (WA) [2010] VSCA 140; (2010) 28 VR 1 ......................................................................................................................... 5.185, 14.105 McKern v Pacific Edge Corp Pty Ltd [2004] NSWSC 1150; (2004) 51 ACSR 602 ................... 17.30 McKinnon, Re Specialised Concrete Pumping Victoria Pty Ltd (admin apptd) [2016] FCA 325 .................................................................................................................................... 19.225 McLean v ANZ Banking Group Ltd [1993] FCA 216; (1993) 42 FCR 300 .................... 3.260, 3.280 McLean v Biztole Corp [1996] FCA 773 ....................................................................................... 3.410 McLellan v Australian Stock Exchange Ltd [2005] FCA 585; (2005) 144 FCR 327 ................ 15.275 McLellan, Re; The Stake Man Pty Ltd v Carroll [2009] FCA 1415; (2009) 76 ACSR 67 ............................................................................................................................................... 16.105 McLennan Holdings Pty Ltd, Re (1983) 1 ACLC 786 ...................................................... 12.30, 12.35 McLernon, Re; Ex parte SWF Hoists & Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408 .................................................................................................................................... 5.260

Table of Cases

xlvii

McLernon, Re; Ex parte SWF Hoists & Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408; (1995) 58 FCR 391 ...................................................................................... 5.270, 5.275 McMaster v Eznut Pty Ltd [2006] WASC 109; (2006) 58 ACSR 199 ......................................... 19.40 McMillan v Bidmonta Pty Ltd [2013] FCA 865 ............................................................................ 6.285 McNamara v Langford (1931) 45 CLR 267; 4 ABC 8 .................................................................. 3.370 McNamara v San (No 3) [2010] FCA 227; (2010) 183 FCR 328; 8 ABC(NS) 161 .......... 4.155, 5.95 McVeigh v Brumley [2009] VSC 668 .......................................................................................... 15.195 McVeigh v Linen House Pty Ltd [2000] 1 VR 31 ....................................................................... 20.280 McVeigh v Long [2002] FMCA 53 ................................................................................................ 5.240 Meadow Springs v Balanced Securities [2007] FCA 1443; (2007) 25 ACLC 1433 .................. 10.345 Meales Concrete Pumping Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2015] VSC 594 ....................................................................................................................................... 1.65 Mecfab Holdings Pty Ltd, Re [2015] NSWSC 46 ....................................................................... 10.320 Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178; (2011) 82 ACSR 300 .......................................................................................... 19.345, 20.255 Meehan v Glazier Holdings Pty Ltd (2005) 53 ACSR 229 ......................................................... 11.190 Meehan v Stockman’s Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123 .................... 20.105 Mehajer v Weston [2018] FCA 608 ....................................................................................... 2.08, 3.430 Meinhardt (Hong Kong) Ltd v William Edward Meinhardt (Deceased) [2006] FCA 1106 ............................................................................................................................................. 3.460 Melbourne University Student Union Inc v Sherriff [2004] VSC 266 .......................................... 13.55 Melluish v Underwood Development Pty Ltd [2004] NSWSC 429 ............................................. 17.85 Melluish as Trustee of the Estate of Eriksson [2015] FCCA 2235 ...................................... 4.15, 6.190 Melsom v Velcrete Pty Ltd (1996) 17 WAR 316 ......................................................................... 18.105 Mendarma Pty Ltd (No 2), Re [2007] NSWSC 99; (2007) 61 ACSR 601 ................................ 15.165 Mentha v GE Capital Ltd [1997] FCA 1579; (1998) 16 ACLC 1,032 ............................ 15.325, 20.15 Mentha v Sydney Airports Corporation Ltd [2002] FCA 530; (2002) 120 FCR 310 .................. 20.55 Mentha, in the matter of ACN 009 758 258 Pty Ltd [2009] FCA 603 ............ 19.300, 19.310, 19.390 Mentha, in the matter of Griffin Coal Mining Company Pty Ltd [2010] FCA 764 ................... 19.390 Mentha, in the matter of Griffin Coal Mining Company Pty Ltd (No 3) [2010] FCA 1087 ........................................................................................................................................... 19.310 Mentha; Re Griffin Coal Mining Co Pty Ltd [2010] FCA 1469; (2010) 82 ACSR 142 ........... 19.225, 21.20 Menzies v Paccar Financial Pty Ltd (ACN 005 592 049) [2010] FCA 692 ................................. 3.430 Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 128; (2011) 10 ABC (NS) 24 ........... 6.465 Merchant Nurseries Pty Ltd, Re (1985) 3 ACLR 840 ................................................................... 18.90 Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70 ... 17.25, 19.415, 19.420 Meriton Apartments Pty Ltd v Industrial Court of New South Wales [2008] FCAFC 172; (2008) 171 FCR 380 ............................................................... 2.370, 4.25, 4.115, 4.120, 6.305 Merrag Pty Ltd v Khoury [2009] NSWSC 915 ........................................................................... 14.155 Merrett, Ex parte (1997) 140 FLR 412 ........................................................................................ 15.160 Messina, Re [1998] FCA 379 .............................................................................................. 8.150, 8.240 Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315 .................................................... 16.20 Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36 ......... 15.155, 15.160, 15.165, 15.170, 15.175, 15.180, 15.195 Metledge v Bambakit Pty Ltd [2005] NSWSC 160 ....................................................................... 17.10 Metropolitan Demolitions Pty Ltd v Gialouris [1998] FCA 936 ................................................... 8.155 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 ................................. 16.95, 16.120 Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 .... 11.155, 11.190, 11.270

xlviii Table of Cases

Midas Management Pty Ltd v Equator Communications Pty Ltd [2007] NSWSC 759; (2007) 25 ACLC 1038 .............................................................................................................. 11.160 Middle Harbour Investments Ltd, Re [1977] 2 NSWLR 652 .......................................... 6.280, 15.205 Midland Credit Ltd v Hallad Pty Ltd (1977) 1 BPR 9570 .......................................................... 18.430 Mighty River International Ltd v Hughes [2017] WASCA 152 ........................... 19.10, 20.10, 20.190 Migration Agents Registration Authority v Frugtniet [2018] FCAFC 5 .......................... 2.355, 10.365 Mijac Investments Pty Ltd v Graham (No 2) [2009] FCA 773; (2009) 72 ACSR 684 ............... 18.10 Miller v Bondi Securities [1994] FCA 654 ...................................................................................... 7.80 Mills v Sheahan [2007] SASC 365; (2007) 99 SASR 357 ......................................................... 15.240 Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd (1989) 1 ACSR 118 ........................ 11.250 Mineral Securities Australia Ltd, Re [1973] 2 NSWLR 207 ............................ 10.315, 10.440, 15.240 Mirabela Nickel Ltd, Re [2014] NSWSC 836 .................................................................. 19.65, 21.150 Mischel & Co Pty Ltd (in liq), Re [2014] VSC 140; (2014) 100 ACSR 125 ................... 13.35, 15.15 Mizuho Bank Ltd v Ackroyd [2016] NSWSC 1148 ...................................................................... 19.85 Moage Ltd, Re (1997) 15 ACLC 1034 ......................................................................................... 15.165 Modena Imports Pty Ltd, Re [2010] NSWSC 739 ............................................................. 17.10, 17.25 Modern Wholesale Jewellery Pty Ltd, Re [2017] NSWSC 236 ....................................... 11.90, 11.190 Modern Woodcraft Pty Ltd, Re [1997] FCA 712; (1997) 75 FCR 454 ...................................... 15.200 Mogilevsky v Leroy (Trustee) [2017] FCAFC 52 ........................................................................... 5.37 Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 63 FCR 391 ............................... 19.140 Moncada, Re [1986] FCA 138; (1986) 11 FCR 205 ...................................................................... 3.120 Monks v Poynice (1987) 8 NSWLR 662 ..................................................................................... 18.100 Moore v Australian Equity Investors [2012] FCA 1002 ................................................................ 13.60 Moore v Inspector-General in Bankruptcy [1997] FCA 638 ......................................................... 2.140 Moore-McQuillan v Scot [2006] FCA 63 ....................................................................................... 4.220 Moran v Robertson [2012] FCA 371 ................................................................................... 8.230, 8.260 Morepine Pty Ltd v Crush Pacific Industries Pty Ltd (1996) 131 FLR 436 .... 15.350, 15.355, 15.360 Morris v The Ship “Kiama” (1998) 16 ACLC 945 ...................................................................... 19.265 Morris Catering (Australia) Pty Ltd, Re (1993) 11 ACSR 601 ................................................... 11.155 Moss v Eaglestone [2011] NSWCA 404; (2012) 9 ABC(NS) 622 ............................................... 4.125 Moss Steamship Co v Whinney [1912] AC 254 .......................................................................... 18.565 Motor Group Australia Pty Ltd, Re [2005] FCA 985; (2005) 54 ACSR 389 ............................. 20.175 Motor Terms Co Pty Ltd v Liberty Insurance Ltd [1967] HCA 9; (1967) 116 CLR 177 .......... 6.470, 15.295 Mottee, Re (1977) 29 FLR 406 ............................................................................................. 3.50, 4.160 Mouglalis v Bendigo and Adelaide Bank Ltd [2017] FCAFC 47 ...................................... 8.275, 8.280 Moutere Pty Ltd v DCT [2000] NSWSC 379; (2000) 34 ACSR 533 ......................................... 11.150 Mulherin v Bank of Western Australia Ltd [2006] QCA 175 .......................................... 14.80, 14.135 Multelink Aust Ltd [2003] NSWSC 836; (2003) 21 ACLC 1,661 ................................................ 20.75 Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 ....................................................................................................... 16.70 Mulvaney v Wintulich (1995) 60 FCR 81 .................................................................................... 20.220 Murdaca v Accounts Control Management Services Pty Ltd [2007] FCA 964 ............................ 3.285 Musolino v Sidiropoulos [1991] FCA 252 ..................................................................................... 8.285 Mustang Marine Australia Services Pty Ltd, Re [2014] NSWSC 136; (2014) 292 FLR 228 ............................................................................................................................................. 15.165 Mustang Marine Australia Services Pty Ltd, Re; Perpetual Trustee Co Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 ......................................... 16.135, 20.255

N N A Katzmann Pty Ltd v Tucker (No 2) (1968) 123 CLR 295 .................................................. 18.315

Table of Cases

xlix

NAB v Cranney [2009] FMCA 169 ............................................................................................... 8.295 NSW Rugby League Ltd v United Telecasters Ltd (1991) 4 ACSR 510 .................................... 11.290 NT Pubco Pty Ltd v DNPW Pty Ltd [2011] NTSC 51 ............................................................... 20.125 NZI Securities Australia Ltd v Poignand [1994] FCA 1219; (1994) 51 FCR 584 ....................... 18.80 Naaman v Sleiman [2015] NSWCA 259 ........................................................................................ 13.55 Nambucca Investments Pty Ltd v Star (1995) 13 ACLC 1814 ................................................... 19.150 Napiat Pty Ltd v Salfinger (No 7) [2011] FCA 1322; (2011) 202 FCR 264 ................................ 3.225 Nardell Coal Corp Pty Ltd v Hunter Valley Coal Processing [2003] NSWSC 642; (2003) 178 FLR 400 ................................................................................................... 18.440, 18.460 Nardell Coal Corp Pty Ltd, Re [2003] NSWSC 860; (2003) 47 ACSR 122 .................. 19.35, 19.300 Nardell Coal Corp Pty Ltd, Re [2004] NSWSC 281; 182 FLR 290 ............................................. 17.10 Nath, Re; Ex Parte Ghysels (1996) 63 FCR 523 ................................................................ 3.165, 3.385 Nathan v Burness [2011] FCA 288; (2011) 193 FCR 360 ............................................................ 4.130 National Acceptance Corporation Ltd v Benson (1988) 12 NSWLR 213 .................................. 14.250 National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386 ............ 18.135, 18.140 National Australia Bank Ltd v Cranney [2011] FMCA 169 .......................................................... 8.245 National Australia Bank Ltd v Horne [2011] VSCA 280; (2011) 253 FLR 205 .......................... 19.30 National Australia Bank Ltd v King [2003] NSWSC 525; (2003) 45 ACSR 413 ....................... 19.85 National Australia Bank Ltd v Market Holdings Pty Ltd [2000] NSWSC 1009; (2000) 50 NSWLR 465 ............................................................................................................. 10.55, 11.215 National Australia Bank Ltd v Market Holdings Pty Ltd [2001] NSWSC 253; (2001) 19 ACLC 710 ........................................................................................................................... 10.210 National Australia Bank Ltd v State of New South Wales [2009] FCA 1066; (2009) 182 FCR 52 ................................................................................................................... 6.285, 15.225 National Australia Bank Ltd v Westbrook [2000] FCA 246 .......................................................... 3.385 National Employers’ Mutual General Insurance Association Ltd, Re (1995) 15 ACSR 624 ............................................................................................................................................. 15.345 National Investment Institute Pty Ltd v Property Corporate Services Pty Ltd [2004] FCA 175; (2004) 48 ACSR 508 ................................................................................................ 12.90 National Safety Council of Australia (Victoria Division), Re [1990] VR 29 ................ 10.210, 11.315 Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (No 2) (1986) 5 NSWLR 227 ....... 10.450, 12.75 Nature Springs Pty Ltd, Re (1994) 13 ACSR 50 ................................................................ 17.10, 17.25 Naumoski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332 .............................................. 15.240 Neffati and Inspector-General in Bankruptcy [2016] AATA 941 ................................................... 7.145 Neffati and Inspector-General in Bankruptcy [2017] AATA 1108 ................................................. 7.145 Nelson v Sutera [2013] FCCA 721 ................................................................................................. 8.275 Nenna v ASIC [2011] FCA 1193; (2011) 198 FCR 32 .................................................................. 11.35 Neon Signs (A/Asia) Ltd, Re [1965] VR 125 .............................................................................. 18.580 Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 ................................................................................................................................. 19.345 Neutral Bay Pty Ltd v Deputy Commissioner of Taxation [2007] QCA 312; 25 ACLC 1341 ........................................................................................................................................... 11.190 New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884 ..................................... 8.230, 8.235 New Bounty Holdings Pty Ltd, Re [2015] NSWSC 1060 .......................................................... 20.220 New Bounty Pty Ltd, Re [2015] NSWSC 1060; (2015) 107 ACSR 504 .......... 19.42, 19.390, 19.395, 20.270, 21.150 New Cap Reinsurance v All American Life Insurance [2004] NSWSC 366; (2004) 49 ACSR 417 ................................................................................................................................. 14.105 New Cap Reinsurance Corporation Ltd v A E Grant, Lloyd’s Syndicate No 991 [2009] NSWSC 662; (2009) 72 ACSR 638 ........................................................................................ 15.430

l

Table of Cases

New Cap Reinsurance Corporation Ltd (in liq) v A E Grant [2008] NSWSC 1015; (2008) 221 FLR 164 .............................................................................................. 1.40, 1.65, 16.100 Newcombe v Inspector-General in Bankruptcy [2004] AATA 1320 ............................................. 7.130 Newdigate Colliery Ltd, Re [1912] 1 Ch 468 ................................................................. 18.150, 18.565 Newman v Bain [2013] FCA 558; (2013) 213 FCR 370 ............................................................... 4.115 Newmont Yandal Operations Pty Ltd v J Aron Corporation [2007] NSWCA 195; (2007) 70 NSWLR 411 ................................................................................................. 3.350, 11.230 Newsnet v Raine & Horne [2001] NSWSC 310; (2001) 19 ACLC 843 .................................... 11.300 Nexus Energy Limited, Re [2014] NSWSC 1910; (2015) 105 ACSR 246 ................................ 21.150 Nexus Energy Ltd, Re [2014] NSWSC 1041 ...................................................... 19.65, 19.170, 21.115 Nguyen, Re (1992) 35 FCR 320 ..................................................................................................... 6.305 Nguyen, Re; Ex parte Commissioner of Taxation [1995] FCA 1036; (1995) 54 FCR 403 ............................................................................................................................................... 3.260 Nicholls as Trustee of the Property of Hills v Hills [2004] FCA 1627 ........................................ 6.245 Nicholls as Trustee of the Property of Hills v Hills [2004] FCA 333 .......................................... 6.245 Nicols v Geekie [2007] FMCA 1576; (2007) 214 FLR 188 ......................................................... 6.530 Nikolaidis v Camden Retail Pty Ltd [2010] NSWSC 977 ............................................................ 12.30 Nilant v Macchia [1997] FCA 966; (1997) 18 FCR 419 ............................................................... 7.115 Nine Entertainment Group Ltd (No 1), Re [2012] FCA 1464; (2012) 211 FCR 439 ................ 21.120 Nixon, in the matter of Nixon [2015] FCA 976 ............................................................................ 2.185 No 5 Lorac Avenue Pty Ltd v Brooke (1995) 16 ACSR 247 ........................................ 15.105, 19.370 North City Development Pty Ltd, Re (1990) 20 NSWLR 286 ................................................... 18.450 North Sydney District Rugby League Football Club v Hill [2000] NSWSC 249 ........................ 20.90 Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 ....... 10.205, 12.65 Nugawela v Deputy Commissioner of Taxation [2016] FCAFC 164 ........................................... 3.300 Nyoni v Pharmacy Board of Australia (No 4) [2017] FCA 911 ................................................... 4.125

O O’Brien v Sheahan; Dixon v Riquero (2004) 1 ABC (NS) 474; [2004] FMCA 173 ..................... 4.50 O’Meara v Hitwise Pty Ltd [2007] FCAFC 114; (2007) 160 FCR 518 ............................ 3.370, 7.170 Oates v Commissioner of Taxation (1990) 27 FCR 289; [1990] FCA 510 ............... 7.25, 7.95, 7.100 Oates, Re; Ex parte DCT (1987) 17 FCR 402 ................................................................................. 7.20 Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (1993) 11 ACSR 516 ............... 13.55 Octaviar Administration Pty Ltd (in liq), In the matter of [2017] NSWSC 1556 ...................... 10.335 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 ........................................... 14.15, 15.350 Official Assignee in Bankruptcy of the Property of Cooksley, in the matter of Cooksley v Cooksley [2017] FCA 1193 ......................................................................................... 5.245, 6.182 Official Receiver v Delaton Pty Ltd [1996] VSC 85; (1996) 130 FLR 207 ................................... 4.55 Official Receiver v Todd (1986) 14 FCR 177 ................................................................................ 7.155 Official Receiver v Walia [1997] FCA 1190 ........................................................................... 3.55, 3.70 Official Receiver (NSW), in the matter of D’Elboux, Re [2002] FCA 510 .................................... 7.85 Official Trustee v Frederiksen [2007] FMCA 1915; 5 ABC(NS) 671 ............................................. 4.50 Official Trustee v Martin (1990) 24 FCR 504 .............................................................................. 14.220 Official Trustee v Mitchell [1992] FCA 521 .................................................................................. 5.220 Official Trustee, In the Estate of Smith [1999] FCA 1755 .............................................................. 7.85 Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372 ......................................................... 5.90 Official Trustee in Bankruptcy v Galanis [2017] FamCAFC 20 ................................................... 2.125 Official Trustee in Bankruptcy v Pastro [2001] FCA 234 .............................................................. 5.240 Official Trustee in Bankruptcy v Pastro [2004] FCA 713; (2004) 2 ABC (NS) 257 ........ 6.425, 6.520 Official Trustee in Bankruptcy v Smith [2014] NZHC 1305 ......................................................... 5.245

Table of Cases

li

Official Trustee in Bankruptcy & Galanis [2017] FamCAFC 20 .................................................. 3.192 Ogle, Re [1986] FCA 275; (1986) 14 FCR 172 ............................................................................ 8.135 Old Kiama Wharf Company Pty Ltd v Betohuwisa Investments Pty Ltd [2011] NSWSC 823; (2011) 85 ACSR 87 .......................................................................................... 14.135 Olive v Litchfield Trading Co Pty Ltd [2015] NTSC 2 ..................................................... 12.20, 12.60 Olivieri v Stafford [1989] FCA 486; (1989) 24 FCR 413 ............................................................. 3.390 Olsen v Nodcad Pty Ltd (1999) 32 ACSR 118 ............................................................................ 19.230 Omarjee v Lincoln Hunt Australia Pty Ltd (1986) 4 ACLC 205 .................................................. 12.35 On Q Group Ltd, Re [2014] NSWSC 1428; (2014) 104 ACSR 470 .......................................... 10.455 One.Tel Ltd, Re; Walker and Sherman [2002] NSWSC 1081; (2002) 43 ACSR 305 .... 6.530, 15.245 One.Tel Networks Holdings Pty Ltd, Re [2001] NSWSC 1065; (2001) 40 ACSR 83 .............. 18.235 One Twenty Seven Corporation Pty Ltd, Re (1995) 13 ACLC 1600 .......................................... 15.180 OneSteel Manufacturing Pty Ltd (admin apptd), Re [2017] NSWSC 21; (2017) 93 NSWLR 611 ..................................................................................................... 14.20, 14.270, 18.325 Onefone Australia Pty Ltd v One.Tel Ltd [2003] NSWSC 1228; (2003) 48 ACSR 562 ........... 10.225 Onefone Australia Pty Ltd v One.Tel Ltd [2008] NSWSC 1335; (2008) 69 ACSR 290 ............. 15.40 Onefone Australia Pty Ltd v One.Tel Ltd [2009] NSWSC 1231; (2009) 74 ACSR 716 ............. 15.40 Onefone Australia Pty Ltd v One.Tel Ltd [2010] NSWSC 1120; (2010) 80 ACSR 11 ............ 10.280, 10.450, 15.380 Onesteel Trading Pty Ltd v D’Arrigo [2013] FCCA 1019 ............................................................ 8.235 Ong v Lottwo Pty Ltd [2013] SASCFC 57; (2013) 116 SASR 280 ............................................. 13.55 Onus v Registrar of Aboriginal and Torres Strait Islander Corporations [2017] FCA 1498 ............................................................................................................................................. 10.25 Opes Prime Stockbroking Ltd, Re [2008] FCA 1425; (2008) 171 FCR 473 ................ 20.175, 20.180 Opes Prime Stockbroking Ltd, Re [2009] FCA 813 ....................................................... 21.120, 21.130 Oriental Commercial Bank, Re; Ex parte European Bank (1871) 7 LR Ch App 99 ................... 6.485 Oriental Inland Steam Co, Re (1874) 30 LT 317; LR 9 Ch App 557 ......................................... 15.430 Orix Australia Corporation Ltd v McCormick [2005] FCA 1032; (2005) 145 FCR 244 .... 3.50, 3.80, 7.90 Orleans Motor Co, Re [1911] 2 Ch 41 ......................................................................................... 14.165 Osborne v Gangemi [2011] FCA 1252; (2011) 9 ABC (NS) 257 ................................................. 8.285 Osborne v Gangemi (No 2) (2011) 9 ABC(NS) 273; [2011] FCA 1278 ........................................ 3.90 Oskar, Re (1984) 55 ALR 717 ........................................................................................................ 3.135 Oswal v Burrup Fertilizers Pty Ltd (rec and man apptd) [2013] FCAFC 9; (2013) 295 ALR 708 ................................................................................................................................... 18.535 Oswal v Commonwealth Bank of Australia [2013] WASCA 58 ................................................... 18.40 Oswal, Re; Burrup Fertilisers Pty Ltd v Carson (No 3) [2013] FCA 357; (2013) 93 ACSR 645 ................................................................................................................................. 18.423 Otis Elevator Company Pty Ltd v Guide Rails Pty Ltd [2004] NSWSC 383; (2004) 49 ACSR 531 ................................................................................................................................. 15.440 Otvosi v Ferella [2008] FMCA 1250 .............................................................................................. 6.475 Ousley, Re [1994] FCA 883; (1994) 48 FCR 131 .............................................................. 3.185, 3.340 Owen, Re; RiverCity Motorway Pty Ltd v Madden (No 4) [2012] FCA 1491; (2012) 92 ACSR 255 ............................................................................................................................ 19.310 Owens v Comlaw [2006] VSCA 151; (2006) 4 ABC (NS) 537 ................................................... 4.115 Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 .................................................................................................................. 17.25 Owners of Strata Plan 5290 v CGS and Co Pty Ltd [2011] NSWCA 168; (2011) 81 NSWLR 285 ............................................................................................................................... 13.10 Owners of Strata Plan 80647 v WFI Insurance Ltd (t/as Lumley Insurance) [2015] NSWSC 1161 .............................................................................................................................. 6.465 Ozone Manufacturing Pty Ltd v DCT [2006] SASC 91; (2006) 94 SASR 269 ......................... 11.175

lii

Table of Cases

P P & J Macrae Ltd, Re [1961] 1 WLR 229 ................................................................................... 11.285 PCM Nominees (WA) Pty Ltd v ACN 063 291 430 Pty Ltd [2017] FCA 848 .......................... 11.100 PT Garuda Indonesia Ltd v Grellman [1992] FCA 188 ................................................................ 5.220 PW Saddington & Sons Pty Ltd, Re (1990) 19 NSWLR 674 ....................................................... 11.35 Pacanowski v ASC [1995] FCA 336; (1995) 57 FCR 173 ............................................................ 17.85 Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 ................................... 11.250 Pacific Hardware Brokers (Qld) Pty Ltd, Re (1998) 16 ACLC 442 ........................................... 14.185 Padagas, Re; Ex Parte Carrier Air Conditioning Pty Ltd [1977] FCA 12; (1977) 30 FLR 170 ...................................................................................................................................... 3.165 Pagnon v WorkCover Queensland [2001] 2 Qd R 492 ................................................................ 17.105 Palmer v Ayres [2017] HCA 5; 118 ACSR 380 ........................................................................... 15.165 Palmer v Registrar-General of Land Titles of the Australian Capital Territory [2017] ACTSC 407 ................................................................................................................................ 6.180 Palmer (Trustee), in the matter of Slater (Bankrupt) [2016] FCA 780 ......................................... 6.180 Pan Foods Company Importers & Distributors Pty Ltd v ANZ Banking Group Ltd [2000] HCA 20; (2000) 74 ALJR 791 .............................................................. 18.80, 18.85, 18.105 Pan Pharmaceuticals Ltd, Re [2003] FCA 855; (2003) 47 ACSR 139 .......................... 19.175, 19.400 Pannowitz, Re; Ex parte Wilson (1975) 38 FLR 184 .................................................................... 3.205 Panorama Investments v Summit Tower (Costs against a bankrupt) [2017] VSC 390 ................ 6.470 Pantzer v Wenkart [2006] FCAFC 140; (2006) 153 FCR 466 ...................................................... 7.100 Paperlinx Ltd v Skidmore [2004] NSWSC 1624; (2004) 51 ACSR 614 .................................... 11.275 Paradise Constructors Pty Ltd v Sleiman [2004] VSC 92; (2004) 8 VR 171 ............... 19.155, 19.390 Paramount Airways Ltd, Re [1993] Ch 223 ................................................................................. 14.170 Parbery, Re; NewSat Ltd [2015] FCA 435 ................................................................................... 19.310 Park v Tschannen [2016] FCA 137 ................................................................................................. 6.235 Parker, Worldwide Specialty Property Services Pty Ltd (In Liq) v Worldwide Specialty Property Services Pty Ltd (In Liq), Re [2017] FCA 687 ....................................................... 14.175 Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186; (2009) 71 ACSR 65 .... 20.80, 20.180 Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120 ........................................ 4.142, 5.45, 5.75 Parsons v Sovereign Bank of Canada [1913] AC 160 ................................................................. 18.550 Partridge, Re (unreported, FCA, 22 September 1982, Lockhart J) ............................................... 2.350 Pascoe v Ambernap [2008] FCA 1975 ........................................................................................... 2.235 Pascoe v Idameneo (No 123) Pty Ltd [2014] FCCA 650 .............................................................. 6.205 Pascoe v Leite [2005] FMCA 334 .................................................................................................... 8.60 Pascoe v Park [2009] FMCA 1244 ................................................................................................... 4.55 Pascoe v Prentice [2003] FMCA 198 ............................................................................................. 6.135 Pascoe and Inspector-General in Bankruptcy [2006] AATA 252 ................................................... 7.145 Pasminco Ltd [2003] FCA 265; (2003) 45 ACSR 1 ...................................................................... 19.90 Pasminco Ltd (No 2), Re [2004] FCA 656; (2004) 22 ACLC 774 ............................... 19.390, 20.220 Patane v Asteron Life Ltd [2004] FCA 232; (2004) 2 ABC (NS) 85 ........................................... 3.310 Paton v Campbell Capital Ltd [1993] FCA 526; (1993) 46 FCR 30 ............................................ 8.220 Patrick Stevedores Operations No 2 Pty Ltd v MUA [1998] HCA 30; (1998) 195 CLR 1 ................................................................................................................................................... 19.90 Pattinson v Bellwether Agriculture Pty Ltd (In Liq) [2018] NSWSC 38 ..................................... 6.465 Pattison v May [2005] VSC 454; (2005) 228 ALR 620 ................................................................ 15.15 Pattison v Schiffer [2007] FMCA 319 ............................................................................................ 6.355 Paul’s Retail Pty Ltd v Morgan [2010] NSWCA 217; (2010) 79 ACSR 580 ............................ 20.145 Pavlakis v Equmen Pty Ltd (No 2) [2014] FCA 951 .................................................................. 19.290 Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277 .................................... 17.85, 17.95, 17.100 Pearce v Gulmohar Pty Ltd [2017] FCA 660 ............................................................................... 14.155

Table of Cases

liii

Pearce (Trustee) v Mulhern (Bankrupt) [2011] FCA 930 .............................................................. 4.235 Pearlburst Pty Ltd v Summers Resort Group Pty Ltd [2007] NSWSC 1126 ............................. 11.100 Pearson, Re; Ex parte Wansley v Pearson [1993] FCA 533; (1993) 46 FCR 55 ......................... 5.275 Pegulan Floor Coverings Pty Ltd v Carter [1997] SASC 6299; (1997) 24 ACSR 651 ............ 10.455, 14.205 Peldan v Anderson [2006] HCA 48; (2006) 227 CLR 471 ............................................................. 5.65 Peldan v DCT (2005) 218 ALR 658; [2005] FMCA 547 ................................................................ 5.40 Peled v Roufeil [2017] FCCA 2342 .................................................................................... 6.365, 7.150 Pendlebury v Colonial Mutual Life Assurance Society (1912) 13 CLR 676 .............................. 18.255 Penning v Steel Tubes Supplies Pty Ltd [1988] FCA 200; (1988) 23 FCR 588 ............ 3.445, 18.565 Pennywise Smart Shopping (Australia) Pty Ltd v Sommer & Co Pty Ltd (1992) 6 ACSR 447 ................................................................................................................................. 14.165 Perazzoli v BankSA, a division of Westpac Banking Corporation Limited [2017] FCAFC 204 ................................................................................................. 6.40, 6.240, 6.260, 6.255 Percival v Wright [1902] 2 Ch 421 ................................................................................................ 16.70 Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Co Pty Ltd (No 7) [2012] WASC 502; (2012) 92 ACSR 281 ................................................................................. 12.35 Perlake Pty Ltd v Finance and Mortgage Corp (NSW) Pty Ltd (1997) 15 ACLC 76 ................. 11.90 Permanent Building Society v Wheeler (1994) 11 WAR 187 ....................................................... 16.45 Permanent Trustee Co Ltd, Re [2002] NSWSC 1177; (2002) 43 ACSR 601 ............................ 20.125 Perovich v Whitton (No 2) [2016] FCAFC 152; (2016) 250 FCR 272 .............................. 7.60, 8.315 Perpetual Nominees v Masri Apartments [2004] NSWSC 500; (2004) 22 ACLC 971 .............. 11.100 Perpetual Nominees v Masri Apartments [2004] NSWSC 551; (2004) 22 ACLC 975 ............. 11.135, 11.305 Perpetual Nominees Ltd v McGoldrick [2017] VSC 78; (2017) 120 ACSR 32 ........... 10.245, 15.240 Perrine v Carrello [2017] WASCA 151 ........................................................................................ 16.110 Perth Freight Lines Pty Ltd v BM2008 Pty Ltd (in liq) [2011] VSCA 62 ................................... 13.45 Perthmetro Pty Ltd (in liq) [2015] FCA 671 .................................................................................. 6.575 Peruss Pty Ltd, Re (1980) 2 NSWLR 443 ................................................................................... 14.165 Petagna Nominees Pty Ltd v Ledger (1989) 1 ACSR 547 .......................................................... 14.120 Peter Conyers Pty Ltd, Re [1996] VicSC 515; (1996) 14 ACLC 1835 ........................................ 17.85 Pevsner, Re [1983] FCA 119; (1983) 68 FLR 254 .......................................................................... 4.25 Phillips v Southage Pty Ltd [2015] FCA 332 ................................................................................ 3.225 Phillips and Inspector-General in Bankruptcy [2012] AATA 788 ................................................. 7.145 Phisci Pty Ltd v Green Frog Nominees Pty Ltd [2008] FCA 638 .............................................. 19.250 Phoenix Institute of Australia Pty Ltd v ACCC [2017] FCAFC 155 ............... 15.250, 20.105, 20.175 Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga in Australia Inc [2012] NSWSC 214; (2012) 87 ACSR 658 ............................................................................ 15.100 Photios v Cussen [2015] NSWSC 336 .............................................................................. 19.30, 19.390 Photosprint Australia, Re [2005] FCA 1504; (2005) 51 ACSR 479 ............................................. 15.20 Piccoli Tesori Pty Ltd (Deregistered), Re; Ex parte Bertuol [2006] FCA 462; (2006) 151 FCR 109 .............................................................................................................................. 17.55 Piccone v Suncorp Metway Insurance Ltd [2005] FCAFC 260; (2005) 148 FCR 437 ............... 4.150 Pilmer v HIH Casualty and General Insurance Ltd (No 2) [2004] SASC 389; (2004) 90 SASR 465 ...................................................................................................................... 13.10, 14.255 Pinklillies Pty Ltd, Re; Northwest Motel Group Pty Ltd v Huxtable [2011] FCA 1543 ........... 10.200 Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2008] NZCA 450 ............ 11.170 Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1998) 16 ACLC 36 ................... 19.250 Pitman v Pantzer (2001) 115 FCR 361 ........................................................................................... 4.145 Plate Impressions Pty Ltd v JRL Consortium Group Pty Ltd [2016] QSC 274 ......................... 11.190 Playford and Inspector-General in Bankruptcy [2018] AATA 19 .................................................. 7.130 Playspace Playground Pty Ltd v Osborn [2009] FCA 1486 ........................................................ 16.100

liv

Table of Cases

Pleash v Buler [2010] FCA 464 ...................................................................................................... 20.55 Pleash, Re [2012] FCA 1125 ........................................................................................................... 20.55 Pleash, in the matter of Equititrust Limited (In Liquidation) (Rec & Mgrs Appt) (No 3) [2017] FCA 1074 .......................................................................................................................... 4.50 Plumbers Supplies Co-operative Ltd v Firedam Civil Engineering Pty Ltd [2011] NSWSC 325 ............................................................................................................................. 19.345 Pluton Resources Ltd (rec & mgrs apptd) (in liq), Re [2017] WASC 142 ................................. 15.365 Plutus Payroll Australia Pty Ltd, Re [2017] NSWSC 1041 ............................................. 12.35, 19.250 Plutus Payroll Pty Ltd, Re [2017] NSWSC 1360 .......................................................................... 11.70 Plymin v ASIC [2004] VSCA 54 .................................................................................................... 16.90 Polgar v Official Receiver [2015] FCCA 1840 .............................................................................. 5.260 Policy Nominees Pty Ltd v McDougall [1997] FCA 1067 ........................................................... 8.170 Pollak v Lombe [2004] FCA 362 ................................................................................................... 6.230 Pollard, Re; Ex parte Lensing Management Pty Ltd [1991] FCA 640; (1991) 33 FCR 284 ............................................................................................................................................... 3.385 Pollitt, Re; Ex parte Minor (1893) 1 QB 455 .................................................................................. 2.95 Pollnow, Re (1994) 12 ACLC 88 .................................................................................................. 17.110 Pollock v DCT [1994] FCA 953 ....................................................................................................... 7.80 Ponsford Baker & Co v Union of London and Smith’s Bank Ltd (1906) 2 Ch 444 ..................... 2.95 Porter v OAMPS [2004] FMCA 272; (2004) 207 ALR 635 ......................................................... 3.260 Portfolio Projects Pty Ltd v Oakes Building Co Pty Ltd (1987) 5 ACLC 911 .......................... 11.275 Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746 ................................................................................................................ 11.185 Posner v Gibb [2001] FMCA 93 ....................................................................................................... 5.70 Poumako (Bankrupt) v Poumako (No 3) [2013] FCA 22 ................................................................ 5.55 Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433 ............................................ 1.30, 1.70, 16.110 Power v DCT [2013] NSWCA 428 .............................................................................................. 16.160 Power v Kenny [1977] WAR 87 ..................................................................................................... 7.160 Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (1998) 16 ACLC 410 .................. 15.420 Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (rec and mgrs appt’d) [2017] NSWCA 8 ..................................................................................... 1.165, 13.70 Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd [2014] FCA 1034; (2014) 225 FCR 305 ................................................................................................................ 14.270 Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132; (2014) 46 WAR 483 .......................................................................................... 11.175 Prendergast v Rolcross [2008] NSWSC 146 .................................................................................. 17.10 Prentice v Boyle [2010] FMCA 681 ............................................................................................... 8.235 Prentice v Cummins (No 5) [2002] FCA 2503; (2002) 124 FCR 67 .............................................. 5.70 Prentice v Cummins (No 6) [2003] FCA 1002; (2003) 134 FCR 449 ............................................ 5.75 Prentice v St George Bank Ltd [2002] NSWSC 358; (2002) 20 ACLC 923 ............................. 14.135 Prentice v Wood (2002) 119 FCR 296; [2002] FCAFC 48 ................................................ 7.120, 7.150 Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676; (2007) 64 ACSR 31 ............................................................................... 2.250, 10.300 Pretorius v Dalton Carpet Tiles Pty Ltd (1984) 1 FCR 273; [1984] FCA 141 ............................ 8.170 Price Right Construction Pty Ltd (Admin Apptd), Re [2006] NSWSC 324; (2006) 57 ACSR 206 ................................................................................................................................. 19.390 Primary Securities Ltd v Willmott Forests Ltd (rec and man apptd) (in liq) [2016] VSCA 309 ................................................................................................................................. 19.230 Primestyle Pty Ltd v Fluhler [2017] WASC 296 ......................................................................... 11.185 Prins v Body Corporate For The Wave CTS [2012] FMCA 148 .................................................. 3.260 Professional Advantage Pty Ltd v Australian Broadcasting Commission [2007] NSWSC 607 ............................................................................................................................................. 11.165

Table of Cases

lv

Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd (No 3) [2010] WASC 93 .......................................................................................................... 11.260 Progress Printers and Distributors Pty Ltd & Production & Graphic Communications Pty Ltd [1996] FCA 1688; (1996) 21 ACSR 241 ................................................................... 11.300 Promnitz v Indochine Mining Ltd [2015] FCA 857 ....................................................... 15.105, 19.345 Promoseven Pty Ltd v Markey [2013] FCA 1281 ....................................................................... 18.422 Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd [2013] QCA 405; (2013) 97 ACSR 390 ................................................................................................................ 20.255 Property Corporate Services Pty Ltd, Re [2004] FCA 175; (2004) 48 ACSR 508 ...................... 12.25 Proserpine Pty Ltd, Re [1980] NSWLR 745; 5 ACLR 603 .......................................................... 17.85 Provident Capital Ltd v Kelso Builders Supplies Pty Ltd [2008] FCA 868; (2008) 66 ACSR 643 ................................................................................................................................. 15.305 Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19 .......................................... 3.415 Puels v Exelerate Funding Pty Ltd (2005) 3 ABC (NS) 660; [2005] FCAFC 38 ........................ 3.180 Pugliese, Re; Ex parte Chase Manhattan Bank Australia Ltd [1993] FCA 454; (1993) 44 FCR 536 ................................................................................................................................ 3.200 Pulsford v Devenish [1903] 2 Ch 625 ............................................................................................ 6.530 Purden, Re [1982] FCA 127; (1982) 64 FLR 306 ......................................................................... 3.340

Q QBSA v Ball [2001] FMCA 47 ........................................................................................... 8.240, 8.295 QIW Retailers Ltd v Felview Pty Ltd [1989] 2 Qd R 245 .......................................................... 11.165 QMT Constructions Pty Ltd, Re [2000] 1 Qd R 284 .................................................................... 19.70 Quality Blended Liquor Pty Ltd, Re [2014] QSC 234; (2014) 102 ACSR 451 ......................... 14.275 Quality Publications Australia Pty Ltd v Commissioner of Taxation [2012] FCA 256 ............... 5.165 Quatrovision Pty Ltd, Re [1982] 1 NSWLR 95 ........................................................................... 15.300 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 ........... 5.185, 14.120, 14.210, 14.215, 16.95 Queensland Nickel Pty Ltd (in liq) v Martino [2017] QSC 95 ..................................................... 13.70 Queensland Nickel Pty Ltd (in liq) (No 2) [2017] QSC 89 ........................................................ 10.200 Quick v Stoland Pty Ltd [1998] FCA 1200; (1998) 87 FCR 371 ................................................... 7.75 Quinn v Official Trustee in Bankruptcy [1996] FCA 443; (1995) 63 FCR 129 ............................. 7.35 Quitstar Pty Ltd v Cooline Pacific Pty Ltd [2003] NSWCA 359; (2003) 48 ACSR 222 ........... 11.85, 11.185

R R v Boulden [2006] NSWSC 1274 ............................................................................................... 16.185 R v Dunwoody [2004] QCA 413; (2004) 2 ABC (NS) 199 .......................................................... 4.235 R v Owen-Pearse [1996] SASC 5420; (1996) 66 SASR 344 ........................................................ 4.230 R v Tu Van Be Nguyen [1996] ACTSC 86 .................................................................................... 4.235 R v Zion [1986] VR 609 ................................................................................................................. 6.250 RH Trevan Pty Ltd, Re [2013] NSWSC 1445 ............................................................................... 17.65 RR Impex Pty Ltd, Re [2013] NSWSC 1667 ................................................................................ 17.40 RS Newman Ltd, Re [1916] 2 Ch 309 ........................................................................................... 13.80 Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216 ........ 11.170, 11.270 Radich v Bank of New Zealand (1993) 45 FCR 101 .................................................................... 3.410 Rae, In re [1995] BCC 102 ............................................................................................................... 4.10 Rafeletos v Great Wall Resources Pty Ltd (No 4) [2012] FCA 1168 ......................................... 14.135 Ragless v IPA Holdings Pty Ltd [2008] SASC 90; (2008) 65 ACSR 700 ................................... 13.75 Rambaldi v Woodward [2012] NSWSC 434 .................................................................................. 2.370

lvi

Table of Cases

Rambaldi, in the matter of Houston (Bankrupt) [2008] FCA 1519 ............................................... 2.250 Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217 ......................................................................................................... 5.150, 14.80 Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 .................... 3.165, 3.390, 11.200 Randall v City of Canada Bay Council (No 4) [2015] NSWSC 1759 ........................................ 17.105 Randall & Albaugh [2009] FMCAfam 475 ...................................................................................... 4.25 Rangott v Marshall (2004) 139 FCR 14; 2 ABC (NS) 385 ........................................................... 7.170 Rapid Metal Developments (Aust) Pty Ltd v Ridean Pty Ltd (No 3) [2010] NSWSC 7 .......... 18.460 Rapsey v Lime Gourmet Pizza Bar (Charlestown) Pty Ltd [2015] NSWSC 244 ........................ 19.40 Re Le Meilleur Pty Ltd v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115; (2011) 256 FLR 240 ....................................................................................................... 20.255 Re Nardell Coal Corporation (In Liq) v Hunter Valley Coal Processing [2003] NSWSC 642 ............................................................................................................................................. 18.430 Re Woods & Lombe as Trustees of the Bankrupt Estate of Ulusoylu v Ulusoylu [2017] FCCA 935 .................................................................................................................. 5.20, 5.30, 5.45 Mackie Group Pty Ltd (in liq) Re[2017] VSC 477 ..................................................................... 15.350 Read, Re [2007] FCA 1985; (2007) 164 FCR 237 ...................................................................... 10.320 Reaper v Vrseck [2016] FCA 509 ................................................................................................... 4.100 Recycling Holdings Pty Ltd, Re [2015] NSWSC 1016; (2015) 107 ACSR 406 ............ 20.40, 20.255 Recycling Pty Ltd, Re [2015] NSWSC 1016; (2015) 107 ACSR 406 ........................................ 19.140 Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 165 FLR 72 .................................................................................................................. 11.150, 11.170 Redmond v DCT [2015] QCA 172 ............................................................................................... 16.160 Rees v Bank of NSW (1964) 111 CLR 210 ................................................................................... 5.185 Rees v Kratzmann (1965) 114 CLR 63 ........................................................................................ 15.155 Registrar-General (ACT) v Inanna Inc [2017] ACTSC 62 .......................................................... 12.100 Reid v Hubbard [2003] FCA 1424; (2003) 1 ABC (NS) 438 ....................................................... 3.330 Reid v Hubbard [2003] FMCA 266; (2003) 1 ABC (NS) 438 ........................................................ 8.95 Reidy (Trustee), in the matter of Hawksford (Bankrupt) [2015] FCA 432 .................................. 6.315 Reiter Brothers Exploratory Drilling Pty Ltd, Re [1994] TASSC 42; (1994) 12 ACLC 430 ............................................................................................................................................... 12.75 Remuneration Data Base Pty Ltd v Pauline Goodyer Real Estate Pty Ltd [2007] NSWSC 59 .................................................................................................................................. 11.90 Renegade Rigging Pty Ltd v Hanlon Nominees Pty Ltd [2010] VSC 385 ................................. 11.100 Renovation Boys Pty Ltd, Re [2014] NSWSC 340 ........................................................ 19.170, 19.230 Reschke Pty Ltd v Digiorgio Family Wines Pty Ltd [2017] SASC 187 ..................................... 11.170 Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No 1) (in liq)) [2015] QCA 235 ........ 15.285 Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333 ....................................... 19.190 Rich v ASIC [2004] HCA 42; (2004) 220 CLR 129 ............................................ 2.355, 10.365, 16.50 Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 ................................ 5.185 Richstar Enterprises Pty Ltd v Carey (No 6) [2006] FCA 814; (2006) 153 FCR 509 .............. 18.140 Rico Pty Ltd, Re (1999) 17 ACLC 16 .......................................................................................... 18.170 Rigg v Baker [2006] FCAFC 179; (2006) 155 FCR 531 ................................................................ 7.80 Ritson v Commissioner of Police, New South Wales Police Force [2018] FCCA 916 ............... 3.205 Riva NSW Pty Limited v Official Trustee in Bankruptcy [2017] FCA 188 ................................. 2.230 Riviera Group, Re (2009) 72 ACSR 352; [2009] NSWSC 585 .................................................. 19.310 Robana Properties Pty Ltd, Re (1987) 5 ACLC 127 ..................................................................... 17.25 Roberts v Juniper [2013] FCCA 130 .............................................................................................. 8.285 Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204 ............................................................................................................................ 11.275 Robertson v Grigg (1932) 47 CLR 257 .......................................................................................... 5.160

Table of Cases

lvii

Robinson, Re; Darrell Lea Chocolate Shops Pty Ltd [2012] FCA 833 ...................................... 19.225 Robit Nominees Pty Ltd v Oceanlinx Ltd (in liq) (recs and mgrs apptd) [2016] FCA 225 ............................................................................................................................................. 19.185 Robson v Ingrilli [1998] FCA 1248 ................................................................................................ 8.170 Rocha Pty Ltd (Deregistered), Re [2016] NSWSC 899 ................................................................. 17.80 Roche v DCT [2015] WASCA 196 ............................................................................................... 16.165 Rock Bottom Fashion Market Pty Ltd v HR & CE Griffiths Pty Ltd [1997] QCA 399; [2000] 2 Qd R 573 ..................................................................................................................... 13.25 Rockwall Homes Pty Ltd, Re [2017] NSWSC 223 ..................................................................... 11.125 Rocom International Pty Ltd v Prentice [2002] FCA 604 ............................................................. 6.520 Roder Zelt-Und Hallenkonstruktionen GmbH v Rosedown Park Pty Ltd (1995) 57 FCR 216; [1995] FCA 1221 ............................................................................................................. 20.125 Rodway v White [2009] WASC 201; (2009) 233 FLR 262 ................................................. 4.60, 4.230 Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347 ................................ 11.155 Rolfe v Transworld Marine Agency Co NV [1998] FCA 532; (1998) 83 FCR 323 ...... 6.182, 14.239 Rosaub Pty Ltd, Re [2005] NSWSC 689; (2005) 192 FLR 395 ................................................... 17.50 Rosen v Georges [2014] VSC 193; (2014) 100 ACSR 258 .......................................................... 13.45 Rosetex Co Pty Ltd v Licata (1994) 12 ACLC 269 .................................................................... 18.535 Roskell v Snelgrove [2008] FCA 427; (2008) 246 ALR 175 ........................................................ 3.350 Rothwells Ltd v Nommack (No 100) Pty Ltd [1990] 2 Qd R 85 ........................................ 1.65, 11.90 Rothwells Ltd, Re [1990] 2 Qd R 181 ........................................................................................... 12.65 Rothwells Ltd (No 2), Re (1989) 15 ACLR 168 ......................................................................... 15.165 Rothwells Ltd (No 2), Re (1989) 7 ACLC 576 ............................................................................. 6.250 Roumanus v Orchard Holdings [2007] NSWSC 1480 ................................................................... 12.25 Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311 .............................................................................................................................. 11.215 Rozenbes v Kronhill (1959) 95 CLR 409 ...................................................................................... 3.380 Rugs Galore Australia Pty Ltd, Re (1999) 17 ACLC 1,529 ........................................................ 20.280 Rupert Co Ltd v Chameleon Mining NL [2006] NSWSC 415; (2006) 24 ACLC 635 .............. 19.415 Rushton v Kaney (Executor), in the matter of Rushton (Dec’d) [2017] FCA 637 ....................... 3.460 Russell v ANZ Bank [1987] FCA 63 ............................................................................................. 3.380 Russell v Westpac Banking Corp (1994) 61 SASR 583 ................................................................ 13.75 Ryan v ASIC [2007] FCA 59; (2007) 158 FCR 301 ................................................................... 20.150

S S & J Promotions Pty Ltd v Hough [2014] FCCA 339 ................................................................... 3.65 SA Asset Management Corporation v Sheahan (1995) 65 SASR 59 ............................................ 13.70 SAL and JGL [2016] WASAT 63 ..................................................................................................... 3.50 SMP Consolidated Pty Limited (in liq) v Posmot Pty Limited [2014] FCA 1382 ......................... 4.95 SNL Group Pty Ltd (in liq), Re; Su v SNL Group Pty Ltd (in liq) [2010] NSWSC 797 ........... 17.10 SSET Construction Pty Ltd, Re [2010] NSWSC 102 .................................................................. 14.115 SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421 ................................. 11.305 St George Bank Ltd v JB (Northbridge) Pty Ltd [2009] NSWSC 1347; (2009) 262 ALR 538 ................................................................................................................................... 18.165 St George Builders Hardware Pty Ltd, Re (1995) 13 ACLC 1801 ............................................. 19.150 St George Wholesale Finance Pty Ltd v Spalla (2001) 181 ALR 682 ......................................... 3.300 St Gregory’s Armenian School Inc, Re [2012] NSWSC 1215; (2012) 92 ACSR 588 .. 2.230, 10.445, 10.470 St Leonards Property v Stanley [2005] 4 ABC (NS) 1 .................................................................... 8.70 St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851; (2004) 50 ACSR 443 ................................................................................................................ 19.255

lviii

Table of Cases

Sales Express Pty Ltd, Re [2014] NSWSC 460 ........................................................................... 19.255 Saba v Plumb [2018] NSWCA 60 .................................................................................................... 5.95 Salfinger v Napiat [2012] FCAFC 77 ............................................................................................. 3.225 Salomon v A Salomon & Co Ltd [1897] AC 22 ............................................................................ 16.85 Salton v New Beeston Cycle Co [1900] 1 Ch 43 .......................................................................... 17.55 Samootin v Official Trustee in Bankruptcy (No 2) [2012] FCA 316 ............................................ 2.225 Sampson (Trustee) v Taboada [2017] FCA 79 ............................................................................... 5.260 Sandell v Porter (1966) 115 CLR 666 ..................................................................................... 1.30, 1.55 Sanders, Re [2003] FCA 1079; (2003) 1 ABC (NS) 408 .............................................................. 3.395 Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459 .............................. 2.195, 10.450, 10.455, 10.460, 15.380, 18.240, 18.495 Sandhurst Trustees Ltd v Harvey [2004] SASC 157; (2004) 88 SASR 519 ................. 15.165, 20.150 Sands v State of South Australia [2015] SASCFC 36 ................................................................... 4.125 Sandtara Pty Ltd v Abigroup Ltd (1996) 42 NSWLR 491 .......................................................... 15.230 Saracen Holdings Pty Ltd, Re [2013] NSWSC 1083 ................................................................... 11.160 Saraceni v ASIC [2013] FCAFC 42; (2013) 211 FCR 298 ......................................................... 15.140 Saraceni v Jones [2012] WASCA 59; (2012) 42 WAR 518 ........................................................ 15.155 Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372 .................................... 3.325, 3.395 Sass, Re; Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12 ........................... 6.485 Say Enterprises Pty Ltd, Re [2018] NSWSC 396 ........................................................................ 18.495 Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 47 FCR 451 ................................................................................................................................ 11.155, 11.175 Scerri, Re [1998] FCA 403; (1998) 82 FCR 146 ........................................................................... 3.240 Scharer v Giro Construction Group Pty Ltd (in liq) (rec and man apptd) [2017] NSWSC 1568 ........................................................................................................................... 19.250 Schekeloff; Ex parte Schekeloff v The Hopkins Group Pty Ltd (1989) 22 FCR 407 .................. 3.285 Schmierer v Smith (No 2) [2004] FMCA 856 ................................................................................. 5.90 Schmierer v Taouk [2004] NSWSC 345; (2004) 207 ALR 301 .................................................... 16.55 Schmitt v Carter [2014] FCA 1370; (2014) 228 FCR 76 ............................................................ 15.400 Scobie, Re [1995] FCA 1456; (1995) 59 FCR 177 .......................................................... 12.55, 16.160 Scott v Commissioner of Taxation [2003] VSC 50 ..................................................................... 16.150 Scott v Dimov [2012] FMCA 903 .................................................................................................. 3.445 Scott v Duncan [2007] FCAFC 30 ................................................................................................... 1.80 Scott v Janniki Pty Ltd (1994) 14 ACSR 334 .............................................................................. 17.100 Scott v Port Hinchinbrook Services Ltd [2017] QSC 92 ............................................................. 19.180 Scott, in the matter of de Varda [2015] FCA 239 ............................................................................ 6.30 Scott (Trustee) v Icicek Holdings Pty Ltd [2015] FCA 1387 ........................................................ 2.235 Scott (Trustee), in the matter of Price (Bankrupt) [2011] FCA 1478 ........................................... 4.130 Secretary, Department of Families, Community Services and Indigenous Affairs and Pollock, Re (2006) 92 ALD 501 ................................................................................................ 6.480 Security Directors Pty Ltd, Re (1997] VicSC 263; (1997) 24 ACSR 558 .................................... 15.40 Seghabi, Re [1994] FCA 1178; (1994) 52 FCR 303 ...................................................................... 3.390 Selim v McGrath [2003] NSWSC 927; (2003) 22 ACLC 112 ........... 15.100, 19.215, 19.305, 19.360, 19.365 Seller v DCT [2011] FCA 865 ........................................................................................................ 3.330 Sellers; Re Beckley Forge Pty Ltd [2003] FCA 523 ..................................................................... 13.45 Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120 .......................................... 3.300 77738930144 Pty Ltd (in liq) (formerly Commercial Indemnity Pty Ltd), Re [2017] NSWSC 452 ............................................................................................................................. 10.320 Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2006] NSWSC 100 ..................... 11.135 Shamji v Johnson Matthey Bankers Ltd [1986] BCLC 278 .......................................................... 18.40 Shannon v CBA [2014] FCA 108 ................................................................................................... 8.235

Table of Cases

lix

Sharma v Yeo [2013] FCCA 444 .................................................................................................... 6.260 Sharpe, Re; Ex parte Donnelly [1998] FCA 6; (1998) 80 FCR 536 ............................................... 4.45 Shaw v Buljan [2016] FCA 829 ....................................................................................................... 7.65 Sheahan v Birdseye [2002] FMCA 41 ............................................................................................ 5.250 Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407 ...... 5.165, 5.175, 5.185, 13.95, 14.85, 18.175, 18.350, 18.465 Sheahan v Fabienne Pty Ltd [1999] SASC 355 ............................................................................. 5.230 Sheahan, Re [2015] FCA 567 ....................................................................................................... 15.185 Shephard v Chiquita Brands (South Pacific) Ltd [2004] FCAFC 76; (2004) 1 ABC (NS) 610 ............................................................................................................... 3.170, 3.260, 3.265 Shepherd, Re [1993] FCA 237 ........................................................................................................ 8.250 Shirlaw v Taylor (1991) 31 FCR 222 ................................................................................ 10.460, 12.75 Shopware Trading & Engineering Pty Ltd, Re [1977-1978] CLC 40-327 .................................. 11.290 Shot One Pty Ltd (in liq) v Day [2017] VSC 741 ......................................................... 14.135, 14.200 Sihota v Pacific Sands Motel Pty Ltd [2003] NSWSC 119; (2003) 56 NSWLR 721 ................. 13.55 Silvia v Fea Carbon Pty Ltd [2010] FCA 515; (2010) 185 FCR 301 ......................................... 20.125 Silvia, in the matter of Tarpam Pty Ltd [2006] FCA 776 ............................................................ 19.330 Silvia; Re FEA Plantations Ltd [2013] FCA 469 ......................................................................... 20.220 Simersall, Re (1992) 108 ALR 375 ................................................................................................ 6.205 Simion v Brown [2007] EWHC 511 ............................................................................................... 2.205 Simionato v Macks (1996) 19 ACSR 34 ...................................................................................... 15.165 Simms, Re [1934] Ch 1 ................................................................................................................. 18.100 Simpson & Anor v Tropical Hire Pty Ltd (in liq) [2017] QCA 274 ............................................. 13.10 Sims v Celcast Pty Ltd (1998) 71 SASR 142 ................................................................. 14.205, 14.210 Sims and Singleton as liquidators of Enron Australia Pty Ltd v TXU Electricity Ltd [2005] NSWCA 12; (2005) 53 ACSR 295 .............................................................................. 15.205 Simto Pty Ltd v Court (1997) 15 ACLC 839 ............................................................................... 15.295 SingTel Optus Pty Ltd v Weston [2012] NSWSC 674; (2012) 90 ACSR 225 ............................. 15.40 Singh v Khatri & Griffin [2011] FMCA 804 .................................................................................. 6.475 Sipad Holding ddpo v Popovic [1995] FCA 1737; (1995) 19 ACSR 108 .................... 18.440, 18.465 Siromath Pty Ltd (No 3), Re (1991) 9 ACLC 1,587 ................................................................... 10.205 Sistrom v Urh [1991] FCA 315; (1992) 40 FCR 550 .................................................................... 4.132 640 Elizabeth Street Pty Ltd (in liq) v Maxcon Pty Ltd [2015] VSC 22 ................................... 14.135 Skalkos v Nicols [2009] FCA 346; (2009) 175 FCR 547 ............................................................. 6.355 Skalkos v Smiles [2006] NSWSC 192; (2006) 4 ABC (NS) 349 ................................................. 7.160 Skalkos v T & S Recoveries Pty Ltd [2004] FCAFC 321; (2004) 141 FCR 107 . 3.225, 3.230, 3.345 Skinner v Jeogla [1999] NSWSC 563; (1999) 150 FLR 359 ...................................................... 18.270 Skinner v Jeogla Pty Ltd [2001] NSWCA 15; (2001) 19 ACLC 1163 .............. 13.55, 18.265, 18.275 Slack v Bottoms English Solicitors [2002] FCA 1445 .................................................................. 3.170 Slap Corp Pty Ltd v Civil, Infrastructure & Logistics Pty Ltd (2017) 50 VR 542; [2017] VSC 168 .......................................................................................................................... 11.85 Slogger Automatic Feeder Co Ltd, Re [1915] 1 Ch 478 ............................................................. 18.565 Smarter Way (Aust) Pty Ltd, Re [2000] VSC 408; (2000) 35 ACSR 595 ...................... 19.30, 19.142 Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528 ............... 1.90, 16.60, 16.100, 16.105, 16.110 Smith v Boné (No 2) [2015] FCA 389 ......................................................................................... 16.110 Smith v DCT (1997) 71 FCR 150; (1997) 15 ACLC 3 ..................................................... 13.85, 19.95 Smith v Offermans [2015] QCA 55; (2015) 105 ACSR 230 ....................................................... 16.110 Smith v Starke (No 2) [2015] FCA 1119; (2015) 109 ACSR 145 .............................................. 14.155 Smith, Re [1985] FCA 253; (1985) 11 FCR 114 ........................................................................... 4.175 Smith, Re [1999] FCA 1755 ............................................................................................................. 3.10 Smith, Re [2006] NSWSC 780; (2006) 58 ACSR 410 ................................................................ 19.180 Smith, Re; Ex parte Kern Corporation Ltd [1985] FCA 216 ........................................................ 3.180

lx

Table of Cases

Smits v Lillas & Loel Lawyers Pty Ltd [2016] FCAFC 143 .......................................................... 8.60 Smolarek v McMaster [2006] WASCA 216 ................................................................................. 19.165 Snelgrove v Roskell [2007] FCA 122; (2007) 157 FCR 313 ............................................. 3.285, 3.295 Snowside Pty Ltd v Boart Longyear Ltd [2017] NSWCA 215 ................................................... 21.145 Sockhill v DCT [2000] FCA 1028 .................................................................................................. 3.260 Soil and Contracting Pty Ltd v Boban Pty Ltd [2014] WASC 402 ............................................ 11.230 Solfire Pty Ltd, Re [1998] 2 Qd R 92 .......................................................................................... 14.140 Solomons, Application by [2013] FCA 1273 ................................................................................. 2.235 Solomons, Re [2012] NSWSC 923 ................................................................................................. 20.15 Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 231 CLR 160 ............... 1.25, 13.45, 15.290 Soper v ASIC [2004] FCA 854; (2004) 207 ALR 509 ................................................................ 15.140 Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466 ................ 11.305 South Eastern Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465; 14 ACLC 1328 ..... 11.170, 11.310 South Head & District Synagogue (Sydney) (admin apptd), Re [2017] NSWSC 823 ................. 19.90 South Pacific Energy Trading Pty Ltd, Re (1996) 21 ACSR 435; 14 ACLC 1594 ...... 15.160, 15.185 Southern Cross Airlines Holdings Ltd, Re (1993) 10 ACSR 466 ............................................... 18.425 Southern Cross Interiors Pty Ltd v DCT [2001] NSWSC 621; (2001) 53 NSWLR 213 ..... 1.30, 1.70 Southern Equities Corporation Ltd, Re (1997) 15 ACLC 1582 .................................................. 15.165 Southland Coal Pty Ltd, Re [2006] NSWSC 184; (2006) 58 ACSR 113 ................................... 18.230 Southwell v Maladina [2002] FCA 802; (2002) 194 ALR 51 ....................................................... 6.235 Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 .................................................. 21.130 Spacorp Australia v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 979 ...................................... 19.390 Spargold Enterprises Pty Ltd, Re (1999) 17 ACLC 1,526 ............................................. 20.280, 20.300 Spedley Securities v Bank of New Zealand (1990) 3 ACSR 366 ............................................... 15.160 Spedley Securities Ltd v Bond Corporation Holdings Ltd (1990) 19 NSWLR 729; 1 ACSR 726 ...................................................................................................... 15.155, 15.165, 16.170 Spedley Securities Ltd, Re (1991) 4 ACSR 555 .......................................................................... 10.225 Spedley Securities Ltd, Re (1992) 9 ACSR 83 ............................................................................ 10.315 Spedley Securities Ltd, Re; Ex parte Potts & Gardner (1990) 2 ACSR 152 .............................. 15.165 Spedley Securities Ltd, Re; Reed v Harkness (1990) 8 ACLC 499 .............................. 15.160, 16.170 Spedley Securities Ltd, Re; Spedley Securities Ltd v Bank of New Zealand (1991) 9 ACLC 124 ................................................................................................................................. 15.165 Spencer v The Commonwealth of Australia (1907) 5 CLR 418 ..................................................... 5.35 Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 .......... 11.155, 11.180 Spies v The Queen (2000) 201 CLR 603 ....................................................................................... 16.70 Spiteri v Lindholm [2003] VSC 42; (2003) 7 VR 315 ................................................................ 19.365 Spratt, Re [1986] FCA 33; (1986) 10 FCR 544 ............................................................................. 4.150 Stake Man Pty Ltd, The v Carroll [2009] FCA 1415; (2009) 76 ACSR 67 ................................. 16.60 Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 ................. 16.95, 16.105 Stansfield DIY Wealth Pty Ltd, Re [2014] NSWSC 1484; (2014) 103 ACSR 401 ........ 10.320, 14.15 Staples v Milner (1998) 83 FCR 203 ............................................................................................. 6.485 State Bank of NSW v Turner Corp Ltd (1994) 14 ACSR 480 .................................................... 10.315 State Bank of NSW Ltd v Chia [2000] NSWSC 552; (2000) 50 NSWLR 587 .......... 18.160, 18.205, 18.245 State Bank of New South Wales v Brown [2001] NSWCA 223; (2001) 38 ACSR 715 ........... 15.420 State of Queensland v Beames [2003] QSC 399; [2004] 2 Qd R 99 ........................................... 4.120 Stecca, Re; Ex parte Scott v Stevens Sheet Metal Pty Ltd [1994] FCA 1542 ............................. 5.230 Stedman v DCT [2000] FCA 336; 44 ATR 88 ........................................................ 3.420, 8.220, 8.230 Steel Wing Co, Re [1921] 1 Ch 349 ............................................................................................. 11.100 Steele, Re [1994] FCA 905; (1994) 48 FCR 236 ............................................................... 6.205, 6.210 Stegbar Pty Ltd v Mayfield (1994) 13 ACSR 354 ......................................................................... 19.85 Stein v Blake [1995] 2 WLR 710 ................................................................................................... 6.490

Table of Cases

lxi

Steinhardt v Trenfield [2015] QSC 237 ........................................................................................ 15.225 Sterling, Re; Ex parte Esanda Pty Ltd (1980) 44 FLR 125; 30 ALR 77 ...................................... 3.280 Stewart v Atco Controls Pty Ltd [2014] HCA 15; (2014) 252 CLR 307 ........................ 10.460, 14.20 Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 ................................................ 10.320 Stivactas, Re; Citibank Ltd v Parker [2000] FCA 1914; (2001) 181 ALR 115 ............................ 5.270 Stobbart v Mocnaj (1996) 16 WAR 318 ......................................................................................... 4.120 Stockford Ltd, Re [2004] FCA 1682; (2004) 140 FCR 424 .......................................... 10.330, 10.450 Stockport (NQ) Pty Ltd, Re [2003] FCA 31; (2003) 127 FCR 291 ............................................. 19.70 Storey v Lane [1981] HCA 47; (1981) 147 CLR 549 ................................................................... 4.220 Strazdins v Birch Carroll & Coyle Ltd [2009] FCA 731; (2009) 178 FCR 300 ........................ 20.125 Streimer v Tamas (1981) 54 FLR 253 ............................................................................................ 3.265 Stubberfield v Paradise Grove [2000] QCA 299 ............................................................................ 4.125 Stubberfield, Re [1995] FCA 1735; (1995) 134 ALR 169 ............................................................ 3.360 Suco Gold Pty Ltd, Re (1993) 33 SASR 99 ................................................................................ 15.350 Suk v Hanjin Shipping Co Ltd [2016] FCA 1404 ......................................................................... 13.60 Suncoast Tile Merchants Ltd, Re (1986) 4 ACLC 663 ................................................................ 15.185 Surber v Lean [2000] WASCA 380; (2000) 23 WAR 445 .......................................................... 20.215 Surfers Paradise Investments Pty Ltd v Davoren Nominees Pty Ltd [2003] QCA 458; [2004] 1 Qd R 567 ................................................................................................................... 15.305 Surpion Pty Ltd v M R Works Pty Ltd (recs and mgrs apptd) [2010] FCA 1262 ..................... 15.195 Sutherland v Brien [1999] NSWSC 155; (1999) 149 FLR 321 ...................................................... 5.35 Sutherland v Eurolinx [2001] NSWSC 230; (2001) 19 ACLC 633 ............................... 14.120, 14.200 Sutherland v Lofthouse [2007] VSCA 197; (2007) 214 FLR 157 ................................. 14.120, 14.170 Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673; (2003) 21 ACLC 1,385; 46 ACSR 458 ..................................................................................................... 17.10, 17.25, 19.415 Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201 ......................................... 12.05, 19.42 Sutherland, Re [2004] NSWSC 798; (2004) 50 ACSR 297 ........................................................ 15.350 Sutherland (In the Matter of Scutts) [1999] FCA 147 ................................................................... 6.315 Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749; (2009) 72 ACSR 627 .......................... 13.55 Swan, City of v Lehman Brothers Australia Ltd [2009] FCAFC 130; (2009) 179 FCR 243 ............................................................................................................................................. 20.250 Swan Services Pty Ltd (in liq), Re [2016] NSWSC 1724 ............................................................. 16.90 Swarbrick v Burge [2009] FMCA 985 ........................................................................................... 3.240 Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 ..................... 11.305 Sydlow Pty Ltd v TG Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234 ......... 10.205, 10.245 Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liq) [2016] NSWCA 329; (2016) 93 NSWLR 251 ............................................................................................................ 14.175 Sydney Ringtread, Re [2001] NSWSC 424; (2001) 19 ACLC 1,215 ........................................... 20.55 Systems Advisers Group Pty Ltd, Re [2013] NSWSC 826 ......................................................... 19.225 Szepesvary v Weston [2017] FCA 344 ........................................................................................... 2.350

T T & L Trading (Aust) Pty Ltd, Re (1986) 10 ACLR 388 ............................................................. 12.15 TEN Network Holdings Ltd (Admins Apptd) (Recs and Mgrs Apptd), Re [2017] NSWSC 1247 ................... 15.290, 19.170, 19.185, 19.205, 19.215, 19.220, 19.325, 20.80, 21.150 TEN Network Holdings Ltd (subject to a DOCA) (rec and man apptd), Re [2017] NSWSC 1529 ............................................................................................................................ 21.115 THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] NSWSC 1136; (2014) 101 ACSR 202 ................................................................................................................... 18.330, 19.190 THO Services Ltd, Re [2016] NSWSC 509 ................................................................................. 19.250 TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd [2012] NSWSC 766 ........... 20.255

lxii

Table of Cases

TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 ..................... 11.315 Talacko v Bennett [2017] HCA 15; (2017) 343 ALR 242 ................................................. 8.60, 14.239 Talacko v Talacko [2010] FCAFC 54; (2010) 183 FCR 311 ............................................. 2.370, 3.440 Tamaya Resources Ltd v Claymore Capital Pty Ltd [2015] FCA 357 ............................ 14.75, 14.210 Tamsin Pty Ltd, Re (1994) 13 ACSR 136 ...................................................................................... 17.95 Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332 ... 6.515, 15.295, 15.300 Tap Inn Pty Ltd v Matthews [2015] SASCFC 188 ........................................................................ 14.85 Tapp v LawCover Insurance Pty Ltd [2013] FCA 35 ........................................................ 6.500, 7.160 Tarea Management (North Shore) Pty Ltd v Glass [1991] FCA 72; (1991) 28 FCR 93 ............. 6.515 Taxation, Commissioner of v 4 Doonan Street Collinsville Pty Ltd (in liq) [2016] NSWCA 69 ................................................................................................................................. 13.55 Taxation, Commissioner of v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48; (2015) 257 CLR 544 .............................................................................................. 18.20, 18.160 Taxation, Commissioner of v Fitzroy All Pty Ltd [2013] WASCA 427 ..................................... 19.250 Taxation, Commissioner of v Jones (1999) 86 FCR 282; [1999] FCA 308 ................................. 6.480 Taxation, Commissioner of v Kassem [2012] FCAFC 124; (2012) 205 FCR 156 ......... 14.80, 14.105 Taxation, Commissioner of v Linter Textiles Pty Ltd [2005] HCA 20; (2005) 220 CLR 592 ........................................................................................................................ 10.45, 10.50, 13.10 Taxation, Commissioner of v Oswal [2012] FCA 1507 ................................................................... 5.95 Taxation, Commissioner of v Oswal (No 6) [2016] FCA 762 ........................................................ 5.70 Taxation, Commissioner of v Paditham [2010] FCA 334 .............................................. 16.105, 16.155 Taxation, Commissioner of v Sims [2008] NSWCA 298; 72 NSWLR 716 ............................... 16.150 Taxation, Commissioner of v Yeo [2018] FCA 635 ....................................................................... 4.150 Tayeh, Re [2005] NSWSC 475; (2005) 53 ACSR 684 .................................................................. 20.15 Taylor v ANZ Banking Corporation Ltd (1988) 13 ACLR 780 ...................................................... 1.80 Taylor v Jarvie [2015] FCA 590 ..................................................................................................... 3.445 Taylor v Rudaks (2007) 166 FCR 451; 5 ABC (NS) 501; [2007] FCA 1962 .............................. 6.465 Taylor v Sanders [1937] VLR 62 .................................................................................................... 17.55 Taylor v White (1964) 110 CLR 129 .............................................................................................. 4.210 Taylor, Re; Ex parte Natwest Australia Bank Ltd [1992] FCA 296; (1992) 37 FCR 194 ........... 3.160 Taylor; Re Origin Internet Solutions Pty Ltd [2004] FCA 382 ..................................................... 19.35 Tea Corp Ltd, Re [1904] 1 Ch 12 ................................................................................................. 21.120 Telecom Australia v Russell Kumar & Sons Pty Ltd (1993) 11 ACLC 281 .............................. 18.350 Telescriptor Syndicate Ltd, Re [1903] 2 Ch 174 ........................................................................... 17.10 Telfer v Astarra Securities Pty Ltd [2010] NSWSC 682 .................................................... 12.35, 12.60 Tellsa Furniture Pty Ltd v Glendave Nominees (1987) 9 NSWLR 254; 5 ACLC 662 .............. 14.250 Templeton v ASIC [2015] FCAFC 137 ........................................................................... 10.455, 18.495 Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47 ..................................................... 4.120, 6.305 Terry, Re [1994] FCA 1531 ............................................................................................................. 6.225 Thai v DCT [1994] FCA 1071 ........................................................................................................ 3.180 The Bell Group Ltd (in liq), Re [2015] WASC 88 ........................................................................ 11.35 The Trustees, Executors and Agency Company Ltd, Re (1985) 3 ACLC 475 ........................... 10.330 The Walker Group Pty Ltd, Re (1995) 13 ACLC 434 ................................................................. 14.145 Theissbacher v MacGregor Garrick & Co [1993] 2 Qd R 223 ............................................ 4.120, 7.15 Thiess Infraco (Swanston) Pty Ltd and Smith [2004] FCA 1155; (2004) 50 ACSR 434 .......... 20.175 Thomas v Todd [1926] 2 KB 511 ................................................................................................. 18.430 Thompson v Turnbull [2015] FCCA 1563 ..................................................................................... 8.120 Thompson, Re (1995) 61 FCR 544 ................................................................................................ 3.320 Thorne Developments Pty Ltd v Thorne [2017] 1 Qd R 156; [2016] QCA 63 ........................... 17.60 311 Hume Highway Liverpool Fund Pty Ltd, Re [2013] NSWSC 465 ........................................ 17.10 3GS Holdings Pty Ltd, Re [2015] VSC 145 ................................................................................ 21.150

Table of Cases

lxiii

13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd [1999] FCA 144; (1999) 17 ACLC 500 ................................................................................................................... 18.205, 18.565 Thorne v Ozibar Pty Ltd [2017] FCCA 3273 ................................................................................ 3.210 Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493 .............................................. 12.35 Tietyens Investments Pty Ltd, Re [1999] FCA 206; (1999) 17 ACLC 697 ................................ 10.315 Tilley Air Conditioning Pty Ltd v Austruc Constructions Ltd [2009] NSWSC 757 .................. 11.310 Timbatec Pty Ltd, Re (1974) 24 FLR 30; [1974] 1 NSWLR 613 ....................................... 1.75, 5.160 Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 .............................................................................................................................. 11.160 Timberworld Ltd v Levin [2015] NZCA 111 .................................................................... 5.185, 14.120 Titchfield Management Ltd v Vaccinoma Inc [2008] NSWSC 1196; (2008) 68 ACSR 448 ............................................................................................................................................. 15.425 Tiver v Official Trustee [2010] FCA 620; (2010) 187 FCR 1 ......................................................... 4.85 Tokich Holdings Pty Ltd v Sheraton Constructions [2004] NSWSC 527; (2004) 22 ACLC 955 .................................................................................................................... 11.270, 11.310 Tolcher v National Australia Bank [2003] NSWSC 207; (2003) 44 ACSR 727 .......................... 14.60 Tolcher v National Australia Bank [2004] NSWSC 6; (2004) 182 FLR 419 ................ 15.420, 19.180 Tolhurst Druce & Emmerson (a firm) v Maryvell Investments Pty Ltd [2007] VSC 271 ........ 14.115, 14.135 Toll Holdings Ltd v Stewart (admin apptd) (recs and mgrs apptd) [2016] FCA 256 ... 19.120, 19.250 Tolric Pty Ltd v Taylor as Liquidator of Bruck Textile Technologies Pty Ltd (in liq) [2015] FCA 1051 ...................................................................................................................... 15.195 Tomic Industries Pty Ltd, Re [2012] NSWSC 1478 .................................................................... 11.135 Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226 ........................... 11.80, 11.85, 11.185 Torsir Pty Ltd v Maxgrow Developments Pty Ltd (1995) 121 FLR 170 ................................... 20.100 Totev v Sfar [2008] FCAFC 35; (2008) 167 FCR 193 ........................................... 3.350, 3.400, 3.410 Totterdell v D’Angelo [2004] FMCA 645 ...................................................................................... 8.270 Totterdell v Nicol-Burmeister (1995) 13 ACLC 1521 ................................................................... 14.75 Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 ...... 16.85, 16.105, 16.110 Touzell v Cawthorn (1995) 18 ACSR 328 ................................................................................... 19.300 Traivelog Pty Ltd v Electrometals Technologies Ltd [2015] QSC 27 ........................................ 20.255 Transmetro Corporation Ltd v Real Investments Pty Ltd (1999) 17 ACLC 1,314 .................... 15.205 Travaglini v Raccuia (2007) 211 FLR 127; [2007] FMCA 777 .................................................... 6.270 Travaglini v Raccuia [2012] FCA 620 ............................................................................................ 6.420 Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; (2016) 316 FLR 318 ................. 11.215 Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72 ............................... 1.60, 1.80, 16.110 Trevor, in the matter of Bell Group NV (in liq) (No 2) [2017] FCA 927 .................................. 15.155 Trinick v Forgione [2015] FCA 642; (2015) 106 ACSR 600 ............................... 1.60, 14.115, 16.105 Trkulja v Morton [2005] FCA 659; (2005) 4 ABC (NS) 110 ............................................ 2.240, 2.350 Trojan v Corporation of the Town of Hindmarsh [1987] FCA 276; (1987) 16 FCR 37 .... 1.80, 3.395 Trojan, Re; Ex parte Corporation of the Town of Hindmarsh [1986] FCA 372 ............................. 1.80 Trollope v The Honourable Justice Middleton [2008] FCA 564; (2008) 169 FCR 507 .............. 6.195 Trollope Property Holdings Pty Ltd, Re; Ex Parte Carson [2009] FCA 118 .............................. 15.420 Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSCA 176 .............................. 11.155 Trust Company (PTAL) Limited (Trustee for the LM Managed Performance Fund), in the matter of Drake v Drake [2014] FCA 1445 ........................................................................ 3.445 Trustee for the Bankrupt Estate of N Lasic & Lasic [2010] FamCA 682 .................................... 4.135 Trustee of the Property of O’Reilly v Law Society of NSW [2001] FCA 701; (2001) 110 FCR 574 ................................................................................................................................ 4.45 Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447 ................. 3.285, 3.430

lxiv

Table of Cases

Trustees of the Property of Cummins (a Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278 ......................................................................................................... 4.132, 4.142, 5.70 Truthful Endeavour Pty Ltd v Condon (Trustee), in the matter of Rayhill (Bankrupt) [2015] FCAFC 70 ....................................................................................................................... 2.370 Tsakirakis v Official Receiver [2013] FCCA 106 .................................................... 5.260, 5.270, 6.220 Tsakirakis v Official Receiver [2014] FCCA 517 ............................................................... 5.270, 5.275 Tu v Chang (No 2) [2016] FCA 1568 ............................................................................................ 3.315 Tucker-Barlow-Gerrard Pty Ltd, Re [2003] FCA 1310; (2003) 133 FCR 83 ............................... 19.65 Tulloch Ltd (No 2), Re (1978) 3 ACLR 808 ............................................................................... 15.225 Turner v Gorkowski [2014] VSCA 248 .......................................................................................... 6.185 Turner v Official Trustee [1996] FCA 1074; (1996) 71 FCR 418 ................................................. 4.100 Turner v Trevorrow [1995] FCA 1091 ........................................................................................... 3.160 Turner as Trustee of the Bankrupt Estate of Wallace v Wallace [2017] FCCA 3044 ......... 4.135, 5.45 Turtle Productions Pty Ltd v Hawa [2011] FMCA 460 ................................................................. 9.110 Tweed Garages Ltd, Re [1962] Ch 406 ............................................................................................ 1.55 2000 Olympic Games v Daly [2000] FCA 1286 ........................................................................... 3.370 Tyler v Thomas (2006) 150 FCR 357; 3 ABC (NS) 773; [2006] FCAFC 6 .................................. 5.35 Tzovaras v Nufeno Pty Ltd [2003] FCA 1152; (2003) 1 ABC (NS) 421 ..................................... 3.320

U UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634 ............................................................................................................................................. 21.130 URS Australia Pty Ltd v ASIC [2007] FCA 1939; (2007) 25 ACLC 1648 ................................ 17.110 Udowenko, Re; Ex parte Mitchell (1996) 69 FCR 299 ................................................................. 3.265 Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 .......... 18.255 Unicomb v Official Trustee in Bankruptcy [2000] FCA 457; (2000) 99 FCR 1 ............................ 4.50 Union Club v Battenberg [2006] NSWCA 72; (2006) 66 NSWLR 1 ................................... 7.15, 7.95 United Medical Protection Ltd, Re [2002] NSWSC 413; (2002) 41 ACSR 623 ... 12.15, 12.85, 12.90 United Medical Protection Ltd, Re [2003] NSWSC 1031; (2004) 22 ACLC 56 . 12.30, 12.35, 12.100 United Medical Protection Ltd (No 4), Re [2002] NSWSC 516; (2002) 42 ACSR 218 ............. 12.60 United Petroleum Pty Ltd v Bonnie View Petroleum Pty Ltd (in liq) [2017] VSC 185 .......... 14.265, 15.285 United Service Insurance Co Ltd v Lang (1935) 35 SR (NSW) 487 ........................................... 17.55 Universal Distributing Co (in liq), Re (1933) 48 CLR 171 ................... 10.460, 12.75, 15.350, 19.230 Universal Financial Group v Mortgage Elimination Services [2006] NSWSC 1132; (2006) 205 FLR 186 ................................................................................................................. 14.155 Universal Liquors Pty Ltd, Re (1991) 9 ACLC 918 .................................................................... 20.125 Uvanna Pty Ltd v Tsang Chi Ming (1997) 72 FCR 502 ............................................................. 19.250

V V & M Davidovic Pty Ltd, Re [2012] NSWSC 1598 ................................................................. 18.215 VMF Holdings Pty Ltd, Re [1998] FCA 1078; (1998) 16 ACLC 625 ....................................... 15.165 VR Dye & Co v Peninsula Hotels Pty Ltd [1999] 3 VR 201 ....................................................... 12.05 Vagrand v Fielding (1993) 41 FCR 550 ......................................................................................... 13.55 Valassis v Bernard [2003] FCA 22 ................................................................................................. 3.460 Vale v Sutherland [2009] HCA 26; (2009) 237 CLR 638 .................................................. 5.260, 5.270 Van Laun, Re; Ex parte Chatterton [1907] 2 KB 23 ..................................................................... 6.515 Vangory Holdings Pty Ltd, Re [2015] NSWSC 546 .................................................................... 11.305 Vassis, Re [1996] FCA 21 ............................................................................................................... 3.160

Table of Cases

lxv

Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627 ................................................................................................................................. 14.155 Vaughan, Re [1996] FCA 1093; (1996) 71 FCR 34 ...................................................... 4.80, 4.85, 4.90 Velkovski v Ryan [1996] FCA 1410; (1996) 19 ACSR 514 ....................................................... 19.210 Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 .......................................................... 10.450 Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653; (2010) 8 ABC (NS) 211 ...... 6.485, 5.30, 5.65 Vero Insurance Ltd v Kassem [2011] NSWCA 381; (2011) 86 ACSR 607 ................................. 19.10 Vero Insurance Ltd v Nicejade Pty Ltd [2010] NSWSC 556 ...................................................... 17.115 Vero Workers Compensation v Ferretti [2006] NSWSC 292; (2006) 24 ACLC 454 ................. 19.415 Viavattene v Birch [2015] FCCA 2676 .......................................................................................... 3.285 Vickers, Re; Challenge Australian Dairy Pty Ltd [2011] FCA 10; (2011) 190 FCR 569 .......... 18.385 Victoria v Mansfield (2003) 130 FCR 376; [2003] FCAFC 154 .................................................. 6.465 Video Excellence Pty Ltd v Cincotta (1998) 44 NSWLR 742 ...................................................... 17.55 Vimblue Pty Ltd v Toweel [2009] NSWSC 494 ............................................................................ 11.90 Vimbos Ltd, Re [1900] 1 Ch 470 .................................................................................... 18.160, 18.240 Viola v Anglo-American Cold Storage Co [1912] 2 Ch 305 ...................................................... 18.500 Visbord v FCT (1943) 68 CLR 354 ................................................................................ 18.160, 18.165 Viscariello v Macks [2014] SASC 189; (2014) 103 ACSR 542 ................................................. 19.135 Visnic v Sywak [2012] NSWSC 1284 .......................................................................................... 10.340 Vista Commercial Construction Pty Ltd v DCT (1997) 15 ACLC 1668 .................................... 11.165 Vitek v Taheri [2012] FMCA 536 ................................................................................................... 6.250 Von Risefer v Mainfreight International Pty Ltd [2009] VSCA 179; 25 VR 366 ........................ 17.10 Vouris, Re; Ex parte Epromotions Australia Pty Ltd [2003] NSWSC 702; (2003) 47 ACSR 155 ................................................................................................................................. 19.385 Vouris and Tonks as Deed Administrators of Good Impressions Offset Printers Pty Ltd, Re [2012] NSWSC 603 ............................................................................................................ 20.190 Vukasin v ASIC [2007] NSWSC 1341; 25 ACLC 1554 ............................................................. 17.105

W Waco Kwikform Ltd v Jabbour [2010] NSWSC 1379 .................................................................. 19.85 Wagner v International Health Promotions (1994) 15 ACSR 419; 12 ACLC 986 .......... 19.40, 19.165 Waldcourt Investment Co Pty Ltd, Re (1986) 4 ACLC 589 ......................................................... 17.85 Walker v Wimborne (1976) 137 CLR 1 ......................................................................................... 16.75 Walker, Re [2015] FCA 146 .......................................................................................................... 15.320 Walker, Re; One.Tel Ltd [2007] NSWSC 1478; (2007) 25 ACLC 1652 .................................... 15.245 Walker; Re One.Tel Ltd [2009] NSWSC 1172; (2009) 74 ACSR 616 ......................................... 15.85 Wallabah Pty Ltd v Navillo Pty Ltd (1997) 23 ACSR 444; 15 ACLC 396 .................... 19.85, 19.250 Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49; (2005) 218 ALR 1 ....................................................................................................................................... 20.175 Waller v Freehills [2009] FCAFC 89; (2009) 177 FCR 507 ....................................................... 15.155 Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486 ........................................................................................................................ 10.210 Walsh, Re [1982] FCA 250 ........................................................................... 3.215, 3.280, 3.285, 3.300 Walsh, Re; Olivieri v Stafford (1989) 24 FCR 413 ....................................................................... 3.300 Wan Ze Property Development (Aust) Pty Ltd, Re [2013] NSWSC 189 ..................................... 13.55 Wangman v Official Receiver [2006] FCA 202 .................................................................... 6.30, 7.115 Warbler Pty Ltd, Re (1982) 6 ACLR 526 ...................................................................................... 17.10 Ward v Zozi [2012] FMCA 898; (2012) 11 ABC (NS) 40 ................................................ 8.230, 8.245 Warner v Mayfair Ltd, in the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441 ....................................................................................................... 8.75, 8.85, 8.325

lxvi

Table of Cases

Warner, Re GTL Tradeup Pty Ltd [2015] FCA 323; (2015) 104 ACSR 633 ............................. 10.455 Warner, in the matter of Rivkin [2007] FCA 2020 ........................................................................ 6.182 Warner as trustee of the deceased estate of Rivkin v Equity Trust (Jersey) Ltd [2008] JRC 003 ...................................................................................................................................... 6.182 Wasilenia v DCT [2003] FMCA 8; (2003) 52 ATR 279 ............................................................... 3.235 Waste Recycling and Processing Services of NSW v Local Government Recycling Co-Operative Ltd [1999] NSWSC 507; (1999) 32 ACSR 194 .............................................. 11.260 Waterco Ltd v Inspector-General in Bankruptcy (2000) 32 AAR 109; [2000] AATA 1063 ............................................................................................................................................. 7.145 Watt, Re [1998] FCA 213 ................................................................................................................. 8.80 Watts v Adelaide Bank Ltd [2009] FCAFC 169 ............................................................................ 3.330 Wealthsure Pty Ltd v Selig (No 2) [2013] FCA 847 ..................................................................... 3.390 Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 ................................... 14.155, 14.190 Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301 ................................. 21.150 Weber, Re (2006) 154 FCR 80; [2009] FCA 636 .......................................................................... 4.132 Webster, Re; Willmott Forests Ltd v Fernandez [2012] FCA 82 ................................................ 19.230 Webster v Strang; Steiner v Strang [2018] NSWSC 495 .............................................................. 4.125 Wedgwood, Re; Ex parte Bank of New Zealand [1993] FCA 368 ............................................... 5.270 Weeks v Elan Trading Corporation [2006] QSC 44 .................................................................... 19.420 Weiss, Re [1983] FCA 361; (1983) 74 FLR 259 ........................................................................... 6.250 Weiss, Re [1986] FCA 287 .................................................................................................... 2.225, 6.90 Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 ........ 14.135 Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483; (2008) 66 ACSR 229 ................. 19.230, 20.145 Wenkart v Pantzer [2003] FCA 432; (2003) 1 ABC (NS) 236 ....................................................... 7.45 Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402; (2012) 92 ACSR 88 . 15.300, 19.255 Western Australia v Bond Corporation Holdings Ltd (1992) 8 ACSR 352 .................................. 6.485 Weston v Carling Constructions Pty Ltd [2000] NSWSC 693; (2000) 35 ACSR 100 .............. 19.230 Weston (Trustee) v ASIC, in the matter of Empire Property and Investment Group Pty Ltd (Deregistered) [2017] FCA 176 .......................................................................................... 2.235 Weston; Re 7 Steel Distribution Pty Ltd (in liq) [2015] FCA 742 ................................ 18.170, 18.370 Westpac Banking Corp v Gollin [1988] VR 397 ........................................................................... 6.485 Westpac Banking Corp v Nageela Properties Ltd (1986) 3 NZCLC 99,588 .............................. 14.225 Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 44 WAR 1; 89 ACSR 1; 270 FLR 1 ..................................................... 1.75, 5.15, 16.30, 16.70, 16.75 Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116; (2010) 8 ABC (NS) 439 ............................................................................................................................ 8.05, 8.245 Westpac Banking Corporation v Totterdell (1997) 142 FLR 137 ................................................ 15.295 Wharton v Official Receiver in Bankruptcy (2001) 107 FCR 28 .................................................. 7.130 Wheeler & Reynolds, Re; Ex parte Kerr v Crowe [1988] FCA 381; (1988) 20 FCR 185 ............................................................................................................................................... 11.80 White v Huxtable [2006] FCA 559; (2006) 24 ACLC 639 ......................................................... 18.235 White v Norman [2012] FCA 33; (2012) 199 FCR 488 ................................................ 18.385, 18.425 White v Spiers Earthworks Pty Ltd [2014] WASC 139; (2014) 99 ACSR 214 ............ 18.325, 19.100 White Constructions (ACT) Pty Ltd v White [2005] NSWCA 173 ............................................ 18.315 Re White; Mossgreen Pty Ltd (Admins Apptd) v Robertson [2018] FCAFC 63 ........ 18.325, 19.205, 19.230 Whittingham; Re The Spanish Club Ltd [2009] NSWSC 1426 .................................................. 20.240 Whitton v Regis Towers Real Estate Pty Ltd (2007) 161 FCR 20; [2007] FCAFC 125 ............... 5.65 Whitton v Regis Towers Real Estate Pty Ltd [2007] FCAFC 125; (2007) 161 FCR 20 ............... 5.70 Wight v Eckhardt Marine GmbH [2004] 1 AC 147 ......................................................... 13.50, 15.250

Table of Cases

lxvii

Wild (Foreign Representative) v Coin Co International PLC (Administrators Appointed); In the Matter of Coin Co International PLC (Administrators Appointed) [2015] FCA 354 ........................................................................................................................ 15.435 Wildtown Holdings Pty Ltd v Rural Traders Co Ltd [2002] WASCA 196 ................................. 11.185 Wilkinson, Re (1970) 16 FLR 414 ................................................................................................. 7.175 Willaire Pty Ltd v Equitrust Ltd [2010] QCA 350; (2010) 81 ACSR 200 ................................... 11.90 Willats, Re [1991] FCA 407; (1991) 31 FCR 206 ......................................................................... 3.320 William Hockley Ltd, Re [1962] 1 WLR 555 ................................................................................ 11.60 Williams v Arnold [2010] FCA 732 ............................................................................................... 17.85 Williams v CD Protective Services Pty Ltd (No 3) [2010] QSC 224 ......................................... 10.450 Williams v Scholz [2008] QCA 94 ................................................................................................... 1.80 Williams v Spautz (1992) 174 CLR 509 ......................................................................... 11.250, 15.180 Williams, Re (1968) 13 FLR 10 ....................................................................................................... 7.65 Williams, Re (1990) 26 FCR 191; [1990] FCA 309 ...................................................................... 8.155 Williams United Mines Pty Ltd, Re (1992) 29 NSWLR 88 ........................................................ 17.100 Williamson v Bond [2013] FCA 828 .............................................................................................. 8.190 Willmott Forests Ltd (No 2), Re [2012] VSC 125; (2012) 88 ACSR 18 ................................... 10.345 Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51; (2013) 251 CLR 592 .................................................................................................................... 6.285, 15.205, 15.220 Willow Court Retirement Village Pty Ltd v ASIC [2007] NSWSC 76 ...................................... 10.220 Willshire-Smith, Re; Ex parte Randle & Taylor Services Pty Ltd (1994) 48 FCR 371 ............... 3.405 Wilson v Official Trustee in Bankruptcy [2000] FCA 282; (2000) 97 FCR 196 .......................... 6.460 Wily v Commonwealth (1996) 66 FCR 206 ................................................................................ 14.255 Wily v Eastern Elevators [2003] NSWSC 377; (2003) 45 ACSR 261 ....................................... 14.120 Wily v Official Receiver [2015] FCCA 425 ................................................................................... 2.275 Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 84 FCR 423 ....................... 14.85 Windimurra Vanadium Ltd and Midwest Vanadium Pty Ltd (No 4), Re [2009] WASC 373 ............................................................................................................................................. 19.310 Windschuegl v Irish Polishes Ltd [1914] 1 IR 33 ....................................................................... 18.495 Wine National Pty Ltd, Re [2014] NSWSC 1516 .......................................................... 18.325, 18.495 Wine National Pty Ltd, Re [2016] NSWSC 4 .............................................................................. 18.495 Wingecarribee Shire Council v Lehman Brothers Australia Ltd (No 3) [2010] FCA 747 ........... 13.55 Winn v Yeo & Rambaldi as former trustees of the estate of Goodwin (a bankrupt) [2017] FCCA 2528 ..................................................................................................................... 2.225 Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 132 FLR 247 ....................................................................................................... 20.65, 20.215, 20.250, 20.270 Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 14 ACLC 1,168 .......................................................................................................................................... 20.180 Wise Energy Group Co Ltd v Rocke [2014] WASC 505 ............................................................ 18.250 Wise Guys International Pty Ltd (in liq), Re [2015] NSWSC 1245 ........................................... 10.340 Wong v Australia Machinery Equipment Sales Pty Ltd [2000] NSWSC 623; (2000) 34 ACSR 669 ................................................................................................................................. 11.210 Wong, Re (1995) 63 FCR 426 .......................................................................................................... 7.30 Wood v Targett [1997] FCA 232; (1997) 23 ACSR 291 ................................................ 10.205, 10.210 Woodgate v Davis [2002] NSWSC 616; 20 ACLC 1,314 ............................................................. 16.85 Woodgate v Fawcett [2008] NSWSC 868; (2008) 67 ACSR 611 ............................................... 14.155 Woodgate v Garard Pty Ltd [2010] NSWSC 508; (2010) 239 FLR 339; 78 ACSR 468 ........... 11.70, 11.100, 11.190 Woodgate v Network Associates International BV [2007] NSWSC 1260 ..................... 14.115, 14.170 Woodgate, in the Matter of Eaton (a Bankrupt), Re [2010] FCA 550 .......................................... 6.425 Woodhead Firth Lee Pty Ltd v Archer Pty Ltd (1995) 13 ACLC 883 .......................... 11.160, 11.260 Woodings, in the matter of the Bell Group Limited [2016] FCA 369 ........................... 10.320, 10.335

lxviii Table of Cases

Woods v Harrison, Re Telco Service Holdings Pty Ltd (in liq) [2017] FCA 732 ...................... 18.135 WorkCover v Picton Truck & Trailer [2004] NSWCA 371; 51 ACSR 102 ................................. 17.85 WorkCover Authority of NSW v Josef & Sons (contracting) Pty Ltd [2002] NSWIR Comm 226 .................................................................................................................................. 13.65 Workers Compensation Nominal Insurer v Denny Earthmoving & Bulk Haulage Pty Ltd [2008] NSWSC 1167 ......................................................................................................... 11.315 World Expo Park Pty Ltd, Re (1994) 12 ACSR 759 ................................................................... 14.140 Worrell v Power and Power [1993] FCA 551; (1993) 46 FCR 214 ............................................. 5.270 Worrell v Woods [1999] FCA 242; (1999) 90 FCR 264 ........................................... 4.50, 6.210, 6.225 Worthley v England (1994) 52 FCR 69 ............................................................. 15.140, 15.160, 15.165 Wren v Mahony (1972) 126 CLR 212 ................................................................. 3.390, 11.200, 15.295 Wu v Li [2017] FCA 500 ................................................................................................................ 3.350 Wu v Li (No 2) [2017] FCA 501 .................................................................................................... 3.350

X X v Milstead [2015] FamCAFC 50 .............................................................................................. 19.250

Y Yakushiji v Daiichi Chuo Kisen Kaisha [2015] FCA 1170 ......................................................... 19.250 Yarrawonga Earthmoving & Garden Supplies Pty Ltd v Clem Court Pty Ltd [2014] VSC 439 ..................................................................................................................................... 18.90 Yates, Re [2006] FCA 370 ............................................................................................................ 19.300 Yellowrock Pty Ltd v Eastgate Properties Pty Ltd [2004] QSC 214 ............................................ 12.35 Yeo v ASIC, in the matter of Ji Woo International Education Centre Pty Ltd (dereg’d) [2017] FCA 1480 ............................................................................................... 17.85, 17.90, 17.100 Yeo v Collings [2012] FMCA 1060 ................................................................................................ 4.132 Yeo v Sharma [2013] FCCA 1946 .................................................................................................. 6.260 Yeo (as liquidator), in the matter of Lyco Innovations Pty Ltd (in liq) v Onesteel Trading Pty Ltd [2013] FCA 568 ............................................................................................ 10.470 Yeo and Rambaldi (as liquidators), in the matter of Rennie Produce (Aust) Pty Ltd (in liquidation) [2015] FCA 849 .................................................................................................... 15.430 Yeomans v Lease Industrial Finance Ltd (1987) 5 ACLC 103 .......................................... 5.160, 5.235 Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139; (2005) 52 ACSR 629 ........ 15.100, 18.100 Young v Brachdale Pty Ltd [2010] VSC 654 ............................................................................... 20.105 Young v Sherman [2002] NSWCA 281; (2002) 170 FLR 86 ..................................................... 20.265 Young v Sherman [2002] NSWSC 1020; (2002) 20 ACLC 149 ................................................. 19.345 Young v Thomson (formerly trustee of the property of Young) [2017] FCAFC 140 .................. 2.225 Yu v STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (Receivers appointed in South Korea) [2013] FCA 680; (2013) 223 FCR 189 .................... 19.250 Yuan Tong Investments Pty Ltd, Re [2017] NSWSC 910 ........................................................... 11.305

Z Zakrzewski, Re [2000] FCA 1187; (2000) 178 ALR 694 .............................................................. 3.320 Zambena Pty Ltd, Re (1995) 13 ACLC 1020 ................................................................. 20.130, 20.165 Zaravinos v Houvardas (2004) 32 Fam LR 490; [2004] NSWCA 421 .......................................... 5.15 Zarzar Pty Ltd, Re [2017] NSWSC 93 ........................................................................................... 11.90 Zdrilic v Hickie [2016] FCAFC 101; (2016) 246 FCR 532 .......................................................... 3.133 Zempilas v JN Taylor Holdings Ltd (1990) 3 ACSR 516 ............................................................. 12.30 Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103 ............................................... 12.30

Table of Cases

lxix

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693 ....................................................................................................... 14.155 Ziziphus Pty Ltd v Pluton Resources Ltd (rec & man apptd) (in liq) [2017] WASCA 193 ............................................................................................................................................. 10.210 Zodiac Investments v Brelsford [1999] FCA 1482 ............................................................. 3.120, 4.160 Zorbas, Re [1994] FCA 1516 .......................................................................................................... 3.120

Table of Statutes Commonwealth

Pt 5.5: 10.20

Bankruptcy Act 1924: 2.05 A New Tax System (Family Assistance) (Administration) Act 1999 s 105: 6.480

A New Tax System (Goods and Services Tax) Act 1999: 19.225 s 58-30: 18.605 s 195-1: 20.140 s 422: 18.290 s 560: 15.410 Div 58: 10.270, 15.405, 18.290, 20.140

ASIC Supervisory Cost Recovery Levy Act 2017: 1.190, 10.10, 10.120, 17.120 Acts Interpretation Act 1901 s s s s

2B: 8.45 2G: 8.95 28A: 11.100 109X: 11.100

Administrative Decisions (Judicial Review) Act 1977: 2.370, 6.220, 15.140 s 10(2)(b)(ii): 5.270

Australian Securities Commission Act 1989 s 7: 10.120

Australian Securities and Investments Commission Act 2001: 10.10, 10.120, 10.365, 18.130 s 13: 10.120 s 13(3): 10.120 s 15: 16.175 s 30B: 10.120 s 127(4)(d)(i): 10.380 s 136(1)(ca): 10.120 s 138: 10.120 s 464: 10.120 s 530C(1): 10.120 s 530C(2): 10.120 Pt 3: 10.120

Australian Securities and Investments Commission Regulations 2001 s 8AA(1): 10.380 s 8AA(2): 10.380

Banking Act 1959: 10.10, 10.25

Bankruptcy Act 1966: 1.20, 1.190, 2.00, 2.05, 2.10, 2.385, 4.210, 5.280, 6.400, 6.595, 8.55, 15.245, 20.250, 20.375 s (6): 3.300 s 4(1): 2.22 s 5: 3.35, 3.75, 4.80, 4.190, 4.195, 5.200, 6.12, 6.15, 6.175, 6.465, 6.505, 8.20, 9.45 s 5(1): 3.35, 3.130, 4.25, 4.150, 5.30, 5.80, 5.250, 5.265, 6.25, 6.195, 6.235, 6.390 ss 5B to 5E: 5.265 ss 5B to 5F: 6.25 s 6: 5.70 s 6D: 2.15 s 7: 3.140 s 7(1): 3.50 s 7(1A): 2.50, 3.50 s 7(2): 2.50, 3.50 s 7(2)(b): 3.95, 3.145 s 7(3): 3.95, 3.145 s 7A: 4.240 s 11: 2.110 s 12: 9.148 s 12(2): 2.110 s 12(4): 2.112 s 15(5): 2.125, 2.370, 6.220 s 18: 2.125, 3.90 s 18(3): 2.125 s 18(8): 2.125 s 18A: 2.275 s 19: 2.230, 2.255, 8.90 s 19(1)(c): 6.10, 6.60 s 19(1)(d): 6.65, 9.145 s 19(1)(h): 4.245 s 19(1)(h)(i): 4.245 s 19(1)(i): 4.245, 5.95, 10.280, 16.65 s 19(1)(k): 6.450 s 19A: 2.275 s 19AA: 4.15, 6.185, 6.205 s 22: 14.239 s 27: 2.370, 5.240 s 27(1): 4.240 s 27(2): 4.240 s 29: 2.300, 2.370, 5.245, 6.175, 6.182, 11.100, 14.237, 18.410 s 29(1): 11.100 s 29(2): 6.182, 17.85 s 29(2)(b): 6.182

lxxii

Table of Statutes

Bankruptcy Act 1966 — cont s 29(3): 4.40, 6.182 s 29(4): 4.35, 6.182 s 29(5): 6.182 s 30: 2.370, 3.445, 5.20, 6.220, 9.110 s 30(1): 2.370, 3.280 s 30(3): 2.370 s 30(5): 2.125, 4.230, 4.235 s 31: 2.370, 18.410 s 32: 6.575 s 33: 3.260, 4.115, 7.115, 8.190 s 33(1): 3.170 s 33(1)(c): 6.520, 8.120, 8.250 s 33A: 7.115 s 33A(3): 7.115 s 35: 2.370 s 35(2): 2.370 s 35A: 2.370 s 35A(3)(e): 2.370 s 35A(5): 2.370 s 37: 7.165, 7.170 s 37(2): 7.165, 7.175 s 37A: 5.95 s 40: 6.12, 10.45, 11.65 s 40(1): 1.85, 3.175 s 40(1)(a): 3.195 s 40(1)(b): 5.180 s 40(1)(c): 3.180 s 40(1)(c)(i): 3.195 s 40(1)(d): 3.175, 3.185 s 40(1)(d)(ii): 11.200 s 40(1)(g): 1.85, 3.175, 3.200, 3.205, 3.310 s 40(1)(g)(i) to (ii): 3.240 s 40(1)(h): 3.192 s 40(1)(i): 3.190 s 40(1)(j) to (m): 3.190 s 40(1)(m): 8.275 s 40(1)(o): 3.192 s 40(1)(da): 3.45 s 40(1)(ha): 9.30 s 40(1)(hb): 9.55 s 40(1)(hc): 9.80 s 40(1)(hd): 9.103 s 40(3): 3.205 s 40(3)(a): 3.205 s 40(3)(f): 3.205 ss 40 to 57A: 3.430 s 41(1): 3.155 s 41(1)(a): 3.215 s 41(1)(b): 3.215 s 41(2): 3.220, 3.285 s 41(3)(b): 3.285 s 41(3)(c)(i): 3.215 s 41(5): 3.300 s 41(6): 3.300 s 41(6A): 3.240, 3.260, 3.265, 3.270, 3.310, 11.140 s 41(6A)(a): 3.255, 3.260

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

41(6A)(b): 3.280 41(6C): 3.270, 11.140 41(7): 3.240, 3.310, 3.320, 3.410 43: 3.170 43(1): 8.275 43(1)(a): 1.85 43(1)(b): 3.160, 8.20 43(1)(b)(i): 3.160 43(1)(b)(iii): 3.160 43(2): 7.170 44: 8.275, 11.210 44(1): 3.155 44(1)(a): 3.135, 3.155 44(1)(b): 3.165 44(1)(c): 1.85, 3.170 45(1): 3.145 45(2): 3.145 46(1): 3.150 46(2): 3.150 47: 8.275 47(1A): 3.340 47(2): 3.360 49: 3.370 50: 2.370, 3.435, 3.445, 6.425, 6.555 50(1): 3.445 50(1)(b): 3.445 50(1A)(b): 3.445 50(1B): 3.445 50(2) to (5): 3.445 51: 3.425 52: 3.335, 3.375, 8.275 52(1): 3.460 52(2): 3.380, 3.395 52(2)(a): 3.395 52(2)(b): 3.400 52(3): 3.430 52(4): 3.350 52(5): 3.350 53: 6.320 54: 4.230, 4.240, 6.30, 6.530, 7.115, 13.30 54(1): 6.30, 7.115 54A: 3.15, 3.20, 3.45 54B: 3.20 54B(b): 3.20 54B(f): 3.20 54C: 3.20 54D(1): 3.80 54E: 3.20 54E(1): 3.35 54E(2): 3.35 54E(3): 3.35 54F: 3.35 54G: 3.35 54H: 3.35 54L: 3.40 55(1): 3.55 55(2): 3.55, 6.30

Table of Statutes Bankruptcy Act 1966 — cont s 55(2A): 3.50, 3.70, 3.160, 8.20 s 55(3): 3.55 s 55(3)(a): 7.90 s 55(3A): 3.80, 7.90, 8.70 s 55(3B): 3.110, 3.125 s 55(3C): 3.110 s 55(3AA): 3.65 s 55(3AB): 3.65 s 55(3AC): 3.65 s 55(4A): 3.85, 7.90 s 55(5): 3.90 s 55(6): 3.70 s 55(6A): 3.75 s 55A(2) to (5): 3.95 s 56A: 3.95 s 56A(1): 3.95 s 56A(6): 3.75 s 56B: 3.95 s 56B(3): 3.95, 6.30 s 56C: 3.100 s 56C(3): 3.100 s 56C(5): 3.100 s 56D: 3.95 s 56E: 3.95 s 56F(1): 3.100 s 56F(3): 3.100 s 57: 3.105 s 57(2): 3.105, 6.30 s 57(3) to (7): 3.105 s 57(8): 3.75 s 57A: 3.85 s 58: 2.270, 4.25, 4.60, 4.135, 6.480, 6.505, 7.180 s 58(1): 4.25, 4.50, 4.115, 4.195, 6.285 s 58(1)(a): 4.25, 4.45 s 58(2): 4.50, 4.132 s 58(3): 4.150, 4.190, 6.590 s 58(3)(a): 4.150 s 58(3)(b): 4.150, 6.475 s 58(5): 4.150, 4.190, 6.505 s 58(5A)(a): 4.155 s 58A: 4.25, 4.195 s 59: 7.180 s 59(1): 7.180 s 59(1)(b): 7.180 s 59(1)(c): 7.180 s 59(1)(e): 7.180 s 59A: 4.25, 7.180 s 60: 4.115, 4.120, 6.50 s 60(1): 4.220 s 60(2): 4.110, 4.115 s 60(2)-(3): 13.15 s 60(3): 2.270, 2.370, 4.115, 4.120 s 60(4): 4.125 s 70(6): 6.165 s 70(7): 6.165 s 72(1): 6.330

lxxiii

s 73: 2.115, 4.45, 6.105, 6.110, 7.15, 7.25, 7.35, 7.45, 7.60, 8.05, 8.280 s 73(1): 6.140, 7.40 s 73(1A): 7.40 s 73B: 7.45 s 74: 7.25, 7.60 s 74(5A): 7.45 s 74A: 7.55 s 74A(6): 7.55 s 75(1): 7.50 s 75(2)(a): 7.50 s 75(2)(b): 7.50 s 75(3): 7.50 s 76B: 7.60, 8.05 s 77: 6.25, 6.225, 8.55, 8.205 s 77(1): 6.20 s 77(1)(a): 4.50, 6.20 s 77(1)(a)(i): 4.15, 6.25 s 77(1)(a)(ii): 4.15, 7.130 s 77(1)(b): 6.35, 6.230 s 77(1)(c): 4.15 s 77(1)(d): 4.15 s 77(1)(e): 4.25 s 77(1)(f): 4.25, 6.195 s 77A: 4.15, 6.200, 6.205, 6.215, 8.205 s 77A(2): 6.205 s 77C: 2.125, 4.15, 4.235, 6.35, 6.200, 6.210, 6.215, 6.220, 6.225, 6.230, 6.245, 6.435, 8.55, 8.205, 15.145, 15.200 s 77D: 6.215, 8.205 s 77E: 8.205 s 77F: 8.205 s 77AA: 6.200, 6.210, 6.225 s 77CA: 2.385, 4.230, 6.30 s 78: 3.445, 4.230, 4.235, 8.55, 8.205 s 78(1): 6.20, 6.195, 8.205 s 78(1)(a): 3.440 s 78(1)(b): 3.440 s 78(1)(d): 6.195 s 78(1)(f): 4.15, 4.230 s 79: 4.105, 16.70 s 80: 4.15 s 80(1): 4.15 s 81: 4.15, 4.130, 5.155, 6.35, 6.90, 6.200, 6.205, 6.215, 6.230, 6.240, 6.245, 6.250, 6.260, 6.265, 6.270, 6.590, 7.155, 8.55, 8.205, 15.125, 15.155 s 81(1): 6.235 s 81(1B): 6.245 s 81(2): 6.230 s 81(11AA): 6.260 s 81(12): 6.245 s 81(13): 6.245 s 81(14): 4.130 s 81A: 6.200, 6.275 s 81B: 6.275 s 81G: 6.205, 6.215, 6.275

lxxiv Table of Statutes Bankruptcy Act 1966 — cont s 81G(2): 6.205, 6.275 s 81G(3): 6.205, 6.275 s 82: 1.65, 6.465, 6.475, 6.590, 7.110 s 82(1): 6.460, 6.470, 6.475, 6.480 s 82(1A): 6.470 s 82(2): 6.465, 7.110, 7.180 s 82(3): 5.05, 6.465, 7.110, 15.275 s 82(3A): 6.465, 15.275 s 82(3B): 6.470, 6.525 s 82(3AA): 3.215, 4.150, 6.465 s 82(3AB): 6.470 s 82(3AB)(a): 7.110 s 82(4): 6.470, 6.475 s 82(5): 6.470 s 82(6): 6.470, 6.475 s 82(8): 6.470 ss 82 to 118: 8.55 ss 82 to 147: 4.210, 6.595 s 84(1): 6.515 s 84(2): 6.515 s 84(2)(b): 6.515 s 84(3): 6.515 s 84(4): 6.515 s 86: 6.490, 15.285 s 86(1): 6.495 s 86(2): 6.495 s 86(3): 6.490 s 90: 7.160 s 90(2): 6.505 s 90(3): 6.505 s 90(4): 6.505 s 91: 6.525 s 91(1): 6.505 s 91(2): 6.505 s 95: 6.485 s 96: 6.470, 15.245 s 100(4): 6.310 s 101: 6.90 s 102(1): 6.515 s 102(2): 6.520 s 102(4): 6.520 s 103: 6.520 s 104: 6.90, 6.520 s 104(1): 6.520 s 104(3): 6.520 s 106: 6.515 s 106B: 8.210 s 107: 6.470, 6.525, 9.20, 9.70 s 108: 6.535 s 109: 1.165, 4.50, 6.90, 6.165, 6.425, 6.535, 6.540, 6.575 s 109(1)(a): 3.425, 6.440 s 109(1)(b): 6.550 s 109(1)(b) to (c): 8.325 s 109(1)(d): 6.590 s 109(1)(j): 6.565 s 109(1B): 6.560

s 109(1C): 6.560 s 109(8): 6.565 s 109(9): 6.565 s 109(10): 6.90, 6.425, 6.570, 15.420 ss 109 to 110: 6.590 s 110: 6.140, 6.315, 6.320 ss 113 to 114: 6.590 s 114: 6.530, 6.555 s 114A: 4.195 s 114B: 4.195 s 114C: 4.195 s 115: 3.133, 4.25, 4.200, 6.590 s 115(1): 2.80, 2.85, 3.130 s 115(2): 2.90, 3.85, 3.125 ss 115 to 128N: 5.280 s 116: 2.55, 2.75, 2.95, 4.25, 4.45, 4.150, 6.505, 6.590 s 116(1): 4.25, 4.55, 4.75 s 116(2): 4.25, 4.75, 4.115, 6.590 s 116(2)(a): 4.50, 4.110 s 116(2)(b): 4.80 s 116(2)(b)(ii): 4.80 s 116(2)(c): 4.85 s 116(2)(c)(ii): 4.85 s 116(2)(c)(iii): 4.85 s 116(2)(d): 4.95 s 116(2)(g): 3.120, 4.100, 4.125 s 116(2)(k): 4.85 s 116(2)(n): 4.100 ss 116(2)(q) to (r): 4.105 s 116(2C): 4.90 s 116(2D): 4.100 s 116(2)(ba): 4.80 s 116(2)(ca): 4.90 s 116(2)(iv): 4.95 s 116(3): 4.100 s 116(4): 4.100 s 117: 6.500 s 118: 4.180, 4.185 s 118(1): 4.175 s 118(2): 4.175 s 118(3): 4.175 s 118(4): 4.175 s 118(5): 4.175 s 118(6): 4.175 s 118(9): 4.175, 5.240 s 118(10): 4.175 s 118(11): 4.175 ss 118 to 122: 4.210 s 119: 4.185 s 119(1): 4.185 s 119(2): 4.185 s 119(3): 4.185 s 119(4): 4.185 s 119(8): 4.185 s 119A: 4.185 s 119A(2): 4.185

Table of Statutes Bankruptcy Act 1966 — cont s 119A(3): 4.185 s 119A(5): 4.185 s 119A(7): 4.185 s 120: 2.15, 2.97, 2.100, 4.25, 4.132, 4.155, 4.170, 5.05, 5.20, 5.35, 5.45, 5.60, 5.65, 5.75, 5.100, 5.105, 5.125, 5.150, 5.225, 5.240, 5.245, 5.255, 5.260, 5.270, 5.275, 6.205, 6.265, 6.275, 6.310, 7.130 s 120(1): 5.25, 5.40, 5.45 s 120(2): 5.40 s 120(2)(b): 5.40, 5.80 s 120(3)(a): 5.25, 5.45 s 120(3)(b): 5.25 s 120(3A): 1.85 s 120(4): 5.55, 5.90 s 120(5): 5.37, 5.75, 5.225 s 120(5)(e): 5.37 s 120(5)(f): 5.37 s 120(6): 4.210, 5.50, 5.85 s 120(7): 5.30, 5.65 s 120(7)(c): 5.35 s 120-122: 5.05, 6.590, 9.103, 9.110 s 121: 2.97, 4.25, 4.70, 4.132, 4.155, 4.210, 5.05, 5.20, 5.45, 5.60, 5.70, 5.75, 5.80, 5.90, 5.95, 5.100, 5.105, 5.110, 5.125, 5.150, 5.240, 5.245, 5.255, 5.260, 5.275, 6.265, 6.310, 7.130, 14.140 s 121(1): 5.75, 5.110 s 121(2): 5.70, 5.110 s 121(3): 5.70, 5.110 s 121(4): 5.75, 5.225 s 121(4)(a): 5.100 s 121(4A): 1.85, 5.110 s 121(5): 5.90 s 121(6): 5.75 s 121(7): 5.80 s 121(8): 5.85, 5.110 s 121(9): 5.110, 5.115 s 121(9)(a): 5.65 s 121(9)(b): 5.65 s 121A: 5.05, 5.100, 5.245 s 122: 4.25, 5.05, 5.20, 5.125, 5.160, 5.165, 5.185, 5.240, 5.245, 5.255, 7.130, 14.50, 14.65, 14.80, 14.105, 14.200, 14.230 s 122(1): 5.135, 5.180, 5.190 s 122(1)(a): 5.135 s 122(1)(c): 5.140 s 122(1A): 5.170 s 122(2): 5.190, 14.200, 14.230 s 122(2)(a): 5.140, 5.190, 5.210 s 122(2)(b): 5.140, 5.195 s 122(2)(c): 5.200 s 122(2)(d): 5.200 s 122(3): 5.190, 5.220 s 122(4): 5.220 s 122(4)(a): 5.170 s 122(4)(c): 4.210, 5.220, 14.215

s s s s s s s s s s s s s s s s s s s s s s s

122(4A): 5.170 122(5): 5.130 123: 2.97, 4.205, 4.210, 5.50 123(1)(a) to (g): 2.97 123(2): 2.97 123(3): 2.97, 4.210, 4.215 123(4): 4.210, 5.05 123(6): 4.70 124: 4.205, 4.215 124(1)(a): 4.215 124(1)(b): 4.215 124(2): 4.215 124(3): 4.215 125: 2.385, 6.45 125(1): 4.15 125(2): 4.15 127: 4.65, 6.330 127(1): 6.330 127(2): 4.180, 5.240 127(3): 5.240 127(4): 5.240 127(5): 5.240 128B: 4.70, 4.95, 4.210, 5.05, 5.105, 5.110, 5.115, 5.245, 7.130 s 128B(1): 5.110 s 128B(2): 5.110 s 128B(3): 5.110 s 128B(4): 5.110 s 128B(5): 5.110 s 128B(6): 5.110 s 128B(7): 5.110 s 128C: 4.70, 4.95, 4.210, 5.05, 5.105, 5.110, 5.115, 5.245, 7.130 s 128C(1): 5.115 s 128C(2): 5.115 s 128C(3): 5.115 s 128C(4): 5.115 s 128C(5): 5.115 s 128C(6): 5.115 s 128C(9): 5.115 ss 128E to 128K: 5.120 s 128F: 5.120 s 128H: 5.120 s 128J: 5.120 s 128K: 5.120 s 128L: 5.120 s 128N: 5.110 s 129(1): 2.255, 6.170 s 129(2): 6.170 s 129A: 6.195 s 129AA: 4.65, 6.330 s 129AA(3)(a): 6.330 s 129AA(3)(b): 6.330 s 129AA(3)(c): 6.330 s 129AA(4): 6.330 s 129AA(5): 6.330 s 129AA(6): 6.330

lxxv

lxxvi Table of Statutes Bankruptcy Act 1966 — cont s 130: 4.25, 6.20 s 130(1) to (2): 6.195 s 131: 6.340 s 133: 6.280, 8.55 s 133(1): 6.280 s 133(1A): 6.280 s 133(1AA): 6.280 s 133(1AB): 6.280 s 133(2): 6.285 s 133(4): 6.285 s 133(9): 6.285 s 133(12): 6.285 s 134: 2.270, 6.300, 6.305 s 134(1)(a): 4.60, 4.120 s 134(1)(b): 6.295 s 134(1)(ma): 4.60 s 134(4): 6.315 s 136: 4.190 s 139: 2.275 s 139ZIEA: 6.340, 6.390 s 139ZIDA: 6.385 s 139ZIHA: 6.400 s 139ZIIA: 6.405 s 139A: 5.250 s 139D: 5.250 s 139D(3): 5.250 s 139E: 5.250 s 139F(1): 5.250 s 139K: 5.260, 6.345, 6.350, 9.25 s 139L: 6.355, 6.365 s 139L(1)(a)(iv): 6.355 s 139L(1)(b)(i)(B): 6.355 s 139L(2): 6.355 s 139M: 6.355, 6.365 s 139N: 6.355 s 139N(1)(b): 4.45 s 139P(1): 6.345 s 139S: 6.190, 6.350 s 139T(2): 6.370 s 139T(12): 6.370 s 139U: 6.360 s 139V: 6.360 s 139W: 6.365 s 139W(1): 6.360 s 139Y: 6.360, 6.365, 7.145, 7.150 s 139Z(1): 6.360 s 139DA: 5.250 s 139DA(2): 5.250 s 139EA: 5.250 s 139WA: 6.360 s 139ZA(1): 6.365 s 139ZA(2): 2.370, 6.365 s 139ZD: 6.365 s 139ZF: 2.370, 6.365 s 139ZG: 6.205, 6.275, 7.130 s 139ZG(1): 6.375, 7.160 s 139ZG(3): 6.375

s s s s s s s

139ZK: 6.380 139ZK(1)(b): 6.380 139ZL: 6.205, 6.275, 6.380, 6.395 139ZL(10): 6.380 139ZM: 6.380 139ZO: 4.15, 6.380 139ZQ: 1.210, 2.125, 5.105, 5.120, 5.255, 5.260, 5.265, 5.270, 5.275, 6.435, 6.455 s 139ZQ(1): 5.260 s 139ZQ(1)(a): 5.260 s 139ZQ(1)(b): 5.260 s 139ZQ(2): 5.260 s 139ZQ(3): 5.260 s 139ZQ(8): 5.260, 5.275 s 139ZR: 5.265, 5.275 s 139ZR(1)(a): 5.265 s 139ZR(2): 5.265 s 139ZR(3): 5.265 s 139ZR(6): 5.265 s 139ZS: 5.270 s 139ZS(1A): 5.270 s 139ZS(2): 5.270 s 139ZT: 5.260 s 139ZT(1): 5.265 s 139ZT(2): 5.265 s 139ZU: 4.95, 5.105 s 139ZIA: 6.385 s 139ZIC: 6.340, 6.385 s 139ZID: 6.385 s 139ZID(3): 6.385 s 139ZIE: 6.390 s 139ZIE(6): 6.390 s 139ZIF: 6.395 s 139ZIG: 6.395 s 139ZIH: 6.400 s 139ZII: 6.400 ss 139ZIJ to 139ZIN: 6.410 s 139ZIO(2): 6.415 ss 139ZIO to 139ZIT: 6.415 s 140: 6.90 s 140(1): 6.525, 6.530 s 140(3): 6.530 s 140(4): 6.530 s 140(9): 6.530 s 140(11): 6.530 ss 140 to 147: 8.55 s 141: 6.140, 6.325 s 145: 6.530 s 146: 6.530 s 147(1): 6.530 s s148 to 154: 7.170 s 149: 4.230, 7.20, 7.110, 7.115 s 149(4): 6.30, 6.530, 7.115 s 149(5): 7.115 s 149A: 7.20, 7.130 s 149A(2): 7.120, 7.135 s 149A(2)(a)(i): 7.120

Table of Statutes Bankruptcy Act 1966 — cont s 149A(2)(ii): 7.120 s 149A(3)(a): 7.140 s 149A(3)(b): 7.140 s 149B: 7.120 s 149B(2): 7.120, 7.130 s 149C(1A): 7.120, 7.130 s 149C(1): 7.120 s 149D: 4.15, 7.120 s 149D(1): 7.120, 7.130, 7.145 s 149D(1)(a): 7.135 s 149D(1)(d): 7.120 s 149D(1)(e): 7.120 s 149D(1)(f): 7.120 s 149D(1)(g): 7.120 s 149D(1)(h): 7.120, 7.135 s 149D(1)(j): 4.15 s 149D(1)(k): 7.120 s 149D(1)(ab): 7.120 s 149D(1)(da): 7.120 s 149D(1)(ha): 7.120 s 149D(1)(ia): 7.120 s 149D(1)(ma): 7.120 s 149F: 7.130 s 149G: 7.130 s 149H: 7.140 s 149H(1): 7.155 s 149J: 7.140 s 149J(1): 7.140 s 149J(3): 7.140 s 149K: 7.130, 7.145 s 149K(1)(3): 7.145 s 149K(1)(a): 7.145 s 149K(1)(b): 7.145 s 149K(2): 2.370, 7.145 s 149K(5): 7.145 s 149K(5)(b): 7.145 s 149N: 7.145 s 149N(1A)(c): 7.130 s 149N(1B): 7.130 s 149N(1)(c): 7.120 s 149N(2): 7.145 s 149Q: 7.145 s 150: 4.235 s 150(6): 4.235 s 151A: 20.85 s 152: 4.230, 7.155 s 153: 7.110, 7.180, 8.205 s 153(2): 7.110, 7.160 s 153(2)(b): 7.160 s 153(2)(c): 7.160 s 153(2A): 7.110, 7.160, 8.45, 8.205 s 153(3): 7.160 s 153A: 7.15, 7.20, 7.25, 7.30 s 153A(1A): 7.30 s 153A(1): 2.365 s 153A(2): 2.365, 7.30 s 153A(6): 7.30

lxxvii

s 153B: 3.120, 7.15, 7.20, 7.25, 7.65, 7.80, 7.100, 7.165, 7.170 s 153B(2): 7.85 s 154: 4.45, 7.95 s 154(1)(a): 7.100 s 154(1)(b): 7.100 s 154(1)(c): 7.95 s 154(2): 7.100 s 154(3): 7.100 s 156A: 2.190, 3.90, 10.45 s 157: 2.125, 2.330 s 158: 2.185 s 160: 2.125, 3.90, 6.160 s 161: 2.275 s 164: 9.148 s 165(1)(d): 6.330 s 176: 2.335, 2.345, 9.145 s 178: 2.335, 2.345, 2.350, 7.125, 7.150 s 179: 2.335, 2.350, 9.145 s 180: 2.320 s 181A: 2.330 s 183: 2.320 s 184: 2.320 s 185: 9.15, 9.43, 9.95 s 185(1): 9.45 s 185C: 9.15, 9.20 s 185C(2A): 9.20 s 185C(2D): 9.20, 9.148 s 185C(2E): 9.20 s 185C(2F): 9.20 s 185C(3A): 9.20 s 185C(2): 9.70, 9.120 s 185C(2)(2B): 9.20 s 185C(2)(d) to (j): 9.20 s 185C(2)(e): 9.20 s 185C(3): 9.20, 9.35 s 185C(4): 9.25 s 185C(4)(a): 9.25 s 185C(4)(b): 9.25, 9.110 s 185C(4)(c): 9.25 s 185C(4)(d): 9.25 s 185C(5): 9.25 s 185D: 9.25 s 185E: 9.15, 9.35 s 185E(2B)(c)(ii): 9.120 s 185E(2AA): 9.35 s 185E(2): 9.35 s 185E(3): 9.35 s 185E(4): 9.35 s 185F: 9.15, 9.43, 9.45 s 185F(1)(d) to (i): 9.45 s 185G: 9.50 s 185H: 9.43 s 185I: 9.15, 9.43 s 185K: 9.15, 9.65 s 185K(3): 9.65 s 185M: 9.15

lxxviii Table of Statutes Bankruptcy Act 1966 — cont s 185M(1A): 9.75 ss 185M to 185MD: 9.75 s 185N: 9.80 s 185N(1): 9.85 s 185N(2): 9.85 s 185N(3) to (4): 9.85 s 185N(5): 9.85 s 185P: 9.80, 9.85, 9.90, 9.103 s 185P(1A) to (1C): 9.90 s 185P(3): 9.90 s 185Q: 9.80, 9.103, 9.115, 9.116 s 185Q(1): 9.115 s 185Q(2): 9.115 s 185Q(4): 9.115 s 185Q(5): 9.115 s 185R: 9.80, 9.85, 9.100, 9.103 s 185S: 9.103 s 185T: 9.80, 9.110, 9.116 s 185T(1): 9.110 s 185T(2): 9.110 s 185T(3): 9.110 s 185T(4): 9.110 s 185U: 9.80, 9.110 s 185U(1): 9.110 s 185U(2): 9.110 s 185U(3): 9.110 s 185U(4): 9.110 s 185V: 9.110 s 185W: 9.116 s 185X: 9.20 ss 185 to 186Q: 9.165 s 185EA: 9.15, 9.20 s 185EA(1): 9.40 s 185EB: 9.40 s 185EC: 9.43 s 185EC(1): 9.43 s 185EC(3): 9.42 s 185EC(4): 9.40 s 185EC(5): 9.42 s 185ED: 9.110 s 185LA: 9.15, 9.145 s 185LB: 9.145, 9.148 s 185LC: 9.95, 9.145, 9.148 s 185LD: 9.145, 9.148 s 185LE: 9.145, 9.148 s 185LF: 9.145, 9.148 s 185LG: 9.145 s 185LG(1): 9.148 s 185LG(2): 9.148 s 185LG(3): 9.85, 9.148 s 185MA: 9.75 s 185NA: 9.15, 9.60, 9.85 s 185NA(2): 9.60 s 185NA(3): 9.60 s 185PA: 9.90 s 185PC: 9.90 s 185QA: 9.80, 9.85, 9.95, 9.103

s 185XA: 9.60 s 185LEA: 9.148 s 185ZCA: 9.145 s 185ZCB: 9.145 s 186A: 9.35, 9.120 s 186A(3): 9.120 s 186C: 9.125 s 186C(6): 9.125 s 186C(8): 9.125 s 186C(9) to (10): 9.125 s 186D: 9.130 s 186E: 9.130 s 186F: 9.130 s 186G: 9.130 s 186H: 9.130 s 186H(6): 9.130 s 186J: 9.130 s 186K: 9.135, 9.150 s 186K(3): 9.135 s 186K(7): 9.135 s 186K(8): 9.135 s 186L: 9.135 s 186N: 9.140 s 186Q: 9.10, 9.125, 9.135 s 186LA: 9.150 ss 186LA to 186LE: 9.150 s 186LB: 9.150 s 186LC: 9.150 s 186LD: 9.150 s 186ML: 9.150 s 187(1): 8.20 s 187(1A): 8.20 s 187A: 8.35 ss 187 to 232: 8.330 s 188: 2.375, 3.20, 3.35, 3.190, 6.110, 6.550, 8.30, 8.45, 8.50, 8.55, 8.60, 8.65, 8.70, 8.75, 8.85, 8.95, 8.120, 8.125, 8.150, 8.190, 9.25 s 188(1): 8.20, 8.70 s 188(2A): 8.70 s 188(2C): 8.70 s 188(2E): 8.70 s 188(2AA): 8.70 s 188(3): 8.75 s 188(4): 8.75, 8.80, 8.190 s 188(5): 8.70 s 188A(1): 8.35 s 188A(2): 8.35 s 188A(2)(e): 8.35 s 188A(2)(g): 8.315 s 188A(2)(h) to (i): 8.235 s 188A(2)(j): 8.270 s 188A(3): 8.35 s 188A(4): 8.35 s 188B(2) to (3): 8.70 s 189: 8.120 s 189(1): 8.75, 8.95 s 189(1A): 8.95, 8.190

Table of Statutes Bankruptcy Act 1966 — cont s 189(1A)(b): 8.200 s 189(1A)(d): 8.95, 8.150, 8.190 s 189(1B): 8.95 s 189(2): 8.75 s 189(2)(a): 8.75 s 189A: 8.70, 8.100, 8.105, 8.120, 8.140, 8.150 s 189A(1): 8.90, 8.100, 8.105 s 189A(3): 8.245 s 189B: 8.110, 8.120, 8.150, 8.170 s 189B(1): 8.90 s 189AA: 8.75 s 189AA(2): 8.75 s 189AB: 8.75 s 189AC: 8.75, 8.175 s 189AAA: 8.60 s 190: 8.75, 8.85, 8.95 s 190(1): 8.85 s 190(2): 8.85 s 190(5): 8.75 s 190A: 8.90 s 190A(1): 8.90 s 194A(3) to (5): 8.245 s 204: 8.110, 8.170, 8.195 s 204(1): 8.170, 8.185 s 204(1)(a): 8.95 s 204(1)(b): 8.95 s 204(1)(c): 8.95 s 204(2): 8.170 s 204(3): 8.170 s 206(1): 8.60, 8.165 s 206B(3): 4.15 s 206B(4): 8.45 s 206G: 2.105 s 208: 8.65, 8.95 s 211: 8.55, 8.205 s 215A(1A): 8.170 s 215A(1): 8.170 s 215A(3): 8.245 s 215A(4): 8.245 s 216(1): 8.200 s 216(2): 8.200 s 221(1)(a): 8.195 s 221(1)(b): 8.195 s 221(1)(c): 8.195 s 221(1)(aa): 8.75 s 221A: 8.305 s 221A(1): 8.215 s 221A(4): 8.215 s 221A(5): 8.215 s 222: 7.60, 8.220, 8.225, 8.230, 8.250, 8.265, 8.285, 9.110 s 222(1): 8.230, 8.235, 8.260, 8.275, 8.285 s 222(1)(d): 8.230, 8.235 s 222(1)(e): 8.235 s 222(2): 8.240, 8.250, 8.260, 8.275, 8.290 s 222(3): 8.240 s 222(4): 8.245, 8.250, 8.275, 8.290

s s s s s s s s s s s s s

lxxix

222(5): 8.245, 8.250, 8.260, 8.270, 8.275 222(6): 8.270, 8.275 222(7): 8.250 222(8): 8.280 222(9): 8.280 222(10): 8.275, 8.280 222(11): 8.275 222(12): 8.230 222A: 7.60, 8.220, 8.300, 8.305, 8.310 222A(5): 8.305 222B: 7.60, 8.220, 8.300, 8.305, 8.310 222B(4): 8.310 222C: 7.60, 8.220, 8.225, 8.255, 8.260, 8.265, 8.275, 8.285, 8.305 s 222C(1)(e): 8.270 s 222C(1)(g): 8.270 s 222C(2): 8.270 s 222C(3): 8.280 s 222C(4): 8.280 s 222C(5): 8.275 s 222C(7): 8.255 s 222D: 7.60, 8.65, 8.220, 8.300, 8.315 s 224: 8.325 s 224A: 8.320 s 227: 8.45 s 229(1): 8.205 s 229(2): 8.205 s 229(2)(a): 8.205 s 229(3): 8.205 s 230: 8.55 s 230(1): 8.205 s 230(4): 8.205 s 231: 8.45, 8.55, 8.205, 8.270 s 231A(1): 8.205 s 231A(2): 8.205 s 232: 8.65, 8.205 s 236: 8.230, 8.255 s 239: 8.230 s 242: 8.230, 8.255 s 244: 3.450, 3.455, 3.460, 3.465, 6.590 s 244(1)(b): 3.460 s 244(1)(c): 3.460 s 244(6)(b): 3.460 s 244(11): 3.460 s 244(13): 3.460 ss 244 to 252C: 3.470 s 245: 3.460, 6.590 s 247: 3.450, 3.465, 6.590 s 247(1): 3.455 s 247(2): 3.455 s 247A: 6.590 s 247A(1)(a): 6.590 s 247A(1)(b): 6.590 s 247A(1)(c): 6.590 s 247A(2): 6.590 s 248: 6.590 s 249: 3.465, 6.590

lxxx Table of Statutes Bankruptcy Act 1966 — cont s 249(3): 6.590 s 249(4A): 6.590 s 249(5): 6.590 s 249(6): 6.590 s 249(7): 6.590 s 249(8): 6.590 s 252: 6.590 s 252(2): 6.590 s 252A: 7.175 s 252B: 7.175 s 252C: 7.175 s 253E: 3.75, 3.423 s 253F: 3.75, 3.423 s 254: 2.385, 6.530, 6.595 s 254(3): 6.530 s 255: 6.245 s 263: 4.132, 4.235 s 263A: 4.235 s 263C: 4.235, 6.110 ss 263 to 277B: 4.210 s 264B: 4.15, 4.130 s 264C: 4.130 s 264D: 4.15 s 265: 4.230, 4.235 s 265(1)(a): 4.230 s 265(7): 4.235 s 265(8): 4.235 s 265(9): 4.235 s 266: 4.235, 4.240, 5.95 s 266(3): 5.60 s 267B: 4.230, 6.215 s 267D: 4.235, 6.215 s 268: 4.235 s 268(2): 8.205 s 269: 4.15, 4.230, 7.110 s 271: 2.385, 4.225, 4.235 s 272: 4.15, 4.235 s 272(2): 4.15, 6.375 s 275: 4.240 s 277: 4.230 s 277A: 6.405 s 277B: 2.365, 4.225 s 301: 6.290 s 302: 6.290 s 304A: 4.15, 4.230 s 305: 6.440, 8.235 s 306: 3.285, 3.385 s 306(1): 3.280 s 306(2): 2.275 s 306B: 2.275, 8.100 s 307: 3.340 s 309: 3.230 s 309(2): 3.345 s 315: 2.15 s 316(1): 2.15 s 1323: 12.05 Pt VIII: 8.210

Pt Pt Pt Pt Pt Pt Pt Pt Pt Pt

5.3A: 2.05, 8.235 5.7B, Div 2: 14.35, 14.50 6: 6.595 7: 2.15, 7.65 9.7: 6.530 10: 8.225 11: 6.595 12: 6.595 13: 6.595 X: 2.00, 2.08, 2.10, 2.45, 2.105, 2.110, 2.115, 3.20, 3.70, 3.95, 3.190, 4.45, 4.105, 4.235, 6.105, 6.445, 6.550, 6.555, 7.40, 7.60, 8.05, 8.10, 8.15, 8.20, 8.30, 8.35, 8.40, 8.45, 8.50, 8.60, 8.70, 8.95, 8.100, 8.120, 8.130, 8.140, 8.150, 8.155, 8.170, 8.200, 8.205, 8.210, 8.230, 8.235, 8.240, 8.275, 8.285, 8.295, 8.300, 8.325, 8.330, 9.10, 9.20, 9.25, 9.60, 9.75, 9.105, 10.200, 19.05, 20.250, 20.375 Pt IV: 6.590 Pt IX: 2.08, 2.10, 2.45, 2.105, 2.115, 3.70, 3.95, 4.230, 5.40, 5.80, 5.200, 6.445, 8.05, 8.330, 9.10, 9.60, 9.110, 9.116, 10.200 Pt IX, Div 3A: 9.145 Pt IX, Div 8: 9.120 Pt VI: 4.210, 5.250, 6.555, 6.590, 6.595 Pt VI, Div 3: 5.280 Pt VI, Div 3, subdiv B: 5.35, 5.105 Pt VI, Div 4A: 5.250 Pt VI, Div 4B: 5.260 Pt VI, Div 4B, subdiv J: 5.255 Pt XI: 2.10, 2.50, 2.385, 3.450, 3.455, 3.460, 3.465, 6.590, 6.595, 7.175, 9.10 Pt VII, Div 2: 7.125 Pt XIA: 8.275 Pt XIV: 4.225, 4.210 Div 4A: 5.250 Div 4B: 5.250, 6.340 Div 6: 2.15 Div 10: 8.205 Sch 2: Insolvency Practice Schedule (Bankruptcy) (IPSB): 2.00, 2.15, 2.22 s 1-1: 2.170 s 5-5: 2.320, 6.590, 7.10, 8.205 s 5-20: 3.465, 6.555, 8.90, 8.205 s 5-20(d): 6.590 s 5-25: 2.185 s 9: 2.295 s 15.15(a): 2.315 s 20-10: 2.138 s 20-20: 2.138, 2.160 s 20-20(5): 9.120 s 20-70: 2.160 s 20-75: 2.160 s 20-75(2): 2.160 s 20.1: 2.140 s 20.5: 2.140

Table of Statutes Bankruptcy Act 1966 — cont s 20.20(4): 2.140 s 20.20(5): 2.140 s 20.20(6): 2.140 s 20.25: 2.140 s 20.35: 2.140 s 20.40: 2.140 s 20.65: 2.140 s 30-1: 2.15, 2.150 s 40-5: 2.220, 2.290, 2.315 s 40-15: 2.220 s 40-15(1): 2.290 s 40-20: 2.295 s 40-25: 2.155, 2.295 s 40-30: 2.295 s 40-40: 2.180, 2.300 s 40-40(1)(m): 9.150 s 40-45: 2.300 s 40-55: 2.305 s 40-55(3): 2.305 s 40-70: 2.155 s 40-100: 2.310 s 40-105: 2.310 s 40.30: 2.155 s 45-1: 2.290, 2.340, 6.415, 6.445 s 45-1(2)(a): 2.335 s 45-1(4): 2.340 s 45-1(4)(e): 2.340 s 45-5: 2.340 s 50-5: 2.305 s 50.55: 2.145 s 60-10: 2.195, 6.50, 6.90 s 60-11: 2.195 s 60-12: 2.195 s 60-15: 6.90 s 60-20: 2.245 s 60-21: 2.245 s 60-26: 2.245 s 65-5: 2.260 s 65-15: 2.260 s 65-25: 2.260 s 65-31: 2.260 s 65-32: 2.260 s 65-45: 2.260 s 65-46: 2.375 s 70-5: 2.150, 6.585 s 70-10: 2.320, 6.90 s 70-15: 6.545 s 70-20: 6.545 s 70-35: 6.590, 8.205 s 70-36: 6.590 s 70-40: 6.65, 8.180 s 70-40(3): 6.75 s 70-45: 6.65 s 70-55: 6.80 s 75-10: 6.95 s 75-15: 2.325, 6.100, 8.30 s 75-15(1): 6.95

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

lxxxi

75-15(5): 8.30 75-20: 6.95 75-25: 6.110 75-27: 8.30 75-30: 6.95, 7.40, 8.140 75-35: 6.95 75-80: 6.510 75-132(2): 8.10 75-137: 6.565 75-270: 6.110 80-10: 2.360 80-15: 15.40 80-20: 15.40 80-26: 15.40 80-30: 15.40 80-35: 2.360 80-35(3): 15.40 80-35(4): 15.40 80-45: 2.360 80-50: 2.360 80-55: 15.40 80-60: 15.40 80-65: 15.40 80-70: 15.40 85-5: 6.90, 8.180 85(2): 6.90 90-2: 2.350 90-5: 2.350, 6.415 90-5(1): 2.335 90-10: 2.350, 6.90, 6.415, 6.445 90-10(2): 2.350 90-15: 2.230, 2.275, 2.345, 2.350, 4.115, 6.310, 6.315, 6.365, 6.415 s 90-15(2)(a): 2.335 s 90-15(3)(b)(c): 2.350 s 90-15(3)(f): 1.15, 1.25 s 90-15(6): 2.350 s 90-20: 2.345, 6.315, 6.445, 7.150, 7.170, 8.85, 8.145 s 90-21: 2.195, 2.205, 2.210 s 90-21(2): 2.195 s 90-21(3): 2.195, 2.210 s 90-22: 2.210 s 90-30: 2.325 s 90-35: 2.240, 2.325, 6.90 s 90-35(5): 2.325 s 90-80: 10.430 s 96-1: 2.295, 2.305 s 96-1(a): 2.160 s 100-5: 2.270, 2.275, 4.120, 6.430 s 100-6: 2.15 s 120: 2.20 s 170A: 2.265 s 476: 2.195 s 1349: 2.355 Ch 6: 2.175 Pt 2: 2.112

lxxxii Table of Statutes Bankruptcy Act 1966 — cont Pt XI: 7.175 Div 20: 2.112 Div 25, s 25-1: 2.150 Div 40: 2.112, 2.220, 2.285, 2.290 Div 42: 2.180, 2.230 Div 45: 2.340, 2.345, 2.370 Div 60: 8.130, 8.180 Div 65: 2.260 Div 70: 8.90, 9.145 Div 80: 8.55 Div 90: 2.195, 2.345, 2.370, 2.375, 6.315, 9.145, 10.340 Div 96: 2.295 Pt 3: 2.22 Sch 6: 8.205 Sch 7: 6.590

Insolvency Practice Rules (Bankruptcy) 2016: 2.15, 2.55 s 1-1: 2.00 s 5-15: 2.10 s 5-16: 2.10 s 5-20: 2.10 s 5-30: 2.55 ss 6.02-6.06: 3.445 ss 12.01-12.02: 3.445 s 15-1(2)(f): 2.315 s 20-10: 2.160 s 35-1: 2.150 s 42-4: 2.180 s 42-30: 6.10, 6.30, 6.185 s 42-35: 6.190 s 42-40: 6.190, 6.450 s 42-50: 6.185 s 42-55: 6.190 s 42-60: 6.190 s 42-140: 2.320 s 42-220: 8.90 s 50-55: 2.305 s 50-90: 2.300 s 60-5: 2.195 s 60-11: 2.195 s 65-1: 2.260 s 65-5: 2.260, 6.335 s 65-20: 2.205 s 65-31: 6.335 s 70-10: 6.130 s 70-10(2): 6.75 s 70-10(4): 6.80 s 70-10(5): 6.75 s 70-17: 6.85 s 70-30: 6.106.30, 6.55 s 70-35: 2.200, 6.30 s 70-45: 2.200 s 70-47: 2.200 s 70-47(5): 2.200 s 70-55: 6.80

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

75-7: 6.110 75-15: 6.145 75-20: 7.45, 8.135 75-25: 8.135 75-27: 7.45, 8.90 75-27(1): 8.65, 8.120, 8.125 75-27(2): 8.120 75-27(2B): 8.150 75-40: 2.115, 7.45, 8.135 75-50: 6.110 75-60: 7.45, 8.90 75-60(2): 8.150 75-65: 6.110, 7.45, 8.170 75-70: 6.110 75-75(4): 7.45 75-85: 8.145 75-90: 6.110 75-100: 8.145 75-105: 6.115 75-105(3): 6.110, 6.115 75-110: 6.110, 6.510 75-110(4): 6.110, 8.145, 9.42, 21.50 75-115: 8.170 75-130: 6.130 75-132: 7.45, 8.60, 8.160 75-137: 6.130 75-140: 6.110, 8.120, 8.150 75-145: 6.130 75-170: 6.320, 8.155 75-170(1): 6.140 75-170(2): 6.325 75-175: 7.45 75-175(2D): 7.45 75-175(4): 7.45 75-180: 7.45 75-180(5): 7.45 75-250: 8.30 75-250(2): 6.150 75-250(5): 6.150 75-260: 6.155 75-265: 2.325 80-5: 6.165 80-10: 6.165 80-15: 6.165 80-15(2): 2.255 80-20: 6.165 80-25: 6.165 80-35: 6.165 80-50: 6.165 80-55: 6.165 80-60: 6.165 80-65: 6.165 80-70: 6.165 85-5: 2.225 90-1: 2.210 90-5: 2.210 90-10: 2.210

Table of Statutes Insolvency Practice Rules (Bankruptcy) 2016 — cont s 90-10(2)(a): 2.210 s 90-10(4): 2.210 s 90-35: 6.125, 6.160 s 90-55: 2.210 s 90-55(3): 2.210 s 90-55(3)(l): 2.210 s 90-65: 2.210 s 90-65(5): 2.210 s 100-5: 6.310 s 100-5(2): 6.310 r 90-80: 2.345 Div 60: 8.130 Div 75: 7.45, 8.150 Div 80: 6.165 Div 90: 2.205 Sch 2, s 1-1: 2.22

Bankruptcy (Estate Charges) Act 1997: 2.10, 2.112, 2.260, 2.265, 2.385, 8.205, 10.120 s 5: 6.335, 8.75, 8.100 s 5(1): 9.148 s 210: 8.75, 8.205

Bankruptcy Legislation Amendment Act 1996: 6.355

Bankruptcy Legislation Amendment Act 2004: 8.05

Bankruptcy Legislation Amendment (Debt Agreements) Act 2007: 9.10 Bankruptcy Regulations 1996: 1.20, 2.00, 2.15, 2.385, 3.285, 3.345 reg 6.03B(3): 4.90 reg 2.05: 2.112 reg 3.01: 6.182 regs 4.01 to 4.13: 3.430 reg 4.02: 3.285 reg 4.02(1): 3.220 reg 4.02(3): 3.220 reg 4.02A(2): 3.235 reg 4.03: 3.220 reg 4.04: 3.155 reg 4.05: 3.340 reg 4.05(3): 3.350, 3.360, 3.365, 3.430 reg 4.06: 3.445 regs 4.06 to 4.09: 3.445 reg 4.07: 3.445 reg 4.08: 3.445, 12.25 reg 4.11 : 3.15 reg 4.11: 7.90, 9.35 reg 4.12: 3.90 reg 6.01: 6.545 regs 6.01 to 6.22: 4.210, 6.595 reg 6.03: 4.80 reg 6.03(4): 4.80

lxxxiii

reg 6.03A: 4.80 reg 6.03B: 4.85 reg 6.04A: 4.85 reg 6.04B: 4.85 reg 6.09: 2.15, 5.40 reg 6.10: 6.280 reg 6.21: 6.530 regs 7.01 to 7.02: 7.170 reg 8.35: 8.70 reg 8.35(1)(t)(ii): 2.375 regs 9.01 to 9.02: 9.165 reg 9.02: 9.125 regs 10.01 to 10.14: 8.330 reg 10.02: 8.70 reg 10.03: 8.70 reg 10.06: 8.185 reg 10.14(4): 8.205 reg 11.01A: 3.455, 3.465 regs 11.01 to 11.02: 3.470 reg 11.02: 6.590 reg 13.02(3): 2.125 reg 13.03: 8.320 regs 14.01 to 14.15: 4.210 reg 16: 3.225 reg 16.01: 3.225, 3.345 reg 16.01(1): 3.225 reg 16.01(2): 3.225 Pt 6: 4.210, 5.280 Pt 10: 8.330 Pt 13: 2.115 Pt 14: 4.210 Sch 3: 6.545 Sch 7: 6.590, 6.595 Sch 8: 2.115 Sch 8, item 28B: 8.320 Sch 8, item 28C: 8.320

Child Support (Assessment) Act 1989: 4.155 Child Support (Registration and Collection) Act 1988 s 50: 15.350

Civil Aviation Act 1988: 14.120 Civil Dispute Resolution Act 2011: 1.210, 2.375, 3.355, 5.275, 10.470 s 17: 3.355 Ch 5: 1.220

Civil Dispute Resolution Regulations 2011 reg 4(a): 3.355

Commonwealth Criminal Code: 4.210 Ch 2: 4.240

Commonwealth of Australia Constitution s 44: 2.08 s 51(xvii): 1.15, 2.05

lxxxiv Table of Statutes Commonwealth of Australia Constitution — cont s 75: 2.370

Companies Act 1955 s 588FG: 14.230

Companies Act 1981 s 453(5): 14.145 s 567(5): 14.145

Company Law Review Act 1998: 10.120 Competition and Consumer Act 2010: 13.65, 15.275, 17.85 s s s s

137F: 18.125 471C: 13.70 554A: 15.280 1323: 18.130

Corporate Law Reform Act 1992: 15.350, 18.255, 18.340, 19.05 s 411: 19.05 s 420A: 18.255 s 420B: 18.340

Corporations (Aboriginal and Torres Strait Islander) Act 2006: 10.10, 10.25, 10.190 s s s s s s

487.5: 10.25 490.1: 10.25 505.1: 10.25 526.15: 10.25 526.35: 10.25 1317B: 10.190

Corporations Act 2001: 1.20, 2.95, 3.200, 3.350, 10.05, 10.25, 10.335, 10.470, 15.35, 17.115, 17.120, 18.05, 18.22, 18.30, 18.130, 18.245, 19.75, 19.110, 19.126, 19.190, 19.210, 19.230 s 5: 15.430, 18.555 s 5(2): 1.65 s 5(2) to (3): 1.50 ss 5B to 5E: 15.175 s 5C: 11.100 s 5G: 15.205 s 8: 18.05, 19.110 s 9: 9.10, 10.125, 10.285, 11.85, 11.90, 11.155, 11.185, 11.210, 11.315, 13.35, 13.40, 13.45, 13.80, 14.40, 14.45, 14.50, 14.80, 14.155, 14.239, 15.10, 15.120, 15.130, 15.140, 15.170, 15.175, 15.205, 15.240, 15.250, 15.315, 15.390, 15.395, 16.10, 16.15, 16.30, 17.70, 18.10, 18.20, 18.30, 18.45, 18.50, 18.75, 18.115, 18.160, 18.185, 18.190, 18.310, 18.400, 18.450, 18.500, 19.105, 19.110, 19.125, 19.135, 19.145, 19.265, 19.270, 19.345, 21.135 s 9(a): 13.40 s 9(b): 13.40 s 12: 13.70 s 15: 10.120

s s s s

21: 15.435 50: 12.05 51: 19.70 51A: 13.70, 15.305, 18.45, 18.50, 19.125, 19.130, 19.190, 19.280, 20.120 s 51B: 19.110, 19.125 s 51C: 18.370 s 51D: 19.120 s 51E: 13.70, 15.305, 20.120 s 51F: 14.275, 18.90, 19.70, 19.125, 19.225 s 58AA: 10.190, 19.225, 19.250 s 58AA(1): 16.150 s 60: 19.145 s 64B: 15.175 s 79: 21.65, 21.165 s 90: 18.25 s 91: 10.90, 10.95, 10.100, 13.100, 14.40, 19.395 s 93AA: 10.120 s 95(1): 11.15 s 95A: 1.30, 1.50, 1.55, 1.65, 1.80, 11.215, 21.20 s 109A: 18.05 s 109X: 11.100 s 109X(1): 11.100, 11.220 s 109X(1)(a): 11.100 s 117: 18.375 s 127(1): 20.55 s 128: 19.42, 20.90 s 129: 19.42, 20.90 s 134: 10.310 s 136: 21.155 s 157A: 18.560, 19.60, 20.85 s 161A: 13.20, 18.560, 19.60, 20.85 s 161A(2): 19.60 s 161A(3): 19.60 s 161A(6): 19.60 s 161A(7): 19.60 s 180: 10.245, 15.240, 15.315, 16.40, 18.285, 19.95, 19.185, 20.135, 21.90 s 180(1): 10.245, 16.42, 21.95 s 180(2): 16.42 ss 180 to 182: 10.255 ss 180 to 183: 10.255, 16.50, 18.285, 21.135 ss 180 to 184: 18.160, 18.260, 18.285, 18.435 s 181: 10.240, 15.240, 15.315, 16.43, 18.285, 19.95, 19.185, 20.135, 21.90 ss 181 to 183: 16.65, 18.285 ss 181 to 184: 18.285 s 182: 15.315, 16.43, 18.285 s 183: 10.255, 15.315, 16.43, 18.285 s 184: 15.315, 16.65, 18.285 s 185: 16.40 s 187: 16.125 s 189: 16.42 s 191: 19.40 s 198G: 13.25, 13.40, 19.80, 19.415 s 198G(3)(a): 19.415 s 206A: 4.15, 7.130

Table of Statutes Corporations Act 2001 — cont s 206B: 19.42 s 206C: 16.50, 18.285 s 206G: 4.15 s 210: 21.155 s 228: 21.155 s 229: 21.155 s 232: 10.20, 10.80, 11.70, 12.15, 14.10, 21.155 s 233: 10.20, 12.15 s 234: 10.65 s 237: 13.25 s 248F: 19.42 s 249H: 10.20, 10.55 s 249H(1): 11.10 s 249H(2): 10.20, 10.55, 11.10 s 249HA: 10.20 s 263: 5.05 s 266: 14.270 s 267: 14.275 s 283BH: 18.45 s 286: 16.90 s 286(1): 14.115 s 286(2): 14.115 s 301: 13.85 s 330: 13.105 s 350: 10.125 s 411: 15.345, 20.90, 21.20, 21.120 s 411(1): 20.125 s 411(2): 20.125 s 411(9): 21.135, 21.145 s 412: 20.125 s 415: 21.135 ss 415D to 415G: 21.120 s 418(1): 18.90 s 418(1)(a): 18.90 s 418(1)(d): 18.05, 18.90 s 418(4): 18.90 s 418A: 18.115 s 419: 18.20, 18.345, 18.440, 18.555 s 419(1): 18.170, 18.195, 18.440 s 419(3): 18.110, 18.475, 18.480 s 419A: 18.460 s 419A(2): 18.460 s 419A(3): 18.460 s 419A(4): 18.460 s 419A(7): 18.460, 18.480 s 420: 18.25, 18.140, 18.150, 18.205, 18.215, 18.220, 18.490, 18.495 s 420(1): 18.215 s 420(2): 18.215 s 420(2)(a): 18.315 s 420(2)(b): 18.215 s 420(2)(h): 18.25, 18.215, 18.345 s 420(2)(n): 18.215 s 420(2)(o): 18.25, 18.555 s 420(2)(u): 11.245, 18.215 s 420A: 15.240, 18.235, 18.255, 18.260, 18.265, 18.270, 18.275, 18.280

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

420A(1): 18.265 420A(1)(a): 15.240, 18.265 420A(1)(b): 18.265 420A(2): 18.285 420B(2): 18.340 420B(3): 18.340 420B(4): 18.340 420B(6): 18.340 420C: 13.95, 18.165, 18.170 420C(1)(a): 18.170 420C(3): 13.95 420C(3)(a): 18.170 420C(4): 18.170 421: 18.350 421A: 18.310 421A(4): 18.310 421A(5): 18.310 422: 18.305, 19.210 422(1): 18.305 422(2): 18.305 422(4): 18.305 422A: 18.290 422B: 18.290 423: 18.260, 18.265, 18.535, 18.630 423(1)(a) to (b): 18.423 423(1)(b): 18.445 423(2): 18.423 424: 18.235, 18.425 425: 18.185 425(5): 18.240 425(8): 18.240 427(1): 18.95 427(1A): 18.95 427(1B): 18.95 427(2): 18.95, 18.145 427(4): 18.605, 21.145 428: 18.290, 18.560 429(2)(a): 18.95 429(2)(b): 18.95, 18.290, 18.295, 18.535 429(2)(c): 18.295 430: 18.225, 18.300, 18.535 431: 18.225, 18.315 433: 1.200, 18.50, 18.170, 18.370, 18.385, 18.465, 19.190 433(3)(a): 18.375 433(3)(b): 18.380 433(3)(c): 18.390, 18.400, 18.405, 18.410 433(6): 18.380 433(7): 18.380 434A: 18.580, 18.630 434B: 18.600 434B(2): 18.600 434B(3): 18.600 434B(4): 18.600 434B(5): 18.600 434D: 18.75 434E: 18.75

lxxxv

lxxxvi Table of Statutes Corporations Act 2001 — cont s 434F: 18.10, 18.75 s 434G: 18.75 s 434J: 18.550, 18.565 s 434J(1): 18.550 s 434J(2): 18.550 s 434J(3): 18.550 s 434J(4): 18.550 s 434J(5): 18.550 s 434J(6): 18.550 s 434J(8): 18.550 s 434J(9): 18.550 s 434K: 18.550 s 434L: 18.550 s 434L(2): 18.550 s 434L(5): 18.550 s 434L(6): 18.550 s 434LA: 18.550 s 435A: 19.10, 19.65, 19.120, 19.190, 19.390, 20.05, 20.265 s 435A(b): 19.185 ss 435A to 451D: 19.450, 20.305 s 435B: 19.70, 19.105, 19.125 s 435C: 19.245, 20.05 s 435C(1): 19.25, 20.05, 20.65 s 435C(1)(a): 19.290, 19.300 s 435C(2): 19.50 s 435C(2)(a): 19.50, 20.65, 20.150 s 435C(2)(b): 19.50 s 435C(2)(c): 19.50 s 435C(3): 19.50, 19.305 s 435C(3)(a): 19.50 s 435C(3)(b): 19.50 s 435C(3)(d): 19.335 s 435C(3)(e): 19.50 s 435C(3)(f): 19.50 s 435C(3)(g): 19.50 s 435C(e)(3): 19.50 s 436A: 19.25, 19.40, 19.42, 19.145, 19.295 s 436A(2): 12.85, 19.42 s 436B: 12.85, 19.25, 19.145, 19.295, 19.300 s 436B(1): 19.35 s 436B(2): 19.135, 19.380, 19.415 s 436C: 18.20, 19.25, 19.30, 19.70, 19.142, 19.145, 19.295, 19.390, 20.120 s 436C(1A): 19.30 s 436C(2): 19.30 s 436E: 19.100, 19.145, 19.290 s 436E(3A): 19.300 s 436E(1): 19.100, 19.290 s 436E(2): 19.290 s 436E(3): 19.155, 19.290, 19.300 s 436E(3)(b): 19.45 s 436E(4): 19.100, 19.290 s 436DA: 10.210, 19.145, 19.295 s 436DA(4): 19.145 s 437A: 19.60, 21.150 s 437A(1): 19.180, 19.200

s s s s s s s s s s s s s s s s s s s s s s s

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

437A(1)(c): 19.185 437A(1)(d): 19.180 437B: 19.60, 19.180, 19.225 437D: 19.60, 19.70, 19.270 437D(2): 19.70 437D(3): 19.70 437D(5): 19.70 437E(1): 19.70 437F: 13.45, 19.65 437F(2): 19.65 437F(6): 19.65 437F(7): 19.65 437F(8) to (15): 19.65 438A: 19.180, 19.205 438B(2): 19.180 438B(3): 19.180 438C: 19.180 438C(1): 19.220 438C(2): 19.220 438C(3): 19.220 438C(4): 19.220 438D: 19.210 439A: 13.100, 19.50, 19.215, 19.300, 19.325, 19.385, 19.390, 19.420, 20.40, 20.190, 20.255, 20.295 439A(2): 19.310 439A(4)(c): 20.40 439A(5): 19.50, 19.310 439A(5)(a): 19.310 439A(6): 19.310, 19.380 439A(7): 19.310 439A(8): 19.310 439B(2): 19.310 439C: 8.165, 19.50, 19.100, 19.305, 19.420 439C(c): 11.45, 13.100, 19.420 440A: 19.100, 19.250, 19.255 440A(2): 11.260, 13.100, 19.255 440B: 18.190, 19.85, 19.105, 19.110, 19.120, 19.125, 19.380 440C: 19.105, 19.130 440D: 19.85, 19.100, 19.120, 19.250, 19.255 440D(1): 19.250, 20.125 440D(2): 19.260 440E: 19.250 440F: 19.85, 19.100, 19.120, 19.125, 19.265 440G: 19.85, 19.265 440G(3): 19.265 440G(4): 19.265 440G(7): 19.265 440G(8): 19.265 440J: 19.85 440J(1): 19.85 440JA: 19.120 441A: 18.190, 19.105, 19.125, 19.126, 19.190, 19.270 441A(1)(b): 19.125 441A(2)(d): 19.125

Table of Statutes Corporations Act 2001 — cont s 441B: 19.105, 19.125, 19.270, 19.280 s 441B(1): 19.125, 19.250 s 441C: 19.125, 19.190 s 441D: 19.126, 19.270, 21.20 s 441D(1): 19.126, 19.270 s 441D(2): 18.190, 19.380 s 441D(3): 18.190 s 441E: 19.125, 19.270 s 441F: 19.130, 19.280 s 441G: 19.130, 19.275 s 441H: 19.130, 19.280 s 441H(1): 19.280 s 441H(2): 19.280, 19.380 s 441H(3): 19.280 s 441J: 19.130 s 442A: 18.20, 19.80, 19.180, 19.190 ss 442A to 442C: 19.190 s 442B: 19.190, 21.20 s 442C: 19.180, 19.190, 21.20 s 442C(1): 18.190, 19.380 s 442C(2): 18.190, 19.190 s 442C(3): 18.190, 19.190 s 442C(4) to (6): 19.190 s 442C(7): 19.190 s 442C(8): 19.190 s 442D: 19.190 s 442D(1): 18.190 ss 442D to 442F: 19.190 s 442E: 19.195 s 442CC(1A): 19.190 s 442CC(2): 19.190 s 443A: 19.90, 19.95, 19.140, 19.225, 19.230, 19.420 s 443A(1)(a) to (c): 19.225 s 443A(1)(d) to (f): 19.225 s 443B: 19.225, 19.230, 20.125 s 443C: 19.225 s 443D: 19.225, 19.230, 19.390 s 443D(a): 19.225, 19.230 s 443D(b): 19.230 s 443D(aa): 19.230 s 443E: 19.225, 19.230 s 443F: 19.230, 20.145 s 443F(1): 19.230 s 443BA: 19.225, 19.230, 20.140 s 444(3): 20.120 s 444A: 20.45, 20.55, 20.125 s 444A(2): 20.45 s 444A(3): 20.50 s 444A(4): 20.50 s 444A(4)(g): 20.230 s 444A(4)(i): 20.165 s 444A(5): 20.50, 20.135, 21.150 s 444B: 20.55 s 444B(2): 20.40, 20.55, 20.295 s 444B(5): 20.55 s 444B(6): 20.55

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

s s s s s s s s s s s s s s s s

lxxxvii

444C: 20.55, 20.110 444D: 20.55, 20.95, 20.120, 20.125, 20.130 444D(1): 20.10, 20.95, 20.120, 20.165 444D(2): 19.30, 19.100, 19.370, 20.10, 20.55, 20.105, 20.120, 20.125, 21.150 444D(2)(a): 20.95 444D(2)(b): 20.95 444D(3): 20.55, 20.120, 20.125 444E: 20.120, 20.125 444E(2): 20.100 444E(3): 20.105, 20.125 444F: 19.126, 20.55, 20.95, 20.120, 20.125 444F(2): 20.120 444F(3): 20.120 444F(3)(b): 20.120 444F(4): 20.125 444F(5): 20.125 444G: 20.65, 20.70, 20.90, 21.150 444H: 20.65, 20.120 444J: 20.90, 20.130, 20.260 444DA: 20.190 444DA(1): 20.190 444DA(2): 20.190 444DA(2)(a): 19.340 444DA(5): 20.190 444DB: 15.265, 20.195 444GA: 19.65, 21.70, 21.150 444GA(1): 21.150 444GA(2): 21.150 444GA(3): 21.150 445A: 20.215 445B: 20.215 445C: 20.155, 20.225 445C(a): 20.240 445C(b): 20.240 445C(c): 20.230 445D: 8.15, 19.50, 19.312, 19.390, 19.400, 19.425, 20.40, 20.225, 20.245, 20.250, 20.255, 20.265, 20.270, 20.280, 20.295, 20.300, 21.150 445D(1): 20.245 445D(1)(a): 20.255 445D(1)(b): 20.255 445D(1)(c): 20.255 445D(1)(e): 20.255, 20.260 445D(1)(f): 20.255, 20.260, 20.265 445D(1)(f)(i): 20.260 445D(1)(g): 20.255, 20.260 445D(2): 20.245 445E: 20.240 445F: 21.120 445G: 8.15, 19.50, 19.390, 19.425, 20.40, 20.215, 20.225, 20.250, 20.255, 20.270 445G(2): 20.250, 20.255 445G(3): 20.250 445G(4): 20.180, 20.215, 20.250 445H: 19.395, 20.285

lxxxviii

Table of Statutes

Corporations Act 2001 — cont s 445CA: 20.155, 20.240 s 445FA: 20.225, 20.235 s 445HA: 20.240 s 445HA(2): 20.60 s 446A: 11.45, 13.100, 17.30, 19.305, 19.390, 19.420, 20.55 s 446A(1)(a): 13.100, 19.420 s 446A(1)(b): 20.40, 20.55 s 446A(2): 19.420, 20.55, 20.295 s 446A(2)(a): 20.295 s 446A(3): 20.55 s 446A(5): 19.420, 20.55 s 446A(6) to (7): 17.30 s 446B: 20.110 s 446C(8): 15.370 s 446AA: 11.45, 13.100, 19.420, 20.295 s 446AA(1)(a): 19.425 s 447: 19.170 s 447A: 15.325, 19.10, 19.30, 19.42, 19.155, 19.165, 19.225, 19.290, 19.300, 19.310, 19.330, 19.335, 19.375, 19.385, 19.390, 19.395, 20.15, 20.55, 20.75, 20.120, 20.135, 20.165, 20.220, 20.270, 21.20 s 447A(2)(b): 20.270 s 447A(4): 19.390 s 447B: 19.400 s 447C: 19.25, 19.165, 19.400, 20.280 s 447C(2): 19.380 s 447D: 19.170, 19.185, 20.255 s 447E: 19.175 s 448A: 19.135, 20.45 s 448B: 19.135, 20.45 s 448C: 10.445, 19.140, 19.420 s 448C(1): 19.135, 20.45 s 448C(1)(a) to (b): 19.135 s 448C(1)(c): 19.135 s 448C(1)(d): 19.135 s 448C(1)(e): 19.135 s 448C(1)(f): 19.135 s 448C(1)(g): 19.135 s 449A: 19.145, 20.45 s 449B: 19.155 s 449C: 19.400, 20.45 s 449C(1): 19.155, 19.160 s 449C(4): 19.155 s 449C(5): 19.160 s 449C(6): 19.155, 19.380 s 449CA: 19.145, 19.160 s 449CA(4A): 19.160 s 450A: 19.125, 19.300 s 450A(1A): 19.45 s 450A(1)(a): 19.45 s 450A(1)(b): 19.45 s 450A(2): 19.45 s 450A(3): 18.190, 19.70 s 450B: 20.60 s 450C: 20.55

s 450D: 20.240 s 450E: 19.60, 20.30, 20.75 s 451B: 20.45 s 451C: 19.75, 19.230 s 451E: 19.95 s 451E(1): 19.95 s 451E(2): 13.85, 19.95 s 451E(2)(a): 20.70 s 451E(3): 13.85, 19.95 s 451E(4): 19.95, 20.70 s 451E(5): 19.95 s 451E(6): 19.95 s 451E(7): 19.95 s 451E(8): 13.85, 19.95 ss 451E to 451H: 19.15, 19.95 s 451F: 13.85, 19.95 s 451G: 19.95 s 451G(2): 19.95 s 451G(5): 19.95 s 451G(6): 19.95 s 451H: 19.95 s 451GA: 19.95 s 459(3)(a): 11.95 s 459A: 10.65, 10.75, 10.190, 11.55, 11.205, 11.215, 11.255, 11.265, 14.10, 14.165 s 459B: 10.65, 10.80, 14.10 s 459B(3): 11.210 s 459C: 10.75, 11.65, 11.70, 11.105 s 459C(2): 1.85, 11.70 s 459C(2)(b): 11.200 s 459C(3): 11.70 s 459D: 11.215 s 459E: 1.85, 10.45, 10.75, 11.65, 11.155, 11.220, 14.70 s 459E(1): 11.90 s 459E(1)(a): 11.90 s 459E(2): 11.85 s 459E(3): 11.95 s 459F(1): 11.110 s 459F(2): 11.140 s 459F(2)(a)(i): 11.110 s 459F(2)(a)(ii): 11.110 s 459G: 1.65, 11.110, 11.115, 11.120, 11.130, 11.135, 11.140, 11.175, 11.250 s 459G(1): 11.120 s 459G(2): 11.120, 11.130 s 459G(3): 11.120 s 459H: 11.115, 11.145, 11.175, 11.185, 11.195, 11.270 s 459H(1): 11.175 s 459H(1)(a): 11.145, 11.150, 11.175 s 459H(1)(b): 11.145, 11.175 s 459H(4): 11.175 s 459H(5): 11.175 s 459J: 11.115, 11.145, 11.180, 11.195 s 459J(1): 11.180 s 459J(1)(a): 11.85, 11.145, 11.180, 11.185

Table of Statutes Corporations Act 2001 — cont s 459J(1)(b): 11.145, 11.180, 11.190 s 459J(2): 11.255 s 459K: 11.195 s 459M: 11.160, 11.195 s 459N: 11.165, 11.195 s 459P: 10.65, 10.75, 10.120, 11.15, 11.55, 11.60, 11.70, 11.205, 11.215, 11.310, 13.10, 13.55, 15.360 s 459P(1): 11.210, 11.215 s 459P(2): 11.210, 11.215 s 459Q: 11.70, 11.220 s 459R: 3.350, 11.230, 11.260 s 459R(1): 11.225 s 459R(2): 11.225 s 459R(2)(a): 11.260 s 459S: 11.130, 11.135, 11.190, 11.305 s 459S(2): 11.130, 11.135 s 461: 10.65, 10.70, 10.80, 10.190, 11.55, 11.230, 14.10 s 461(1)(k): 11.55, 12.15, 17.100 s 462: 10.65, 10.70, 10.80, 11.70, 11.270, 11.310 s 462(2): 11.55 s 462(2)(b): 11.215 s 462(2)(e): 10.120 s 464: 10.65, 10.80, 11.70, 11.310 s 465: 13.10, 15.25 s 465A(b): 11.220 s 465B: 11.310 s 465B: 11.310 s 465C: 11.245 s 468: 14.10 s 493(1): 13.05 s 501: 15.440 s 601AB(2): 17.45 s 465B(4): 11.310 s 465C: 11.245 ss 465 to 489E: 12.105 s 466: 15.360 s 466(1): 11.315 s 466(2): 11.315, 15.360 s 466(3): 11.315, 15.360 s 467(1)(a): 11.255, 11.315 s 467(1)(b): 11.255 s 467(1)(c): 11.255 s 467(2): 1.90, 11.295 s 467(3): 11.255 s 467(3)(b): 17.100 s 467A: 11.255 s 468: 13.10, 14.10, 14.250, 14.255, 19.70 s 468(1): 13.10, 14.250, 14.265 s 468(2): 14.250 s 468(2)(a): 13.10 s 468(3): 14.250 s 468(4): 13.50, 14.260 s 468A: 13.45 s 468A(8) to (15): 13.45 s 470(1): 10.125

lxxxix

s 470(1)(b): 11.320 s 470(2)(a): 11.320 s 470(2)(b): 11.320 s 470(2)(c): 11.320 s 471A(1A): 17.25 s 471B: 12.50, 13.15, 13.55, 13.65, 20.105 s 471C: 13.70, 15.305 ss 471 to 471C: 13.110 s 472: 2.230, 10.45, 11.315, 12.60 s 472(2): 10.190, 12.05, 12.55, 18.130 s 472(4): 12.60 s 472(4)(a): 12.60 s 473: 10.390 s 473(3): 10.460 s 473(10)(d): 2.195 s 473A: 10.390 s 474: 11.320 s 474(1): 10.260, 14.10, 15.25 s 474(2): 4.25, 13.10, 15.305 s 475: 13.30, 15.335, 16.175, 16.185, 18.185 s 475(1): 12.45, 13.30 s 475(2): 13.30, 13.80 s 475(2) to (5): 12.45 s 475(4): 10.280 s 475(5): 13.30 s 476: 10.120, 10.125, 15.115 s 477: 10.340, 12.60, 14.15, 15.240, 15.315 s 477(1): 10.310, 10.315 s 477(1)(a): 10.265, 13.05, 15.235 s 477(1)(b): 10.330 s 477(2): 10.310, 10.335 s 477(2)(c): 10.320, 12.60, 16.115, 18.215 s 477(2)(k): 10.330 s 477(2)(m): 10.320, 10.335 s 477(2A): 10.315, 10.350, 15.65 s 477(2B): 10.320, 10.350, 15.65 s 477(2C): 10.320, 15.65 s 477(6): 10.250, 10.310 s 477A: 20.175 s 478: 10.285, 10.350 s 478(1): 10.260, 15.25 s 479(3): 19.170 s 480(a): 17.40 s 480(d): 17.40 s 481(3): 17.40 s 482: 10.190, 13.25, 17.10, 17.20, 17.25, 17.30, 19.415, 20.55 s 482(1): 17.10 s 482(1A): 17.10, 17.25 s 482(1A)(b): 17.10 s 482(3): 17.10 s 483: 13.35 s 483(1): 10.260, 13.35, 15.15, 15.25 s 483(3): 13.35 s 486: 15.65 s 488: 10.340 s 488(2): 10.340, 15.440

xc

Table of Statutes

Corporations Act 2001 — cont s 489EA: 11.25, 11.50, 17.45 s 489EA(1): 11.50 s 489EA(2): 11.50 s 489EA(3): 11.50 s 489EA(4): 11.50 s 489EA(6): 11.50 s 489EB: 11.50 s 489EC: 11.50 s 490: 11.300, 19.420 s 490(a): 11.300 s 491: 20.55, 20.295 s 491(2)(a): 11.30 s 491(2)(b): 11.20, 11.30 s 493(1): 13.05, 15.235 s 493A: 13.45 s 494: 19.420, 20.295 s 494(1): 11.15 s 494(2): 11.15 s 494(3): 11.15 s 494(4): 11.15 s 494(5): 11.15 s 496(1): 11.15, 11.40 s 496(1)(c): 11.40 s 496(4): 11.40 s 496(5): 11.40 s 496(7): 11.40 s 496(8): 11.40 s 497: 11.15 s 497(1)(a)(ii): 15.335 s 499(2A): 19.420 s 499(2A) to (2C): 20.295 s 499(3): 10.390 s 500: 13.110, 14.240 s 500(1): 14.260 s 500(2): 13.55, 13.65 s 500(3): 10.260 s 501: 15.440 s 506(1): 10.285 s 506(1)(b): 10.350 s 506(1)(c) to (e): 10.350 s 506(1)(d): 13.35 s 506(1A): 10.350 s 509: 17.50, 17.90 s 509(1): 17.50 s 509(2): 17.50 s 511: 19.170 s 513: 10.100 s 513A: 10.95, 14.40, 14.270 s 513AA: 14.20 s 513A(a): 14.10 s 513A(a) to (d): 14.10 s 513A(b): 19.395 s 513A(e): 10.95, 11.315, 13.10, 14.10 s 513B: 10.100, 14.40, 19.230, 19.420 s 513B(a) to (da): 14.10 s 513B(e): 14.10 s 513C: 10.100, 14.40, 19.230, 19.395, 19.420

ss 513 to 581: 12.105, 13.110, 15.440 s 515: 13.45 s 516: 13.45 s 530A: 13.40, 13.80, 15.15, 15.20, 16.175, 16.185 s 530A(1): 13.40 s 530A(2): 13.40, 15.20 s 530A(3): 13.40, 15.20 s 530A(4): 13.40 s 530A(5): 15.20 s 530A(7): 13.40 s 530B: 10.340, 15.15 s 530C: 10.340, 15.15, 15.25 ss 530 to 540: 16.190 s 532: 10.200 s 532(1)(c): 10.200 s 532(1A): 12.55 s 532(2): 10.190, 10.200, 10.445, 19.140 s 532(2)(b): 19.420 s 532(4): 10.20, 11.23 s 532(5): 10.200 s 532(8): 10.200 s 532(9): 11.235 s 533: 10.120, 10.125, 10.280, 10.295, 16.65, 16.85, 18.305, 19.210 s 533(1): 15.120 s 533(2): 15.120 s 534(1): 16.175 s 534(2): 16.175 s 535: 19.195 s 536: 2.335, 10.405, 10.435 s 537: 10.270 s 541: 13.20, 15.235 s 544: 15.335 s 545: 2.255, 10.295, 15.120 s 545(1): 10.295, 10.325 s 548: 11.35 s 553: 1.65, 6.465, 6.500n 15.250, 15.255, 19.215, 19.350, 20.165 ss 553 to 554J: 15.245 s 553(1A): 15.270 s 553A: 15.290 s 553B: 6.465, 15.275, 20.95 s 553B(2): 15.275 s 553C: 14.130, 15.285, 20.180 s 553C(2): 15.285 s 553D: 15.295 s 553AB: 20.195 s 554A: 6.465 s 554A(2): 15.280 s 554A(3): 15.280 s 554A(4): 15.280 s 554B: 15.255 s 553E: 15.245 s 554E(3): 15.305 s 554E(4): 15.305 s 554E(5): 15.305 s 554F(2): 15.305

Table of Statutes Corporations Act 2001 — cont s 554F(3): 15.305 s 555: 15.340, 15.345, 15.350 s 556: 1.165, 15.350, 15.360, 15.390, 15.415, 18.170, 18.395, 19.230, 20.55, 20.145, 20.185, 20.190, 20.260 s 556(1): 10.450 s 556(1)(a): 12.75, 15.270, 15.355, 15.365, 15.375, 15.390, 19.225, 19.230 s 556(1)(b): 11.315, 15.360, 19.230 s 556(1)(c): 19.225 s 556(1)(e): 15.270, 15.390, 18.390, 20.190 s 556(1)(g): 18.400 s 556(1)(g)(ii): 15.395 s 556(1)(h): 18.405 s 556(1A): 15.390 s 556(1A) to (1C): 18.395 s 556(1B): 15.395, 18.400 s 556(1C): 15.400, 18.405 s 556(1AE): 15.270 s 556(1AF): 15.270 s 556(1)(ba): 11.315, 15.360, 19.255 s 556(1)(de): 19.225 s 556(1AB) to (1AG): 15.390 s 556(1)(daa): 15.370 s 556(2): 15.355, 15.390, 15.400, 18.390, 18.395 s 558: 18.385 s 558(1): 15.400 s 560: 15.415, 18.410, 20.190, 20.260 s 561: 18.170, 19.190, 20.190 s 562: 18.375 s 563A: 13.45, 15.290, 21.160 s 563A(1): 15.290 s 563C: 15.345 s 564: 10.190, 15.65, 15.350, 15.420 s 565: 5.125 s 568: 15.205 s 568(1): 15.205 s 568(1)(g): 15.205 s 568(1)(h): 15.205 s 568(1A): 15.205 s 568(3): 15.230 s 568(8): 15.205 s 568A: 15.210 s 568B: 15.215 s 568C(1): 15.220 s 568D(1): 15.220 s 568D(2): 15.220, 15.230 s 568E(1): 15.225 s 568E(2): 15.225 s 568E(5)(b): 14.225 s 568F(1): 15.225 s 569: 14.240 s 569(1): 14.240 s 569(2): 14.240 s 569(3): 14.240 s 569(6): 14.240 s 569(7): 14.240

s s s s s s s s s s s s s s s s s s s s s s s s s s

xci

570(1): 14.245 570(3): 14.245 570(5): 14.245 570(6): 14.245 570(7): 14.245 570(8): 14.245 571: 15.315 571(1)(b): 15.315 571(1)(d): 15.315 571(2): 15.315 571(2) to (7): 15.315 571(9): 15.315 571(11): 15.315 573: 15.315 578: 15.315 579: 15.315 579A: 15.315 579E: 15.320 579E(2): 15.320 579E(10): 15.320 579E(11): 15.320 579G: 15.320 579G(2): 15.320 579Q: 15.315 580: 6.182, 15.425, 15.435 581: 6.182, 14.237, 14.239, 15.425, 15.430, 15.435 s 581(2): 14.237, 15.435 s 581(2)(a): 15.425, 15.435 s 581(2)(b): 15.425 s 581(3): 14.237, 15.425 s 581(4): 14.239, 15.425, 15.430 s 582(3): 14.239 ss 582 to 588Z: 15.440 s 583: 14.239 s 588E: 1.85, 14.55, 14.115 s 588E(8A): 14.115 s 588E(1)(e): 16.90 s 588E(3): 14.115, 16.90 s 588E(4): 14.115, 16.90 s 588E(4)(a): 14.115 s 588E(4)(b): 14.115 s 588E(5): 14.115 s 588E(6): 14.115 s 588E(7): 14.115 s 588E(8): 14.115 s 588E(9): 14.115 s 588F: 16.135, 21.90, 21.165 s 588G: 1.155, 4.235, 6.465, 16.05, 16.50, 16.60, 16.85, 16.90, 16.110, 16.120, 16.135, 16.140, 16.155, 18.450, 19.40, 20.300, 21.90, 21.110, 21.135 s 588G(1A): 16.100 s 588G(2): 16.60, 16.110 s 588G(3): 4.235, , 16.85, 16.110, 16.120 ss 588G to 588Z: 16.190 s 588H: 16.05, 16.105, 16.130, 16.155, 19.40

xcii

Table of Statutes

Corporations Act 2001 — cont s 588H(2): 16.105 s 588H(3): 16.105 s 588H(4): 16.105 s 588H(5): 16.105 s 588H(6): 16.60, 16.105, 19.40 s 588J: 16.120 s 588J(2): 16.120 s 588K: 16.120 s 588M: 6.465, 16.60, 16.110, 16.120 s 588M(1)(d): 16.115 s 588P: 16.120 s 588R: 16.120 s 588S: 16.120 s 588T(2): 16.120 s 588T(3): 16.120 s 588U: 16.120 s 588V: 16.130 s 588V(2): 16.130 s 588W: 16.130 s 588X: 16.130 s 588Y(1): 16.135 s 588Y(2): 16.135 s 588Y(3): 16.135 s 588Y(4): 16.135 s 588FA: 5.10, 5.125, 14.35, 14.65, 14.75, 14.80, 14.105, 14.135, 14.165, 14.270, 16.150, 18.100 s 588FA(1): 14.75, 14.120 s 588FA(1)(b): 14.105 s 588FA(2): 14.85 s 588FA(3): 5.185, 14.120 ss 588FA to 588FJ: 14.237 s 588FB: 10.260, 14.35, 14.115, 14.135, 14.170, 16.100 s 588FB(1)(a): 14.135 s 588FB(1)(b): 14.135 s 588FB(1)(c): 14.135 s 588FB(1)(d): 14.135 s 588FB(2): 14.155 s 588FB(2)(a): 14.135 s 588FC: 14.35, 14.55, 14.90, 14.135, 14.160 s 588FC(b): 14.205 s 588FD: 14.35, 14.150 s 588FD(2): 14.150 s 588FE: 5.230, 14.90, 14.135, 14.140, 14.145, 15.10, 18.315 s 588FE(2A): 14.35, 14.160 s 588FE(2B): 14.35, 14.160 s 588FE(2): 10.95, 14.45, 14.95 s 588FE(3): 14.135 s 588FE(4): 14.45, 14.100, 14.135 s 588FE(5): 14.35, 14.55, 14.140, 14.142 s 588FE(5)(b): 14.140 s 588FE(6): 14.150, 14.160 s 588FE(7): 14.160 s 588FF: 5.240, 14.60, 14.135, 14.170, 14.175, 14.185, 14.250, 16.150, 18.100, 18.315

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

s s s

588FF(1): 14.170, 14.175 588FF(1)(a): 14.170 588FF(1)(b): 14.170 588FF(1)(c): 14.170 588FF(3): 14.175 588FF(3)(a): 14.175 588FF(3)(b): 14.175 588FF(4): 14.170 588FG: 14.125, 14.135, 14.145, 14.180, 14.185, 14.230 588FG(1): 14.185, 14.190 588FG(1)(a): 14.190 588FG(2): 14.185, 14.195, 14.200, 14.210, 16.95 588FG(2)(b): 14.205 588FG(2)(b)(i): 14.205 588FG(2)(c): 14.220 588FG(3) to (5): 14.220 588FG(b)(ii): 14.210 588FH: 14.145 588FH(3): 14.145 588FH(4): 14.145 588FI: 14.130 588FJ: 11.215, 14.165, 14.270, 18.100 588FJ(1): 14.165 588FJ(2): 14.165 588FJ(2)(a): 14.165 588FJ(2)(a) to (b): 14.165 588FJ(3): 14.165 588FJ(4): 14.165 588FJ(5): 14.165 588FJ(6): 14.165 588FL: 13.70, 14.20, 14.270, 15.305, 18.100, 19.100, 19.225 588FL(2)(a): 14.270 588FL(2)(b): 14.270 588FL(2)(b)(iii): 14.270 588FL(4): 14.270 588FL(5): 14.270 588FM: 13.70, 14.20, 14.270 588FM(2): 14.270 588FM(3): 14.270 588FN: 14.270 588FO: 14.270 588FP: 14.275, 18.100 588FP(1)(c): 14.275 588FP(2): 14.275 588FP(3): 14.275 588FP(4): 14.275 588FP(5): 14.275 588FP(6): 14.275 588FP(7): 14.275 588GA: 1.25, 1.155, 10.80, 11.265, 16.05, 16.60, 16.78, 16.85, 19.05, 19.40, 19.42, 21.20, 21.25, 21.45, 21.90, 21.110, 21.135, 21.165 588GA(1): 14.115, 21.95, 21.105 588GA(1)(b): 21.100 588GA(2): 21.105

Table of Statutes Corporations Act 2001 — cont s 588GA(2)(d): 16.105, 21.65 s 588GA(3): 21.105 s 588GA(4): 21.105 s 588GA(4)(b): 21.105 s 588GA(5): 15.20, 21.105 s 588GA(6): 21.105 s 588GA(7): 21.95, 21.105 s 588GB: 21.105 s 588GB(1): 21.105 s 588GB(2): 21.105 s 588GB(3): 21.105 s 588GB(4): 21.105 s 588GB(5): 21.105 s 588GB(6): 21.105 s 588WA: 16.130, 21.90 s 588WA(1): 14.115 s 588FDA: 14.35, 14.155 s 588FDA(1)(a)(ii): 14.155 s 588FDA(2): 14.155 s 588FDA(3): 14.155 s 588FGA: 16.150, 16.155, 16.165 s 588FGA(5)(b): 16.150 s 588FGB: 16.105, 16.155 s 588FGB(3): 16.155 s 588FGB(4): 16.155 s 588FGB(5): 16.155 s 588FGB(6): 16.155 s 588FGB(7): 16.155 s 589(1)(g): 21.135 ss 589 to 596: 16.190 s 590: 21.135 s 590(1): 18.320 s 590(1)(a): 16.185 s 590(1)(c)(i): 16.185 s 590(1)(c)(v): 16.185 s 590(1)(c)(ii): 16.185 s 590(1)(c)(iv): 16.185 s 590(1)(c)(iii): 16.185 s 590(1)(d): 16.185 s 590(1)(f): 16.185 s 590(1)(g): 16.185 s 590(1)(h): 16.185 s 592: 16.140 s 596A: 10.280, 13.40, 15.20, 15.125, 15.130, 15.135, 15.160, 15.165, 15.180, 15.195, 18.185, 18.230, 20.150 s 596B: 10.280, 13.40, 15.20, 15.125, 15.135, 15.160, 15.180, 15.195, 18.230, 20.150 s 596C: 15.180 s 596C(1): 15.180 s 596E: 15.180 s 596AA(1): 16.80 s 596AB: 16.80 s 596AC: 16.80 s 596AC(4): 16.80 s 596AF: 16.80 s 596AH: 16.80

s 597: 15.190, 15.195 s 597(4): 15.185 s 597(5A): 15.185 s 597(5B): 15.170 s 597(7): 15.185 s 597(9): 15.185, 15.430 s 597(12): 15.190, 15.195 s 597(12A): 15.190 s 597(13): 15.195 s 597(14): 15.145, 15.195 s 597(14A): 15.195 s 597(16): 15.185 s 597A: 15.200 s 597B: 15.195 s 597F: 15.185 s 598: 16.60, 18.455 s 598(2): 16.55 s 599: 18.422, 18.423, 18.535, 18.580 s 600A: 19.345 s 600G: 15.45, 19.300 s 600G(1)(a): 19.290 ss 600G(1)(b) to (c): 19.310 s 600H: 13.45, 15.290, 21.160 s 601AA: 17.115 s 601AA(1): 17.115 s 601AA(2): 17.115 s 601AA(2)(f): 17.85 s 601AA(4): 17.115 s 601AA(5): 17.115 s 601AB: 10.120 s 601AB(1A): 17.120 s 601AB(1B): 17.120 s 601AB(2): 17.45 s 601AB(3A): 17.45, 17.120 s 601AB(1): 17.120 s 601AB(2): 17.120 s 601AB(3): 17.45, 17.120 s 601AB(4): 17.45 s 601AB(5): 17.45, 17.120 s 601AB(6): 17.45 s 601AC: 10.120 s 601AC(1)(b): 17.40 s 601AC(1)(c): 17.50 s 601AD: 17.55, 17.110 s 601AD(1): 10.45, 17.55 s 601AD(2): 17.60 s 601AD(3): 17.60 s 601AD(4): 17.60 ss 601AD to 601AF: 17.55 s 601AE: 17.60 s 601AE(1): 17.60 s 601AF: 17.60 s 601AH: 17.70, 17.85, 17.110 s 601AH(1): 17.75, 17.105 s 601AH(2): 17.55, 17.80, 17.100, 17.105 s 601AH(2)(b): 17.90 s 601AH(3): 17.105

xciii

xciv Table of Statutes Corporations Act 2001 — cont s 601AH(3)(b): 17.110 s 601AH(5): 17.105, 17.110 s 601FB: 10.25 s 606: 21.155 s 610AH(3): 17.105 s 611: 21.155 s 674: 21.160 s 674(2A): 21.160 s 708: 21.155 s 708(17): 21.155 s 708(17A): 21.155 s 1041H: 20.165 s 1041I: 13.45 s 1043A: 21.155 s 1274(2)(a)(iv): 18.305 s 1308(2): 16.180 s 1311(5): 16.180 ss 1311 to 1317: 16.190 s 1313: 16.180 s 1313(1)(a): 16.180 s 1313(1)(b): 16.180 s 1313(5)(a): 16.180 s 1313(5)(b): 16.180 s 1313(6): 16.180 s 1314: 16.180 s 1314(3): 16.180 s 1314(5): 16.180 s 1315: 16.175 s 1315(1)(a): 10.120 s 1316: 16.175 s 1317C: 10.190 s 1317E: 16.50, 16.110, 18.285 s 1317G: 3.215, 4.150, 6.465, 16.50, 16.110, 18.285 s 1317G(1): 16.50 s 1317H: 16.50, 16.60, 16.110, 18.285 s 1317J: 16.50 s 1317S: 16.60, 16.105, 21.135 s 1317S(3): 16.60 s 1317S(4): 16.60 s 1318: 15.350, 16.60, 16.155, 18.235, 18.480, 21.135 s 1318(2): 16.60 s 1318(4)(d): 18.480 s 1321: 10.440, 15.300, 18.422 s 1322: 10.20, 11.10, 11.35, 11.130, 15.70, 19.165, 19.305 s 1322(4): 19.42, 19.390 s 1322(4)(a): 10.320 s 1323: 18.130 s 1323(1)(h): 18.05 s 1324(10): 19.190 s 1325: 13.45 s 1330: 10.120 s 1337C: 10.190 s 1337F: 10.190 s 1349: 10.365

s 1349(1): 16.50 s 1364: 10.10 Ch 2D, Pt 2D.1: 20.135 Ch 2K: 14.270 Ch 5: 1.160, 1.195, 10.10, 10.25, 13.60, 18.05, 21.05, 21.15 Ch 5C: 10.25, 21.70 Ch 6: 21.155 Ch III: 15.165 Pt 2F.1A: 19.250 Pt 2F.2: 13.45, 21.155 Pt 2N.4: 17.120 Pt 5.1: 10.50, 12.95, 17.25, 19.375, 20.10, 21.120, 20.125 Pt 5.2: 12.90, 17.125, 18.05, 18.10, 18.20, 18.645 Pt 5.3A: 1.195, 8.15, 10.35, 10.50, 10.100, 11.15, 11.45, 11.260, 11.315, 12.85, 13.100, 15.325, 15.420, 16.140, 17.30, 17.125, 18.20, 18.190, 19.05, 19.10, 19.15, 19.42, 19.45, 19.50, 19.55, 19.65, 19.85, 19.90, 19.95, 19.100, 19.105, 19.110, 19.200, 19.215, 19.225, 19.230, 19.250, 19.255, 19.270, 19.285, 19.300, 19.355, 19.375, 19.380, 19.385, 19.390, 19.395, 19.415, 19.420, 19.425, 19.450, 20.05, 20.10, 20.15, 20.20, 20.25, 20.40, 20.55, 20.105, 20.120, 20.150, 20.165, 20.250, 20.255, 20.260, 20.270, 20.280, 20.305 Pt 5.3A, Div 6: 19.125, 20.10 Pt 5.3A, Div 7: 19.70, 19.125, 19.270 Pt 5.3A, Div 7, subdiv B: 19.125, 19.126, 19.130, 19.280 Pt 5.3A, Div 7, subdiv C: 19.125 Pt 5.3A, Div 10: 20.50 Pt 5.3A, Div 13: 20.05 Pt 5.3A, Div B, subdiv B: 19.270 Pt 5.4: 11.250, 17.45 Pt 5.4, Div 2: 11.75, 11.190 Pt 5.4, Div 3: 11.75, 11.115, 11.190 Pt 5.4A: 10.100 Pt 5.4B: 10.100 Pt 5.4C: 10.30, 10.120, 11.25 Pts 5.4 to 5.6: 10.475 Pt 5.5: 19.390 Pt 5.6: 10.100, 14.20, 15.440, 19.395 Pt 5.6, Div 1A: 10.90, 14.40, 15.10 Pt 5.6, Div 2: 13.45 Pt 5.6, Div 3: 16.190 Pt 5.6, Div 9: 14.239 Pt 5.7: 14.239, 15.425, 15.440 Pt 5.7B: 5.10, 14.155, 14.170 Pt 5.7B, Div 2: 14.35, 14.165, 14.185, 14.237, 14.245, 18.175, 18.315 Pt 5.7B, Div 2A: 14.35 Pt 5.7B, Div 2B: 14.35 Pt 5.7B, Div 5: 16.130 Pt 5.7B, Divs 3 to 7: 16.190

Table of Statutes Corporations Act 2001 — cont Pt 5.7B Div 2A: 14.270 Pt 5.7B Div 2B: 14.270 Pt 5.8: 16.190 Pt 5.8A: 15.40, 16.80 Pt 5B.2, Div 2: 14.239, 15.425 Pt 9.2: 10.475 Pt 9.4, Div: 16.190 Pt 419A: 18.20 Pt X: 2.05, 8.15, 19.135 Pt IX: 19.135 Pt XIV: 16.185 Div 5: 11.205 Sch 2 Insolvency Practice Schedule (Corporations) (IPSC): 10.05, 10.10, 19.05 s 1-1: 10.05, 10.185 s 5-15: 10.05, 18.185, 18.235 s 5-20: 10.05, 12.55, 18.05, 18.185, 20.135 s 5-27: 15.315 s 5-30: 15.65, 19.155, 20.45, 20.145, 20.290 s 9: 10.365 s 10-5: 10.120 s 15-1(2)(f): 10.385 s 15-1(5): 10.385 s 20-10: 10.145 s 20-20: 10.145, 10.170 s 20-20(4): 10.150 s 20-20(4)(d): 19.135 s 20-20(6): 10.150 s 20-25: 10.150 s 20-35: 10.150 s 20-40: 10.150 s 20-65: 10.150 s 20-75: 10.170 s 20-75(2): 10.170 s 25-1: 10.180 s 30-1: 10.160 s 35-1: 10.160, 10.385 s 35-5: 10.160 s 40-5: 10.360 s 40-15: 10.365 s 40-15(1): 10.360 s 40-15(1)(e): 10.360 s 40-20(1)(a): 19.135 s 40-25: 10.165, 10.365 s 40-25(1)(f): 10.390 s 40-30: 10.165, 10.365 s 40-30(1)(f): 10.390 s 40-35: 10.365 s 40-40: 10.370, 10.380, 10.385 s 40-45: 10.370 s 40-55: 10.375 s 40-55(3): 10.375 s 40-70: 10.165 s 40-100: 10.380 s 40-105: 10.380 s 40-111: 10.365, 10.390

xcv

s 45-1: 10.120, 10.360, 10.400, 10.405, 10.415, 10.425, 19.155, 19.175, 20.290 s 45-1(2): 19.155 s 45-1(3): 19.155 s 45-5: 10.405 s 60-5: 10.450, 20.145 s 60-10: 10.450, 10.465, 15.65, 15.70, 20.145 s 60-10(2): 11.15 s 60-10(3): 10.460 s 60-10(4): 10.460 s 60-11: 10.450, 15.65, 20.145 s 60-11(4): 10.450 s 60-12: 10.450, 10.455, 10.460, 10.465, 20.145 s 60-12(l): 10.460 s 60-15: 10.450 s 60-16: 12.55 s 60-16(1): 12.75 s 60-20: 10.240 s 70-5: 10.275, 15.45, 20.60, 20.210 s 70-5(6): 12.70, 15.45 s 70-6: 12.100, 17.40, 17.50, 20.210 s 70-6(5): 12.70 s 70-10: 10.275, 15.65, 15.70 s 70-15: 19.240 s 70-30: 10.280, 10.450, 12.100 s 70-30(3): 10.450 s 70-35: 10.275, 10.450, 17.65 s 70-35(2): 17.65 s 70-35(3): 17.65 s 70-40: 15.35, 15.45, 19.215 s 70-40(1)(c): 15.55 s 70-40(2): 15.45 s 70-45: 15.45, 19.215 s 70-45(1)(c): 15.55 s 70-45(2): 15.45 s 70-55: 6.80 s 75-10: 19.340, 20.215 s 75-15: 12.55, 15.35, 15.65,15.70, 20.215 s 75-15(5)(a): 12.55 s 75-15(5)(b): 19.100 s 75-20: 15.70, 20.215 s 75-20(1): 20.215 s 75-40: 15.70, 19.285, 19.340, 20.215 s 75-40(2): 15.70 s 75-41: 11.35, 19.345, 20.265 s 75-41(4): 19.345 s 75-42: 19.345 s 75-43: 19.345 s 75-115: 15.105 s 80-27: 12.55 s 80-27(5)(b): 19.100 s 80-55: 15.240 s 80-60: 15.240 s 85-5: 10.340, 15.65 s 90-5: 10.400, 10.415, 19.175 s 90-7: 10.442 s 90-10: 10.400, 10.420, 10.435, 15.65, 19.175

xcvi

Table of Statutes

Corporations Act 2001 — cont s 90-10(6): 10.410 s 90-14: 19.400 s 90-15: 2.25, 10.190, 10.210, 10.400, 10.430, 10.435, 10.440, 12.60, 15.40, 15.65, 15.300, 17.30, 17.65, 18.235, 19.155, 19.170, 19.175, 19.380, 19.400, 20.45, 20.160, 20.290 s 90-15(1): 10.345 s 90-15(2): 10.390 s 90-15(3): 10.425, 19.155 s 90-15(3)(a): 10.345, 19.170 s 90-15(4): 10.425, 19.155 s 90-15(4)(e): 10.425 s 90-15(6): 19.155 s 90-20: 10.05, 10.390, 10.400, 10.430, 12.60, 15.65, 19.155, 20.45 s 90-21: 11.290, 19.175 s 90-22: 10.442, 12.55 s 90-23: 12.55 s 90-23(1): 10.442, 19.175 s 90-23(5): 10.442, 19.175 s 90-23(6): 10.190, 10.442, 19.175 s 90-23(7): 10.442, 19.175 s 90-23(8): 10.442, 19.175 s 90-23(9): 10.442, 19.175 s 90-23(10): 10.442, 19.175 s 90-24: 10.442, 15.65 s 90-24(1): 10.442 s 90-24(2): 10.442 s 90-24(4): 10.442 s 90-24(5): 10.442 s 90-24(7): 10.442 s 90-27: 10.442 s 90-28: 10.442 s 90-30: 12.55 s 90-35: 10.55, 10.395, 10.445, 15.35, 15.65, 15.70, 19.100, 19.145, 19.290 s 90-35(6): 15.70 s 90-80: 10.430 s 100-5: 10.190, 16.115, 21.110 s 100-5(2): 16.115 s 100-5(3): 16.115 s 100-5(4): 16.115 s 100-6: 10.125 s 182: 10.240 s 436B: 19.415 s 447A: 20.270 s 447D: 19.170 s 477: 10.205 s 511(1)(b): 17.30 s 556(2): 15.390 s 601AH: 17.70 s 1274: 10.385 s 1349: 16.50 s 1349(3)(la): 10.365 Pt 2: 18.05 Pt 3: 12.55, 15.05, 18.05, 19.05, 20.135

Pt 9.6A: 10.190 Div 40: 10.120, 10.200, 10.360, 10.385, 10.435, 16.50, 18.580, 19.155 Div 45: 10.400, 10.410, 20.290 Div 60: 2.195, 10.55, 10.442, 10.460, 12.55, 15.05, 18.185, 15.380, 18.05, 19.175, 19.230, 19.235, 19.375 Div 70: 19.100, 19.240 Div 75: 10.55, 15.05, 15.70, 19.375, 20.215 Div 80: 10.55, 15.05 Div 85: 15.05 Div 90: 10.205, 10.345, 10.400, 10.410, 10.460, 15.05, 18.05, 19.05, 19.375, 20.290, 21.135 Div 96: 10.365 Div 100: 15.05 Form 8: 10.465 Form 16A: 10.450 Form 509H: 11.85 Sch 3: 15.15, 16.110, 16.185

Insolvency Practice Rules (Corporations) 2016: 15.05, 19.05 s 75-110(10: 15.105 s 5-5: 10.175 s 20-1: 10.150, 18.90 s 20-1(2)(d): 18.90 s 20-1(4): 18.90 s 20-5: 10.150 s 20-5: 10.442 s 50-30: 10.05 ss 70-1 to 70-15: 19.215 s 70-10(2): 15.55 s 70-15: 19.215 s 70-15(2): 15.55 s 70-30: 15.30, 19.215 s 70-35: 15.30 s 70-40: 15.30, 15.45 s 70-45: 15.30 s 70-55: 6.80 s 75-10: 15.65, 15.75, 20.215 s 75-15: 11.15 s 75-20: 20.215 s 75-25: 15.75 s 75-30: 11.20, 11.30, 15.70, 19.300 s 75-35: 11.20, 11.30 s 75-40: 15.75, 19.285 s 75-50: 19.330 s 75-50(1): 19.300 s 75-50(2): 15.85, 19.300 s 75-75: 19.300 s 75-85: 15.65 s 75-85(3): 15.100, 19.360 s 75-85(4): 15.100, 19.365 s 75-86: 15.100 s 75-87: 15.100, 15.305, 19.355 s 75-87(4): 19.355 s 75-90: 15.100 s 75-100: 15.100

Table of Statutes Insolvency Practice Rules (Corporations) 2016 — cont s 75-105: 19.300 s 75-105(1): 15.80 s 75-105(2): 15.80 s 75-105(3): 15.80 s 75-105(4): 15.80, 15.95 s 75-110(1)(B): 19.340 s 75-110(3): 19.370 s 75-115: 10.450, 15.105, 19.340 s 75-115(3): 15.85, 15.105, 19.340, 19.345 s 75-115(5): 19.340 s 75-115(6): 15.105, 19.340 s 75-115(7): 19.340 s 75-130: 15.70, 19.340 s 75-130(4): 15.70, 19.340 s 75-130(6): 15.70, 19.340 s 75-135(3): 15.70, 19.285 s 75-140(1): 15.95 s 75-140(3): 19.335 s 75-140(4): 15.95 s 75-145: 15.90 s 75-150: 15.75 s 75-180: 15.315 s 75-180(3): 15.315 s 75-225: 19.100, 19.315 s 75-225(1): 19.305 s 75-225(3): 19.220 s 75-225(3)(a): 19.215 s 75-225(3)(vii): 19.325 s 75-265: 10.395 s 75-270: 15.70 s 80-5: 15.40 s 80-5(6): 15.40 s 80-10: 15.40 s 80-10(5): 15.40 s 80-15: 15.40 s 80-20: 15.40 s 80-25: 15.40 s 80-30: 15.40 s 90-7: 19.175 s 90-18: 10.442, 19.175 s 90-22: 19.175 s 90-24: 10.442, 19.175 s 90-24(1): 19.175 s 90-24(2): 10.442, 19.175 s 90-24(4): 19.175 s 90-24(5): 19.175 s 90-24(7): 19.175 s 90-27: 19.175 s 90-80: 10.430 s 545: 15.55 s 560: 15.100 s 600AA: 15.30 s 1274: 10.175 s 75100: 19.360 Pt 2: 18.05 Pt 3: 12.55, 18.05

Div Div Div Div Div Div

50: 60: 70: 75: 80: 90:

10.155 19.375 15.05, 19.100 15.70, 19.375, 20.215 15.40 19.375

Corporations Amendment (Insolvency) Act 2007: 15.310, 19.10, 19.15, 20.190 s 444DA: 20.190 Pt 5.6, Div 8: 15.310

Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003: 14.155 s 588FG: 14.155

Corporations (Fees) Act 2001: 10.10 Corporations (Fees) Regulations 2001 Sch 1: 10.125

Corporations Law: 3.215, 11.185, 15.245 s 411: 19.05 s 567(5): 14.145 s 567(6): 14.145 Pt 5.3: 19.05

Corporations Regulations 2001: 1.20, 10.05, 10.10, 10.125, 12.60, 19.05 reg 1.0.03A: 15.210, 21.135 reg 5.1.01: 20.125 reg 5.2.01: 18.645 reg 5.3A.01: 19.160 regs 5.3A.01 to 5.3A.07A: 19.450, 20.305 reg 5.3A.03A: 19.300 reg 5.3A.06: 20.50, 20.150 reg 5.4.01A: 12.105 reg 5.4.01: 11.210 reg 5.4.02: 10.315, 15.65 reg 5.6.01: 10.10 regs 5.6.01 to 5.6.74: 15.440 reg 5.6.10: 10.10 regs 5.6.11 to 5.6.56: 19.450 reg 5.6.12: 10.10 reg 5.6.19: 19.370 reg 5.6.36: 10.10 reg 5.6.41(a): 15.295 reg 5.6.44: 15.255 reg 5.6.49(2): 15.295 reg 5.6.53(1): 15.295 reg 5.6.53(2): 15.295 reg 5.6.54: 15.300 reg 5.6.56: 15.300 reg 5.6.63: 15.335 reg 5.6.65(1): 15.335 reg 5.6.67(2): 15.330 reg 5.6.68: 15.335 reg 5.6.74: 14.239 reg 5.6.75: 11.240

xcvii

xcviii Table of Statutes Corporations Regulations 2001 — cont reg 6.2.02: 2.175 reg 9.12.01: 2.175, 21.155 Pt 5.3A: 20.305 Pts 5.4 to 5.6: 10.475 Pt 5.5: 15.440 Pt 5.7: 14.239 Pt 9.7: 15.335 Sch 2, Form 535: 15.295 Sch 2, Form 536: 15.295 Sch 8A, cl2(zc): 20.150 Sch 8A: 20.50, 20.135, 20.155, 20.180, 20.185, 20.205 Sch 8A, item 6: 20.120 Sch 8A, cl 1: 20.135 Sch 8A, cl 2: 20.135 Sch 8A, cl 5: 20.200 Sch 8A, cl 7: 20.200 Sch 8A, cl 11: 20.205 Sch 8, cl 6: 20.200

Corporations (Review Fees) Act 2003 s 5: 17.120 s 345A: 17.120

Crimes Act 1914: 4.210, 4.240 s s s s s s

4B: 4.240 4G: 4.240 4H: 2.365, 4.240 4AA: 16.180 15B(1): 4.240 80: 4.240

Criminal Code Act 1995 s 70.2: 15.430

Cross-Border Insolvency Act 2008: 2.10, 4.40, 10.10, 10.25, 14.235, 14.237, 15.425, 15.435, 18.05 s 2: 13.110 s 5(1): 2.120 s 10: 2.370, 10.190 s 11: 2.120, 10.200 s 16: 13.60, 13.110 s 17: 5.245, 14.237 s 21: 6.182 s 581(2): 15.430 Sch 1: 13.60, 15.430

Crown Debts (Priority) Act 1980: 15.350 Evidence Act 1995 s 69: 6.215 s 255: 6.215

Fair Entitlements Guarantee Act 2012: 6.95, 6.540, 10.30, 15.270, 15.415, 18.410, 18.555, 19.90 s 5: 19.90 s 10: 19.90

Family Law Act 1975: 2.20, 3.205, 4.95, 4.210, 5.40, 10.190 s 4: 4.135 s 4AA: 4.135 s 5(1): 4.95 s 35: 4.105 s 35A: 4.105 s 59A: 4.135 ss 71 to 90: 8.210 s 75: 4.135 s 75(2)(ha): 4.135 s 79: 4.105, 4.135 ss 79(14) to (15): 8.210 s 79A: 4.105, 5.80 s 90B: 4.155, 5.40 s 90C: 4.155, 5.40, 5.80 s 90D: 4.155, 5.40 s 90K: 5.80 s 90K(1)(aa): 4.135 ss 90AA to 90AK: 8.210 s 90SN: 8.210 s 90SS: 6.530 s 104: 4.165 s 114: 6.530 s 120: 14.135 Pt VIIIAB: 3.192, 7.180 Pt VIII: 4.135, 7.180 Pt VIIIAA: 8.210 Pt V: 4.135

Family Law Rules 2004: 2.20 rr 26.01 to 26.31: 4.210 Ch 25: 10.190 Ch 26: 4.210 Pt 6: 2.20 Pt 26: 2.20

Federal Circuit Court of Australia Act 1999 s 114: 18.05

Federal Circuit Court (Bankruptcy) Rules 2016: 2.20

Federal Circuit Court Rules 2001 r 16.05: 7.165 Div 13.3: 3.430

Federal Court (Bankruptcy) Rules 2016: 2.20 r 2.03: 7.170 r 2.7(1): 11.220 r 2.8: 17.15 r 2.9(2): 11.245 r 2.12: 11.240 r 2.06: 3.355 rr 3.01 to 3.03: 3.430 rr 4.01 to 4.10: 3.430 rr 4.08 to 10: 3.425 r 5.01: 3.100, 3.430 rr 6.01 to 6.18: 6.595

Table of Statutes Federal Court (Bankruptcy) Rules 2016 — cont r 6.13(5): 6.240 rr 6.16 to 6.22: 4.210 r 7.06: 7.75 rr 9.01 to 9.05: 9.165 rr 10.01 to 10.05: 8.330 regs 11.01 to 11.04: 3.470 r 11.01 to 11.04: 6.595 rr 12.01 to 12.02: 6.595 rr 13.01 to 13.05: 3.430, 6.595 Pt 3: 3.250 Pt 6: 6.270 Pt 6, Div 6.2: 3.445 Pt 6.5: 4.210 Pt 9: 9.116 Pt 10: 8.275, 8.330 Pt 11: 3.450 Pt 13: 3.425 Pt 13, Div 13.2: 6.545 Div 6.3: 6.240 Div 6.4: 6.240 Form 5: 3.355 Form 6: 3.340 Form 9: 3.445 Form 11: 7.75 Pt X: 8.05 Sch 1: 7.170

Federal Court (Corporations) Rules 2000: 10.190, 12.60 r 4.1: 18.423, 18.645 r 5.2: 11.120 r 5.4: 11.220 r 5.5: 11.235 r 5.6: 11.240 r 5.10: 11.310 r 5.11: 11.315, 11.320 r 6.1(4): 12.25 rr 6.1 to 6.2: 12.105 r 7.5: 17.40 r 7.6: 17.40 r 7.9(2): 15.440 r 7.11: 10.442 r 9.1: 18.185, 18.240, 18.495, 18.645 r 9.2: 19.450, 20.145, 20.305 r 9.2A: 19.450, 20.145, 20.305 r 9.3: 12.75, 12.105 r 9.4: 10.475 r 9.4A: 10.475 r 11.2: 18.645 r 11.3: 15.180, 18.185 r 11A.01: 10.475 rr 15A.1 to 15A.9: 13.110 Form 8: 10.465 Pt 5.3A: 19.05 Pt 5.7B, Div 2: 11.220 Div 6: 12.30, 12.65 Div 7: 15.440

Div Div Div Div

xcix

10: 15.440 11: 15.440 11A: 15.440 15A: 14.237, 15.435, 15.440

Federal Court Rules 2011 r 7.32: 6.190 r 7.35(5): 4.15 Pt 26: 3.430 Sch 3: 3.425, 6.545 Sch 3, reg 40.41: 15.360 Item 13, Sch 3: 11.315

Federal Court of Australia Act 1976: 2.375 s s s s s

35A: 2.370 37M: 6.75, 10.470, 15.55 37N: 3.133 57: 18.05 57(1): 18.05

Federal Proceedings (Costs) Act 1981: 3.350 Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018: 10.25 Foreign Judgments Act 1991: 4.150, 14.239 Higher Education Support Act 2003: 6.470 Income Tax Assessment Act 1936: 16.150, 16.160, 16.190 s 167: 6.480 s 218: 5.255 s 221P: 20.185 s 222AOB(1): 16.160 s 222AOB(2): 16.160 s 222AOE: 16.165 s 222AOJ(3): 16.165 s 263: 6.210 s 264: 6.215 Pt VI, Div 4B: 6.480

Income Tax Assessment Act 1997 s 106-30: 4.45

Insolvency Law Reform Act 2016: 1.15, 1.25, 1.155, 1.160, 1.185, 1.210, 1.220, 1.225, 2.00, 2.22, 2.230, 7.170, 8.30, 9.10, 10.100, 10.140, 10.150, 10.350, 11.320, 14.40, 15.440, 19.450 Insolvency Law Reform (Transitional Provisions) Regulation 2016: 2.22 Insolvency Tax Priorities (Legislation) Amendment Act 1993: 16.145 Insurance Act 1973: 10.25 Ch 5: 10.25

Judiciary Act 1903

c Table of Statutes Judiciary Act 1903 — cont s 31: 18.05 s 32: 18.05 s 55ZF: 2.375, 10.470 s 79: 4.132

Jurisdiction of Courts (Cross-vesting) Act 1987: 2.370 s 35: 2.370

Laws Amendment (2017 Enterprise Incentives No 2) Act 2017: 18.550 Legal Profession Uniform Law s 188: 10.470

Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 s 60: 10.230 r 11: 10.215

Legal Services Directions 2017: 2.375 Life Insurance Act 1995: 10.25, 17.10, 19.155 Mobile Equipment (Cape Town Convention) Act 2013: 18.550, 19.95 National Disability Insurance Scheme Act 2013: 4.100 s 44: 8.45 s 46A: 3.423

Paid Parental Leave Act 2010: 15.30 Parliamentary Service Act 1999 s 52: 8.45

Payment Systems and Netting Act 1998: 18.550, 19.95

Personal Property Securities Act 2009: 1.165, 1.200, 2.10, 9.60, 13.70, 14.20, 14.270, 15.305, 18.05, 19.30, 19.126, 19.130, 19.170, 19.190, 19.225, 19.270, 20.120, 21.50 s 5: 4.190 s 8: 4.190, 13.70, 18.50, 18.370 s 10: 14.20 s 12: 18.50, 19.105, 19.110 s 12(1): 14.20, 19.100, 19.270 s 12(2): 14.20 s 12(3): 19.100, 19.270 s 13: 19.110, 19.126 s 18(4): 18.335 ss 18 to 21: 19.100 s 19: 14.270, 19.30 s 19(5): 14.20 s 20: 14.270, 19.30 s 31: 14.20, 18.360 s 31(1)(a): 14.20 s 31(1)(b): 14.20

s 31(1)(c): 14.20 ss 31 to 34: 18.335 s 32: 14.20, 18.360 s 33: 14.20 s 51: 20.120 s 51A: 14.270, 18.05, 19.270 s 51B: 14.270 s 51E: 18.05 s 55: 15.305 s 55(3): 18.325 s 57: 18.325 s 61: 15.305 s 62: 14.20, 18.325 s 75: 18.325 s 115: 18.22 s 116(1): 18.22, 18.45, 18.180 s 116(2): 18.22, 18.30 s 140: 18.180, 19.190 s 165: 14.20 s 267: 4.190, 9.60, 13.70, 14.20, 14.270, 15.305, 18.100, 18.325, 18.330, 19.100, 19.110, 19.126, 19.225 s 267(3): 14.270 s 267A: 18.100, 19.225 s 268: 14.270, 19.126 s 269: 14.270, 19.126 s 307: 19.70 s 308: 19.70 s 318: 18.50 s 339: 19.190 s 340: 18.370, 19.190 s 340(2) to (4): 19.190 s 341: 19.190 Ch 4: 18.22, 18.30, 18.45 Pt 2.6: 14.20, 18.50 Pt 5.2: 18.22 Pt 5.7B, Div 2: 14.35 Pt 9.5: 18.50

Personal Property Securities (Corporations and Other Amendments) Act 2010: 19.70 Personal Property Securities (Corporations and Other Amendments) Act 2011: 19.70 Personal Property Securities Regulations 2011 reg 1.4: 18.360

Privacy Act 1988 s 20X: 2.40

Proceeds of Crime Act 2002: 2.10, 2.125 Public Governance, Performance and Accountability Act 2013: 2.110, 2.112, 2.125 s 11(2): 2.110 s 12: 2.110 s 18AA: 2.125

Table of Statutes

Rural Adjustment Act 1992 s 22: 3.423

Social Security Act 1991: 6.350, 9.25 s 139K: 6.350

Superannuation Guarantee (Administration) Act 1992: 6.560, 16.190 s 482: 17.10

Superannuation Industry (Supervision) Act 1993: 4.95 s 17A: 4.15 s 120: 4.15, 4.95

Trade Support Loans Act 2014: 6.470 Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Act 2018: 9.165

Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017: 6.290, 12.40, 19.15, 19.95, 20.70, 21.120 s 198G: 12.45

Venture Capital Act 2002: 3.95

Australian Capital Territory

Tax Laws Amendment (Transfer of Provisions) Act 2010: 16.160 Taxation Administration Act 1953: 6.395, 16.105, 16.145, 16.165, 16.190, 19.40 s 260-5: 14.255 s 533: 16.175 s 588GA: 16.145 s 588FGA: 16.165 s 588FGB: 16.165 Sch 1: 16.160 Sch 1, Div 269: 10.55, 16.165, 16.190 Sch 1, Div 355: 6.480 Sch 1, Div 389: 16.165 Sch 1, 269-20: 16.160 Sch 1, 269-25: 16.160 Sch 1, s 260-5: 5.255, 18.360 Sch 1, s 260-45: 10.270, 15.405 Sch 1, s 260-75: 18.95, 18.290 Sch 1, s 269-1: 16.160 Sch 1, s 269-5: 16.160 Sch 1, s 269-10: 16.160 Sch 1, s 269-15: 16.160, 16.165 Sch 1, s 269-15(2)(a): 16.160 Sch 1, s 269-15(2)(b): 16.160 Sch 1, s 269-15(2)(c): 16.160 Sch 1, s 269-15(3): 16.160 Sch 1, s 269-20: 16.160 Sch 1, s 269-25: 16.160 Sch 1, s 269-25(4): 16.160 Sch 1, s 269-30: 16.160 Sch 1, s 269-35(1): 16.165 Sch 1, s 269-35(2): 16.165 Sch 1, s 269-35(3): 16.165 Sch 1, s 269-35(3A): 16.165 Sch 1, s 269-35(5): 16.60 Sch 1, s 269-45: 16.160 Sch 1, s 269-52: 16.160 Sch 1, Pt 2-5: 6.295 Sch 1, Pt 2.6: 18.360

Trade Practices Act 1974: 17.85, 20.165 Pt IV: 17.85

ci

Civil Law (Property) Act 2006 s 426: 20.125

Supreme Court Act 1933 s 26: 18.05

New South Wales Associations Incorporation Act 2009: 10.25 Co-operatives (Adoption of National Law) Act 2012: 10.25 s 444: 10.25

Companies Act 1961: 17.80 Conveyancing Act 1919: 2.05 s s s s s s s

37A: 4.155, 5.95, 14.142 58(3): 5.95 66G: 4.132 109(1)(c): 18.05 115A: 18.125 121: 5.95 129: 20.125

Industrial Relations Act 1996: 3.320, 20.165 Legal Profession Uniform Law: 10.470 s 170: 10.470 Pt 4.3: 10.470

Occupational Health and Safety Act 1983 s 15(1): 15.235

Partnership Act 1892 s 23: 18.125

Payroll Tax Act 2007 s 99: 10.270

Registered Clubs Act 1976: 19.395 Supreme Court Act 1970

cii

Table of Statutes

Tasmania

Supreme Court Act 1970 — cont s 67: 18.05

Supreme Court Rules 1970 r 55.13(2): 3.133

Trustee and Guardian Act 2009: 3.50

Northern Territory

Bankruptcy Act 1870: 2.05 Conveyancing and Law of Property Act 1884 s 15: 20.125

Supreme Court Civil Procedure Act 1932 s 11(12): 18.05

Law of Property Act 2000

Victoria

s 138: 20.125

Supreme Court Act 1979 s 69: 18.05

Insolvency Act 1915: 2.05 Legal Profession Uniform Law: 10.470

Queensland Cooperatives Act 1997: 10.25 Insolvency Act 1874: 2.05 Property Law Act 1974 s 89(1): 18.125 s 124: 20.125 s 228: 5.95

Queensland Building and Construction Commission Act 1991 Pt 3A: 4.15

Partnership Act 1958 s 27: 18.125 s 37: 4.15 s 38: 8.45 Pt 3: 3.95 Pt 5: 3.95

Payroll Tax Act 2007: 10.270 Property Law Act 1958 s 101(1)(c): 18.05 s 146: 20.125 s 172: 2.05, 4.155, 5.95

Supreme Court Act 1986 s 37: 18.05

Subcontractors’ Charges Act 1974: 19.250

Western Australia

Succession Act 1981 s 57: 3.450

Trusts Act 1973 s 80: 4.15

Bankruptcy Act 1892: 2.05 Guardianship and Administration Act 1990: 3.50

Uniform Civil Procedure Rules 1999 s 274: 18.05

South Australia Administration and Probate Act 1919 s 61: 3.450

Property Law Act 1969 s s s s s

81: 20.125 89: 5.95, 14.142 89(1): 4.155 121: 14.142 444H: 20.130

Supreme Court Act 1935 s 25(9): 18.05

Insolvent Act 1886: 2.05 Landlord and Tenant Act 1936

England and United Kingdom

s 11: 20.125

Law of Property 1936 s 51(1): 18.125

Supreme Court Act 1935 s 29(1): 18.05

Bankruptcy Act 1883: 2.05 Debtors Act 1869: 2.05 Fraudulent Conveyances Act 1571: 2.05 s 37A: 2.05

Table of Statutes

Insolvency Act 1986 Insolvency Act 1986: 19.05 s 123: 1.55 s 214: 16.105 s 244: 14.150 s 279: 7.170 ss 335A to 338: 4.132 s 426: 6.182, 15.430 s 581: 15.430 Pt 1: 20.05

ciii

s 292(4B): 14.120

Insolvency (Cross-border) Act 2006: 5.245 s 8: 15.430 s 597(9): 15.430

United States Bankruptcy Reform Act 1978: 2.05, 19.05

Treaties and Conventions

Statute of Elizabeth: 5.95 s 121: 5.95

Winding Up Act 1844: 10.05

Ireland Bankruptcy (Amendment) Act 2015: 7.170

New Zealand Companies Act 1955 s 311A(7): 14.225

Companies Act 1993

UNCITRAL Model Law on Cross-Border Insolvency (Model Law): 4.35, 10.190, 10.200 Art Art Art Art Art Art Art Art Art Art Art

2: 13.60 2(c): 13.60 2(f): 13.60 4: 10.190 16: 13.60 18: 14.237 20: 13.60 23(1): 5.245, 14.237 23(2): 14.237 25: 14.239 32: 5.245

PartI:Introduction Chapter1:IntroductiontoInsolvency–theLaw,PolicyandCurrentIssues ..

The opening chapter of this book examines the broad concept of insolvency, fundamental as it is to both the personal and corporate spheres of financial distress. Its operation today is examined, followed by a brief history of its development from early times. The meaning of the term “insolvency” is explained by reference to statute and case law and how it is relevant in different contexts. The chapter then offers a discussion of a range of issues about the theory of insolvency compared with the reality of its practice, which aims to provide a reference point for many of the topics covered in the following chapters. Ideas for reform are also offered.

1

Introduction to Insolvency – the Law, Policy and Current Issues [1.05] INTRODUCTION .................................................................................................................... 4 [1.10] INSOLVENCY TODAY ........................................................................................................... 4

[1.15] Terminology ............................................................................................................. 5 [1.20] Overview of the legislative, judicial, regulatory and professional regimes . 6 [1.25] Recent legislative changes ..................................................................................... 7 [1.30] MEANING OF INSOLVENT AND INSOLVENCY ........................................................... 8

[1.35] How is insolvency relevant? ................................................................................. 9 [1.40] Retrospective and current insolvency ................................................................. 9 [1.45] Tests of insolvency ................................................................................................ 11 [1.50] Cash flow ........................................................................................................................... 11 [1.55] Balance sheet ..................................................................................................................... 11 [1.160] Indicators ......................................................................................................................... 25

[1.165] Debts v claims ..................................................................................................... 27 [1.70] Effect of creditor concessions .............................................................................. 14 [1.75] Realisable assets .................................................................................................... 14 [1.80] Relevance of the ability to borrow unsecured ................................................. 15 [1.85] Insolvency as relevant to sequestration or winding up ................................ 16 [1.90] Recalcitrant or unwilling debtors ...................................................................... 16 [1.95] AIMS AND PURPOSES OF INSOLVENCY LAW ........................................................... 17 [1.100] 1. To protect the debtor from the consequences of their insolvency .................... 17 [1.105] 2. To release of the debtor from liabilities ................................................................. 18 [1.110] 3. To support the rule of law ...................................................................................... 18 [1.115] 4. To align with and accommodate existing rights and other areas of law ........ 18 [1.120] 5. To protect those creditors who take security ........................................................ 18 [1.125] 6. To ensure equal sharing between creditors .......................................................... 19 [1.130] 7. To investigate and to provide accountability ....................................................... 19 [1.135] 8. To recycle ..................................................................................................................... 19 [1.140] 9. To assist in the restructuring of an insolvent business ....................................... 20

[1.145] Other attributes ................................................................................................... 20 [1.150] INSOLVENCY – THE THEORY AND THE REALITY ................................................. 21

[1.155] Insolvency Law Reform Act 2016 and following reforms ........................... 23 [1.165] Equal sharing – of no or limited assets .................................................................... 27

4

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.05]

[1.170] Are we expecting too much? ............................................................................ 29 [1.175] The need for the regime .................................................................................... 29 [1.180] AUSTRALIA’S REGIME ..................................................................................................... 30

[1.185] Separate regimes for personal and corporate ................................................ 30 [1.190] Bankruptcy ........................................................................................................... 31 [1.195] Corporate .............................................................................................................. 33 [1.200] THE CONTEXT IN WHICH THE INSOLVENCY REGIME OPERATES ................. 34 [1.205] THE IMPACT OF THE LAW ............................................................................................ 36

[1.210] The costs ............................................................................................................... 36 [1.215] The insolvency practitioner ............................................................................... 38 [1.220] IDEAS AND RECOMMENDATIONS ............................................................................. 39

[1.225] Other aspects of insolvency’s structure .......................................................... 41 [1.230] The need for an inquiry ..................................................................................... 42

INTRODUCTION [1.05] In previous editions of this text, Chapter 1 explained the relevance of insolvency in the modern day, the history of the law, and the concept of insolvency itself. In the last chapter, Chapter 21, we then gave a critique of the regime, from the perspective of the whole text, how it is working and how it might best be reformed. For this tenth edition, we have combined those two chapters and continue to rely upon the issues raised in them, but repeat only aspects here with some further ideas and comments added.

INSOLVENCY TODAY [1.10]

The insolvency of individuals and businesses will occur in any modern economy. It is a sign of healthy competition, entrepreneurial risk taking and the inevitability of human failings or external pressures that operate in any market economy. Insolvency law offers a legal regime for handling the impact of insolvencies, the impact on creditors whose moneys are not repaid, on the debtor or the business and its owners in relation to the consequences of non-payment, and on others – employees, families, shareholders, the government and more. An absence of any insolvency law could mean that creditors pursue their own remedies individually, invariably inefficiently, often with the strongest prevailing over the weaker, and with unlawful conduct involved. The debtor would be subject to harassment and undue pressure; at the same time their own involvement in disposing of assets would go undetected. The reallocation of the business assets to better economic use would be hampered by the potential for their break up or loss of value or utility in the process. It would be messy at best, as it was two thousand years ago when its principles started to develop to address the issues just described. In modern times, in the case of the collapse of complex corporate structures, the unravelling and accounting for what can be substantial losses would be absent, a

[1.15]

1 Introduction to Insolvency – the Law, Policy and Current Issues

5

harmful outcome for public confidence in investment in industry and technology, and in fairness, and in the perception of economic integrity. None of this is to suggest that, while insolvency comes into operation at these times of crisis, it offers a solution and redress or a panacea for all wrongs or misfortunes. This is certainly not the case for all creditor losses, or employees without jobs, or suppliers unpaid, or for the sense of injustice often felt by those harmed that the perpetrators, if any, or beneficiaries of the failure will be pursued and moneys recouped. Insolvency is there to do the best it can, but, in simple terms, money cannot be got from a stone. To suggest otherwise serves only to reinforce what is an on-going community misconception of what the aims and purposes are of the insolvency regime.

Terminology [1.15] It is important at the outset to settle the correct terminology we use in this text, particularly given some changes introduced by the Insolvency Law Reform Act 2016 (Cth) (ILRA). “Insolvency” is a term describing a person’s or company’s inability to pay all their debts as and when they fall due.1 In Australia a person who is insolvent may go into bankruptcy. In contrast, a company which is insolvent may go into liquidation or, as it can also be referred to, winding up. Personal insolvency covers the insolvency of individuals, and corporate insolvency covers companies and other business structures. There purposes and policies are largely common, but there needs to be separation at various stages to acknowledge the differences between an individual person and an inanimate company, both in substance and in the terminology used. In that respect, it is important to accept that the laws relating to each of individuals and companies are essentially insolvency laws, and that the legislative distinction between the two should not unduly separate the reliance and dependence each has on the other. Apart from the many common provisions and terms, much of the law concerning individuals and companies is related and similar, questions of solvency being a prime example. As well, questions of good faith and suspicion of insolvency arise in relation to voidable transaction provisions in both bankruptcy and corporate law, and concepts of disclaimer of property are similar; the duties of liquidators and trustees are generally indistinguishable, all allowing for the essential differences between companies and individuals. For this reason, in this book, there are many cross-references. We suggest that the courts and legal and insolvency practitioners should take a broad view of insolvency law when administering or deciding upon insolvency matters.2 1 Although the Australian Constitution, s 51(xvii), and some legislation, refers to (corporate) insolvency and (personal) bankruptcy. 2 The efficiency need for the harmonisation of personal and corporate insolvency law was raised in the Productivity Commission’s Research Report, Annual Review of Regulatory Burdens on Business: Business and Consumer Services (August 2010), Ch 4, available at http://www.pc.gov.au.

6

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.20]

Overview of the legislative, judicial, regulatory and professional regimes [1.20] The insolvency of individuals is governed by the Bankruptcy Act, including Bankruptcy Schedule 2, and the rules, and the Bankruptcy Regulations 1996 (Cth). This regime is administered and regulated by the Australian Financial Security Authority (AFSA), which houses the government trustee, the Official Trustee in Bankruptcy, the Official Receiver and the Inspector-General in Bankruptcy. The relevant courts are the Federal Court of Australia and the Federal Circuit Court of Australia, with the Family Court of Australia also having some jurisdiction. Corporate insolvency is governed by the Corporations Act, including Corporations Schedule 2, and the rules, and the Corporations Regulations 2001 (Cth), with the regime regulated by the Australian Securities and Investments Commission (ASIC), among its many other responsibilities. Significant corporate insolvency jurisdiction is conferred specifically on the “Courts” set out in s 57AA of the Corporations Act, being the Federal Court of Australia, the Supreme Courts of all the States and Territories and the Family Court of Australia. However, the Corporations Act also gives jurisdiction to “courts” more generally, being any courts, including lower district and county courts. The text refers throughout to the Insolvency Law Reform Act 2016 (Cth) (ILRA) and the substantial changes it has made to insolvency law and practice, including the harmonising of terms and concepts between personal and corporate insolvency. That should engender an increased commonality between corporate and personal insolvency practitioners, and lawyers and judges, who up until now have tended to focus on one or other of the two insolvency regimes. As to the profession, around 210 trustees in bankruptcy, registered and regulated by AFSA, administer personal insolvencies, along with the government Official Trustee in Bankruptcy. Over 600 liquidators, registered and regulated by ASIC, administer all corporate insolvencies; there is no government liquidator. Many bankruptcy trustees are also registered liquidators. ARITA (the Australian Restructuring Insolvency and Turnaround Association, formerly the Insolvency Practitioners Association (IPA)) is the professional body representing the majority of liquidators and trustees, as well as lawyers and other advisers.3 The Association of Independent Insolvency Practitioners (AIIP) is a new group representing the smaller firms of trustees and liquidators. The Personal Insolvency Practitioners Association (PIPA) represents debt agreement administrators. The Turnaround Management Association (TMA) focuses more on corporate pre-insolvency restructuring, workouts and turnarounds for businesses in financial difficulties. The Law Council of Australia, the peak body of lawyers, has an Insolvency and Restructuring Law Committee of senior insolvency lawyers. As

3 See http://www.arita.com.au. See also APES 330 – Insolvency Services, at http://www.apesb.org.au.

[1.25]

1 Introduction to Insolvency – the Law, Policy and Current Issues

7

with any professional body, each organisation seeks to establish and promote high standards of professional conduct through education and guidance to its members. STRUCTURE OF AUSTRALIA’S INSOLVENCY REGIME Personal Corporate Bankruptcy Act 1966 (Cth) Corporations Act 2001 (Cth) Law Courts

High Court, Federal Court, Federal Circuit Court, Family Court

Regulator Professional bodies

AFSA ARITA, AIIP, PIPA

High Court, Federal Court, Supreme Courts, lower State and Territory courts ASIC ARITA, TMA, AIIP

Recent legislative changes [1.25]

In recent years there have been a number of changes to the law as it relates to the insolvency of both individuals and companies. The changes to bankruptcy laws have been more frequent, often in response to a particular issue or court decision, such as the bankruptcy of Alan Bond, or the superannuation decision of the High Court in Cook v Benson [2003] HCA 36; (2003) 214 CLR 370 or in relation to the interaction of bankruptcy with family law. These are set out in the 9th edition of this text and we do not repeat them. Since 2016, in bankruptcy, the obvious recent change has been through the ILRA. Pending reforms, in particular in relation to the one-year period of bankruptcy, and debt agreements, are significant. Corporate insolvency changes over the last 20 years have not been as extensive, following the major changes in 1993 based on the Harmer Report, and again in 2007. Particular legislative change was made in relation to the rights of shareholders, following the High Court’s decision in Sons of Gwalia v Margaretic [2007] HCA 1. The ILRA has had a more significant impact on corporate insolvency than on personal insolvency, largely because the Act introduced into corporate insolvency many of the processes of bankruptcy law – the registration and misconduct processes, voting mechanisms, the replacement of liquidators and more. The safe harbour reform under s 588GA, which commenced in August 2017, is very significant, as is the restriction on ipso facto termination rights, commencing 1 July 2018. Although the over-regulatory focus of the ILRA is to be criticised, one advantage is that it at least provides common terms and provisions between personal and corporate insolvency for committees of inspection, remuneration determinations, powers of the court, directions, and many other common concepts. This should mean that case law on a section in the Corporations Schedule should likewise apply, other things being equal, to the same worded section in the Bankruptcy Schedule. For example, given that the power of the court to give directions is the same in both personal and corporate insolvency, the decision in Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481 that the directions power in IPSC, s 90-15 is wider in scope than that available under the former directions provisions should

8

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.30]

apply generally. Similarly, a common provision that on its face gives a very wide power of the court to make orders “as it thinks fit”, under IPSB, s 90-15(3)(f) has been held to be limited by the availability of a more specific remedy in Div 90: Andersen v Lennon [2017] FCCA 2452. Cross-references between the law of corporate and personal insolvency feature throughout this text.

MEANING OF INSOLVENT AND INSOLVENCY [1.30] We have been discussing these terms and now need to examine their legal meaning. This will be relevant to numerous issues arising later in this book where insolvency is in issue. Again, these have been dealt with in detail in the 9th edition of this book. We present a more concise analysis here. Both the Bankruptcy Act and the Corporations Act define the term “insolvent”. The Corporations Act, s 95A contains a definition of “solvent” and indirectly this provides a test of insolvency. The section states that: (1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they became due and payable. (2) A person who is not solvent is insolvent.

The sections refer to the “inability to pay all the debts”, hence the inability to pay a particular debt when it falls due can show insolvency, although a temporary lack of liquidity needs to be discounted. Nor is insolvency assessed by whether an immediate payment of a debt from current cash resources can be made by the debtor. The classic explanation of this was given by Barwick CJ in Sandell v Porter (1966) 115 CLR 666. These resources: “extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.”

That statement has been accepted as saying that an assessment of insolvency needs to take into account the commercial realities of the debtor’s situation – the resources that are available to the company to meet its liabilities as they fall due, if not by cash, then by way of sale or borrowing upon security, within an acceptable time frame: Southern Cross Interiors Pty Ltd v DCT [2001] NSWSC 621; (2001) 53 NSWLR 213; Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1 at [1090]. That time frame is variable, depending on the debt and the nature of the company, and must be balanced against the fact that the creditor should not be obliged to wait too long for payment of its debt.4 Insolvency is necessarily the state of being insolvent. While this is a simple definition, there can be some complexity in its application to the circumstances of a particular company or individual. 4 Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589 at [75].

[1.40]

1 Introduction to Insolvency – the Law, Policy and Current Issues

9

How is insolvency relevant? [1.35] In a book about insolvency law, it must be said that the insolvency of a debtor is a fundamental issue. While that is so, it is not always that the fact of insolvency will be of particular relevance or that it will require any precise determination of the fact that it exists or determination of when it commenced. That is largely because in any bankruptcy or liquidation, the insolvency of the company or the individual will be apparent and no issue of debate or contest about it will arise. If the debtor is the subject of sequestration or winding up action, under both the Bankruptcy Act and the Corporations Act insolvency need not be formally proved but it can be presumed to exist by virtue of the debtor not having met the requirements of a bankruptcy notice or a winding up demand. Even after bankruptcy and winding up has occurred, throughout the administration of the insolvency, there may be no need to formally prove the fact that this particular debtor is insolvent. Insolvency may only need to be proved if there is a challenge to a prior transaction, which has the fact of insolvency as a necessary element to any challenge. Even then, it can be agreed or presumed to have existed even if other elements of any claim remain in contest. But when the need for formal proof of insolvency does arise, it can be a significant factual and legal issue. While insolvency as such is not a condition to which legal sanctions apply – it is of itself not a criminal or civil offence to be insolvent – if a person or a company is insolvent it may precipitate the initiation of some form of insolvency administration – bankruptcy or liquidation, or serve to impose some liability, for example on the bankrupt or on third parties, to repay moneys, or cause directors to be liable for the company’s debts. As an example, a transaction can be voidable as an undervalued transaction in the period five to two years before bankruptcy, but only if the bankrupt was insolvent at that time. If a company is insolvent and the company continues to incur debts, the directors may be personally liable for those debts.

Retrospective and current insolvency [1.40] When insolvency is an issue the point in time of its assessment generally falls into two categories. In the case of a hearing for a winding up or sequestration order, whether the debtor is or is not currently solvent is of great relevance. But once a person or company goes into insolvency, there can often be a need to prove that the bankrupt or company was also insolvent at some time in the past, for example at a time when some voidable transaction occurred, for example, when a liquidator is seeking to recover an unfair preference or to set aside an insolvent transaction so that the issue is solvency as at a date prior to the winding up. The question of current insolvency may arise prospectively where a company is sought to be wound up in insolvency and the company’s ability to pay its debts must be determined not only by reference to debts payable as at the date of trial but also by reference to its ability to pay debts which will fall for payment sometime in the near future.

10

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.40]

In the case of retrospective insolvency the Court has the benefit of hindsight in determining whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due. This task is often the less difficult. In contrast, prospective insolvency involves the more difficult assessment based on foresight. A Court may be reluctant to make a forward assessment of insolvency because of the uncertainties involved.5 While described as prospective, the test is more precisely whether there is a current ability to pay all debts as and when they become due and payable; the words “as and when they become due” meaning, as far as the debts to be taken into account are concerned, that the courts may also look to see what debts will fall due in the future.6 But, in that instance, the court is not assessing whether the company can meet future liabilities that may arise, or its future trading prospects;7 the court is examining existing liabilities that will fall due in the future. How far a court can look into the future will depend on the debtor and the debtor’s circumstances.8 A longer term view often needs to be taken in particular cases. An insurance company may well be insolvent now because its reserves are not such that they will be adequate for future claims.9 A more common situation for a consumer or a trader is that of a person or a company with a liability that will fall due which the debtor could not have any expectation of paying – insolvency may well be assessed even though the debt is not immediately due, although that assessment may then bring in a need to examine future or expected assets of the company or the individual. The relevance of contingent liabilities arises in relation to long-tail liabilities arising out of medical claims, in particular from exposure to asbestos, where the time period from the exposure to the illness can be years or decades. The unexpected later discovery of a liability, or later quantification of a liability at an unexpected level, may well occur, but at the earlier time it was properly excluded from consideration because it was not reasonably known or was assessed at a lesser amount. Environmental claims raise similar issues. The assessment of insolvency retrospectively can be difficult to make, increasingly so the further back in time the assessment needs to be made. A reconstruction of the company’s financial position is required, often using limited or incomplete or inaccurate records of the insolvent, which is made more difficult the further back in time the assessment is required to go. However, in making a retrospective assessment, the court will have the benefit of hindsight applied to what were at the time future financial uncertainties. The distinction between retrospective and current assessments will be referred to as insolvency arises as an issue in particular parts of this book. 5 Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385. 6 Bank of Australasia v Hall (1907) 4 CLR 1514, 1528. 7 ASIC v Radisson Maine Property Group (Aust) Pty Ltd [2004] NSWSC 949; (2004) 51 ACSR 420, 430. 8 See further, Harris, “The Role of Future Liabilities in Insolvency Law” (2009) 9 INSLB 129. 9 Insurance Commissioner v Associate Dominions Assurance Society Pty Ltd (1953) 89 CLR 78 (an insurer’s lack of capacity to pay claims beyond seven years). See also New Cap Reinsurance Corp Ltd v Grant [2008] NSWSC 1015; (2008) 68 ACSR 176.

[1.55]

1 Introduction to Insolvency – the Law, Policy and Current Issues

11

Tests of insolvency [1.45] With those comments, we now examine the process of assessment of whether a company or individual is insolvent. There are two primary tests that are generally used to determine whether any person or company is solvent: they are the “cash flow” or “commercial” insolvency test on the one hand; and the “balance sheet” or “absolute” insolvency test on the other. Cash flow

[1.50] Under the cash flow test a person (or company) is generally regarded as insolvent when there exists an inability to pay all the person’s or company’s debts as and when they become due and payable. This means that there is insufficient cash or other realisable resources available to pay all creditors at the various times they can demand payment. As we have explained, it is the test defined in s 95A of the Corporations Act and s 5(2) – (3) of the Bankruptcy Act. Balance sheet

[1.55] Under the balance sheet test, a person or company is insolvent if the total liabilities outweigh the value of the assets and therefore there are insufficient assets to discharge the liabilities. A business might be commercially insolvent and fail the cash flow test but be asset sufficient and therefore able to satisfy the balance sheet test; its creditors may, however, wait some time for payment. From the perspective of the cash flow test, that is not good enough. “… it is useless to say that if [a company’s] assets are realized there will be ample to pay 20 shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realisable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent …”10

Similarly, a business may be solvent from a cash flow point of view even though its liabilities are greater than its assets. That may not be a problem if, for example, the business generates significant cash flow from sales or services provided; or, as the High Court explained in Sandell v Porter (1966) 115 CLR 666, other resources are available to be promptly realised in order to make the due payment. The cash flow test can be more imprecise in its application, necessarily because the focus is on the more indeterminate cash flow or access to cash, or readily saleable assets and its capacity at any one time to meet liabilities requiring payment, rather than on assets and liabilities. Hence the decision about whether a company on a particular day was insolvent is often a difficult and imprecise one. With the balance sheet test the problem lies with what can be imprecision in relation to the valuation of assets, and how they are treated in accounting terms. As well, it can be difficult to estimate the value of some liabilities, in particular unquantified existing liabilities and contingent and future liabilities.11 10 From Re Tweed Garages Ltd [1962] Ch 406, 410, quoting from Buckley on the Companies Acts. 11 See further, Margret, “Insolvency and Tests of Insolvency: An Analysis of the ’Balance Sheet’ and ’Cash Flow’ Tests” (2002) 12 Australian Accounting Review 59.

12

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.160]

Overall, it has been suggested that an assessment of insolvency on either test should generally give the same answer.12 Both tests have been used in the law in Australia and other common law countries, including England, New Zealand and the United States of America.13 However, despite this, cash flow test insolvency is the form of insolvency that must be applied under the legislation: Crema Pty Ltd v Land Mark Property Developments Pty Ltd [2006] VSC 338; (2006) 58 ACSR 631. A further issue is that there needs to be some continuing inability to pay. It is going too far to say that insolvency exists if there is, at a particular point in time, a cash shortfall. This may be indicative of insolvency but it is also consistent with the possibility of a temporary lack of liquidity. Insolvency exists beyond that when there is an “endemic shortage of working capital”, a term originating in the 1977 decision of Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321; (1977) 2 ACLR 559 and used throughout the subsequent case law.14 While there is much case law analysis, based on particular cases, the central legal issue under s 95A is clear enough without too much further explanation. The “ultimate issue is a question of fact” which question “cannot readily be constrained by the enunciation of legal criteria”.15 Indicators

[1.160] Acknowledged indicators of insolvency have usefully been incorporated into ASIC’s Information Sheet 42, “Insolvency: a guide for directors”. These indicators include: • • • • • •

continuing losses; liquidity ratios below 1;16 overdue taxes; inability to borrow further funds or to raise further capital; bank requests to reduce overdraft; suppliers changing supply terms to cash on delivery (COD), or otherwise demanding special payments before resuming supply;

12 Dr D Tabak, “Should Solvency Tests Give the Same Answer?” (NERA Economic Consulting, 28 July 2015). That paper refers to a third test, “capital adequacy”, referring to JB Heaton, “Solvency Tests”, The Business Lawyer (May 2007), pp 983-1006. 13 In England, s 123 of the Insolvency Act 1986 (UK) variously describes when a company will be deemed “unable to pay its debts”, including the Australian cash flow test, and a balance sheet test if “the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”. See BNY Corporate Trustee Services v Eurostar-UK [2013] UKSC 28. 14 See, for example, Clifton v Kerry J Investment Pty Ltd trading as Clenergy [2017] FCA 1379. 15 Iso Lilodw’ Aliphumeleli Pty Ltd v Commissioner of Taxation [2002] NSWSC 644; (2002) 42 ACSR 561. 16 A current assets/current liabilities ratio measures the ability of a business to pay its debts as they fall due. “Current” usually is defined as within one year. The ratio depends on the type of business, but generally it should be at least 2:1. A lower current ratio can indicate cash flow insolvency, and while a higher ratio supports the company’s solvency, it may also mean, from a business perspective, that its cash and safe investments could be put to better use in the business.

[1.165]

1 Introduction to Insolvency – the Law, Policy and Current Issues

13

• failure to pay within trading terms; • dishonoured, post-dated or rounded sum cheques; • special arrangements with selected creditors; • enforcement action taken by creditors; • inability to produce timely and accurate financial information. These indicators have been applied in various cases.17 They are, however, mere indicators of insolvency and do not operate as a list of issues that needs to be established in order to prove insolvency. Insolvent companies may illustrate one or more of these indicators at any one time. Some of the factors can also be irrelevant, such as enforcement action taken by creditors where, for example, the underlying debt is disputed by the debtor. Persistent late-payment of debts may infer insolvency but that may be rebutted by evidence showing a reason, other than incapacity to pay, for the late payment: Hussain v CSR Building Products Ltd [2016] FCA 392; Treloar Constructions Pty Limited v McMillan [2017] NSWCA 72. Ultimately, the determination of insolvency is “usually conclusionary in nature” but it is “rarely a matter of straightforward proof”. There needs to be an examination of the financial condition of the company over a period of time, the identification of the typical symptoms of insolvency; and then the determination of the fact of insolvency.18

Debts v claims [1.165]

Section 95A of the Corporations Act uses the term “debts” rather than “claims”, in contrast to other provisions in the Acts which generally include both debts and claims (such as s 553).19 A debt may be defined as liquidated sum in money which is due from the debtor to the creditor.20 The term “liquidated sum” refers to a debt of a precise amount. This may be contrasted with an unliquidated claim which requires the court to determine the amount of the debt payable. The typical example of an unliquidated claim is a claim for damages for breach of contract. The point of this analysis is that s 95A is said to be concerned only with debts and not with unliquidated claims made upon the debtor for payment.21 But it will depend on the particular business. In the context of an insurer, its future liabilities to its policy holders are neither debts nor claims. In New Cap Reinsurance Corporation Ltd (in liq) v A E Grant [2008] NSWSC 1015; (2008) 221 FLR 164, the 17 See Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175; ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126; Trinick as Liquidator of Forgione Family Group Pty Ltd (in liq) v Forgione [2015] FCA 642. 18 Jetaway Logistics Pty Ltd v DCT [2009] VSCA 319; (2009) 26 VR 657 at [14]. 19 Section 5(2) of the Bankruptcy Act also refers to “debts” although s 82 refers not to claims, but to “liabilities”. 20 Rothwells Ltd v Nommack (No 100) Pty Ltd [1990] 2 Qd R 85, 86. A debt claimed under a statutory demand under s 459G of the Corporations Act is discussed in Meales Concrete Pumping Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2015] VSC 594. 21 Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471. See also Powers, “The Impact of Unliquidated Claims when Assessing Solvency: A Director’s Dilemma” (2017) 32 AJCL 368.

14

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.70]

court noted the “absurdity” of assessing an insurer’s solvency without reference to those liabilities to pay what were strictly unliquidated damages, and not debts. A debt can exist as a contingent liability and is incurred when the debtor acts in such a way as to give rise to a legal obligation to pay a sum of money in the future, that is contingent on one or more events occurring, such as a guarantee given by person A that B will pay the debt to C. A then owes a contingent debt to C: Hawkins v Bank of China (1992) 26 NSWLR 562. A claim for payment under a quantum meruit22 is a debt for the purposes of s 95A: ASIC v Edwards [2009] NSWCA 424; (2009) 76 ACSR 369.

Effect of creditor concessions [1.70] Insolvency does not arise if debts are not in fact payable because creditors have granted the debtor extended terms of repayment.23 But unless there is that concession, the failure by a creditor to formally demand payment does not prevent a debt from being due and payable: Southern Cross Interiors Pty Ltd v DCT [2001] NSWSC 621; (2001) 53 NSWLR 213.24 An assessment of insolvency can take into account any extra time allowed to the debtor, and the parties’ usual business practice, where, for example, in an industry which is experiencing recession, “even though they would prefer people to stick to their 30 day terms it is better to have recalcitrant debtors than sell no product at all”: Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330; (2002) 20 ACLC 1304, 1310. However, there must generally be a firm arrangement with each creditor for an extension of terms of trade: Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589 and the onus is on the debtor to show this: Southern Cross Interiors Pty Ltd v DCT [2001] NSWSC 621; (2001) 53 NSWLR 213.

Realisable assets [1.75] As we discussed in explaining Sandell v Porter, a debtor is not limited to its cash resources; the law allows a debtor to demonstrate their solvency by being able to realise assets within a relatively short time. A debtor who can fairly promptly sell assets or borrow money on the strength of their assets is solvent.25 What is regarded as “a short time” will depend on the nature and amount of the debts and the circumstances of the debtor’s business. In Hall v Poolman [2007] NSWSC 1330, Palmer J indicated that in some cases the ability to realise assets within 90 days may be sufficient to include the assets within the solvency assessment. In the 22 What the job done is worth. That case involved amounts owed by a person to a builder for work undertaken pursuant to an invalid building contract; the application of the quantum meruit principle allowed the builder to claim payment nevertheless. 23 The cases accept that no distinction is to be drawn between the words “due” and “payable” – see Marshall, “Is ’Due and Payable’ a Magic Phrase?” (2007) 15 Insolv LJ 115. 24 See however, Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279, where the commercial reality of the situation demonstrated that a loan payable on demand to the sole shareholder and director of the company was not due and payable as the director had no intention of demanding payment in the near future. 25 Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410.

[1.80]

1 Introduction to Insolvency – the Law, Policy and Current Issues

15

restructuring of the large and complex Bell Group, Owen J considered that a solvency assessment could allow 12 months to demonstrate solvency: The Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1 at [1129].26 The facts and circumstances of each person or company therefore have to be considered separately before one can say insolvency has occurred. This involves considering the nature of the debtor’s business, the manner or method of payment of debts, the manner of obtaining credit and the nature of the assets of the debtor. In other words, the whole of the debtor’s financial position has to be considered. There is also a difference between a company’s temporary illiquidity (lack of cash) and the “endemic shortage of working capital” cited earlier, “whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed”.27 As Palmer J said in another case, “[t]he first is an embarrassment, the second is a disaster”.28 Illiquidity is not conclusive of insolvency nor is availability of assets conclusive of solvency.29 But if the debtor can only pay the debt by way of selling off or breaking up its business, this would constitute a terminal lack of liquidity: Re Timbatec Pty Ltd (1974) 24 FLR 30, 37.

Relevance of the ability to borrow unsecured [1.80] A debtor is solvent if it can borrow money to pay its debts, certainly by way of giving security, thereby changing the form of its real property into cash. But even an unsecured load, which simply replaces one debt with another, allows solvency.30 The former definition of “insolvency” included the words that the debt must be able to be paid “from the debtor’s own moneys”. Those words were omitted when s 95A of the Corporations Act was enacted. In a review of the law, and largely as a consequence of that change, the fact that the company can borrow money in order to pay its debts will be enough for its solvency to be maintained: Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385, 410.31 The commercial reality of being able to pay remains the prime focus. A mere short term load or one payable on demand “does not enhance solvency: it merely substitutes one form of immediate (or near immediate) obligation for another”: ASIC v Edwards [2005] NSWSC 831 at [99].32 In other words, you cannot necessarily rob Peter to pay Paul. 26 This point was not challenged on appeal: Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 44 WAR 1. 27 Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559, 566. 28 Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123. 29 Expo International Pty Ltd v Chant [1979] 2 NSWLR 820, 837. 30 Re Trojan; Ex parte Corporation of the Town of Hindmarsh [1986] FCA 372, upheld on appeal Trojan v Corporation of the Town of Hindmarsh (1987) 16 FCR 37; Taylor v ANZ Banking Corporation Ltd (1988) 13 ACLR 780. 31 Williams v Scholz [2008] QCA 94; Scott v Duncan [2007] FCAFC 30. 32 See also Treloar Constructions Pty Limited v McMillan [2017] NSWCA 72.

16

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.85]

Insolvency as relevant to sequestration or winding up [1.85] As discussed earlier, it is only when a person or company is insolvent that formal bankruptcy or liquidation can occur. To establish the insolvency of an individual, a creditor who wishes to bankrupt the debtor will prove an act of bankruptcy on the part of the debtor within the six months preceding the presentation to the court of a creditor’s petition: Bankruptcy Act, ss 43(1)(a), 44(1)(c). There are numerous acts of bankruptcy which can be relied upon (see s 40(1)) but the one used in most cases is the failure of a debtor to comply with a bankruptcy notice: s 40(1)(g). The commission of an act of bankruptcy by a debtor is tantamount to an admission of insolvency for the purposes of the Bankruptcy Act and is the essential foundation upon which a creditor can petition the court for that debtor to be made bankrupt. To establish the insolvency of a company, a creditor (or other person who is permitted to seek the liquidation of a company) will usually seek to rely on the Corporations Act, s 459C(2). This section allows a party seeking liquidation to rely on a statutory presumption of insolvency. Thus a company is deemed to be insolvent if, during or after the three months ending on the day when an application for winding up was made, it fails to comply with the terms of a winding up demand issued under s 459E, or the execution process issued against the company on a judgment is returned wholly or partially unsatisfied, or a receiver is appointed or security interests are enforced. In both cases, the debtor may challenge the presumptions, thereby bringing into consideration prospective insolvency. The presumption of insolvency available to a creditor on a winding up or a bankruptcy hearing is also available in some instances to a liquidator or a trustee. That is, rather than being required to formally prove insolvency, in order to pursue recovery proceedings, insolvency will be presumed. Such presumptions are available in corporate insolvency under the Corporations Act, s 588E in relation to defined “recovery proceedings” brought by a liquidator, including insolvent trading, uncommercial transactions and preference recoveries. The presumption can arise, for example, if the company has failed to keep proper financial records under its obligations to do so under the Act. A similar presumption applies in bankruptcy, in relation to proceedings concerning undervalued transactions or transactions to defeat creditors.33

Recalcitrant or unwilling debtors [1.90] Finally, whether one is concerned with the affairs of a person or a company, the actual inability to pay debts must be distinguished from other reasons why debts have not been paid. The alleged debtor may refuse to pay, even though able to do so, because a bona fide dispute exists about whether there is a debt in fact owing, or as to the quantum of the debt. The debtor may have failed to 33 Generally, there is a rebuttable presumption of insolvency if the former bankrupt had not kept or preserved such books and records as are usual and proper in relation to their business that were sufficient to disclose their business transactions and financial position: Bankruptcy Act, ss 120(3A) and 121(4A).

[1.100]

1 Introduction to Insolvency – the Law, Policy and Current Issues

17

pay through inadvertence or because they simply do not want to pay.34 This can often occur in the case of an individual who, through some animosity, simply refuses to pay the creditor, often “as a matter of principle”, even though that individual is solvent and quite capable of paying. In these situations a creditor must rely on the general processes of the law in order to recover its debt. The insolvency courts have emphasised that they do not exist to assist creditors collect debts, although in practice the insolvency processes are often used for this purpose.35 As former Justice Michael Kirby observed, “the realities of this world are [that insolvency] is often the first port of call”.36 It can also be added in this context that impecuniosity is no defence to a bankruptcy or winding up process, in both personal and corporate insolvency, as being an argument based upon futility. Corporations Act, s 467(2) specifically states this, and, as well see in bankruptcy, such a defence is invariably refused.

AIMS AND PURPOSES OF INSOLVENCY LAW [1.95] At this early point in the text, we consider it useful to examine the aims and purposes of insolvency law, which we state in concise terms. These may be referred back to when any assessment is to be made of the detailed law as explained in the following chapters. In stating these aims and purposes, we have regard to the two major reports, the Cork Report in the United Kingdom and the Harmer Report in Australia, and to other international statements which have attempted to encapsulate what insolvency law seeks to achieve.37 The aims and purposes of insolvency law which we explain are generally sound and long-standing, although they are not static. The change of bankruptcy law from one of punishment to one of protection of the debtor is an example. Similarly, corporate insolvency has assumed a more rehabilitative focus, recognising the need and ability to preserve value and to promote enterprise. Economic aspects of insolvency have also developed. The rights of creditors have received more emphasis, while at the same time the protection of security continues to be maintained. How and whether these aims and purposes are achieved is an issue we examine later in this chapter. 1. To protect the debtor from the consequences of their insolvency

[1.100] An aim of insolvency is to protect the debtor and its assets – whether an individual or a company – from undue claims by its creditors. This operates well; 34 In Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528, the director’s claim that a debt was not paid despite the capacity to do so was rejected by the court because of the director’s evidence that he did not deliberately avoid paying debts. 35 Mann v Goldstein [1968] 1 WLR 1091; [1968] 2 All ER 769; Re Lympne Investments Pty Ltd [1972] 2 All ER 387; CVC Investments Pty Ltd v PT Aviation (1989) 7 ACLC 1218, 1221; Re Bond Corporation Holdings Ltd [1990] 1 WAR 465. 36 DCT v Broadbeach Properties Pty Ltd [2008] HCATrans 244. 37 See, for example, the UNCITRAL Legislative Guide on Insolvency Law which “provides a comprehensive statement of the key objectives and principles that should be reflected in a State’s insolvency laws”: http://www.uncitral.org.

18

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.105]

perhaps because it is one of the more straightforward and more readily enforced aspect of its operations. The individual debtor is protected from creditor contact and demand, their assets come under the control and authority of the trustee, their personal assets have particular protection, and they no longer have the psychological and financial pressure of trying to resolve their difficulties alone. In corporate insolvency, the protection is given to the company and its assets; the protection for the directors is their limited liability, in the typical corporate structure, subject to personal guarantees, tax liabilities and other such potential dangers. 2. To release of the debtor from liabilities

[1.105] The insolvency process has an important aim of releasing the debtor from all or most liabilities, allowing the personal debtor a fresh start, free of debt. That is also the case with a company that goes through a deed of company arrangement, or a director whose company is liquidated, and who, as an individual, is able to start again with another company. While that release is not absolute, with the fact of having been through insolvency often remaining as an on-going impediment and stigma for the debtor. 3. To support the rule of law

[1.110] Both the first two purposes contribute to a higher purpose, to support the maintenance of the rule of law in providing an equal, fair and orderly procedure in handling the affairs of insolvent debtors in circumstances where there otherwise might be disorder, unfair retrieval of funds or assets and unlawful and criminal conduct. The law of insolvency serves as a process of ordered and predictable control according to settled rules under the control of a person given legal authority. 4. To align with and accommodate existing rights and other areas of law

[1.115] The legal impact of insolvency is severe, in particular, on unsecured creditors and their rights to pursue their debts. These rights are substituted with a mere right to share in the remaining assets of the debtor, if any in fact remain. Insolvency law prevails over many rights existing under law. At the same time, it acknowledges pre-existing rights in relation to property, contract, equity and more. The question that comes under scrutiny in any insolvency is how and when those rights arose; in other words, even though they might otherwise be valid, whether they are susceptible to later challenge by insolvency law as being, for example, pre-emptive of the insolvency and inconsistent with the pari passu principle of fairness. 5. To protect those creditors who take security

[1.120]

Importantly, insolvency acknowledges the rights of those creditors who take valid security over the debtor’s assets. The purpose of taking security is essentially to protect against the event of the debtor’s inability to repay, together with a facilitation of the process of recovery. In the larger scheme, this supports the lending of moneys, and the rates and terms of lending. Again, that is not an

[1.135]

1 Introduction to Insolvency – the Law, Policy and Current Issues

19

absolute right in the context of insolvency, with employees taking priority in certain cases, and with the validity of the security and its timing itself being subject to challenge. 6. To ensure equal sharing between creditors

[1.125] That fundamental pari passu rule requires all creditors to be treated equally within their respective classes of secured, priority and unsecured claims.38 The status of a secured creditor is not generally under question, but the equality of treatment of unsecured creditors is under constant pressure from outside policies that seek to recognise or elevate particular types of claims. Two areas of pressure on the pari passu rule come from those more powerful creditors who can elevate their claims by way of taking security for moneys advanced, and from those groups who seek and often succeed in having their claims elevated above unsecured creditors as a matter of law; employees are a legitimate and obvious example. We discuss this in more detail later in this chapter. 7. To investigate and to provide accountability

[1.130] Insolvency law also aims to find out and explain why and how a company or individual became insolvent and whether any unlawfulness was involved. The investigation of an insolvency, inherently seen as one requiring explanation, is an important aim of insolvency law. The collected information gained from corporate collapses feeds into the regulation of business and principles of good governance. One simple example is the need for accurate and current accounts that allow any decline in the health of a business to be forestalled and treated. The reasons for personal insolvency, and those using it, are also the subject of close analysis. While there should not be any assumption of unlawfulness connected with an insolvency, the law does require some investigation be pursued and for a report to be made on any offences that have been committed. Experience tells us that this is a necessary exercise. This goes to support the maintenance of the integrity of and support for the insolvency process and of general commercial morality. It gives some answer or explanation to creditors about their loss where otherwise there would be speculation, perhaps unfairly so. 8. To recycle

[1.135] Insolvency promotes the more efficient use of productive assets that, in the hands of the insolvent entity, are invariably being used less than to full effectiveness. Society should seek to promote the most efficient and effective use of available resources in a sound economic environment. An insolvent entity is, per se, using its assets unproductively for whatever reason. There is an economic need to have those assets better used – whether it be plant and machinery, a retail store, or 38 Although not necessarily equally in terms of each creditor’s need for the return of their funds.

20

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.140]

intellectual property. Insolvency serves a purpose of putting an end to this misuse of capital. It also tries to forestall any diminution or loss of value. All this is so in theory, but the reality is difficult to assess, at least in terms of what should be insolvency’s maximum efficiency and effectiveness. Better statistics and data in insolvency might allow this economic purpose of insolvency to be properly assessed. 9. To assist in the restructuring of an insolvent business

[1.140] It is perhaps odd to say that the insolvency regime, which this book explains, should be best avoided by a failing business. But that is only to say that the desirable outcome of such a business is to have its financial difficulties attended to earlier, rather than later. Insolvency law should be reserved for those inevitable cases where the legal attributes of the regime, in particular its protection from claims and rebalancing of rights, is needed. Insolvency law can be used to implement a restructuring, but its detailed and restrictive processes can be an impediment. These issues are best explained throughout the following commentary and in Chapter 21. Other attributes [1.145]

We add these general attributes of insolvency.

Insolvency law attends to the necessary task of informing creditors of the fact of the insolvency so as to protect them from further dealings with the debtor, and to allow them to factor in their potential losses. That then allows creditors to be given an assurance of their equal treatment and the equitable distribution of the debtor’s assets, if any are available; with the law and its regulation giving a further assurance that the administration will be conducted in an independent and competent manner. It provides access for the creditors to be involved, in the selection of the administrator, in assessing and advising on the conduct of the investigations, in particular if any particular creditors can assist the administrator in locating or securing assets. The debtor itself can offer on-going assistance, although not to the extent that it may remain in possession and control of the process, as in many other jurisdictions. There are some particular purposes of personal insolvency we discuss in Chapter 2, in particular, those necessarily relating to the bankrupt as an individual.39 The way these and other aims are met will be explained as we discuss the individual forms of insolvency administration. At this point however, some important and fundamental features of insolvency law are emphasised, by which these aims are pursued. These are the collective, compulsory and equalising processes of insolvency law in both dealing with the insolvents and with creditors’ claims. 39 Allsop J, “Values in Public Law (FCA)” [2015] FedJSchol 17.

[1.150]

1 Introduction to Insolvency – the Law, Policy and Current Issues

21

INSOLVENCY – THE THEORY AND THE REALITY [1.150] The following opening explanations of common issues confronted in insolvency allow us to explain how insolvency law operates in practice, as compared with how it is said to operate in theory. While the aims and purposes of insolvency law are sound, as we have explained them, they must inevitably be examined and assessed in the overall context of how the law, business and society operate. These thoughts may provide some ongoing insights in reading the following chapters – explaining how insolvency works in practice, and putting the law and practice into perspective. It should be obvious, but it is worth stating, that insolvency as a legal regime is not imposed automatically by the law. It must be invoked by either a creditor, or the debtor; or in some limited cases in corporate insolvency, by a regulator or other government agency. That is, there is no separate activating trigger that initiates formal insolvency when a person or entity cannot pay their debts; there is no “grim reaper”. Many individuals and companies that may well be insolvent in legal and financial terms continue to trade and to consume, with the potential to do financial harm to those who extend them credit or trust in their continued operation. In some cases, they may be able to trade out of or recover from their insolvent state. That may be through some luck or change in market conditions, or through efforts of the company to restructure its operations, often with outside advice. Others may be in a fragile “zombie” state, where insolvency is potentially imminent if certain volatile factors change – higher interest rates, new competition or reduced consumer demand. If formal insolvency under the law is activated, while it purports to offer accountability to the community and recourse for creditors, the reality will usually be that these attributes will not be realised, at least in terms that many creditors unrealistically expect. For one thing, there may not be sufficient funds available for the necessary recovery and investigation work to be done. Even if it is done, evidence to substantiate recovery of moneys may not be available. Even if proceedings are taken, the proposed respondent may not be worth suing. And, overall, there are many other inevitable limitations in seeking to recover assets, to unwind transactions, all often pursued by a trustee or liquidator in distant retrospect. To a similar extent, any private individual wronged by another faces the same realities: they need to spend money to try to recover their loss, they may lack documentary or other evidence; and time and the complexity of pursuing their quarry may be against them. Yet there exists what we see as an unrealistic expectation gap in insolvency in what the creditors,40 the public and politicians want insolvency to achieve or think that it can achieve. Somehow either experience in the realities of commercial loss is 40 See further, C Anderson and C Brown, “Mind the Insolvency Gap: Lessons to be Learned from Audit Expectations Gap Theory” (2014) 22 Insolv LJ 178.

22

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.150]

lacking, or the elements of insolvency – the ability of the debtor to be protected and walk away from the loss – aggravates the wider population. As we stated in the 9th edition, neither insolvency law nor its practitioners are the panacea for all the harmful outcomes that can occur when a formal insolvency is invoked. This is despite the fact that an insolvency practitioner is given perhaps the strongest powers of any comparable position under our law – to claw back assets, to publicly examine, to demand documents and information. In the same way, a similar gap exists in how the regulators – ASIC, APRA and the ATO – are subjected to criticism that, in spite of the extensive powers granted to them, they don’t prevent or resolve failed investment schemes, misleading prospectuses, restrictive insurance terms, tax evasion and fraud. The gap is the more evident in insolvency in that it is largely the private profession to which the conduct of insolvency and the achievement of its outcomes is delegated. The insolvency profession must operate as a commercial business, where public interest considerations are financially unproductive and costly to pursue. The only source of funds usually available include the assets or moneys remaining in the insolvent entity, or funds from creditors or from private sources. Yet, at times, a liquidator will be asked to recover money or conduct investigations with their own funds, albeit with some prospect of recovery from assets later recovered. That is not realistic but it is a common misconceived expectation. Professionalism extends only so far, and in any event, is generally a matter of commercial choice by the provider. At the same time, the insolvency profession suffers from a negative perception, for a range of reasons. Insolvency itself is an unfortunate outcome for all concerned. What joy there is, is limited, if that be receiving 5c in the dollar for an unpaid debt; or being satisfied that those responsible were held properly accountable. That is compounded by the fact that the process of recovery of money or assets involves the practitioner spending money that would otherwise be available for creditors. That is a reality of the cost of justice, not only in insolvency.41 This brings an additional focus – on the costs of the regime, comprising largely the remuneration of the practitioner, which are a multifaceted issue that generates much debate. The work done in administering an insolvency can be significant – if company records have not been maintained, personnel are uncooperative and bases for legal recovery are complex. Even at a minimum level, establishing the full extent of creditors and the assets can involve much professional work, particularly given the increased tasks imposed under recent changes to the law. Practitioners also have high demands placed upon them of maintaining their independence, even though there are inherent perceptions of a lack of independence by virtue of many of the insolvency processes, the selection of the administrator or liquidator in voluntary arrangements is a prime example. Operating in a competitive professional environment is another source of tension, where work 41 See Kirby, “Bankruptcy and Insolvency” (2010) 22 A Insol J 4, 14

[1.155]

1 Introduction to Insolvency – the Law, Policy and Current Issues

23

referrals from sources are common, as in many trades or professions, but which can themselves create a situation of apparent conflict. The courts do generally accept those realities, but the issue remains as one of undefinable degree. An understanding of the work needed can be difficult to convey to creditors and the community. At the same time, much is left to the integrity of the professionals in the way they conduct the administration, and the way they charge their fees. In an environment where those fees are often not recoverable, it must be acknowledged that there is a behavioural incentive for practitioners to maximise their fees where possible, to the extent of unfairness or more in an individual estate. Creditors should themselves monitor the costs, as they no doubt do with their own service providers; but their inevitable indifference and unwillingness to spend more time or money, and their claimed ignorance of the process does mean that oversight is reduced. The inevitable asymmetry of power at meetings of creditors is also a reality.42 A further issue, rather unique to insolvency, is that practitioners often assume personal liability for debts incurred in the course of administering the winding up or bankruptcy. That is an underlying and fundamental feature of the voluntary administration regime, which, while supported by a right of claim over the company’s assets, nevertheless involves personal risk. Bankruptcy trustees assume a liability at general law. There are inevitable and acceptable costs associated with the practitioner seeking to protect themselves in the conduct of an administration. Despite these features of the regime, support at a political and regulator level is limited, for political reasons and reasons of the complexity of the issues. Criticism of insolvency practitioners may well be valid, as in any profession or trade or service industry, but the criticism in insolvency is often ill-directed, based on unrealistic expectations. It may often more properly be directed at the regime itself. We state that the unsatisfactory law reform approach taken by the ILRA is a political consequence of a combination of these perceptions, and realities, of our insovency regime.

Insolvency Law Reform Act 2016 and following reforms [1.155] The ILRA made significant changes to insolvency practice under both the Bankruptcy Act and the Corporations Act. These new provisions replace or modify a large number of existing provisions in both Acts, particularly with respect to practitioner registration and supervision, creditor meetings, reporting requirements, remuneration approval and review and court powers. The overall focus is one of regulation and prescription, to some extent inherently in conflict with what the insolvency regime requires. The changes commenced in two stages, on 1 March and on 1 September 2017. Delays in the drafting of the rules and regulations and consequential amendments were given as the reason. Transitional provisions mean that that former provisions 42 See generally, V Finch & D Milman, Corporate Insolvency Law: Perspectives and Principles (3rd ed, Cambridge University Press, 2017).

24

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.155]

continue to apply to many existing insolvency administrations. For those matters, readers are referred to the 9th edition of this book. Apart from this Act, there has been the significant introduction of a safe harbour defence to insolvent trading for directors – s 588GA – and a limitation on the exercise of ipso facto termination rights, both passed into law after many years of debate. These were both discussed in the last and earlier editions of this book. Some more reforms are now being enacted, after many years of inquiries and recommendations with little legislative attention. These include a one-year period of bankruptcy, a collective investment vehicle regime to replace managed investment schemes, additional “crisis management” powers of APRA, reforms to address phoenix company misconduct, including, possibly, a government liquidator. The role of banks is under scrutiny and apart from what may be major structural reforms to the banking system, this may impact the role of their appointed receivers. Insolvency is now, in 2018, being examined in the government’s focus on the promotion of entrepreneurial business conduct, and research and development, with business “risk” a necessary and accepted element for advancement of ideas. In the event that the business idea is not successful or fails, Australia’s perhaps severe cultural view of business failure and unpaid debt and our regime’s strict insolvency focus are seen as inhibitions on entrepreneurialism; Australia’s international status in business innovation is in fact perceived as low. A more sympathetic insolvency regime is needed to better preserve the business idea and encourage further initiatives. This approach is consistent with reforms overseas, particularly in England and the European Union. The Productivity Commission’s report Business Set-up, Transfer and Closure of December 2015 explained this view as being the appropriate objective of an insolvency regime, that it:43 “should be to provide a genuine opportunity for restructure for economically viable companies, without providing incentive for strategic behaviour by debtors and creditors. If restructure is not possible, the insolvency system should aim to provide an efficient (expedient and inexpensive), effective and orderly process for winding up the company. This process should involve consideration of creditors, as well as other stakeholders, and provide certainty regarding future developments. The regime should foster a coordinated approach to recovery of a company, or its assets.”

While that is useful, it does not address the wider economic, legal and social benefits of an insolvency regime. It did at least support the Commission’s particular recommendations. But while we now have the safe harbour protection under s s 588GA, the reality is that s 588G liability remains. Australia continues to be a long way off the “restructuring first” mentality of countries such as the United States with its Chapter 11 procedure, and more recently the United Kingdom and the European Union. It remains to be seen whether the various measures adopted in Australia will not only bring about a change in the legal and practice approach to distressed 43 Business Set-up, Transfer and Closure (2015), p 353.

[1.160]

1 Introduction to Insolvency – the Law, Policy and Current Issues

25

businesses, but a more constructive cultural change to corporate failure. At the same time, Australia has relatively high standards of business conduct. Any deterioration of those through too lax a view of business compliance can have a wider detrimental impact. It is of benefit that our insolvency regime has been subject to a more economic focus, assessing its ability to promptly deal with what would otherwise be ill-used or lost resources and capital, and examining legal or other impediments, or other incentives, to ensure this. The law’s ability to influence good financial conduct is limited, however much the regime seeks to regulate director conduct, for example, by way of requiring proper accounting and monitoring of the company’s financial position. Despite the warnings of the dangers of insolvent trading, both from the courts and from the regulators, a reality is that in most cases directors try to address their companies’ pending failure far too late, with limited outcomes for creditors being the result. It cannot realistically be expected that the enactment of s 588GA will change that, without more, and at least in the short term.

[1.160] In that respect, there is only limited focus in insolvency research and literature on measures beyond the law, such as the behavioural approaches now being used effectively with taxpayers, which might readily be applied to directors or debtors. Only now is some attention being given to proactive or pre-emptive measures, such as greater transparency through director identification and openness of corporate ownership. It is not expected however that Australia will provide free public access to the ASIC database, as is the case in the United Kingdom, a major initiative that would, in our view, assist the administration of the insolvency regime, and much more beyond. Nor is the use of technology in insolvency administration and regulation much in focus, necessary in particular because of its greater efficiency and lower cost, and its ability to offer greater information to creditors and regulators. The ILRA has introduced some reforms, but very limited in terms of what is possible.44 We also mention that social and professional media are having some impact on business reform, perhaps more so than the professions and academia. This is evident in tax reform, the rights of workers in franchises and in consumer protection and in banking. There was an initial political and media impetus to the ILRA, going back to 2007, even though it provoked more populist and reactive responses. Media influence on law reform can be both good and bad. This lack of government attention to insolvency reform may in fact have some benefit, with the profession taking on more “informal” restructuring of distressed businesses, unrestricted by the regulatory requirements of Ch 5 of the Corporations Act, but nevertheless within the limits of the availability of finance and management options, and other applicable laws. Indeed, the rather dramatic fall in the number of formal insolvencies – both corporate and personal – may represent a move towards a more flexible culture and approach to financial distress, even if the low numbers are mainly the result of the low interest rates and a flat economy, here 44 As to what is possible, see Chun and Steele, “How Technologies and Innovation Are Driving Chinese Insolvency Law Developments: New Supreme People’s Court Bankruptcy Information Platform” (2018) 15 International Corporate Rescue 33.

26

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.160]

and in comparable jurisdictions. The safe harbour reforms appear to encourage this and even to discourage entry into formal arrangements. We discuss these alternative approaches in detail in Chapter 21. What is then needed is a better promotion of legitimate service providers, acknowledging also that illegitimate advice will also be offered. The insolvency industry itself suffers from the perception and reality that its members are mainly focused on acting under formal legal appointments, under the Corporations Act and the Bankruptcy Act, even if these may then allow some restructuring of the insolvent to be pursued. Their profile as a restructuring profession to some extent conflicts with their formal insolvency role, although the maturing of that side of the profession may take some time. Business advisers, in the wide sense that terms entails, are more readily seen as a first port of call for a distressed business, in particular, in the smaller SME sector. There is also an increasing influence of international and cross-border matters in Australia, with the beneficial result of allowing us to know and observe comparative regimes. Australia is gaining a better perspective on our own regime through our high level of involvement in INSOL International and through professional, if not government, involvement in the insolvency and security groups of UNCITRAL.45 It should not be forgotten that while personal liability and financial responsibility remain in focus, much of insolvency law is also directed at the resolution of issues where the insolvency has occurred through no-one’s real “fault”, or deception or fraud, even if management of the insolvent business might have been better. There are also those businesses that fail through unanticipated change in market conditions or simply from greater competition. In these cases, no one is held responsible or liable and nor should they be. Business failure is an aspect of a market economy. Earlier attention to the problems might in many cases have preserved the business or those parts of it with value, and directors and debtors might be criticised, and found liable, for not acting earlier. But if a business is to fail, in many cases because it is just not viable, the focus is then on adjusting the rights of the various creditors between themselves to enable them to share in whatever assets are available. Insolvency law then serves both a substantive and administrative role in dealing with those insolvent individuals and companies. Contrasting the law in action with the theoretical framework underpinning insolvency law brings into consideration the basic reality of insolvency – which is a fundamental lack of funds to satisfy all claims in full. This gives rise to an inevitable tension in relation to decisions that need to be made about the use of the limited funds available. Creditors feel a (justifiable) sense of entitlement to funds remaining in the insolvent estate, but the very task of administering that estate requires expenditure of those funds, not only to preserve, and where possible increase, the pool of funds available for distribution to creditors, but also to investigate and report on the circumstances of the insolvency. 45 See the activities of the UNCITRAL Co-ordinating Committee Australia (UNCCA) at http:// www.uncca.org.au.

[1.165]

1 Introduction to Insolvency – the Law, Policy and Current Issues

27

The need to increase the funds available by way of recovery of transferred assets and challenging voidable transactions will often arise because of the limited legal or other proscriptions on debtors dealing with their assets in advance of a pending insolvency, or on debtors protecting their assets in complex structures. Assuming funds in the depleted insolvent company remain, insolvency does provide effective recovery mechanisms. But insolvency inherently operates in retrospect, after the assets have been unfairly dealt with, and not in the real time when such conduct occurs. The need for real time focus applies more so in the case of a failing company when greater opportunity to assist in its problems exists. The laws do little to encourage this in reality, despite the theory, and insolvency more often is struggling to assist a business well past the time when it might have been fully revitalised. Equal sharing – of no or limited assets

[1.165]

The pari passu principle comes under constant pressure in insolvency policy. Firstly, the law necessarily allows pre-existing contractual and proprietary rights that exist outside insolvency law to be recognised, whereby sophisticated and stronger creditors (such as banks and financiers) protect their position by taking security over the debtor’s assets in the event of insolvency. In recent times the PPSA has recognised broader categories of secured credit arrangements, which may be shifting the power dynamic in insolvencies. For example, the operation of the PPSA vesting rules may mean that the pool of assets available for unsecured creditors can be increased where the secured creditor fails to perfect their interest prior to external administration and thereby loses their secured status. One dramatic example of that arose from the legal outcome in the Forge Group administration.46 The operation of the vesting rules has generated most of the litigious disputes, and hence case law, on the PPSA since its introduction in 2012. That may be diminishing in 2018 as familiarity with the law increases. While PPSA and other secured protections disturb the fundamentals of pari passu, the recognition of secured rights and proprietary claims helps to minimise credit risk and thereby the cost of capital for all borrowers. And in so far as insolvency does not usually provide creditors with any significant returns on their unsecured losses, the PPSA might better be seen as a means whereby creditors can more effectively secure their position in the face of a potentially insolvent customer. Even apart from that, the law might also provide incentives, or reverse disincentives, for unsecured trade creditors to adopt pre-emptive credit policies that either reduce the risk of debtor default, or include that risk in what may be their more entrepreneurial business model. An unrealistic expectation of the outcomes of insolvency, in redressing wrongs to creditors, creates a moral hazard that has perhaps only served over time to entrench creditors’ inattention to good credit management and business practice. 46 See Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (rec and mgrs appt’d) [2017] NSWCA 8.

28

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.165]

A second pressure category on pari passu is the creation of statutory exceptions to it. Employees are the main example, but there are others as listed in s 556 of the Corporations Act and s 109 of the Bankruptcy Act. That elevation comes only at the expense of the unprotected unsecured creditors. Whatever rearrangements of priorities are made, limited or no funds for any type of creditor are often a reality. And even if funds are available, insolvency law can only assist to a limited extent – full restitution is rarely, if ever, possible. To repeat a message earlier stated, insolvency law is not the panacea for society’s financial ills and it must be seen as part of the network of legal regimes such as those dealing with tax, superannuation, social security, labour law, workplace safety, tort and environmental law in which it takes its place and which themselves have their own protections for their respective constituents. The priorities that these areas seek to impose as additional claims are not for the insolvency regime to decide, save that the pari passu rule exists for good reason and exceptions should be well justified. If those regimes seek to themselves provide their creditors with priority protection – as the law does to some extent for employees, or indeed to protect their debtors as superannuation law does in bankruptcy – that is for those other regimes to decide as a matter of policy. The inevitable reality is that total security for all is unachievable, and is contradictory of an entrepreneurial and productive business culture. Another disconnect with reality is that an insolvency practitioner is expected and required to investigate and explain, often using scarce funds to do so. Aspects of this were discussed at [1.160]. This public purpose underpinning insolvent administration stands in contrast to the goal and task of an administrator of maximising and distributing available funds to creditors. Indeed, although these two goals may assist each other, they often do not. While regulators retain the responsibility for enforcing the law, insolvency practitioners are at the coal face and bear the burden of public expectation to fully investigate and enforce the law through court action. Both the public and regulators look to insolvency practitioners to explain creditors’ losses. Very often the directors themselves are unable to explain this, at least realistically, indicative perhaps of the reason for their failure. Incomplete (or no) proper records are a further explanation, and a further reason why the practitioner’s task is difficult. The expectation of a full investigation is misplaced as insolvency practitioners are not equipped with the resources and funds to do so. It is inevitably expensive and time consuming, and this cost and time is imposed on the creditors who must take lower or even nil returns as the price for some attempt at the public accountability of insolvent individuals and companies. Other disconnects between theory and reality exist; that is, at least in so far as we can determine the extent of that disconnect. The poor state of information that would allow us to better ascertain how much the reality aligns with the theory limits any real assessment. As one example, we know that of over $330 million brought in by registered bankruptcy trustees in 2016-2017, only $57 million reached unsecured creditors, with trustee remuneration, costs and other payments

[1.175]

1 Introduction to Insolvency – the Law, Policy and Current Issues

29

exceeding $150 million.47 While income contributions brought in around $38 million, challenges to voidable transactions produced only $12.5 million, and probably accounted for much of the costs incurred by trustees. Chapter 5 of this book, on recovery of assets by trustees, might be read in a different view in light of that knowledge, and refinements and changes made by bankrupts accordingly. That secured creditors were paid over $93m indicates the worth of secured protection. This lack of information more clearly shows the realities of insolvency, as opposed to the expectations that society has of what appears to be, in theory, a legally effective regime.

Are we expecting too much? [1.170] The extent of these aims causes us to ask whether we are expecting too much of insolvency law and practice, certainly in terms of the constraints imposed by the reality in which insolvency operates, primarily the need to balance its costs against its returns. We expect the insolvency practitioner, in applying the regime, to act as a protector of the insolvent company or individual, as an asset recovery agent and asset protector, a commercial investigator and problem solver, a public inquisitor, and then, as needed, a distribution agent. These tasks involve the practitioner acting in the inherently competing interests of the insolvent, the creditors and the community. And most significantly, the practitioner is expected to do this with limited or, in some cases, no funds, or where funds are available, in the knowledge that these expenses compete with funds which the creditors might see, unrealistically, as theirs. The ongoing debate concerning remuneration levels in the profession, and their proportionality to the financial outcomes, might properly be viewed with these considerations in mind. Our answer to the question is qualified in saying that, as the regime is presently constructed, we do expect too much. There are many inherent contradictions and inconsistencies in the way the regime operates which, in part, lead to these unmet expectations.48

The need for the regime [1.175] None of these internal tensions within the insolvency regime raises any question about the fundamental need for the regime itself. Without insolvency laws it can reasonably be anticipated that a debtor would be subject to constant attempts at recovery, with some of the persistent or stronger creditors succeeding, and other creditors being left with nothing. The extent of the debtor’s claimed lack of assets could not be authoritatively confirmed, with the result that creditors may still persist, to no avail. Among creditors, there may be tensions and desperate (perhaps 47 AFSA administration statistics 2016-2017. 48 See “What do we expect of insolvency and of insolvency practitioners?”, Harris and Murray, paper presented at the INSOL Academics’ Colloquium, The Hague 18-19 May 2013.

30

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.180]

even unlawful) attempts to take back what they can, an inherently unfair and socially disruptive activity in such circumstances. In the case of a devious debtor, the whole scenario may have been planned, with assets disposed of, unable to be retrieved, and indeed hidden by the debtor or their associates for another day. Commercial activity would be debased by elements that would see insolvent trading as the norm, phoenix resurrections as a common device for dealing with unwanted debt obligations, and commercial responsibilities as being dispensable. This scenario may be tempered by the inherent tendency of our society to fair dealings. But it is difficult to be pure when financial difficulties are pressing. As we later explain however, to some extent this description has some real semblance to the present reality of the commercial world: see [1.200].

AUSTRALIA’S REGIME [1.180] Accepting that an insolvency regime is necessary, we then look to see what laws and rules apply to implement it. As a preliminary comment, if one were to devise an insolvency regime afresh, it would be quite different from the set of laws which we have today. Australia’s insolvency laws have evolved over time in an often piecemeal way to meet the needs and (perceived) exigencies of commercial and consumer developments. Each new scandal ushers in urgent reforms to fight the then current war. Separate regimes for personal and corporate [1.185] We have said enough about the difficulties of Australia’s divided system of insolvency regulation. The law itself is divided between corporate and personal insolvency, a necessary division for the issues in which there are relevant differences, but unnecessarily different otherwise. While the ILRA is to be criticised in many respects, it has made some effort at harmonising the two regimes. The continued lack of cohesion between the two arises principally from the different approaches of the two regulators and their respective government departments, between the Attorney-General’s Department and Treasury. In our view, the AGD, with its focus on national security, money laundering and criminal law, is an unfortunate location for bankruptcy policy, in particular given the government’s attempts to ameliorate the stigma of bankruptcy, and of insolvency generally. Treasury, the home of economic and tax policy, is the more appropriate location for both personal and corporate insolvency. The complex structure of the ILRA which attempts to harmonise many aspects of corporate and personal insolvency regulation and practice, reinforces how little the two regimes have operated harmoniously over the years. Indeed, it is telling that the new law requires the two regulators – AFSA and ASIC – to “work cooperatively with” each other.49 The average creditor must be confused. If its insolvent debtor is a company, it must deal with a liquidator under the Corporations Act, and litigate in the Federal Court 49 Section 10-5 in each of the IPSB and the IPSC.

[1.190]

1 Introduction to Insolvency – the Law, Policy and Current Issues

31

and Supreme Court, with some assistance, recourse and regulation given by ASIC. But if it is also a creditor of an individual debtor, it must deal with a trustee under the Bankruptcy Act, and litigate in the Federal Court and Federal Circuit Court, with regulatory oversight by AFSA. The rather complex hierarchy of court decisions is also an issue. While that is clear enough in personal insolvency, with Federal Court decisions binding upon the Federal Circuit Court, the parity of decisions between each of the State and Territory Supreme Courts and between them and the Federal Court, can be unclear. The recent decisions of State and Federal appeal courts in Amerind and Killarnee, respectively, are examples.50 We can ask whether the complexity of this system matters in practical terms. The answer may be that the regime exists and works reasonably well in spite of this structure but in a developed nation, where issues of impediments to productivity and undue and inconsistent regulation can be quantified and dealt with, it should matter, particularly in relation to insolvency where issues of costs and efficiency are heightened. As Justice Farrell said in relation to the priority issue in Killarnee: “(s)ome of the economic justifications for establishing unambiguous regimes for priorities in insolvent administrations are so that assets may be efficiently deployed in the economy (rather than locked up during protracted insolvent administrations) and so that returns to creditors, investors and beneficiaries are maximised rather than monies being expended on applications to the courts for directions in order to provide certainty and protect the position of liquidators”.51

The efficiency of the insolvency system, and the degree of creditor protection that system provides, have a significant influence on the cost of doing business in Australia and the competitiveness of our capital and product markets. Nevertheless, the structural impediments can be ameliorated if personal and corporate insolvency laws exist that are of sufficient quality. That in itself is open to question, although the conclusion here is that “they are good in parts”.

Bankruptcy [1.190] The bankruptcy laws have operated under the present Bankruptcy Act since 1968. Since then, the Act has been significantly amended numerous times, with increased activity in more recent years, into 2010. But while the Act has received much legislative attention and introduced some major improvements that deal with issues of currency – for example, superannuation, family law and bankruptcy administration – much of the old law and concepts have been left untouched. But for all that, the Bankruptcy Act operates well enough, in particular with its foresight in introducing debt agreements in 1996 which now offer a significant alternate course to bankruptcy. Personal insolvencies are in fact decreasing but whether this represents a permanent shift or one based only on the unusual 50 Commonwealth v Byrnes [2018] VSCA 41 (Amerind); Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40. See Chapter 15. 51 Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 at [207].

32

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.190]

economic conditions will be awaited. Most bankruptcies continue to be those of consumers and these raise few issues. There are no assets to pay creditors, let alone the trustee, and little likelihood of any prior transactions or other such issues to pursue. In that respect, personal insolvency law operates mostly as a protective mechanism, and very few of the sections of the Act are called upon by the trustee. Where there are issues to pursue, either in the debtor’s defence of compulsory proceedings or during the bankruptcy itself, the law works well enough. Bankruptcies with assets appear to be more complex than in the past, perhaps reflecting an increasing sophistication in how domestic finances are now arranged – with self-managed superannuation, investment properties and family trusts. The bankruptcy with an unencumbered significant asset are more the exception, not because of some attempt at asset protection, but because homes, for example, are often secured or leveraged for further moneys to be spent on domestic living. The extent to which the assumptions in the present Act can address issues of the 21st century – crypto currencies, ready access to overseas protections, and online transfers of funds, internet trading and complex domestic and corporate structures – is increasingly under question, even if only in the minority of bankruptcies. A key performance indicator in bankruptcy is the existence of reliable and up-to-date information and statistics that, whatever the criticisms of the regime, show that assets are realised, trustees’ work is done and remunerated, and dividends are paid to creditors. The overall costs of the regime are monitored.52 There is data on the amount of creditor claims in bankruptcies, the value of assets available or recovered, the costs of administering those bankruptcies and the final dividends paid to creditors. AFSA’s focus on gathering data and publishing statistics is a valuable contribution to the ongoing integrity of the regime. Likewise, the simplicity of the funding of the regime by way of a percentage on the realisation of assets compares well with the byzantine “industry funding model” process introduced in corporate insolvency.53 That these figures produce outcomes that may disturb the assumed outcomes and the theory should be highlighted, not to diminish the need for the regime, but to redirect and enhance its effectiveness and efficiency. That income contributions produce so much and unwinding voidable transactions produce so little, is one stark example. It raises a concern for some over the proposed one-year period of bankruptcy. But where dividend returns are, on average, so derisory, an impact one way or another will not make much difference to creditors. Given the place of bankruptcy as being more relevant in the protection of the debtor and the release of debt, rather than the recovery of funds or assets, bankruptcy may properly be reimagined as a part of consumer law, with the charged term “bankruptcy” replaced by the more neutral personal insolvency In any event, the Bankruptcy Act does represent mostly a significant and comprehensive body of law to deal with what society, through parliament, accepts 52 See generally, AFSA’s Annual Report and its Administration statistics, 2014-2015. 53 See ASIC Supervisory Cost Recovery Levy Act 2017 (Cth).

[1.195]

1 Introduction to Insolvency – the Law, Policy and Current Issues

33

and it should apply to balance the rights of creditors and debtors in an area overlaid with issues of morality, fairness, finality and the concept of a clean slate, no matter the amount of debt involved.

Corporate [1.195] A similar assessment of the Corporations Act raises parallels with bankruptcy law. Ch 5 of the Act – External Administration – is a product of its history, with concepts and terms going back to the origins of company law in the 19th century. For example, the court as a matter of law conducts a compulsory liquidation through its appointed officer, the official liquidator; a voluntary liquidation is merely controlled by the creditors, under a registered liquidator. These outmoded concepts lead to separate administration and recovery provisions for voluntary and compulsory liquidations in the law itself which retain no practical significance or importance.54 But, like the Bankruptcy Act, Ch 5 of the Corporations Act has some more modern provisions, for example in relation to voidable transactions and Pt 5.3A voluntary administrations. The Pt 5.3A regime has been continually reviewed and by and large is said to work well,55 in terms of the rather limited aims for its introduction, although support for it cannot be substantiated by clear financial outcomes because of the fundamental lack of statistical data. Existing statistics tell us how many companies enter formal insolvency each year but shed little light on what happens thereafter. It is an underlying uncertainty in any assessment of the corporate insolvency regime and compares unfavourably with personal insolvency. What data and research has been produced, as in bankruptcy, reveals outcomes that are not always consistent with theory or assumptions, or not close enough to say that what is being achieved is adequate. Corporate insolvency is the largest component of insolvency practice, both in terms of raw numbers, and of value of assets and liabilities. Bankruptcy law is largely focused on consumer debtors; corporate insolvency is more focused on small to medium traders, across industries, with general commercial, tax and property issues to be resolved. While the complications in bankruptcy arise through family law, superannuation, domestic dealings and the fact that an individual’s rights have to be managed, complications in corporate insolvency arise more in the size and nature of the corporate structure. Large corporate collapses are exceedingly complex and perhaps increasingly so, in particular in the mining, industrial and financial sectors. The law exists to deal with their insolvency but is strained in coping with managed investment schemes, corporate groups, the existence of the use of trusts in business operations, and complex financial arrangements. Cross-border disputes involving multinational enterprises add a further layer of complexity. The area of potential change in corporate insolvency is, in effect, to have companies try to avoid the formal regime itself, by way of taking pre-emptive and earlier action to address their financial difficulties. That has long been a prime and 54 Generally explained in Chapter 10. 55 See Chapter 19.

34

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.200]

legitimate aim of insolvency, to be there for the inevitable cases, but to also be an area to be used on as a last resort. That is the context in which safe harbour operates, and which the restructuring focus in Chapter 21 seeks to explain. There are dangers if the pre-emptive processes become debased, and they require support from the law, which does exist to regulate directors’ breaches of their duties, misrepresentations and other uncommercial conduct, and it requires support from the professionals, whose expertise and ethics should be promoted and, if appropriate acknowledged. The Turnaround Management Association (TMA), for example, does offer a Code of Conduct which states worthy principles by which its members are bound. There are parallels with the call for lawyers, supported by the courts, to attempt out of court mediation and settlements before embarking upon what can be an expensive and time-consuming alternative. Again, the principles of lawyers are meant to offer a check on undue injustice in the process. These issues are discussed further in Chapter 21.

THE CONTEXT IN WHICH THE INSOLVENCY REGIME OPERATES [1.200] Under all this of course comes the day-to-day practical application of the insolvency laws, where the law may or may not be observed, by debtors and creditors, and may not be fully applied or enforced by regulators and others. In the commercial world, there is an expectation that creditors and debtors operate fairly, meaning here that people will be paid for their services provided or goods delivered, absent issues of dispute about quality or price. Nevertheless, the commercial world also operates in an environment where debtors delay payments to their creditors beyond agreed terms, knowing that the creditor often needs their business enough not to protest. Courts dealing with insolvency matters recognise that a suspicion of insolvency does not necessarily exist because the creditor has had to resort to letters of demand, hard bargaining and other such measures. It is all part of the context in which insolvency law operates and in which its issues must be decided. The effectiveness of insolvency law in meeting its aims is limited but its necessarily retrospective operation, not at the time that the assets are being transferred or insolvent trading is occurring. And deterrence from the insolvency regime is again necessarily limited. While this is said to represent a balance between the need for economic freedom to encourage entrepreneurial conduct, and the need for commercial propriety, standards of the latter are a matter of choice for many, with the risk of private action limited by the costs of doing so, and with regulatory action even more distant a threat. At the same time, many seek to abide by good commercial standards, though these can be fragile in the face of unfair competition from others. A fall in standards of commercial propriety that can lie behind an insolvency are not necessarily lowered by design, more often by default. To become a director requires no real business expertise or knowledge. Directors will often allow or not realise that there has been a drift in and out of insolvency by their company unless there is the impetus given by a creditor applying for a formal winding up order. In the event that a winding up order is made, there is a possibility that liability may be imposed on the directors, but this is a relatively rare occurrence in most

[1.200]

1 Introduction to Insolvency – the Law, Policy and Current Issues

35

corporate insolvencies; commercial realities of the costs and time involved usually prevail. The law and the regulators necessarily have some impact on director conduct but in the face of the reality of financial difficulties and commercial dealings the law may only inadvertently be considered. Likewise, the threat of future court action will seem distant in the turbulence of financially distressed or unfocused directors.56 The basic human desire to “not fail” combined with an optimistic perception through “rose-coloured” glasses that things will get better (“if we can just keep the doors open till Christmas we will survive”) means that many businesses (both personal and corporate) continue trading well beyond the point at which an economically rational individual would close them down. The pervasive use of personal guarantees over business loans by banks further encourages business people to continue trading rather than face financial ruin by closing down. The lack of any protection for the family home in a bankruptcy plays heavily on the mind of the trader in financial distress.57 Nevertheless, even in that scenario what will intrude upon the mind of a director is real time action taken at that time – a judgment obtained by a creditor with enforcement following swiftly by way of the sheriff attending to seize company assets. That in itself is somewhat fanciful both because of the cost and time of the creditor in taking such action, and the uncertainty of recovery, and the fact that, like a liquidator, the creditor is acting in retrospect, rather than acting in real time by way of taking security or demanding strict payment terms. One creditor that has that front-end right of recovery is the ATO, with its ready ability to impose potential personal liability on the director for the company’s taxes, or use its garnishee powers. However much the threat or likelihood of personal liability exists, action by the Tax Commissioner is more immediate and requires prompt action. The Commissioner’s ability to influence, or not influence, insolvent companies is underrated, and goes beyond the impact of action by the insolvency regulators and other creditors. Changes to the tax laws in 2012 have only served to enhance that authority although the PPSA regime has also enhanced other creditors’ rights, if they choose to use it. On the other hand, ASIC has a more limited approach to what might be termed pre-insolvency commercial conduct, constrained by a lack of a pre-insolvency regulatory regime, and preoccupied as it is by its other large range of responsibilities. The role of the Department of Employment is increasingly significant, with its financial focus being on recoupment of the moneys paid by the government under the Fair Entitlements Guarantee. While it has no priority of itself, it assumes priority rights of employees, and the Department’s on-going audit of compliance with those priorities, particularly under s 433 of the Corporations Act where valuable rigour is imposed onto the administration of many insolvencies.

56 Murray, “The Empty Threat of Insolvent Trading” (2009) 9 INSLB 126. 57 See [4.30] for the effect of bankruptcy on the debtor’s home.

36

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.205]

THE IMPACT OF THE LAW [1.205] This book is then primarily concerned with the legal circumstance when insolvency intervenes in the commercial or consumer landscape. The existence of the legal regime, and the possibility, or perhaps likelihood, of a formal insolvency being imposed, with its strictures and inquiries, are meant to influence commercial and consumer life at this pre-formal insolvency stage. ASIC has or should have a significant role here. But ASIC’s efforts are focused, not on deterring or addressing insolvency misconduct in the corporate world, but on the conduct of liquidators who look after the 0.04% of companies that end up in insolvency. It is those liquidators who are confronted by businesses that operate in a largely unregulated space allowing them to mistreat some creditors at will, with the directors inattentive to, or unknowing of, their duties, and often misusing company assets. As ASIC sees it, liquidators are one of many “gatekeepers”, and significant ones at that, in terms of their authority and power. While that necessarily calls for strict regulation, it also calls for regulator support and promotion of what are often delegated investigations carried out by liquidators on behalf of ASIC, and other government regulators and agencies. That role is, it must be acknowledged, recognised by ASIC.58 In that respect, creditors are meant to be influenced by the insolvency laws, to prompt their own protection. While at one level the law exists to give them some comfort that the regime imposes order and that fairness prevails, the law is also designed to influence their behaviour, by prompting care in their commercial dealings and extensions of credit. Delivery of goods and services without arranging some security of payment is inherently risky. A creditor cannot complain too much about an insolvency regime that does not fully or even partly redress lax commercial conduct. The caution of economists about the need for an insolvent trading regime at all, and other creditor protections, in terms of the moral hazard it raises, is worth re-emphasising.59

The costs [1.210] This brings to the foreground a reality of a formal insolvency – that it is an expensive and labour-intensive process, driven in part by the fact that it often involves complex and difficult tasks that require time and the expertise of an insolvency professional.60 Even at a minimum, the law requires a certain level of process to be applied and investigation to be pursued and reported. The informal restructuring of a business, discussed in Chapter 21, avoids much of this although it has its own issues of cost and efficiency. 58 ASIC previously conducted its own national insolvent trading program. Its focus now on “supervising registered liquidators through our assessment of reports of misconduct, and through our surveillance and enforcement activities”. ASIC does go on to acknowledge the “collaborative work” it undertakes with liquidators, who “perform an important function in winding up or restructuring insolvent companies”: see Report 532, ASIC Regulation of Registered Liquidators: January to December 2016. 59 See A Keay, Company Directors’ Responsibilities to Creditors (Routledge-Cavendish, 2007), Ch 20, “A theoretical analysis of insolvent trading”. 60 Discussed by Kirby, “Bankruptcy and Insolvency” (2010) 22 A Insol J 4, 14.

[1.210]

1 Introduction to Insolvency – the Law, Policy and Current Issues

37

Liquidators and trustees are persons of significant experience and qualifications who should be paid accordingly. That expertise may often be brought to bear in significantly increasing the pool of funds for creditors; or it may result in a thorough investigation but no realisations and with any dividends to creditors being lessened by the consequent cost. The desired proportionality of effort and cost and return is not always achieved. It is not unusual, and indeed is understandable, that in the case of a company with liabilities of $100,000 and assets of $15,000, creditors will receive nothing, with the cost of the liquidator’s work equalling or exceeding the amount left. Taking over and running or closing down an insolvent business, invariably with poorly kept records and limited management co-operation, and in the atmosphere of creditors wanting to know their returns, is not a simple or straightforward task. Large corporate insolvencies are massive in terms of the time and costs needed to unravel their complexities. Practitioners’ remuneration always comes under close scrutiny, perhaps more so in general community debate than in any individual insolvency. Creditors’ disengagement, after their initial shock at their financial loss, as well as what may be called an imbalance of power, means the scrutiny is less than it should be. It is a fundamental issue in all such professional services, as to how they are to be valued and quantified. All service providers are inherently impacted by adverse behavioural incentives, that the more work they do, the more they are paid; but constrained by inherent integrity and standards of conduct, the law and the rigour of the client in monitoring their services. The difficulty is compounded in insolvency by the lack of a client with a direct interest in the work being done, but also by creditor ignorance and disengagement. Creditors may pay little regard to the information provided by the insolvency practitioner in the (sometimes justified) belief that there is little chance of receiving a substantial return of funds. Outside of regular participants in insolvency situations (banks, finance companies, major landlords and revenue authorities) there is a pervasive lack of knowledge and understanding of the mandatory and discretionary processes involved in administering an insolvency. The ILRA provides creditors greater potential for involvement but the onus remains on them to participate.61 This knowledge imbalance, in itself, is not unusual, as anyone who has engaged a plumber, engineer or doctor will find. We are all confronted by the need to rely on the integrity of others in areas outside our own expertise, including as to their reasonable charges. It does raise a particular responsibility of an insolvency practitioner to fairly counter and address that imbalance to the extent possible. The funds of an insolvent company or individual are also consumed by costs and expenses. Our insolvency regime is legally based and its remedies require traditional litigation processes to have them pursued. These are inherently expensive, in particular in proving reasonable suspicion, good faith, intent to defeat creditors and the like. We have seen that the fact of proving insolvency itself is difficult, although presumptions of insolvency assist where available. Bankruptcy 61 Usefully discussed in Finch and Dilman, Corporate Insolvency Law: Perspectives and Principles (3rd ed, Cambridge University Press, 2017), ch 5.

38

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.215]

law has attempted some short-cuts of the litigation processes through its s 139ZQ notices.62 Court involvement itself could be reduced through greater regulator authority but the potential is minimal, although reforms requiring mediation to be attempted may assist.63 Litigation funding spreads the cost and the risk, but is expensive. Perhaps, though, it is better than no claim being made at all. Again, the costs of litigation generally are issues of concern well outside the insolvency regime.64 Nor should creditors claim to be so shocked to find that their funds need to be spent to recover assets. Any person in business knows that it costs money to recover money, and that the outcome can be unsatisfactory. Then there are the governments themselves that seek to recoup their support of the regime – court filing and hearing fees, fees for issues of notices and statutory charges all go to deplete moneys for creditors. And the quasi-regulatory work that liquidators and trustees do, by way of investigating and reporting, is costly time-consuming work, in effect delegated by the government to assist it to regulate the regime. There is also the cost of the requirements to lodge accounts, to advertise, and to inform. It is unsatisfactory and peculiar that liquidators must pay ASIC for access to its database so that those liquidators can investigate and report back to ASIC for some regulatory action to be taken. While these tasks are generally all for worthwhile purposes that serve the broader community, they add to the cost of the insolvency administration, paid for by the creditors and through them the community itself, via higher prices for goods and services and lower tax revenues (due to the increased cost of doing business). The term “economic dysfunction” comes to mind in reviewing the corporate insolvency regime, with its true outcomes and costs hidden by the complex structure in which it operates. ASIC’s complex and costly process for funding its regulation of practitioners only serves to exacerbate the problem.

The insolvency practitioner [1.215] It is perhaps unusual in our legal system that an individual person is authorised under the law to assume significant powers and responsibilities, to take over the insolvent entity and to be given strong powers of recovery, examination, challenge and inquiry. These authorised individuals often exercise quasi-judicial powers which can involve closing down a business, sacking employees, restraining creditors from seizing assets, and pursuing litigation against those involved in contravention of the law (such as breaches of directors’ duties and voidable transactions). These powers are necessary for the regime to operate effectively. Placing these powers in the hands of private practitioners is a reality, and might be seen as a delegation of authority from the state, and the courts. It is necessarily accepted that the vulnerability of the unsecured creditors in an insolvency, who are reliant on the integrity and expertise of the practitioner, calls for a high degree of scrutiny and control of the profession. That is provided by a 62 See [5.260]. 63 See the Civil Dispute Resolution Act 2011 (Cth). 64 See the Productivity Commission’s Access to Justice Report, 2014.

[1.220]

1 Introduction to Insolvency – the Law, Policy and Current Issues

39

regulatory regime comprising the regulators and the courts, as well as the creditors. High standards of professional conduct are expected of practitioners, approaching that of a government model litigant. Whether that standard of conduct is achieved and whether there are sufficient controls is cause of some debate. Insolvency practice has to be assessed in the often difficult circumstances involved in administering an insolvency, where expedient and business-related decisions need to be made, often against the views of others. Any regulation also must be weighed against its cost, not only in relation to file and practice audits by the regulator, but also in increased disclosure and reporting, and court involvement.65 Where funds are limited, the commercial reality must mean that, beyond required investigations and reports, a practitioner’s task is limited even though creditors may well feel that full attention has not been given to their claims. Regulators and prosecutors suffer the same constraints in accessing public moneys for their work. The consequent and perhaps inherent costs raise the need for savings elsewhere, in particular in more technologically-based regulation and practice, an issue we go on to address in our comments on the need for change.

IDEAS AND RECOMMENDATIONS [1.220] This all leads to our concluding assessment of what should be done, if anything, by way of improving or overhauling our insolvency regime. We have discussed some open policy issues but generally say that the implementation of the aims of insolvency through the law is relatively effective. Even on that assumption, we consider that the future still demands a rewriting of our personal and corporate insolvency laws, drafted by those with some knowledge of the scope and limits of the law and its operation in practice. There need not necessarily be one insolvency statute but both the Bankruptcy Act and Ch 5 of the Corporations Act should be rewritten with more modern language and concepts, with simpler framework structures and internal processes. Common procedures to both Acts should be introduced where possible, but with the same basic rules in relation to recovery of assets, avoiding certain transactions, conduct of investigations and examinations. The overall theme of any revisiting of the present law would continue to be based on what we have said are sound principles and aims – to manage the inevitable inability to pay creditors, at the same time to try to forestall or limit that occurrence, and to regulate and deter from any abuse of the concessions that insolvency provides. The economic need for efficiency and effectiveness on preserving businesses, and their assets and their value, and returning them to viability, should remain as a central focus. Registration and oversight of the one insolvency practitioner, whether they be a liquidator or trustee, should be by the one regulator, whether that agency is operating in corporate or personal insolvency. The 2010 Senate Committee Report recommended the creation of the Australian Insolvency Practitioner Authority. How it would be resourced, funded and structured are matters of detail. How it would be linked with existing corporate regulation is a matter of substance but is 65 Kirby, “Bankruptcy and Insolvency” (2010) 22 A Insol J 4.

40

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.220]

not unachievable. One of its prime roles was to be the collection and collation of statistics, the lack of which is a serious impediment to the effectiveness of our laws. Regulation of insolvency itself – of offences, insolvent trading, failure of individuals and directors to assist in their respective bankruptcy and liquidation – should likewise be assumed by, what may more accurately be called, an insolvency regulation authority. While practitioners need to be regulated, those who were unlawfully involved in the insolvency are the priority for being investigated and pursued. It would be a fundamental but perhaps effective shift if the practitioners were relieved of the core of such regulatory tasks, and the consequent cost to the creditors, in favour of those practitioners instead attending to asset investigations and recovery, realisation and distribution to creditors. That is a threshold issue, the need to resolve the role and status of insolvency practitioners, and their funding. The potential for other costs savings exists, if only because of some of the inherent inefficiencies and routine tasks under which the present regime operates. More emphasis on expediency, even at the cost of accountability and explanation, may be needed, including some compromise of the “one size” approach in relation to small insolvencies. The fact that the government has itself raised the concept of a government liquidator, a role that we have long advocated, is significant, even if, as might be expected, it is not immediately accepted. At another level, there is potential for improved cost effectiveness in communications with creditors. The ILRA has brought in some changes and some research is being conducted. Overseas experience has much to offer, including by way of revealing our limited approach to this issue. The courts and practitioners are readily adopting electronic means of communication and relevant law is needed to support it.66 Privacy issues are relevant, but efficient processes should be paramount in dealing with financial distress.67 The courts themselves are continually seeking to provide easier means of resolving claims and disputes; indeed the law could properly seek to further limit the need for court involvement in time extensions and other more routine applications. The potential here is enormous, as it is for business and society generally. Insolvency should have a government controlled portal on which all administrations should be conducted. Access would be had proportionately by creditors and the public. Existing overseas regimes offer examples. Society can hardly express dissatisfaction with a regime and its costs when technological savings are available. This also extends to what we might call the pre-insolvency area. Access to company data is essential. Greater use of the internet would also assist the regulators, who would have real time access to ongoing administrations, as would creditors, in relation to the particular aspects to which they are permitted, and entitled. The need for 66 See Chapters 3 and 11. 67 Australian Law Reform Commission, Australian Privacy Law and Practice (ALRC Report 108), Ch 16.

[1.225]

1 Introduction to Insolvency – the Law, Policy and Current Issues

41

practitioners to send reports would disappear, and the need for meetings would be reduced. The cost savings in such a process are evident, including the costs of regulation. In personal insolvency the position is developing, with AFSA appearing to be moving towards a portal-based online process, with the potential for all administrations to be located on a central database, accessible in varying degrees by trustees, regulators, creditors and the public. Such arrangements exist internationally.68 In supporting such structural changes to insolvency, it is perhaps enough to refer to the continual process of lodging forms, sending reports and calling meetings, referred to throughout this book, and with separate regulators. As well, the internet provides the potential to increase access for creditors to information about the entities with which they deal, transparency being a significant protection in any business dealings. Of course this would all happen in the context of a wider adoption of such technology in the business and domestic community, and revenue, competition and financial regulation. Blockchain, bitcoin and other financial developments are changing the landscape, as is the revenue approach of securing payment of taxes directly from taxpayer funds in bank accounts. Indeed it might be said that full adoption of technology might produce better outcomes than any other law reform.

Other aspects of insolvency’s structure [1.225] We have accepted the need for separate laws for indigenous corporations, and for insurers and banks, but laws should be national rather than State-based and they should be regulated nationally, even if it is on cost and efficiency basis alone.69 The personal property securities regime is a prime example. The insolvency regime should have an efficient and effective legal framework to support the achievement of its goals and the implementation of its policies. This book explains the present law and practice. It works well enough, but more in spite of the law and the structure of the regime than because of it. As to the future of law reform, the Insolvency Law Reform Act 2016 only ever represented a rather narrow focus, despite its lengthy gestation, and avoided the growing importance of preventive restructuring and turnarounds. Apart from that, and the considerable effort put into it, the regulatory focus of government has primarily been on making further inquiries, despite the excess of reports into insolvency already existing. There has however been some useful reform. The introduction of the safe harbour regime may prove useful if taken up by those who for so long have sought its introduction. Interesting reform ideas are raised in the

68 See Chun and Steele, “How Technologies and Innovation Are Driving Chinese Insolvency Law Developments: New Supreme People’s Court Bankruptcy Information Platform” (2018) 15 International Corporate Rescue 33. 69 Productivity Commission, Contribution of the Not-for-Profit Sector (11 February 2010), Ch 6.

42

Keay’s Insolvency: Personal and Corporate Law and Practice

[1.230]

current phoenix inquiry. The proposed one-year bankruptcy and the reform of debt agreements are significant personal insolvency reforms.70 All this stands in contrast to the current and ongoing debate among the insolvency profession on some trend away from traditional “insolvency” work. A large proportion of the work of national and major regional insolvency practices is now focused on transactional advisory and restructuring work. Formal insolvency appointments, and registered liquidator numbers have remained fairly static since the Global Financial Crisis and certain appointments (such as voluntary administrations and large receiverships) are reducing in number each year. Indeed a number of large insolvency advisory firms have stopped referring to insolvency in their marketing. Some firms have established separate brands for non-insolvency work, particularly turnaround and restructuring advisory work. Put simply, the focus is less so on traditional external administration work. The focus is on advising businesses well before the tipping point of insolvency, because there are simply more options available at that stage and the chances of a better outcome are much greater. Chapter 21 explains this is more detail. The profession is focused on helping businesses restructure and recover rather than cleaning up the mess when everything falls apart, but the statutory and regulatory focus is still squarely on the diminishing number of formal appointments. The focus on the cost of insolvency procedures is worthy of attention, but is not a panacea for increasing creditor returns. A greater focus needs to be given to addressing what happens to companies as they approach financial distress. An ounce of prevention is worth a pound of cure. That may call for a reassessment of what might be seen as an imposing and even threatening insolvency regime, as opposed to one that offers collaboration and assistance. The apparent aversion to debtor-in-possession concepts might need to be re-evaluated. To some extent, the safe harbour regime goes some way to accommodating this. The influence of secured creditors might also need to be reassessed, while at the same time maintaining the balance in favour of good corporate and financial governance. The constant inquiries into banks and their receivers may result in secured creditors losing their separate right of appointment, as in the United Kingdom.

The need for an inquiry [1.230]

The future of insolvency law reform should involve a grass roots re-evaluation of the role of insolvency law in modern capital markets and its effectiveness in preserving and rehabilitating distressed businesses. Both the 2014 Financial System Report and the Senate Economics References Committee have recommended further reviews into insolvency law to better facilitate restructuring. The government’s response to the former has been patchy.71 In comparison, current 70 For example, see ALRC 95, Principled Regulation, ch 32. See also M Murray, “Progress” on Insolvency Law Reform, CCH Law Chat Blog (27 July 2015). 71 Improving Australia’s Financial System – Government response to the Financial System Inquiry (20 October 2015).

[1.230]

1 Introduction to Insolvency – the Law, Policy and Current Issues

43

overseas experience – in the United Kingdom, the United States and Europe – is pointing the way. Put simply, another Harmer Report is long overdue. The Australian Law Reform Commission or similar body should be given a reference to review insolvency law to ensure that Australian law provides an appropriate legal framework to support both external administration and restructuring and work out activities in a manner that will allow Australia to remain competitive for global funds and will support and assist businesses in financial distress. While law reform should be the primary focus, economic perspectives and the benefits of technology should also have input into any review. Those who criticise the conduct and operations of the regime cannot properly do so when the potential for reform is unattended and when the focus on what needs to be done is narrow and ill-directed, and the expectations of the regime unfairly and unreasonably promoted. Informed and constructive criticism is, however, required for the regime to improve. In the 9th edition, we concluded that the position would again be assessed in any further edition of this text. While the position has improved, there is more to be done.

PartII:PersonalInsolvency– BankruptcyArrangementsfor Individuals Chapter2:IntroductiontoBankruptcyanditsAdministration..............................  Chapter3:GoingBankrupt–VoluntaryandCompulsoryBankruptcy.............  Chapter4:ImpactofBankruptcy...............................................................................  Chapter5:RecoveryofAssetsforCreditors.......................................................  Chapter6:AdministrationoftheBankruptcy.....................................................  Chapter7:EndofaBankruptcyandBeyond...................................................... 

In this Part we explain how the law deals with the insolvency of an individual person. Persons who are insolvent are covered by the Bankruptcy Act 1966 (Cth). There are separate laws for the insolvency of companies, which we discuss in Parts IV and V. The Bankruptcy Act deals with the processes whereby a person becomes bankrupt and how the assets and liabilities of the bankrupt are dealt with. The chapters in this Part explain the various aspects of the administration of a person’s bankruptcy, including the recovery of assets and payment of dividends, leading to the ultimate discharge of that person from bankruptcy. The administration of a deceased estate in bankruptcy is also explained. This Part also refers to pending changes to reduce the period of bankruptcy from three years to one, under the proposed Bankruptcy Amendment (Enterprise Incentive) Bill 2017.

2

Introduction to Bankruptcy and its Administration [2.00] An overview of this chapter .......................................................................................... 49 [2.05] BRIEF HISTORY OF BANKRUPTCY ................................................................................ 49 [2.08] NUMBERS AND TRENDS .................................................................................................. 51 [2.10] BANKRUPTCY LEGISLATION .......................................................................................... 52

[2.10] Bankruptcy and related legislation .................................................................... 52 [2.15] Bankruptcy regulations and related legislative instruments ........................ 53 [2.20] Court Rules ............................................................................................................ 53 [2.22] Insolvency Law Reform Act 2016 ...................................................................... 54 [2.24] PURPOSES OF BANKRUPTCY .......................................................................................... 54

[2.25] Pari passu distribution ......................................................................................... 54 [2.30] Protection and rehabilitation .............................................................................. 55 [2.35] Investigation .......................................................................................................... 55 [2.40] Restrictions on dealings ....................................................................................... 55 [2.42] Benefits to society ................................................................................................. 56 [2.45] OVERVIEW OF THE COURSE OF A BANKRUPTCY ................................................... 56

[2.50] [2.55] [2.60] [2.65] [2.70]

Voluntary and involuntary bankruptcy ............................................................ Vesting of property ............................................................................................... Realisation of property ........................................................................................ Dividends to creditors ......................................................................................... Discharge and annulment ...................................................................................

57 57 58 58 59

[2.75] TIMING AND DATES .......................................................................................................... 59

[2.80] Commencement of the bankruptcy ................................................................... 59 [2.85] Date of commencement when bankruptcy is based on a creditor’s petition ....... 59 [2.90] Date of commencement when bankruptcy is based on a debtor’s petition .......... 60

[2.95] The doctrine of relation back and the identification of the property of the bankrupt ................................................................................................................. 60 [2.97] Defences against relation back ........................................................................... 62 [2.100] Timing for voidable transactions ..................................................................... 63 [2.105] ALTERNATIVES FOR AN INSOLVENT INDIVIDUAL .............................................. 63 [2.110] ADMINISTRATION OF BANKRUPTCY ........................................................................ 64

[2.110] Inspector-General in Bankruptcy ..................................................................... 64 [2.112] Confidential information ............................................................................................... 65

48

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.115] National Personal Insolvency Index (NPII) ................................................... 66 [2.120] Trustees in bankruptcy ....................................................................................... 66 [2.125] Official Trustee and Official Receiver in Bankruptcy ............................................... 66 [2.130] Practice statements and directions .............................................................................. 67 [2.135] Registered trustees ......................................................................................................... 68 [2.195] Remuneration .................................................................................................................. 72 [2.225] DUTIES AND POWERS OF TRUSTEES IN BANKRUPTCY ...................................... 76

[2.225] Generally .............................................................................................................. 76 [2.230] Section 19 ......................................................................................................................... 77 [2.235] Independence .................................................................................................................. 78 [2.240] Dealing with the person who is bankrupt ................................................................ 79 [2.245] Duties of trustees relating to undue benefits etc ..................................................... 80

[2.250] The rule in Ex parte James ................................................................................ 80 [2.255] Particular responsibilities .................................................................................. 81 [2.260] Funds handling ............................................................................................................... 82 [2.265] Administration returns .................................................................................................. 82

[2.270] Powers of the trustee ......................................................................................... 83 [2.275] Liability of the trustee ........................................................................................ 83 [2.285] Trustees – their regulation and removal ......................................................... 84 [2.285] Regulation by the Inspector-General .......................................................................... 84 [2.290] Termination of registration ........................................................................................... 84 [2.295] Suspending or cancelling registration ........................................................................ 85 [2.300] Show-cause notice .......................................................................................................... 85 [2.305] The discipline committee .............................................................................................. 86 [2.310] Industry body notices ................................................................................................... 86 [2.315] Register of Trustees ........................................................................................................ 87 [2.320] The trustees’ resignation, release etc .......................................................................... 87 [2.325] Replacing a trustee ......................................................................................................... 87 [2.330] Streamlined replacement – s 181A .............................................................................. 88

[2.335] Court oversight of trustees ............................................................................... 88 [2.340] Court review of a trustee’s conduct ........................................................................... 88 [2.345] Court’s review of the administration of an estate ................................................... 89 [2.350] Section 90-15 ................................................................................................................... 89 [2.355] Penalty privilege ............................................................................................................ 90

[2.360] Creditor oversight ............................................................................................... 90 [2.365] Penalties for offences .......................................................................................... 91 [2.370] THE BANKRUPTCY COURTS AND TRIBUNALS ...................................................... 91 [2.375] LEGAL PRACTITIONERS ................................................................................................. 94 [2.385] CONCLUSION ..................................................................................................................... 95

[2.05]

2 Introduction to Bankruptcy and its Administration

49

An overview of this chapter

[2.00] This chapter provides an overview of the structure and context in which the bankruptcy system operates, and its history. The regulator, the trustee and the creditors are explained, as well as the detail of how trustees are registered and regulated, and their significant powers and duties. This overview is necessary in order to then understand the following chapters, which progress through the proceedings leading to a debtor’s bankruptcy, and the law and procedure in administering a bankruptcy through to its conclusion. The 9th edition of this book included as much as was feasible in relation to what was then the Insolvency Law Reform Bill 2015. There were no Insolvency Practice Rules, regulations or forms at that time. This new edition incorporates the legislation introduced by the Insolvency Law Reform Act 2016 (ILRA) and the Rules, including available forms and regulations. The referencing of the new law has the potential to create confusion. Its structure is outlined below, showing sample section references. • Bankruptcy Act 1966 (Cth). • Bankruptcy Act 1966, Sch 2, s 1-1, being the Insolvency Practice Schedule (Bankruptcy) 2016 (IPSB). • Insolvency Practice Rules (Bankruptcy) 2016, s 1-1 (IPRB). • Bankruptcy Regulations 1996. We simplify citations by referring to, for example, Bankruptcy Act, s 160; IPSB, s 90-20 (refers to a provision in Schedule 2); IPRB, s 50-25 (refers to a section in the Insolvency Practice Rules). The Schedule (IPSB) now contains much of the law and processes in personal insolvency, rather than the provisions in the Act itself. The Schedule is supported by the Insolvency Practice Rules (IPRB).

BRIEF HISTORY OF BANKRUPTCY [2.05] The inability of a person to repay debts has long been an issue in human society. The law concerning what we now call bankruptcy can be traced to Greek and Roman times, where, as now, the issue was often a source of political and social conflict. The fundamentals of insolvency were applied – the ordered forfeiture and sale of a debtor’s property and the process of paying out each creditor in proportion – so as to provide some means of resolving the unfairness of debts being unpaid, and to impose some law and order upon an otherwise socially disruptive situation.1 But the law was also often harsh with servitude and death being outcomes for those not paying moneys owing. The principles remained and took hold in England in the 16th century with the Bankruptcy Act of 1542 being seen as the foundation of bankruptcy law as we now 1 See Quilter, “The XII Tables as Part of Bankruptcy’s Narrative: Identifying Creditors’ Collective Rights” (2011) 19 Insolv LJ 91. See also Graeber, Debt: The First 5,000 Years (Melville House, 2011).

50

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.05]

know it.2 Its preamble recited it as “an Act against such persons as to make bankrupts”. This law was designed to deal with debtors who absconded leaving their creditors unpaid. It allowed creditors to obtain the seizure and sale of the debtor’s assets, with the proceeds of sale then being paid equally among them all. That requirement of equal payment, in proportion to the debts owing to each creditor, remains a fundamental aspect of insolvency law. Bankruptcy law in England was initially focused on trading debtors and it developed in this area over the following centuries. Other debtors were unprotected, and debtors could be imprisoned for unpaid debts. History records that some recalcitrant debtors were nailed by their ears to a pillory as an inducement to pay up and as a warning to others.3 However, that did not deter some debtors from trying to hide or transfer their assets to protect them from being taken and sold by their creditors. Complaints that such devices were “more commonly used and practised in these days than have been seen or heard of heretofore” prompted Queen Elizabeth I, in 1570, to make laws allowing assets to be recovered.4 As we will see, that 16th century law of Elizabeth I remains in force in each of the Australian States and is commonly applied. It was also a precursor to a similar provision in current bankruptcy law. The incomplete coverage and harshness of the law led to changes in the 19th century in England and to more protective measures for those otherwise at the mercy of continual pursuit by their creditors. These changes marked the beginnings of modern bankruptcy. Imprisonment as a response to unpaid debt was abolished in 18695 and a new Bankruptcy Act became law in 1883.6 Throughout the latter part of the 19th century in Australia, and into the 20th, bankruptcy was regulated by the different Australian States. They had each passed laws, either when they were colonies or after they became States, based on the English bankruptcy statutes.7 It was not until 1924 that there was Commonwealth legislation, the Bankruptcy Act of that year. It was based largely on the 1883 English Bankruptcy Act, although the negotiations between the States leading up to its enactment were protracted.8 The Commonwealth Parliament had the power under the then new Australian Constitution to make laws “with respect to bankruptcy and insolvency”, in s 51(xvii); the word “insolvency” referring to corporate insolvency, a meaning not 2 (ENG) (34 and 35 Hen 8 c 4). See Quilter, “Development of Bankruptcy Process in the Late Republic and its Relationship to Modern Bankruptcy” (2013) 21 Insolv LJ 125. 3 F Whitmarsh, A Treatise on the Bankrupt Laws (2nd ed, J Butterworth & Son, 1817) p 418. 4 The Statute of 13 Elizabeth, being the Fraudulent Conveyances Act 1571 (Eng) (13 Eliz 1, c 5). The successor to it is found in various State laws – for example Conveyancing Act 1919 (NSW), s 37A; Property Law Act 1958 (Vic), s 172. 5 Debtors Act 1869 (Eng) (32 & 33 Vict, c 52); see H Rajak, “The Culture of Bankruptcy”, in P Omar (ed), International Insolvency Law – Themes and Perspectives (Ashgate, 2008), Ch 1. 6 Bankruptcy Act 1883 (UK) (46 & 47 Vict, c 52). 7 Bankruptcy Act 1898 (NSW); Insolvency Act 1874 (Qld); Insolvent Act 1886 (SA); Bankruptcy Act 1870 (Tas); Insolvency Act 1915 (Vic); Bankruptcy Act 1892 (WA). 8 See Officially Receiving: A History of Australia’s Bankruptcy Law and Administration (ITSA, 2010).

[2.08]

2 Introduction to Bankruptcy and its Administration

51

necessarily consistent with modern usage. The Parliament used this power when it enacted the Bankruptcy Act 1924; it could have in fact enacted a general law about both personal and corporate insolvency but in those times corporations were still in relatively early stages of development and personal insolvency was seen as quite separate. The legislation commenced operation in 1928, on the brink of the Great Depression. The State courts of New South Wales and Victoria were unable, however, to cope with the high bankruptcy caseload and in 1930 a Commonwealth court – the Federal Court of Bankruptcy – was created. The Bankruptcy Act 1924 (Cth) was amended a number of times before a major review of bankruptcy was conducted in the early 1960s, by what is known as the Clyne Committee, headed by an eminent bankruptcy judge of the time. The Committee’s report is the first major review of bankruptcy laws as a whole in more modern times and its recommendations led to the enactment of the Bankruptcy Act 1966 (Cth). That Act commenced operation on 4 March 1968 and remains our current law, although it has been amended significantly and at regular intervals since then. The later full review of bankruptcy law was then carried out by the Harmer Committee, whose report in 1988 made many recommendations about changes in bankruptcy law, though few were ever implemented. In contrast, the Harmer recommendations in corporate insolvency were largely enacted; most significantly, the voluntary administration regime under Pt 5.3A of the Corporations Act, loosely based on Pt X of the Bankruptcy Act. Corporate insolvency had relied upon the voidable transaction regime in bankruptcy, but a new regime was introduced specifically designed for companies, even if based on the original bankruptcy concepts. The Federal Court of Bankruptcy was replaced by the Federal Court of Australia in 1977 which also assumed a corporate insolvency jurisdiction. The Federal Court continues to deal with bankruptcy, although most bankruptcy matters are now heard by the Federal Circuit Court of Australia, established as the Federal Magistrates Court in 1999. The Family Court of Australia also has jurisdiction in relation to “matrimonial” bankruptcies.

NUMBERS AND TRENDS [2.08]

Numbers of personal insolvencies in Australia over the years have increased significantly, although in recent times they have started to plateau, and are presently in decline. There were just over 7,000 bankruptcies in 1988-1989. The introduction of Pt IX debt agreements in 1996 reduced the number of debtors opting for bankruptcy and bankruptcies are now, in 2018, at their lowest – around 16,320 – since 1994-1995. Not unexpectedly, debt agreements are at their highest – around 13,600. Most bankruptcies relate to consumer unemployment, income and use of credit. Business-related factors are responsible for over 24% of all bankruptcies, and 16% of all cases of personal insolvency. The percentage is generally over 30% in the case of Pt X agreements. These are often sole traders, partners and directors who each can be personally liable for debts incurred by a business. The occurrence of

52

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.10]

business related personal insolvencies varies within different sectors of the economy, with construction workers representing the highest number of debtors entering a business related personal insolvency in 2013-14, followed by those working in transport, hospitality and retail. Putting this in perspective, Australia has a low number of personal insolvencies at 0.1% of the population, compared with England and Wales (0.2%), and the United States (0.5%).9 We therefore have a relatively modern approach to bankruptcy but vestiges of its severe past remain. The frequent references to absconding debtors and avoidance of creditors in sixteenth century English law carries through to today’s laws, with the link between bankruptcy and wrongdoing still often drawn. Section 44 of the Australian Constitution groups bankruptcy with treason as a reason for a person not becoming, or remaining, a member of Parliament; many other laws link bankruptcy with unlawfulness.10 Courts also refer to the quasi-penal consequences of bankruptcy, which, in some senses, is a reality, given that certain restrictions on a bankrupt person are imposed for an extended period.11 While in the last 50 years bankruptcy has become more accepted, and more frequent, in particular given the greater access to credit, it still retains some moral and social stigma.12

BANKRUPTCY LEGISLATION Bankruptcy and related legislation [2.10] The Bankruptcy Act 1966 (Cth) (now referred to as “the Act” or the Bankruptcy Act) contains the rules and procedures governing bankruptcy proceedings from pre-bankruptcy matters through to the discharge of the bankrupt and the release of the trustee in bankruptcy. The trustee is the person charged with the administration of the bankruptcy. The Act also regulates deceased estates in bankruptcy (Pt XI), and non-bankruptcy agreements made with creditors under Pt IX and Pt X of the Act: see Chapters 8 and 9. We use the generic term “regulated debtor”, or debtor or bankrupt: IPRB, s 5-15. “Regulated debtor’s estate” and “trustee of a regulated debtor’s estate” have consequential meanings: IPRB, ss 5-16, 5-20. Other significant Commonwealth legislation relevant to the administration of personal insolvencies include the Bankruptcy (Estate Charges) Act 1997 (Cth) 9 Business Set-Up, Transfer and Closure (Productivity Commission, September 2015) [12.1]. 10 See M Murray, Bankruptcy, Treason and Other Crimes [2001] 1 INSLB 138. 11 Ahern v DCT (1987) 76 ALR 137, 148; Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490 at [36]; Mehajer v Weston (Trustee), in the matter of Mehajer [2018] FCA 608 at [8]. 12 Usefully discussed in Officially Receiving: A History of Australia’s Bankruptcy Law and Administration (ITSA, 2010). The stigma of bankruptcy is discussed in The World Bank, Report on the Treatment of the Insolvency of Natural Persons (The World Bank, 2013) at p 43. See also “Short a Few Quid’: Bankruptcy Stigma in Contemporary Australia” (2015) 38(4) UNSW Law Journal 1575, Ali P; O’Brien L; Ramsay I; Howell N; Mason R, “Reinforcing Stigma or Delivering a Fresh Start: Bankruptcy and Future Engagement in the Workforce” (2015) 38(4) UNSW Law Journal 1529.

[2.20]

2 Introduction to Bankruptcy and its Administration

53

(Bankruptcy (Estate Charges) Act, the Personal Property Securities Act 2009 (Cth) (PPSA), the Proceeds of Crime Act 2002 (Cth) and the Cross-Border Insolvency Act 2008 (Cth).

Bankruptcy regulations and related legislative instruments [2.15]

Section 315 of the Act permits the making of regulations. The Bankruptcy Regulations 1996 (Cth) (“the regulations”) prescribe the more detailed procedures to be followed in the administration of bankruptcies. These supplement IPSB and the IPRB.

“Approved forms” are issued by the Inspector-General in Bankruptcy: s 6D.13 These are published on the AFSA website: http://www.afsa.gov.au. These are forms to be used by bankrupts, trustees, creditors and others and include forms of statements of affairs, proofs of debt and proxies. Throughout this text they are referred to as “AFSA Form [number]”. Categories of AFSA Forms are at Appendix A to this chapter. The regulations are now less relevant in that much of their content has been transferred to the Schedule or the Rules. They continue to prescribe certain information, for example, for the purpose of s 120 of the Act (reg 6.09), as to the definition of income (Div 6) and for the purpose of discharge and annulment of bankruptcies (Pt 7). Matters of further detail are dealt with in various determinations, made under authority of s 316(1) of the Act. In particular, these concern fees and charges, for example the Bankruptcy (Fees and Remuneration) Determination 2015 and the Bankruptcy (Estate Charges) (Amount of Charge Payable) Determination 2015.

Court Rules [2.20] As we have explained, most bankruptcy matters are heard in the Federal Circuit Court with others, and appeals, being heard in the Federal Court. The relevant rules are the uniform Federal Court (Bankruptcy) Rules 2016 (Cth) and the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth). Both sets of rules deal with matters of court practice and procedure, and set out in schedules the form and content which court bankruptcy documents are to take. We refer to these collectively as the Courts’ Bankruptcy Rules. The Family Court of Australia also has a role in bankruptcy under the Family Law Act 1975 (Cth), as does the Administrative Appeals Tribunal. The Family Law Rules 2004 (Cth) contain provisions concerning bankruptcy proceedings, in Pt 6 and Pt 26. The AAT hears applications to review decisions of the Inspector-General in Bankruptcy: IPSB, s 96-1. It has no particular provisions concerning bankruptcy. The courts exercising bankruptcy or related jurisdiction are explained at [2.200]. 13 The terms of that section allow the Inspector-General to require information beyond the requirements of the particular section; see for example, IPSB, s 30-1 and the Annual Trustee Return. ASIC has similar authority under Corporations Schedule, s 100-6.

54

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.22]

Insolvency Law Reform Act 2016 [2.22] The Insolvency Law Reform Act 2016 (Cth) made a substantial change to the structure of the Act and to the content of the process of bankruptcy law, including the regulation of trustees. It made little impact on core bankruptcy law – the processes leading to bankruptcy, voidable transactions, examinations, statutory notices, and the like. Many features of bankruptcy law and practice now apply to the corporate insolvency regime. To that extent, the law and practice of bankruptcy, and the regulation of trustees, has not changed to the same extent as that in corporate insolvency. However, many existing sections in the Bankruptcy Act are reformulated and renumbered in the IPSB. The objects of the new Schedule 2 – Insolvency Practice Schedule (Bankruptcy)14 are expressed to be: to better regulate trustees; to have estates administered consistently; and to allow creditors greater control of the administration of estates: IPRB, s 1-1. The ILRA had a staged commencement. Its registration and disciplinary processes commenced on 1 March 2017, generally with immediate effect. Provisions introduced by IPSB, Pt 3 – General rules relating to estate administrations, commenced on 1 September 2017 for new estates, and to most ongoing estates, but generally only in relation to new events. The new provisions in relation to remuneration apply to new estate administrations.15

PURPOSES OF BANKRUPTCY [2.24] In Chapter 1, we explained the broad aims and purpose of insolvency law generally. In this Chapter we focus on the particular purposes of personal insolvency, without repeating in any detail those overall purposes.

Pari passu distribution [2.25]

Bankruptcy and corporate insolvency are aligned to the purpose of providing a procedure where an authorised person, a trustee, takes control of the financial affairs of a debtor and administers those affairs – their assets and liabilities – according to rules in bankruptcy law. Creditors of the bankrupt are able to recoup some, or all of their losses from the assets of the bankrupt; the bankrupt is protected from creditor claims. Both personal and corporate insolvency are based on, as we explained in Chapter 1, this pari passu or equal sharing principle. The need for fairness and equity between creditors was explained as early as 1592 where the court in The Case of The Bankrupts (1592) 2 Co Rep 25; 76 ER 441 said (at 473):

14 Schedule 1 is an existing list of Acts repealed: see s 4(1) of the Act. 15 The Insolvency Law Reform (Transitional Provisions) Regulation 2016 served to delay the commencement of much of the ILRA until 1 September 2017. See The ILRA – what insolvency professionals need to know at https://www.afsa.gov.au.

[2.40]

2 Introduction to Bankruptcy and its Administration

55

“But if after the debtor becomes a bankrupt, he may prefer one … and defeat and defraud many other poor men of their due debts it would be unequal, and unconscionable and a great defect in the law.”

Protection and rehabilitation [2.30] A second purpose of bankruptcy law is to protect debtors in difficult financial positions to obtain relief from the pressure of their creditors and to be given an opportunity to make a fresh financial start. In contrast to the severity of the earlier law, bankruptcy now has a focus on the protection of bankrupts and their financial rehabilitation. The term “fresh start” is often referred to, encompassing both financial and psycho-social release of past liabilities and events. The government’s announced intention of allowing a one year period of bankruptcy is an aspect of this rehabilitation focus.16 This is the fact that bankruptcy, when applied to an individual person, gives a more focused purpose than the protection of an inanimate company and its assets.

Investigation [2.35] A third purpose of bankruptcy law is to allow for an investigation of the conduct of any bankrupt which led to the bankruptcy. Again, this compares with corporate insolvency although the investigations there are often the more complex and substantive, and the law itself imposes a wider range of tasks on an external administrator. A tension both in personal and corporate insolvency is the extent to which investigations are or must be pursued when there are no or limited funds for the trustee, or liquidator, to do so; and when those funds might otherwise be paid to creditors.

Restrictions on dealings [2.40]

Fourthly, bankruptcy law benefits the community in imposing certain restrictions on bankrupts in their commercial or domestic dealings. This is a more particular aspect of personal insolvency, although the need to stop an insolvent company from continuing to trade and incur debt also applies. A personal restriction imposed is that a bankrupt cannot obtain credit of above a certain amount without disclosing their bankruptcy. Persons cannot pursue certain occupations while they are bankrupt, or they need approval to do so. A practical reality is also that credit reporting will show that a person is or has been a bankrupt and that may affect their credit rating, although there are time limits beyond which credit agencies cannot retain personal insolvency information. For bankruptcy, it is the later of five years after the date of the bankruptcy or two years after the date the bankruptcy ends: Privacy Act 1988 (Cth), s 20X.

16 See Ali, O’Brien and Ramsay, “Bankruptcy and Debtor Rehabilitation: An Australian Empirical Study” [2017] MULR 688.

56

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.42]

Irrespective, the names of bankrupts always remain on the National Personal Insolvency Index (NPII), although, of course, it will also show when the person has been discharged from bankruptcy. The fairness of this is not unquestioned, with many or most bankruptcies occurring without involving any unlawful or unfair conduct of the debtor. Employment and other restrictions on bankrupts are also the subject of current review by the government. That fairness needs to be assessed against the fact that while a director of a company may suffer some stigma from having had a failed company, it is far less of a stigma and imposes no subsequent business or personal restrictions.

Benefits to society [2.42] More broadly and particularly, and as well explained in a 2013 World Bank report,17 bankruptcy also serves to reduce or limit wasteful collection costs and diminished value in sales of debtors’ assets; to encourage responsible lending to debtors; to concentrate losses on more efficient and effective loss distributors; to reduce welfare-related costs through illness, crime and unemployment; to increase the debtor’s capacity to again earn taxable income; to encourage entrepreneurship; and to enhance stability and predictability in the broader economy and financial system. Its overall importance as a matter of the rule of law, in the provision of a regime that seeks to provide some equitable justice and fairness, and pre-empt harsh and unfair behaviour by those not paid, should not be underestimated.18

OVERVIEW OF THE COURSE OF A BANKRUPTCY [2.45] Bankruptcy can only be used for people who are insolvent, that is, those who are unable to pay all their debts as and when they fall due. However, as we mentioned in Chapter 1, bankruptcy is not the inevitable result for every person who becomes insolvent. The debtor may, unless in a hopeless position, enter a personal insolvency agreement under Pt X of the Act (discussed in Chapter 8) or a debt agreement under Pt IX (discussed in Chapter 9) by which debts can be discharged without the formal processes and restrictions of bankruptcy applying. A debtor may also use a variety of informal solutions such as the rescheduling of debt payments with the agreement of the relevant creditors and thus avoid the processes of the Act altogether. We discuss the various options in more detail at [2.105]. If the debtor’s position cannot be retrieved, practically speaking, or if the creditors are not willing to consider these formal or informal arrangements, the debtor may have no option but bankruptcy. At the same time, the option of bankruptcy lies only with the creditors, or the debtor. If neither chooses that option – the creditors because they do not want to 17 Again, these are more particular to the purposes of personal insolvency, with little relevance to the purposes of corporate insolvency. The World Bank, Report on the Treatment of the Insolvency of Natural Persons (The World Bank, 2013), at http://www.worldbank.org. 18 For a discussion of bankruptcy as an important aspect of public law, see Chief Justice James Allsop, “Values in Public Law” [2015] FedJSchol 17.

[2.55]

2 Introduction to Bankruptcy and its Administration

57

incur the cost and time, with little likelihood of any recovery, the debtor, because there is no real pressure to resolve their inability to pay – then the debtor simply remains insolvent. It might be however – through obtaining employment, or being left money under a will – that their circumstances change for the better.

Voluntary and involuntary bankruptcy [2.50] A person can become a bankrupt in one of two ways. First, a sequestration order may be made by the court on the application of a creditor, resulting in the debtor becoming a bankrupt. This process is often referred to as involuntary bankruptcy which recognises the right of a creditor to force bankruptcy on a debtor if a debt remains unpaid. Secondly, the debtor can voluntarily go bankrupt by presenting a debtor’s petition to the Official Receiver. Unless there is a pending application by a creditor to bankrupt the debtor, the petition is accepted and the person becomes bankrupt. This is called voluntary bankruptcy. The ability of a debtor to choose to go bankrupt accords with the long-established policy that insolvent debtors may seek the protection offered by bankruptcy, without reference to their creditors or the court. A deceased person’s estate may also become bankrupt, both voluntarily on the petition of the administrator, and compulsorily on the petition of a creditor. These processes are dealt with in Pt XI of the Act. Bankruptcy applies only to an individual person, including a minor under the age of 18: s 7(1A); but not to a corporation or other entity registered under a law which provides for its winding up: s 7(2). If a creditor wants to commence compulsory bankruptcy proceedings in court, the creditor must first be able to establish that an “act of bankruptcy” has been committed by the debtor, usually through non-compliance with a demand for payment – a “bankruptcy notice” – served on the debtor. The creditor must then present a “creditor’s petition” to the court within six months of the date of the commission of that act of bankruptcy. The debt, or debts, owed to the creditor must be at least $5,000. The court (either the Federal Court or the Federal Circuit Court) must then decide whether a “sequestration” order should be made, that is, that the debtor be made bankrupt. The debtor must be or appear to be insolvent, that is, they have debts they cannot pay, whether the process be voluntary or involuntary, although it may become apparent later that they were not in fact insolvent, on an assets basis, at the time.

“Vesting” of property [2.55]

In the case of a company in liquidation, the company continues to exist and retains ownership of its assets, but instead of the company being under the control of the directors and members, the liquidator controls the company, and hence the assets. There is, however, no separation of ownership and control with the assets of an individual. In the event of insolvency, bankruptcy has created a mechanism to deal

58

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.60]

with this difference. This is achieved by creating a separate trust estate, “the bankrupt estate”, and the person appointed to administer it is described as a trustee in bankruptcy. The former property of the bankrupt “vests” in, or passes to, the trustee. The trustee is either a private “registered trustee” in bankruptcy or the government Official Trustee in Bankruptcy. More accurately, the trustee is but one of several persons defined in the IPBR as “persons with a financial interest in the administration of a regulated debtor’s estate”: s 5-30. Apart from the trustee, there is the regulated debtor, and creditors and any other prescribed person, though none has been prescribed. Describing the trustee as a person with a financial interest in the administration of the estate is quite odd, with its implication that the trustee has a comparable interest to that of a creditor, or has a financial interest at all. It is merely a collective term that assists in drafting. The term “trustee” is used in this book unless the text necessitates otherwise. All “property of the bankrupt” vests in the trustee as “divisible property” except for those items specifically exempted by s 116, such as personal and household property, a car under a certain value, superannuation funds and property held by the bankrupt in trust. The bankrupt’s home vests in the trustee and may need to be sold. The trustee has the task of ascertaining the property of the bankrupt and in some cases recovering property which may have been unfairly disposed of by the bankrupt prior to bankruptcy. For example, the debtor may have transferred their property for limited or no payment to a family member with the purpose of keeping that asset out of the reach of their creditors. This may require the trustee to take litigation proceedings against those persons to whom the property has been transferred. The trustee has wide powers to investigate the affairs of the bankrupt and recover the bankrupt’s property.

Realisation of property [2.60] Once the trustee has located and, if necessary, recovered the bankrupt’s property, the trustee is required to “realise” or sell the divisible property and divide the proceeds of sale among the creditors in accordance with the law under the Act.

Dividends to creditors [2.65]

The proceeds of the realised estate are then distributed rateably – pari passu – among all the creditors who are owed debts by the bankrupt that were legally recoverable from the debtor before bankruptcy. Such debts are known as “provable debts” and the procedure involved in establishing the debt is called “proving the debt”. Creditors who have proved their debt are paid “dividends” by the trustee from any assets realised. Certain debts are not provable or, even if provable, are not discharged by bankruptcy and remain personally payable by the bankrupt. The remuneration and expenses of the trustee and other statutory charges are paid out first, before the dividend amount to be paid to creditors is calculated.

[2.85]

2 Introduction to Bankruptcy and its Administration

59

Discharge and annulment [2.70] A bankrupt is able to gain an automatic discharge from bankruptcy three years from the date upon which they became bankrupt on a debtor’s petition, or, in the case of a bankruptcy based on a sequestration order, from the date that the bankrupt filed their statement of affairs. If an objection is made to the discharge by the trustee, the bankruptcy can be extended up to eight years. The effect of discharge is to release the debtor from all provable debts. The creditors may or may not have been paid a dividend in respect of those debts but in any event they have no further claim on the bankrupt. Alternatively, there can be an annulment of the bankruptcy if the trustee is able to have enough assets to pay out all the bankrupt’s debts. This may be because, when the debtor went bankrupt, they in fact had enough assets to pay out their liabilities but did not have the time to sell their assets to do so. An annulment may also be ordered by the court if, for example, a sequestration order should not have been made because of some major procedural or other irregularity. This is discussed in Chapter 7.

TIMING AND DATES [2.75]

It is necessary at this point to introduce an explanation of important issues in bankruptcy concerning the time it is deemed to commence. Bankruptcy law makes a distinction between the date of the “commencement of the bankruptcy” and the later “date of the bankruptcy”. These two dates are important throughout the legislation in determining what property vests in the trustee – this is the fundamental principle in bankruptcy law of the “doctrine of relation back”. Under s 116 of the Act, the trustee can claim all property belonging to the bankrupt at the date of commencement of the bankruptcy and all property acquired by the bankrupt between that commencement date and the actual date of the bankruptcy. The two dates are also relevant to the time periods back through which bankruptcy law can examine and allow transactions to be challenged by a trustee.

Commencement of the bankruptcy [2.80]

The date of commencement of a bankruptcy is determined by s 115(1) of

the Act. Date of commencement when bankruptcy is based on a creditor’s petition

[2.85] Section 115(1) provides that the commencement of bankruptcy, for someone made bankrupt pursuant to a creditor’s petition, is at the time of the commission of the earliest act of bankruptcy occurring within six months immediately preceding the presentation of the creditor’s petition. Hence, in the following example the commencement of the bankruptcy is 23 March 2015, illustrated by Timeline A.

60

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.90]

Timeline A: Time period within which a creditor’s petition must be presented

The act of bankruptcy on 16 February 2015 is outside the six months preceding the presentation of the creditor’s petition, and the act of bankruptcy committed on 23 March 2015 is the relevant act of bankruptcy which was committed within the six-month period. This date marks the commencement of the bankruptcy. Date of commencement when bankruptcy is based on a debtor’s petition

[2.90] Section 115(2) provides when the commencement of bankruptcy occurs if a person is made bankrupt pursuant to a debtor’s petition. Typically, that date is simply the date the debtor presents their petition to go bankrupt. Three other situations are set out in s 115(2) and the respective dates of commencement are shown: • where the debtor’s petition is accepted under court direction – the date of commencement is the time specified by the court; • where the petition is presented when at least one creditor’s petition is pending against the debtor and the debtor’s petition is accepted without court direction – the date of commencement is the time of the commission of the earliest act of bankruptcy on which any of the creditor’s petitions was founded; • where the petition is presented when the debtor has committed at least one act of bankruptcy in the past six months – the date of commencement is the time of the commission of the earliest act of bankruptcy in the six months prior to presentation of the petition. These commencement dates will be explained further when we examine debtors petitions in Chapter 3. In most cases however, the debtor has committed no act of bankruptcy before presenting a petition and the date of “commencement” and the date of the bankruptcy will coincide.

The doctrine of relation back and the identification of the property of the bankrupt [2.95]

The actual date of commencement of the bankruptcy can be crucial because, as we have explained, under s 116, the trustee can claim property belonging to the bankrupt at that commencement date and all property acquired by the bankrupt between the commencement of bankruptcy and the date of bankruptcy. Thus, in the example given earlier, under the doctrine of relation back, the trustee could claim property owned by the then debtor as at 23 March 2015, even though the debtor did not go bankrupt on a sequestration order until 6 November 2015. The period can be extensive given that a creditor’s petition can have an extended “life” of two years. In the example given, the sequestration order could be made on 21 September 2017, with the bankruptcy having a deemed commencement date of 23 March 2010. This is illustrated by Timeline B.

[2.95]

2 Introduction to Bankruptcy and its Administration

61

Timeline B: Showing the date of commencement of the bankruptcy

The doctrine of relation back was explained in Ponsford Baker & Co v Union of London and Smith’s Bank Ltd (1906) 2 Ch 444, 452: “Until commission of the act of bankruptcy [the bankrupt] was, of course, the beneficial owner of whatever assets he possessed, but by the act of bankruptcy his title to be regarded as such beneficial owner is no longer absolute, but is contingent on no bankruptcy petition being presented within three months [now six months] of the date of the act of bankruptcy which leads to a receiving [sequestration] order being made. If such receiving order be made the whole of the assets vest in his trustee as from the date of the act of bankruptcy. He is, therefore, in the position that should such a contingency occur he is from the date of the act of bankruptcy something less than a mere trustee of his assets for the creditors in his bankruptcy. Until this state of suspense has been removed either by a receiving order or by lapse of time, he has no right to deal with those assets that were in his hands, and can give no title in them to any transferee with notice. Similarly, with regard to the debts and other choses in action which form part of his estate, he cannot collect them or give a valid discharge for them, and anyone making a payment to him with notice of the act of bankruptcy does so at his peril.”

The result of the doctrine “is that all subsequent dealings with the debtor’s property must be treated as if the bankruptcy had taken place at the moment when the act of bankruptcy was committed”.19 The significance of the earlier date of the act of bankruptcy being the date of commencement of the bankruptcy, in relation to the nature and timing of the vesting of property, was explained by Lindgren J in Anscor Pty Ltd v Clout (2004) 135 FCR 469; 1 ABC (NS) 558: “The vesting in the trustee in bankruptcy does not take place upon the commencement of the bankruptcy; it takes place forthwith upon the debtor’s becoming a bankrupt … The ‘commencement of the bankruptcy’, however, marks the time as at which the items of property constituting the ‘property of the bankrupt’ are to be identified. Those items of property constitute the property which vests in the trustee in bankruptcy forthwith upon the debtor’s becoming a bankrupt. Such an item of property will not vest in the trustee in bankruptcy if it no longer exists when the debtor becomes a bankrupt, or if it still exists then but has been transferred in the meanwhile for full value under a transaction protected by s 123 … (but) if the property still exists at the commencement of the bankruptcy, it will form part of the property of the bankrupt which will vest in the trustee forthwith upon the debtor’s becoming a bankrupt, if the property also still exists then.”

While relation back may serve that purpose for creditor’s petitions, there will be no relation-back period where a debtor’s petition has been presented and the debtor did not commit an act of bankruptcy in the six months preceding the presentation of the petition. In most cases there is no such act of bankruptcy available. 19 In Re Pollitt; Ex parte Minor (1893) 1 QB 455, 457-458 cited in Re Edelsten [1988] FCA 395.

62

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.97]

It should be noted that the relation-back concept also exists under the Corporations Act 2001 (Cth), but it serves only to establish the time period during which proceedings to challenge voidable transactions may be undertaken: see [10.90] and Chapter 14.

Defences against relation back [2.97] By allowing a deemed date of commencement of a bankruptcy, the doctrine could operate harshly unless there were defences to its operation. Section 123, titled “Protection of certain transfers of property against relation back etc”, provides these; in fact it goes so far as to render the doctrine rather ineffective. Subject to certain sections, the doctrine does not impact upon various transactions of the debtor with other parties before bankruptcy20 as long as that other person did not at that time have notice of the presentation of a petition against the debtor and the transaction was conducted in good faith and in the ordinary course of business. The burden of proving those matters lies upon that person who relies on the validity of the transaction: s 123(2).21 Where the doctrine is emasculated is that knowledge by the other party that the debtor had committed an act of bankruptcy does not impute lack of good faith or mean that the transaction was not in the ordinary course of business: see s 123(3). This makes the doctrine difficult to apply. In any event the voidable transaction provisions – for example under ss 120 and 121 – are more effective. There have been very few recent cases where relation back has been used by trustees to recover property: see [4.200]. Hence, although the doctrine is fundamental to bankruptcy law, the need for its continued existence is questionable. Bankruptcy law relied upon acts of bankruptcy historically as some indicator to the world of the danger of dealing with someone who is in effect a prospective bankrupt. It was retained in the 1924 Act despite opposition to it.22 It was recommended for retention by the Clyne Report, with protections that now appear in the Act.23 The 1988 Harmer Report recommended the concept of the act of bankruptcy be abolished, including the doctrine of “relation back”, as being a “fictitious, artificial and abstract concept … rarely understood”.24

20 Including a payment by the debtor to a creditor, or a transfer or contract for market value: see: s 123(1)(a) – (g). 21 That burden was not discharged by the respondent in Khatri and Lane v McDonald, in the matter of Wilkie [2018] FCA 543, in relation to an equitable charge given over the bankrupt’s property created by an acknowledgment of debt. 22 The drafter described it as “a useless doctrine, approaching almost final extinction in the latest English legislation”: Officially Receiving: A History of Australia’s Bankruptcy Law and Administration (ITSA, 2010) p 24. 23 Clyne Report at [148] – [151]. 24 Harmer Report at [697].

[2.105]

2 Introduction to Bankruptcy and its Administration

63

Timing for voidable transactions [2.100] Voidable transactions will be examined in Chapter 5. In the context of this explanation of the date of commencement of the bankruptcy and the date of the bankruptcy, it is timely to explain that the date of commencement of the bankruptcy is the date back from which bankruptcy law determines whether a transaction can be challenged by a trustee. For example: • an undervalued transaction may be set aside by the court under s 120 of the Act if it occurred “in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy”; • preferences may be recovered if they occurred, in the case of a creditor’s petition, in the “period beginning 6 months before the presentation of the petition (that is, the date of commencement of the bankruptcy) and ending immediately before the date of the bankruptcy of the debtor”. Other issues concerning these dates will be explained in later chapters.

ALTERNATIVES FOR AN INSOLVENT INDIVIDUAL [2.105] We have explained that bankruptcy is not inevitable for an insolvent debtor. There are a number of options: • to simply stall or evade creditors. Besides being questionable on moral grounds, this course means the debtor remains continually subject to creditors’ pursuit of their claims; • to come to a private informal arrangement with individual creditors by, for example, restructuring loans or obtaining a debt moratorium; • to enter into private agreements with creditors under either Pt X or Pt IX of the Act, discussed in detail in Chapters 8 and 9 respectively. Of course a creditor may simply decide that pursuing the debtor for repayment is too costly and unlikely to produce payment, if the debtor is without money or assets. Many debtors may rely on that but one fact to consider is that once the creditor obtains judgment, interest on the judgment sum starts to accrue, and the creditor generally has 12 years to enforce recovery under its judgment. In assessing a debtor’s position an adviser should consider a number of other matters. These are briefly listed here although they will be explained in detail in the following chapters: • the real and personal property owned by the debtor. Unless protected, all property will vest in the trustee; • the extent of the debtor’s liabilities, including contingent and prospective debts. Most liabilities will be discharged by bankruptcy although if there are debts incurred by fraud, or certain fines or penalties, these may not be discharged, nor will unliquidated claims in tort (for example personal injury claims against a debtor), or potential costs orders; • assets which may become the debtor’s in the future, for example, a bequest from an elderly relative. If that estate becomes available during bankruptcy it will vest in the trustee as after-acquired property; • rights held in a trust or superannuation fund which may be protected, although this will depend on the nature of transfers into the fund before bankruptcy;

64

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.110]

• the income that is expected to be earned by the bankrupt in the three years (or one year) of bankruptcy (and beyond). The bankrupt may be required to make contributions from that income; • the effects bankruptcy would have on the ability of the debtor to earn income; some professions may not allow bankrupts to be principals of businesses, for example, real estate agents, builders, lawyers or accountants; • whether the debtor is a director of any companies; a bankrupt cannot be a company director, without court leave;25 • whether the debtor has made any substantial transfers of property before bankruptcy. These may be recovered by the trustee; and • how the family home is owned. Invariably the half interest of the bankrupt in a jointly owned home will pass to the trustee. Unlike in some States in the United States of America, the family home is not protected in bankruptcy in Australia; nor is there any delay imposed on its sale by the trustee, as in England. For a debtor to decide to enter into any formal process under the Bankruptcy Act involves a significant decision and one that should not be taken lightly. Any process under the Act has significant legal consequences, including of course benefits. AFSA recommends that debtors seek advice from financial counsellors, lawyers or accountants before deciding.

ADMINISTRATION OF BANKRUPTCY Inspector-General in Bankruptcy [2.110] The bankruptcy regime is generally administered by the office of the Inspector-General in Bankruptcy, established under s 11 of the Act, who heads the Australian Financial Security Authority (AFSA), a “listed entity” under the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act).26 That Act imposes high standards of conduct in public administration, including co-operation and communication with other agencies. As a Commonwealth agency, the Inspector-General is also bound to comply with the Model Litigant policy. The Inspector-General comes under the supervision of the Attorney-General and the functions of the position are set out in ss 11(2) and 12 of the Bankruptcy Act. These include investigating the administration of a bankruptcy or the conduct of a bankrupt or the trustee, and investigating whether any offences under the Act have been committed. The Inspector-General obtains statutory information from Official Receivers, registered trustees and others, and reports on the ongoing operation of the Act. In the role of regulation of trustees, and the Official Trustee, the Inspector-General may require the production of trustees’ books and records and require the trustee to 25 Under Corporations Act, s 206G; see, for example, In the matter of Endeavour Energy Network Management Pty Limited [2017] NSWSC 1825. 26 AFSA is a party to a Memorandum of Understanding (MOU) with ARITA, dated 20 February 2017, which sets out a framework for co-operation between them to facilitate liaison, co-operation, assistance and the exchange of information “for the effective and efficient performance of their functions”.

[2.112]

2 Introduction to Bankruptcy and its Administration

65

answer questions concerning their bankruptcy or Pt X administrations, or matters concerning, for example, the independence of trustees: s 12(2). In the conduct of such reviews of trustees and Official Receivers the Inspector-General operates through Bankruptcy Regulation and Enforcement personnel of AFSA. Under Pt 2 of the IPSB, the Inspector-General also registers persons who wish to be trustees in bankruptcy (Div 20), and regulates their conduct, including by way of terminating their registration (Div 40). This is discussed later in this chapter. The Inspector-General, or delegate, also exercises powers of administrative review of decisions of registered trustees and of the Official Trustee.27 For example, a decision to lodge an objection to discharge, or an income assessment, can be reviewed by the delegate of the Inspector-General. An appeal may then lie to the AAT or in some cases to the court: see [2.370]. As we have seen, the Inspector-General issues approved forms to be used by bankrupts, trustees, creditors and others involved in bankruptcy practice. Under the Bankruptcy (Estate Charges) Act 1997 (Cth), a percentage charge is imposed on asset realisations in all bankrupt estates to provide funding for the administration of the personal insolvency system. The percentage is 7% from 1 July 2015.28 Fees for the filing of documents and for other AFSA services, and the remuneration of the Official Trustee, are set under powers given in s 316 of the Bankruptcy Act.29 This stands in contrast to the industry funding model used to fund ASIC’s regulation of liquidators: see [10.120]. Confidential information

[2.112] Information obtained by the Inspector-General may be confidential. In so far as it relates to the standards of conduct of trustees, s 12(4) allows the Inspector-General to disclose such information to nominated bodies if it is satisfied that the information will enable or assist the particular body to exercise any of its powers or perform any of its functions. These bodies are any other Commonwealth PGPA Act entities or any one of a number of prescribed professional disciplinary bodies.30 The purpose of this appears to be to allow co-regulation of the trustee profession by means of a range of other professional bodies whose members – lawyers, barristers, accountants – may be impacted by the decisions of a trustee in administering a bankruptcy. 27 See IGPS 12 – Statutory reviews of trustees’ decisions under the Bankruptcy Act 1966 by the Inspector-General in Bankruptcy. 28 Bankruptcy (Estate Charges) (Amount of Charge Payable) Determination 2015 (Cth). 29 See the Bankruptcy (Fees and Remuneration) Determination 2015 (Cth), a legislative instrument made under s 316 of the Bankruptcy Act. 30 Bankruptcy Regulation, 2.05 provides that these professional disciplinary bodies are prescribed: (a) ARITA; (b) CPA Australia; (c) CAANZ; (d) the IPA; (e) the NSW Bar Association; (f) the Law Society of NSW; (g) the Victorian Legal Services Commissioner; (h) the Victorian Legal Services Board; (i) the Bar Association of Queensland; (j) the Queensland Law Society; (k) the Legal Practice Board of WA; (l) the Law Society of SA; (m) the Legal Profession Conduct Commissioner of SA; (n) the Law Society of Tasmania; (o) the Law Society of the ACT; (p) the Law Society NT.

66

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.115]

An equivalent arrangement applies in corporate insolvency: see [10.380].

National Personal Insolvency Index (NPII) [2.115] An important aspect of the administration of bankruptcies is that it is a public process by which creditors, in particular, can take part. Important aspects of the progress of a bankruptcy are recorded on the National Personal Insolvency Index (NPII), established under Pt 13 of the regulations and maintained by the Inspector-General. It is a database that stores the bankruptcy records, and specifically the matters referred to in Sch 8 of the regulations. It records the formal arrangements entered under the Act, including Pt IX debt agreements, Pt X agreements and debtors’ petitions and sequestration orders, and includes the person’s name, address and date of birth. Except for debt agreements, these details remain permanently on the NPII as a public record. It also records the fact of a creditor’s petition having been presented to the court against the debtor, although not the issue of a bankruptcy notice. Details of registered trustees in bankruptcy are also listed. Documents filed at the offices of the Official Receivers, in particular statements of affairs, are also open to public search. As to debt agreements, once an agreement is successfully completed, information about it is removed from the NPII at the later of five years from the date the debt agreement is made or the date the obligations under the agreement are discharged. An outline of the filing requirements under the Act is at Appendix A at the end of this chapter. AFSA also provides space on its website for the advertisement of certain creditors’ meetings under both ss 73 and Pt X of the Act.31 Other than those, bankruptcy law requires very little publication of its processes, in particular in comparison with corporate insolvency. For example, there is no requirement to advertise the making of a sequestration order; it is enough that it is recorded on the NPII.

Trustees in bankruptcy [2.120] The person who administers the estate of a bankrupt is known as the trustee in bankruptcy. This title can be attributed either to a private individual, who is often referred to as a “registered trustee” , or to the Official Trustee in Bankruptcy. In this book the term “trustee” is used to refer to both registered trustees and the Official Trustee, unless otherwise specified.32 Although the role of the Official Trustee and registered trustees in any given estate is essentially the same, it is necessary to explain more about each position. Official Trustee and Official Receiver in Bankruptcy

[2.125] The Official Trustee is in effect the Government trustee in bankruptcy. It conducts over 80% of bankruptcies in Australia, many of which are consumer 31 IGPD 21 – Lodging notice of s s 73 of Part X meeting with the Inspector-General in Bankruptcy for publication. See IPRB, s 75-40. AFSA Form 38. 32 Under s 11 of the Cross-Border Insolvency Act 2008 (Cth), the Model Law is taken to refer to the trustee within the definition of s 5(1) of the Bankruptcy Act where relevant.

[2.130]

2 Introduction to Bankruptcy and its Administration

67

bankruptcies with limited or no assets.33 It is a body corporate created by the Act, has perpetual succession, and it may sue and be sued in that name: s 18. Unless a private trustee consents to act, the Official Trustee automatically becomes the trustee of the estate: s 160. The Official Trustee may be replaced by a private trustee if the creditors so resolve: s 157. If there is no trustee for any reason, for example if the appointed trustee dies, the Official Trustee becomes the trustee: s 160. There is an Official Receiver who is, with their staff, the individual officer who may exercise the powers and perform the functions of the Official Trustee: s 18(8). In effect, when the Official Trustee is appointed in respect of an estate it is the Official Receiver and staff who conduct the administration. The Official Trustee is remunerated according to the Inspector-General’s determinations, on a commission basis.34 Besides administering some estates, the Official Receiver has a supervisory and oversight role under the Act, including over estates administered by private trustees. The Official Receiver may apply to the court to have an order against a bankrupt, a trustee or other person enforced (s 30(5)) and they have the power to issue and serve notices under the Act on behalf of private trustees, such as those requiring production of documents under s 77C, or to recover property under s 139ZQ. The Official Receiver is required to maintain the NPII: reg 13.02(3). The Official Receiver’s non-bankruptcy functions also include acting on a court order for the payment of a debt due to the Commonwealth or a Commonwealth authority: s 18(3). This may include selling property and applying the proceeds towards the debt owed. Acts done by the Official Receiver may be reviewed by the court under s 15(5): CK Nominees Australia Pty Ltd v Official Receiver (WA) [2007] FCAFC 118; (2007) 160 FCR 524. Other Commonwealth laws confer further functions on the Official Trustee, a significant role being that under the Proceeds of Crimes Act 2002 (Cth). Practice statements and directions

[2.130] AFSA issues practice statements which describe how both the Official Trustee and the Official Receivers carry out their respective duties under the Act and related legislation and how their decisions are made. For example, the Official Trustee has issued practice statements relating to the assessment and collection of income contributions (OTPS 1), on dealing with bank accounts (OTPS 2), and the Official Receiver has issued ORPS 7 on issuing an Official Receiver notice and on inspecting documents filed on the NPII (ORPS 9). Separately, the Inspector-General 33 It is not a Commonwealth entity for the purposes of the Public Governance, Performance and Accountability Act 2013 (Cth): see s 18AA of the Bankruptcy Act: see also Official Trustee in Bankruptcy v Galanis [2017] FamCAFC 20. 34 In the order of $4,000 plus 20% of realisations. Fees are set under the Bankruptcy (Fees and Remuneration) Determination 2015 (Cth), a legislative instrument made under s 316 of the Bankruptcy Act.

68

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.135]

issues Inspector-General Practice Directions (IGPD) and Inspector-General Practice Statements (IGPS), referred to throughout. A list of these statements and directions relating to bankruptcy is at Appendix A at the end of this chapter. Registered trustees

[2.135] A registered trustee is a private individual, usually an accountant, who has authority under the Act to administer bankruptcies. Trustees are often also registered liquidators. About 20% of bankruptcies are administered by around 210 registered trustees in Australia. Application to become a trustee

[2.138] Any person with the required experience and qualifications can apply to the Inspector-General to be registered as a trustee in bankruptcy and thereby be authorised under the law to administer bankrupt estates. Bankruptcy is a specialised profession and trustees generally operate from an insolvency firm, with other trustee partners. They are often also registered with ASIC as company liquidators. Liquidation is the dominant focus of the profession and in fact many of the larger insolvency firms do not have bankruptcy trustees at all. On a person applying for registration, a committee is convened comprising the Inspector-General, a nominee of the Attorney-General and a registered trustee of at least five years experience chosen by ARITA (s 20-10). The committee must interview the applicant and it can also set an exam: s 20-20. Qualifications and experience etc

[2.140] IPRB, s 20-1 sets out the qualifications, experience, knowledge and abilities that a person must have to be a trustee. Practically, applicants are accountants of considerable experience in bankruptcy and insolvency practice. Applicants must be able to demonstrate the completion of certain academic requirements in accounting and commercial law, for example a business degree; at least “4000 hours of relevant employment” in the administration of bankrupt estates and exposure to the external administration and receivership of companies; and a demonstrated ability to perform the duties of a trustee: IPRB, s 20-1. The reason interviews are maintained, and introduced into the liquidator registration process, is that they allow a better assessment of an applicant’s “ability” to perform as a trustee, which is generally seen as the attribute that is the real task of the committee to assess. Experience can be confirmed, knowledge can be tested, but, as the AAT said in Crowe,35 ability refers to broader issues of professional behaviour, integrity and the capacity to act authoritatively and competently. Correct answers to questions, and experience and qualifications may not be enough. The test is not whether the applicant is as good as the experts 35 Crowe and Committee Convened by the Inspector-General in Bankruptcy [1999] AATA 200.

[2.150]

2 Introduction to Bankruptcy and its Administration

69

interviewing, but whether the applicant would be suitable in terms of the requirements in the law: Growden and Committee Under Part VIII of the Bankruptcy Act [2008] AATA 604. The law allows a person to be registered as a trustee, even if they do not satisfy these requirements, if it is thought that they are in fact suitable: s 20-20(5): see Crowe, under the former law. Therefore, while qualifications as a lawyer, even if experienced in insolvency and with accounting experience, were held not to qualify an applicant in Moore v Inspector-General in Bankruptcy [1997] FCA 638, such a person may now qualify. Certain criteria, including convictions of an offence for fraud or dishonesty, or having been a bankrupt, disqualify a person from being a trustee: IPSB, s 20-20(4). The committee may decide that a trustee’s registration should be made subject to certain conditions, for example that the trustee only take appointments jointly for the first year: s 20-20(6). The trustee can then or later request a variation or removal of any conditions: ss 20-40 – 20-65. One standard condition is that the new trustee undertake at least 40 hours of continuing professional education (CPE) each year: s 20-35, s 20-5. The committee must give reasons for its decision to the applicant and the Inspector-General, including details of any conditions imposed: s 20-25. These decisions are not published. The Inspector-General must then register the applicant as a trustee, subject to being satisfied that prior insurance is in place, and the application fee has been paid. That is, there is no separate discretion of the Inspector-General to reject a committee’s decision. The trustee’s name is entered on the Register of Trustees. The registration lasts for three years and must then be renewed. The committee

[2.145] The committee must accord natural justice but is not bound by rules of evidence.36 Necessarily, if the committee wishes to take account of some information about the applicant, it must disclose that and seek a response. The persons on the committee must not have any conflict of interest or material personal interest in the applicant or their firm. On-going obligations

[2.150] Once registered and in practice, trustees must lodge an “annual trustee return” (Form 32) by the end of each “trustee return year”, being the 12 month anniversary of the date of their initial registration: s 30-1. There are particular professional indemnity and fidelity insurance requirements imposed on trustees: Div 25, s 25-1. The form requires the trustee not only to give an assurance about having maintained adequate insurance (as required by s 30-1) but to supply other information about any disciplinary actions, cancellations of memberships or convictions of serious offences. 36 IPRB, s 50-55.

70

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.155]

This is quite different from the “annual administration return”, under s 70-5, which reports on the various estates which the trustee is administering: see [2.265]. A trustee must notify the Inspector-General if certain events occur, such as their bankruptcy or their conviction of a serious offence: IPRB, s 35-1. Other events must be notified including if information is a return is found to be incorrect, or they cease to practise or change their address.37 Other requests

[2.155] Sections 40-25, 40-30 and 40-70 of the IPSB contemplate a trustee asking the Inspector-General to suspend their registration for a period, or cancel it, or to lift or shorten a suspension.38 Renewal of registration

[2.160] The three yearly renewal process is done “on the papers”: ss 20-70, 20-75. At that point, a check is made by AFSA of the maintenance of insurance by the trustee, compliance with CPE requirements, and whether more than $500 in estate charges is owing: IPRB, s 20-10 The Inspector-General then renews the registration by entering details on the Register, for another three years: s 20-75(2). A decision of the committee under IPSB, s 20-20 is reviewable to the AAT:s 96-1(a).39 The role of the AAT is to make the decision afresh, not review the decision of the committee. AFSA records and publishes the numbers of applications for registration as trustee and the numbers refused and accepted. Register of Trustees

[2.165] The details of all registered trustees are contained in the Register of Trustees. Once a person is registered without restriction he or she is able to perform all functions of a trustee under the Act. The objects

[2.170]

The law provides that the objects of these provisions include to ensure that trustees behave ethically, and have an appropriate level of expertise: IPSB, s 1-1. Other registrations

[2.175] Trustees may be called upon to bring a range of expertise to their work, beyond their knowledge and experience in bankruptcy. This will extend to legal issues involving employment, property, contract and litigation, as well as forensics, 37 Form 33 – Trustee notification to the Inspector-General of significant and other events. 38 See Form 34 – Trustee requests to the Inspector-General relating to registration. 39 See, for example, Growden and Committee Under Part VIII of the Bankruptcy Act [2008] AATA 604.

[2.190]

2 Introduction to Bankruptcy and its Administration

71

valuation and investigations. The personal circumstances and well-being of the bankrupt can also require the trustee’s attention. Generally, trustees will require no separate registration in applying their knowledge of such disciplines. They would know that as trustee they cannot give a formal valuation or give legal advice. The same applies in relation to tax issues where a trustee may represent the bankrupt’s interests in dealings with the Commissioner of Taxation as a creditor, and otherwise attend to tax reporting and other issues. However, if an accountant trustee were to provide advice about tax issues to a debtor outside any formal appointment, in performing a role seeking to assist the debtor come to some informal arrangement with their creditors, the trustee must be registered as a tax agent.40 To the extent relevant, trustees have certain exemptions from the takeover provisions in Chapter 6 of the Corporations Act, and the insider trading provisions under Chapter 7.41 Conduct standards for trustees

[2.180] One ground for the Inspector-General to issue a show cause notice under IPSB, s 40-40 that may lead to the suspension or termination of registration, is the trustee’s failure to comply with a prescribed standard, being the standards under Div 42 of the IPSB: see [2.300]. These set out the minimum level of acceptable conduct and performance of trustees’ duties. We refer to these throughout this book as the “Standards”. The Inspector-General is able to consider these Standards in making decisions about a trustee’s suitability for continued registration. The purpose of these Standards is stated to be to ensure that trustees act in accordance with their powers and duties under the legislation “and in relation to the practice of bankruptcy law generally … and that an administration to which these standards apply is carried out consistently at a high level”: IPRB, s 42-4. Joint trustees

[2.185] The creditors are entitled to appoint two or more trustees to administer an estate, jointly or jointly and severally: s 158. In either case, the bankrupt’s property vests in the trustees as “joint tenants” and they can act severally notwithstanding that they are joint trustees: Condon v Watson (2009) 174 FCR 314; Nixon, in the matter of Nixon [2015] FCA 976. Any reference to “trustee” in the law includes a reference to joint trustees: IPSB, s 5-25. Consent to act

[2.190] In any of these circumstances, a registered trustee cannot be appointed as trustee to a particular estate unless they sign a “consent to act” which is filed with 40 See Tax Practitioners Board Information Sheet TPB(I) 12/2012 – Insolvency practitioners: Do you need to register as a tax or BAS agent? (27 September 2016). 41 Corporations Regulations 2001 (Cth), regs 6.2.02 and 9.12.01.

72

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.195]

the Official Receiver: s 156A, see AFSA Form 12. This compares with corporate insolvency except that the consent, in different form, is a form in the Courts’ Corporations Rules: Form 8.42 Remuneration

[2.195] A trustee is entitled to receive remuneration for necessary work properly performed done in administering the bankrupt estate, and in accord with “remuneration determinations”. Those determinations are made by either the creditors or the committee of inspection (IPSB, s 60-10), or by the Inspector-General (IPSB, s 60-11). Determinations may be of a particular amount, or a method for calculating the remuneration, for example by time-costing or by commission: IPSB, s 60-12. The usual course is for creditors to determine the remuneration, under IPSB, s 60-10. Their reasons for approval are at large unconstrained by the legislation. Nevertheless, the law requires that the creditors be given enough information by the trustee to allow them to make an informed decision based on the general guidance in the law. In estates with minimal funds, the trustee is entitled to receive remuneration up to a maximum default amount of $5,000, on the basis that work at least to that value was done. No creditors’ meeting, nor approval from creditors is required.43 The principles in relation to remuneration are largely the same between personal and corporate insolvency. They differ in their application because of the different roles given to each of ASIC and AFSA in relation to assessing and reviewing remuneration, and resolving disputes. In particular, the Inspector-General has the power to determine and review a trustee’s remuneration;44 ASIC relies upon an external reviewing liquidator for this purpose: see [10.440]. In corporate insolvency, the courts also assume those roles. The Inspector-General’s role includes being a default determiner of a trustee’s remuneration, a resolver of remuneration disputes, and a reviewer of remuneration.45 The structure is this: • if creditors fail or refuse to determine remuneration, or it is impractical or not cost-effective for the trustee to seek approval, the Inspector-General may do so: IPSB, s 60-11; IPRB, s 60-5. Proof of those circumstances of dispute or impracticality is required before the Inspector-General will intercede: IPSB, s 60-10. 42 The forms of practitioner independence declaration in these, and in the DIRRI under the ARITA Code, are unfortunately all different. 43 “... [T]his provision seeks to facilitate a trustee being able to draw a base amount of remuneration without incurring the expense of convening a meeting to obtain creditor approval. This provision is expected to be particularly valuable for a no (or low) asset administration”: Explanatory Memorandum to the Insolvency Law Reform Bill 2015, at [3.19]. 44 See M Murray, “Insolvency Practitioner Remuneration under the New Law and Post-Sakr Nominees” (2017) 18(3&4) INSLB 62. 45 See M Findlay, “Spotlight on Remuneration Reviews” (2018) 16(1) Personal Insolvency Regulator 5.

[2.195]

2 Introduction to Bankruptcy and its Administration

73

• If creditors do determine the remuneration, the Inspector-General may review the amount of that determination, on application of the trustee: IPSB, s 60-10; IPSB, s 60-11. This might be the case where the creditors considered that the trustee’s fees were too high and approved them at a lower amount be reduced.46 • As an alternative process, often as a result of a complaint, the Inspector-General may review a trustee’s remuneration, under Div 90, either on his or her own initiative, or on application by the bankrupt or a creditor: IPSB, s 90-21(2) That determination is ultimately reviewable by the court: IPSB, s 90-21(3).47 In a review by the court under IPSB, s 90-21, the question for its determination is whether the trustee’s remuneration is reasonable, taking into account any or all of these remuneration factors, summarised as follows: • the extent to which the work was necessary and properly performed; • the period of time during which the work was performed; • the quality of the work; • the complexity (or otherwise) of the work; • the extent (if any) to which the practitioner was required to deal with extraordinary issues; • the extent (if any) to which the practitioner was required to accept a higher level of risk or responsibility than usual; • the value and nature of any property; • the number, attributes and conduct of the creditors; • if claimed on a time-cost basis, the time properly taken; • whether the practitioner was required to deal with other appointees; • the report of the Inspector-General; and • any other relevant matters. These are the criteria that have applied in corporate insolvency law for some time, under former s 473 of the Corporations Act, and which now appear in Div 60 of the IPSC. In Sanderson v Sakr Nominees [2017] NSWSC 38, the NSW Court of Appeal saw factors in former s 473(10)(d)-(e) (quality and complexity) and (g)-(h) (risk and value of property) as relating to the concept of proportionality, it being an important consideration in determining reasonableness. That is, the work done, and consequent remuneration claimed, must be proportionate to the difficulty and importance of the task in the context in which it needs to be performed. The Court held that relying solely on a percentage based calculation to secure proportionality, as earlier decisions had suggested, was not appropriate. As a matter of how the new law is framed, the remuneration factors apply only as criteria for determinations or reviews by the court, under IPSB, s 90-21, or where the Inspector-General assumes what is a quasi-judicial role under IPSB, s 60-11, according to the criteria in IPRB, s 60-11. 46 There is no direct right of appeal from the Inspector-General’s determination although a right of judicial review may be available: see Inspector-General Practice Statement (IGPS) 15 – Assessment by the Inspector-General of a trustee’s remuneration approval request. 47 Andersen v Lennon [2017] FCCA 2452.

74

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.200]

In other cases, the bases for determining remuneration are left open – for the creditors or the committee, or the Inspector-General in her or his reviewing role. While that is how the law is expressed, nevertheless the remuneration factors are a general guide to determining whether remuneration is reasonable, to which the creditors and other parties can usefully refer. Notices

[2.200] The law necessarily ensures that creditors are advised of the remuneration being claimed, in particular, because they are authorised to approve it. The various notices to the creditors and the bankrupt are: • an Initial Remuneration Notice, as to the method by which remuneration is to be calculated: IPRB, s 70-35; • subsequent Remuneration Claim Notices, advising creditors of their right to elect within 20 business days whether they want to receive a remuneration claim notice under IPRB, s 70-47; • Reports about Remuneration given to creditors before Remuneration Determinations are made: IPRB, s 70-45. Remuneration Claim Notices must be sent to those who have elected to receive them, under IPRB, s 70-47 before finalising the administration. The Remuneration Claim Notice must show the total amount of remuneration claimed and details of work performed, the method of calculation, disbursements claimed and how calculated, and an explanation of any variation from the amounts set out in any report under IPRB, s 70-45 in relation to the remuneration claimed, and the method of calculating the amount of remuneration claimed. It must also include a statement advising the bankrupt and the creditors that they can, within 20 business days, request the Inspector-General to review the remuneration claimed by the trustee: IPRB, s 70-47(5). Particular remuneration issues

[2.205] Typically, a trustee is remunerated according to time reasonably spent by the trustee and their staff based on hourly rates approved by creditors. Remuneration is then drawn from the proceeds of assets realised in the estate or from funding or indemnities given by creditors. Costs and disbursements of the trustee – such as legal fees and search fees – are not remuneration and while the trustee does not need approval from creditors to incur and pay them, the law requires the trustee to incur them with the care and attention as if they were his or her own expenses. These may be reviewed by the Inspector-General under IPSB, s 90-21, IPRB, Div 90. The trustee may also dispute the third party’s bill – for example, legal costs – under IPRB, s 65-20, with a right of review to the AAT then available. As in corporate insolvency, the assessment of a trustee’s remuneration can raise contentious issues, including in relation to the amount of remuneration and

[2.210]

2 Introduction to Bankruptcy and its Administration

75

disbursements compared with the amounts realised and paid to creditors as a dividend, if any dividend is paid at all: see Boensch v Pascoe [2007] FCA 1977, at [6.450]. Courts have pointed out that “a trustee has no choice but to carry out certain statutory duties and that, in a small bankruptcy, the trustee’s costs might appear disproportionately large”;48 and that while “(t)he number and size of claims and the number and value of assets is an important, but not the only, element … there are many ways in which costs may be incurred which are not related, principally or even at all, to the assets and liabilities of the estate”.49 Reviews of trustees’ remuneration by the Inspector-General

[2.210] The Inspector-General has authority under IPSB, s 90-21 to review a trustee’s remuneration on application by a creditor or the debtor or on his or her own initiative: IPSB, ss 90-21, 90-22; IPRB, ss 90-1 to 90-65. This contrasts with corporate insolvency where a “reviewing liquidator” is appointed for such a task: see [10.440]. The application for review must be in writing and made within certain time limits: IPRB, s 90-5. The Inspector-General may extend the time limit, if appropriate, and this decision is itself subject to AAT review. An application must meet certain threshold criteria: IPRB, s 90-10 and the Inspector-General must refuse an application to review unless at least one of grounds listed in s 90-10(2)(a) is met. The Inspector-General must also refuse an application if satisfied that the applicant does not have an interest in the outcome of the review, for example, where it appears that the review is sought in order to delay the administration of the bankruptcy, or where the applicant has not adequately particularised their concerns, or the application is frivolous or vexatious. Notwithstanding these, the Inspector-General still has a discretion to accept the application in exceptional circumstances. An application for review should occur only after other avenues of dispute resolution have been attempted. Where an applicant fails to pursue these without reasonable explanation, the Inspector-General may refuse the application under IPRB, s 90-10(4). The applicant must then be given notice within 10 business days along with reasons for the refusal. IPRB, s 90-55 provides the Inspector-General with flexibility and discretion in the conduct of such reviews but ordinary requirements of procedural fairness apply to the conduct of reviews including to direct questions to be answered, to engage experts and to inspect documents. Ordinary requirements of procedural fairness apply to the conduct of reviews. There is power to direct the trustee to refund remuneration: IPRB, s 90-55(3)(l). If directions of the Inspector-General under IPRB, s 90-55(3) are not complied with, the trustee may not be entitled to the remuneration under review, and third party’s costs may be denied, for example a lawyer whose bill of costs is under review. 48 Simion v Brown [2007] EWHC 511 (Ch). 49 Brook v Reed [2011] EWCA Civ 331; [2011] 3 All ER 743.

76

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.220]

The Inspector-General must make a decision on the review within 60 days of accepting or initiating the review (IPRB, s 90-65) and prepare a written statement which includes the decision, reasons for the decision, any findings of fact and the material on which those findings are based. The statement must also refer to IPSB, s 90-21(3) which allows for an application to the court to review the Inspector-General’s decision, by any of the trustee, the bankrupt, or a creditor. The statement must be given to each party to the review within 10 business days of making the decision: IPRB, s 90-65(5). Other authority over trustees

[2.220] The Inspector-General has many other administrative powers over trustees, contained in IPSB, Div 40 – Disciplinary and other action. These include the power to direct a registered trustee to comply with a requirement to lodge a document, or give any information or document, to the Inspector-General (IPSB, s 40-5); and to direct a trustee not to accept any more appointments as trustee (IPSB, s 40-15). These are discussed after the following explanation of the duties and powers of trustees. DUTIES AND POWERS OF TRUSTEES IN BANKRUPTCY Generally [2.225] As explained earlier, either a registered trustee or the statutory Official Trustee may act as the trustee of a bankrupt estate. Trustees are governed by the general rules relating to trustees except where their position is modified by the provisions of the Act or other statutes.50 Bankruptcy trustees owe duties to creditors, including fiduciary duties, as well as to the bankrupt and the community, and this can require trustees to maintain the right balance of competing interests. Hence, the position of a bankruptcy trustee is more complex than the one in which most trustees find themselves in a conventional trustee situation.51 See Samootin v Official Trustee in Bankruptcy (No 2) [2012] FCA 316 at [26]: “Unlike the trustee/beneficiary relationship there is no identity of interest between the bankruptcy trustee and the bankrupt in all aspects of the administration of the bankrupt estate. In the trustee/beneficiary relationship, every step the trustee takes must be in furtherance of the beneficiary’s interest … In contrast, (a bankruptcy trustee) acts in furtherance of its statutory duties, which may not always coincide with the interests of the bankrupt.”

A feature of the trustee’s role is that there is no client for whom the trustee acts, as in a typical professional relationship. Instead there are the range of stakeholders, mainly the creditors, for whom, largely, the trustee is responsible and to whom 50 Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, 209. And see IGPD 14 – Proper performance of duties of a trustee. 51 Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, 208; Fuller v Wily [1996] FCA 1593.

[2.230]

2 Introduction to Bankruptcy and its Administration

77

duties are owed. But while they must act in the creditors’ interests, and must take into account any lawful directions given by the creditors at a meeting (IPRB, s 85-5), the trustee is not bound to comply with those directions.52 Ultimately, it is the trustee’s own decision as to how the estate is administered. In one case, the court rejected a sole creditor’s challenge to the decisions of the trustees. The court said the applicant creditor: took the view that the trustees were working for her and her alone and that she simply had to benefit financially from the administration. The applicant ignored the fact that the trustees were independent professional officers of the court who owed duties to persons beyond the applicant.53

Nor are trustees required to abide by the principles of procedural fairness in their dealings with creditors: Young v Thomson (formerly trustee of the property of Young) [2017] FCAFC 140. This unique position is coupled with strong powers of the trustee over the creditors and other stakeholders involved in the bankruptcy. The trustee holds money on account of the creditors to be distributed according to the legal requirements and according to fiduciary responsibilities. These powers entail a corresponding “vulnerability in the creditors, members and the public”54 that requires high standards of honesty, impartiality and probity in the trustee. As trustees are usually professional accountants, they are bound by the Code of Ethics for Professional Accountants,55 and, depending on their professional body membership, by the ARITA Code or APES 330 – Insolvency Services. Section 19

[2.230] The general duties of a bankruptcy trustee are also expressed in s 19 of the Act. These are listed as: (a) notifying the bankrupt’s creditors of the bankruptcy; (b) determining whether the estate includes property that can be realised to pay a dividend to creditors; (c) reporting to creditors within three months of the date of the bankruptcy on the likelihood of creditors receiving a dividend before the end of the bankruptcy; (d) (repealed by the ILRA 2016) (e) determining whether the bankrupt has made a transfer of property that is void against the trustee; (f) taking appropriate steps to recover property for the benefit of the estate; (g) taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt’s duties under this Act; (h) considering whether the bankrupt has committed an offence against this Act; 52 Re Weiss [1986] FCA 287. 53 Winn v Yeo & Rambaldi as former trustees of the estate of Goodwin (a bankrupt) [2017] FCCA 2528. 54 ASIC v Edge [2007] VSC 170; (2007) 211 FLR 137. 55 APES 110; Accounting Professional & Ethical Standards Board Limited (“APESB”).

78

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.235]

(i) referring to relevant law enforcement authorities any evidence of an offence by the bankrupt against this Act;56 (j) administering the estate as efficiently as possible by avoiding unnecessary expense; (k) exercising powers and performing functions in a commercially sound way; (l) attending to the duties imposed on the trustee under Schedule 2, that is, the IPSB. These are supplemented by the “Standards” in IPRB, Div 42 (see [2.180]), including as to realising assets, conducting investigations and dealing with creditors. The court may order that a trustee make good the loss that their conduct has caused to the bankrupt estate under IPSB, s 90-15.57 The duties in s 19 are not exhaustive; no other duties can conflict with them. The standard to which the trustee must attend to these duties is that of “reasonable skill”. Hence, any application for removal of the trustee and to make good losses allegedly suffered by the estate, is to be determined by that standard.58 Trustees have been regarded as officers of the court, whether they are acting under a court ordered bankruptcy or a voluntary bankruptcy; that is, they are seen as an arm of the court whom the court will protect and assist where necessary; but at the same time, the court expects trustees to act with the highest probity.59 They also have broad commercial discretion, such as when and how assets are sold, and the courts generally do not seek to interfere in their commercial judgment when it is challenged. They should act with reasonable diligence and, it has been said, as an ordinary prudent person in business.60 They are required to properly disclose to the court all relevant matters when they are a party to any proceedings and to conduct litigation at a high standard: In the matter of St Gregory’s Armenian School (in liq) [2012] NSWSC 1215. Independence

[2.235] A fundamental requirement, not directly stated in the Act, is that trustees must act impartially and independently, and be perceived to be doing so.61 Indeed, given their role, their independence standards are higher than those imposed on other professionals.62 This is the same requirement expected of registered liquidators. 56 See IGPS 14 – Referral of offences against the Bankruptcy Act 1966 to the Inspector-General. 57 Hacker v Weston [2015] FCA 363. 58 Riva NSW Pty Limited v Official Trustee in Bankruptcy [2017] FCA 188, Perry J reviewing the relevant case law. 59 Unlike liquidators, trustees are not in fact appointed by the court when a sequestration order is made: see Bankruptcy Act, s 156A(3); compare Corporations Act, s 472. 60 Commercial and General Acceptance Ltd v Nixon [1981] HCA 70[ (1981) 38 ALR 225. 61 Lamb v Registrar in Bankruptcy (1984) 56 ALR 521; Re Hurt (1988) 80 ALR 236. 62 Re Ladyman (1981) 38 ALR 631, 642; Mannigel v Aitken (1983) 77 FLR 406, 408-409; Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, 208-209.

[2.240]

2 Introduction to Bankruptcy and its Administration

79

The perception of their independence from parties connected with the bankrupt is as important as the reality of their acting independently. For example, in Boral Montoro Pty Ltd v McLachlan [2007] FMCA 533, the fact that a proposed trustee’s firm was a creditor of the bankrupt, even though only for a small amount, meant that there was a perceived lack of independence and the trustee could not take the appointment. It was not enough that the trustee’s firm offered to not lodge a proof of debt for that claim in the bankruptcy; the court was concerned with the appearance of the trustee’s firm being a creditor. But in some cases, the courts are ready to address conflicts without requiring the trustee be removed, in particular if the issue arises in the midst of the administration of the estate. So, in Griffin v Triscott (2004) 183 FLR 1, the trustees and the liquidators of the bankrupt’s company were partners in the one firm. The trustees envisaged potential claims being made by the liquidators against the bankrupt estate. The trustees acknowledged the conflict but successfully sought the appointment by the court of a separate “special purpose” trustee to deal with the liquidators’ claim. In making this appointment, the court accepted that it would cause unnecessary expense to the bankrupt estate if the trustees were removed. Courts will allow a company director’s trustee in bankruptcy to also be the liquidator of the director’s company in circumstances where the creditors, assets and factual and legal issues are intertwined, usually with a direction made that the trustee come back before the court in the event that a conflict arises: Application by Solomons [2013] FCA 1273. Courts may also allow a joint appointment where, for example, the bankrupt director is the sole shareholder: Pascoe v Ambernap [2008] FCA 1975. In another case, the court permitted the firm partners of the trustee to become the liquidators of the bankrupt’s company: Scott (Trustee) v Icicek Holdings Pty Ltd [2015] FCA 1387; see also Weston (Trustee) v ASIC, in the matter of Empire Property and Investment Group Pty Ltd (Deregistered) [2017] FCA 176. Dealing with the person who is bankrupt

[2.240] Bankruptcy can raise tensions and emotions in the bankrupt and those affected by the bankruptcy. These must be managed but there have been cases where there has been a breakdown in the trustee’s relationship with the bankrupt, in which the trustee should consider resigning (Doolan v Dare [2004] FCA 682; (2004) 2 ABC (NS) 16; Trkulja v Morton [2005] FCA 659; (2005) 4 ABC (NS) 110). Relationships with creditors can also become fraught, although creditors have the option to remove the trustee, under IPSB, s 90-35. However, the law will not allow certain creditors to abuse this power by removing a trustee who is, for example, bringing proceedings against them for recovery of property. Nor will the court stand by and allow the bankrupt or the creditors, by continued resistance to the trustee, to allow the administration of the estate to so degenerate: Boensch v Pascoe [2007] FCA 1977; (2007) 5 ABC (NS) 480. These may be issues that more frequently arise given the extended authority of creditors in the reforms introduced by the ILRA, for example to request information and documents.

80

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.245]

Although the trustee is not to be regarded as the agent of the bankrupt, and does not act according to their’ requests,63 the trustee must not ignore the interests of the bankrupt. Indeed, protection of the bankrupt from creditors’ claims is an important purpose of bankruptcy which the trustee must try and ensure. Duties of trustees relating to undue benefits etc

[2.245]

As with any fiduciary, a trustee must not directly or indirectly derive any profit or advantage from the estate: IPSB, s 60-20. This would preclude profiting from a sale of property, or from purchasing estate property, or receiving some benefit from a creditor. It extends to any related entity of the trustee. This does not apply to the extent that some other provision of the Act allows it or the court gives leave. The section notes, for example, that the trustee is not prevented from recovering remuneration for necessary work properly performed, permitted under other provisions of the Act. The prohibition does not apply if the trustee engages a related entity without reasonably knowing of the benefit gained, or the creditors agree to the arrangement, or it is not reasonably practicable to gain the creditors’ agreement, and the cost involved is reasonable. Nor does the prohibition apply to any payment from the Commonwealth. A transaction or any other arrangement entered into in contravention of s 60-20 may be set aside by the Court. IPSB, s 60-21 prohibits payments by a trustee with a view to securing their appointment or nomination as a trustee; or securing or preventing the appointment or nomination of another trustee; payments to a trustee for performance of their ordinary duties are prohibited by s 60-26, unless the payment was authorised by resolution of the creditors or a committee of inspection. The seriousness of these prohibitions is indicated by their penalties – 50 penalty units, and 3 months imprisonment for a breach of s 60-21.

The rule in Ex parte James [2.250] The rule in Ex parte James; In re Condon (1874) LR 9 Ch App 609 is a rule of fair dealing expected of a trustee in bankruptcy (and of a liquidator), that can be used to resist a trustee’s claim on a person, even if that means overriding the trustee’s strict legal rights. It typically applies where there has been a mistake of law or fact made by that person. In the case itself, a creditor had obtained execution against a debtor before his bankruptcy but the creditor paid the amount in question to the trustee in the mistaken belief that the trustee was legally entitled to the funds. The trustee was ordered to repay the moneys to that creditor. The rule requires three elements to be satisfied, that the person seeking to rely upon the rule must have caused some form of enrichment of the bankrupt estate, usually by payment of money; the person must not be able to prove their claim in the bankruptcy; and an honest person would acknowledge that it was not fair that the 63 Re Challen [1996] FCA 1414.

[2.255]

2 Introduction to Bankruptcy and its Administration

81

enrichment should not be the subject of redress and the money repaid. That redress is given only to the extent necessary to require, usually, a repayment of the money by the trustee, even though this might not necessarily restore the person’s financial status quo.64 The position of the general creditors is not relevant; the concern is solely whether it is clearly unfair for the trustee to retain the money at the person’s expense.65 Each case is to be assessed on its own facts and circumstances – the court is free to act according to what would be just and fair in the mind of a reasonable person – “the person on the Bondi bus” as one judge referred to it – and whether that person “would consider that it would be unfair or even shabby conduct” for the trustee or liquidator to insist on their legal rights and deny the claim.66 It is referred to in AFSA’s guidance, IGPD 14 – Proper performance of duties of a bankruptcy trustee. While the rule is often raised against trustees, it is not often accepted by the courts. In Re Ayoub; ex parte Silvia [1983] FCA 112; (1983) 67 FLR 144 a bankrupt continued to operate a business after bankruptcy and obtained goods from suppliers on credit for the purpose of that business. The suppliers were unaware of the bankruptcy. Apart from the fact that the debts were incurred after bankruptcy, and were not provable, nor was the trustee personally liable for them, the principle in did not mean that it was unfair for the trustee to rely upon his strict legal rights in not paying the suppliers. It was expected that the suppliers would have checked on the creditworthiness of the bankrupt.67 In contrast, where a revenue authority refunded, in error, an amount of goods and services tax to a liquidator, the rule was applied to authorise the liquidator to repay back the amount of tax.68

Particular responsibilities [2.255] Although there is no provision in the Bankruptcy Act to excuse a trustee from acting if there are no funds in the estate,69 a trustee is not obliged to take steps which would be unrealistic or expensive; a commercial approach must be taken. The fact that a trustee has no funds which would permit a particular course to be taken – for example to recover assets – is a relevant consideration for a trustee to weigh up and for a court to assess in reviewing the trustee’s conduct in not pursuing those assets: Freeman v Joiner [2005] FCAFC 149; (2005) 3 ABC (NS) 332; Boensch v Pascoe [2007] FCA 1977; (2007) 5 ABC (NS) 480. One exception is that the law excuses a trustee from responding to creditor requests for information, or to hold a meeting, if there are no funds: IPRB, s 80-15(2). 64 One type of order is to direct the trustee or liquidator to pay a percentage of the value of the relevant property to the person who has succeeded under the rule: see Ebner v Official Trustee in Bankruptcy (2003) 126 FCR 281, 294. 65 Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676; (2007) 64 ACSR 31 and cases there cited. 66 Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676; (2007) 64 ACSR 31. 67 The rule was also unsuccessfully invoked in Rambaldi, in the matter of Houston (Bankrupt) [2008] FCA 1519. 68 Burns v Commissioner of Inland Revenue [2011] NZHC 1363. 69 See Corporations Act, s 545.

82

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.260]

Nevertheless, there are particular statutory responsibilities required of a trustee. These include to notify the bankrupt’s debtors, banks, the Commissioner of Taxation and others of the bankruptcy; to take possession of property of the bankrupt (s 129(1)); to obtain a statement of affairs from the bankrupt; and to keep accounts and records which demonstrate a full and correct account of the administration. The investigation and referral of offences is another fundamental obligation, under s 19 of the Act. Funds handling

[2.260] The handling of funds by trustees is necessarily a significant responsibility. In 2016–17, registered trustees handled over $330 million in estate funds. IPSBDiv 65 gives detailed rules about these responsibilities, including the requirements to pay all moneys of the estate into an interest-bearing account within 5 business days – IPSB, s 65-5; IPRB, r 65-1; not paying any other money into the account – IPSB, s 65-15; and only paying money out of the account for estate administration purposes, or by direction of the court: IPSB, s 65-25. Penalty interest of 20% applies: IPRB, r 65-5. Interest on an administration account is payable to the trustee and is not subject to taxation, except under the Bankruptcy (Estate Charges) Act 1997: IPSB, s 65-31. This means that although the trustee receives the interest, it must then be paid over in estate charges. A trustee can keep a single account for more than one estate, on certain terms: IPSB, s 65-32. This is not permitted in corporate insolvency: see [10.275]. Creditors can apply to the court for directions to the trustee about the way money and other property of the estate is to be handled: IPSB, s 65-45. If these requirements are not complied with, the trustee may have to pay penalties, be paid less remuneration or even be removed as trustee. In addition, the Standards set out various required actions of a trustee, in particular at an early stage to notify the bankrupt and the creditors, to make an assessment of assets and the likelihood of their realisation or recovery, to conduct property searches and to determine if income contributions are payable. Administration returns

[2.265] Section 70-5 of the IPSB will require a trustee to lodge with AFSA an annual administration return for each estate administered during the year. This must be lodged within 25 business days after 30 June. However, this requirement does not commence until the 2018-19 financial year; the existing requirements under former s 170A continue until then. These returns provide the Inspector-General with necessary information about the operation of the Act as well as about the trustee’s compliance with the Act in relation to specific estates, including payment of interest and realisation charges under the Bankruptcy (Estate Charges) Act 1997 (Cth). See IGPS 7 – Annual estate returns. Trustees can now lodge these returns through an online process.

[2.275]

2 Introduction to Bankruptcy and its Administration

83

Powers of the trustee [2.270] A trustee has a variety of powers to do many things in administering the estate. Important powers exercisable at the trustee’s discretion are contained in s 134 and they include: • selling property. This includes selling a bankrupt’s right of action. The right of a trustee to sell their own rights of action, as trustee, under IPSB, s 100-5, does not come within s 134 because those rights of action are not property of the estate, they are rights of the trustee personally; • carrying on the bankrupt’s business (but only so far as is necessary to sell it, for example as a going concern); • compromising any debt due to or by the bankrupt. Unlike in corporate insolvency, there is no limit on the amount which the trustee may decide to settle a debt owed: see [10.220]; • obtaining advice and assistance, such as legal or valuation advice; • taking or defending legal proceedings. This power is connected with the right to continue a bankrupt’s litigation claim, under s 60(3), or to defend a creditor’s claim if the creditor has leave to continue with it, under s 58; and • leasing the bankrupt’s property. This may be necessary to continue a lease or to lease a property pending its sale. The powers also include generally superintending the management of the estate and administering its property “in any other way”. Other powers exist allowing the trustee to demand books and to access property, apply to the court for the bankrupt to be arrested, make requests of the bankrupt for assistance, and to have the bankrupt and others publicly examined in court. These powers are explained in Chapter 6.

Liability of the trustee [2.275] Under the general law trustees are personally liable for costs incurred and other liabilities imposed in the course of the administration. For example, a trustee is personally liable for costs awarded against the trustee arising from the unsuccessful pursuit of litigation. Litigation is brought or defended in the trustee’s own name, as trustee for the estate: see s 161. It follows that the trustee in bankruptcy, as at general law, is entitled to a full indemnity out of the bankrupt estate against all costs, charges and expenses that have been properly incurred: Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201. However, this indemnity may be worthless if there are no assets in the estate; trustees may therefore seek indemnities from creditors or other external funding for litigation purposes. This right of indemnity applies also to the Official Trustee () whose liability is indemnified by the Commonwealth: s 18A. The Commonwealth also provides an indemnity for liability of the Inspector-General, and of the Official Receivers: s 19A. Trustees are generally not required to give security for costs in their pursuit of litigation: Macks v Valamios Produce (No 2) [2003] NSWSC 1044.

84

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.280]

However, if a trustee has been found to have acted unsatisfactorily or unreasonably, for example in the conduct of litigation, a court may order that the trustee on behalf of the estate have no order for costs (Macks v House [2002] FCA 1540) or that costs be borne by the trustee personally, with no right of indemnity from the estate. An example under the old law is Liprini v Pascoe (No 2) [2012] FCA 1024. Particular power is given to the court under IPSB, s 90-15 to make such orders. There are also certain limitations on the personal liability of trustees contained in s 139 of the Act, as to seizure or dealing with property, land rates and charges, and long service or other such leave. Section 306B gives protection to certain statements made by the trustee in good faith in certain statutory reports. The right of a trustee to assign a voidable transaction claim under IPSB, s 100-5 is another means of a trustee protecting themselves, and the estate, by way of avoiding the risks of adverse costs orders inherent in litigation. A trustee (and others) have some protection where there is found to be a defect or irregularity in the trustee’s appointment. If the trustee has administered the bankruptcy in the meantime, that defect or irregularity does not invalidate any act done by the trustee in good faith: s 306(2). See Wily v Official Receiver [2015] FCCA 425.70

Trustees – their regulation and removal [2.280] Given the significant powers and responsibilities of trustees, they are closely regulated, both by the Inspector-General and by the courts. Creditors also have a role in the regulation and oversight of trustees. Regulation by the Inspector-General

[2.285] IPSB, Div 40 contains a range of provisions allowing the InspectorGeneral to regulate the conduct of trustees and if necessary to suspend or terminate their registration. This extends to the Inspector-General directing that a trustee accept no further appointments; or referring the trustee to a discipline committee, or the court. A trustee’s registration is automatically cancelled in some cases, for example, if they go bankrupt. Termination of registration

[2.290] IPSB, Div 40 sets out the process by which the Inspector-General may take disciplinary and other action against a trustee, including by way of terminating a trustee’s registration for grounds such as misconduct, or commission of some serious offence. The Inspector-General may direct a registered trustee to comply with a requirement to lodge a document or to provide information: IPSB, s 40-5. If the trustee fails to 70 Self-represented litigants have no right to recover “professional costs”, unless they are lawyers: London Scottish Benefit Society v Chorley (1884) 13 QBD 87; Coshott v Spencer [2017] NSWCA 118; [2018] HCA Trans 81.

[2.300]

2 Introduction to Bankruptcy and its Administration

85

comply, the Inspector-General can direct that the trustee accept no further appointments (IPSB, s 40-15(1)) or seek an order from the Court directing the trustee to comply (IPSB, s 45-1). Similar processes apply if the Inspector-General reasonably suspects that information provided by a trustee under the Act is incomplete or inaccurate. The Inspector-General can also direct the trustee to advise relevant people about the incorrect information. There are other grounds on which the Inspector-General can issue a direction not to accept further appointments, for example, if the trustee fails to comply with a direction to convene a meeting. Suspending or cancelling registration

[2.295]

The registration of a trustee is automatically cancelled if the trustee becomes an insolvent under administration71 or dies: IPSB, s 40-20. In some circumstances, the Inspector-General can suspend or cancel the trustee’s registration: IPSB, ss 40-25, 40-30. A decision about the suspension or cancellation of the registration of a trustee is reviewable by the Administrative Appeals Tribunal (see IPSB, Div 96): see IPSB, s 96-1. Show-cause notice

[2.300] Under IPSB, s 40-40, the Inspector-General may request a written explanation from a trustee as to why they should continue to be registered if the Inspector-General believes that the trustee no longer has the relevant ability to act as a trustee; has been convicted of an offence of fraud or dishonesty; or has failed to discharge their duties as trustee properly.72 That process is usually activated following some complaint about the trustee’s conduct or competence, or following a review of the trustee’s files by the Inspector-General. These are commonly known as “show cause” notices. If there is no satisfactory explanation from the trustee, a discipline committee may be convened under IPSB, s 40-45 to which the Inspector-General can refer the trustee’s conduct for a decision whether the trustee should continue to be registered. There is no requirement for the Inspector-General to give reasons for the referral.73 The committee must make its best endeavours to make its decision within 60 days: IPRB, s 50-90. 71 Defined in Corporations Act, s 9 72 This extends to the trustee’s conduct “in a foreign country”, for example, when acting under the authority of Bankruptcy Act, s 29 in pursuing assets overseas: see M Murray, “Cross-border Regulation of Insolvency Practitioners” [2018] 19(3) INSLB 55. 73 Decision of the Committee in the matter of Louise Thomson, 6 April 2018, recorded on AFSA’s Register of Trustees.

86

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.305]

The discipline committee74

[2.305] The committee sits informally but must abide by principles of natural justice and although it is not bound by the rules of evidence it must have regard to them75 and be cautious, for example, about relying upon hearsay evidence. The members of the committee must be independent of the trustee and must be seen to be so. It is important that the person on the committee from AFSA should not have been involved in investigating the trustee’s conduct.76 The trustee chosen by ARITA must also meet independence standards and be a person with the knowledge and experience necessary to carry out their functions on the committee. This person should have, apart from knowledge of bankruptcy, knowledge also of the requirements of natural justice and of objective decision-making, and of the available penalties.77 The trustee should be entitled to representation. Further, while the Act and Rules are limited in their statutory requirements, as a requirement of natural justice, the trustee must be clearly advised of the case against them. This is despite the fact that under IPSB, s 40-55(3) is not clear as to what decision, beyond penalty, the committee is to make. The committee can nevertheless have regard to a wide range of issues, including any information provided by the Inspector-General, any explanation or information given by the trustee, and any other matter that the committee considers relevant: IPSB, s 40-55(3). The committee then must make a decision whether the case against the trustee in respect of their conduct has been shown and if so what penalty to apply. It has the option to cancel the registration, or allow the registration to continue subject to specified conditions: IPSB, s 40-55. Any such decision is reviewable to the AAT: IPSB, s 96-1.78 Industry body notices

[2.310]

An “industry body” can lodge with the Inspector-General notice of possible grounds for disciplinary action against a trustee: IPSB, s 40-100.79 This involves any of a large number of professional bodies – ARITA, CAANZ, CPA80 – determining on reasonable suspicion that there are grounds for the InspectorGeneral to take some action against a trustee. The Inspector-General must consider the information referred and let the industry body know. 74 The processes are set out in IPRB, Div 50. See generally “Disciplinary Tribunals and Rules of Procedural Fairness” at [1.1320] in Walmsley, Abadee, Zipser and Sirtes, Professional Liability in Australia (3rd ed, Lawbook Co, 2016). 75 IPRB, s 50-55. 76 The principle is discussed in Isbester v Knox City Council [2015] HCA 20. 77 IPSB, s 50-5. 78 As to the impact of cancellation of registration, see Castle, “Insolvency Law Reform — Resignation Versus Cancellation” (2016) 17(5) INSLB 73; Castle, “Insolvency Law Reform – The 10-year Ban” (2016) 17(7) INSLB 127. 79 See AFSA Form 35 – Notice by an industry body of possible grounds for disciplinary action. 80 These professional bodies are listed at footnote 30.

[2.325]

2 Introduction to Bankruptcy and its Administration

87

Given the potential for liability from this process, the industry body, and any person referring information or using it, is protected, if they act in good faith and their suspicion is based on reasonable grounds: IPSB, s 40-105. Register of Trustees

[2.315] Some disciplinary processes and outcomes are to be recorded on the Register of Trustees: IPSB, s 15-15(a). These include particulars of any disciplinary action (defined in s 5-5) but exclude the giving of a direction by the InspectorGeneral under IPSB, s 40-5: IPRB, s 15-1(2)(f). The trustees’ resignation, release etc

[2.320] A trustee may wish to resign from an estate, under s 180, or be removed as trustee from a particular estate without any issue being raised about their continued registration as a trustee. A resignation as trustee of an estate is subject to the court accepting that resignation. The court did so in Malanos v Trovas [2012] FMCA 897 in light of the trustee’s perceived conflict of interest arising from a connection with certain creditors. Attending to conflicts of interest is a requirement of trustees under the Standards. A trustee may also be “released” from a trusteeship of a particular estate by order of the court under s 183. Such an application may be made where there is some possible liability of the trustee from which the trustee seeks protection: Hacker v Weston (No 2) [2015] FCA 521. The relevant court bankruptcy rules provide that a trustee’s application for acceptance of their resignation, or release, must be accompanied by evidence of the grounds in support, and in the case of a release, by details of the realisation of the bankrupt’s property and distribution of the estate and a copy of the file records (books) of the trustee’s administration of the estate kept under IPSB, s 70-10; Courts’ Bankruptcy Rules, r 8.02. If not otherwise released, the trustee is released automatically at the expiration of seven years from the date on which the Official Receiver entered on the NPII the fact that the administration of the estate was “finalized”: s 184. That term is not defined but it seems it should not precede the end of the three-year period of bankruptcy. IPRB, s 42-140 simply says that a trustee, when distributing dividends, must also advise creditors if “the administration is finalized”. Note that the “end of an administration” is the day the bankruptcy is annulled or the bankrupt is discharged, whichever happens first: IPSB, s 5-5. Replacing a trustee

[2.325]

Trustees may also be replaced at any time by resolution of the creditors: IPSB, s 90-35. This may be for reasons of creditor dissatisfaction with the trustee, or for reasons of convenience (the trustee may wish to retire) or a conflict of interest may have arisen. The trustee cannot refuse to convene such a meeting if validly requested according to the requirements under IPSB, s 75-15: Liprini v Pascoe [2012]

88

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.330]

FCA 886, a decision under the former law. A similar provision to remove a liquidator applies in corporate insolvency: Subdiv D. At least five business days’ notice of the meeting must be given to the creditors. This also applies to the Official Trustee: IPSB, s 90-30. The law allows the trustee who has been removed to apply to the court to be reappointed. If they do so, they must record all their costs incurred in relation to the application in a way that separates those costs from their costs incurred in relation to other matters. The court may order that the former trustee be reappointed if it is satisfied that the removal was an improper use of the powers of one or more creditors: IPSB, s 90-35(5). Other orders may be made as the court thinks fit, including orders in relation to the costs of the application and the remuneration of the former trustee. The law imposes no obligation on a former trustee to apply for reappointment, even if there appears to be improper conduct. If they choose not to contest their removal in such a case, the proper course for the former trustee may be to refer the matter to the Inspector-General. The incoming trustee must give a declaration of independence: IPRB, s 75-265. Streamlined replacement – s 181A

[2.330] A “streamlined method” of replacing a trustee is also available, under s 181A. Another trustee can be nominated to the creditors in writing, who then have 10 days to object. Where no objection is made by any creditor, the new trustee replaces the former trustee as trustee of the estate. This process is often used by the Official Trustee in transferring to registered trustees bankrupt estates that it does not have the resources to handle.81

Court oversight of trustees [2.335] Necessarily the court has a significant role in the oversight of trustees’ conduct; at the same time, a court can act to protect or assist a trustee, for example, by giving directions. The new powers introduced by the ILRA are broadly equivalent to former ss 176, 178 and 179 of the Act. A significant addition under the new law is that the court can act “on its own initiative, during proceedings before the Court”, comparable with former Corporations Act, s 536: see IPSB, ss 45-1(2)(a), 90-5(1); 90-15(2)(a). Court review of a trustee’s conduct

[2.340] Under IPSB, Div 45, the court has various powers to deal with the conduct of a particular trustee. Under IPSB, s 45-1, the court “may make such orders as it thinks fit in relation to a registered trustee”. It may do this on its own initiative or on application by the trustee or the Inspector General. 81 See also s 157. See the National Panel of Registered Trustees on the AFSA website.

[2.350]

2 Introduction to Bankruptcy and its Administration

89

There then follows a list of adverse orders that might be made against a trustee, somewhat inconsistent with the opening neutral power of the court and the right of the trustee to apply: IPSB, s 45-1(4). These include whether the trustee has faithfully performed their duties; whether their action or failure to act was in compliance with the law, or an order of the court, and whether any person has suffered, or is likely to suffer, loss or damage because of this. The court may take into account the seriousness of the consequences of any conduct of the trustee conduct and the effect it has “on public confidence in registered trustees as a group”: IPSB, s 45-1(4)(e). The court may make an order about costs: IPSB, s 45-5. Court’s review of the administration of an estate

[2.345] In contrast, IPSB, Div 90 contains powers of the court in relation to the administration of a particular bankrupt estate or estates. This Division concerns the courts’ powers in respect of the estate itself, rather than, under IPSB, Div 45, the trustee. IPSB, s 90-15 contains a general power for the Court to ’make orders as it thinks fit’ in relation to the administration of an estate, and IPSB, s 90-20 allows a creditor to apply for an order under s 90-15. Other than the Inspector-General, an application must be made within 60 days from when the person making the application became aware of the trustee’s act, omission or decision: IPRB, r 90-80. This is broadly equivalent to former ss 176 and 178. Many of the cases under those sections will remain relevant and they are referred to in the 9th edition of this book. Section 90-15

[2.350] Former s 179 permitted the court, on the application of the InspectorGeneral or a creditor or the bankrupt, to pursue an inquiry into the conduct of a trustee in relation to the administration of a bankruptcy. This is now replaced by both IPSB, s 90-5 – whereby the court can inquire on its own initiative, and IPSB, s 90-10, which allows creditors, the bankrupt and the trustee to apply to the court for the court to inquire: IPSB, s 90-10(2). Under the former law, and now under IPSB, s 90-15, the court may remove the trustee and order that another trustee be appointed: s 90-15(3)(b)(c).82 This provision has often been used by bankrupts alleging some misconduct and seeking to remove their trustee from the bankruptcy.83 Although the court’s powers under s 90-15 are broad – “to make such orders as it thinks fit” – they can be limited by the operation of other provisions that bear more directly upon a particular issue; for example, as to the process of review of the remuneration and disbursements incurred by a trustee: Andersen v Lennon [2017] FCCA 2452. 82 A former bankrupt could apply under former s 179: Ferella v Official Trustee [2010] FCA 766. 83 Maxwell-Smith v Donnelly [2006] FCAFC 150; (2006) 4 ABC (NS) 621 and cases there cited.

90

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.355]

An application for a court inquiry under the former s 179 involved a two-step process. First, to determine whether there were sufficient grounds in support of an application to hold an inquiry; second, if so, whether an inquiry should be undertaken and on what grounds.84 The court is generally reluctant to undertake an inquiry, unless there are substantial grounds for believing that the trustee erred in the administration. Indeed, if an inquiry is unlikely to reveal misconduct, it should not be undertaken. Courts take the view that they should not unduly interfere with the trustee’s day-to-day administration of the estate: Trkulja v Morton [2005] FCAFC 259; (2005) 4 ABC (NS) 110. The practical utility of an inquiry is a further consideration. Hence, many s 179 applications were determined at the first step, by deciding that an inquiry was not warranted. If an inquiry does proceed, the court may nevertheless have found that there was no misconduct involved. If the court does find misconduct, the court still has a discretion. It may, but need not, order that the trustee be removed; it may instead set conditions on the continuation of the trustee’s appointment,85 or order that a particular creditor be appointed to a committee of inspection to allow more oversight of the trustee.86 As with former s 178, it is not available to simply pursue a claim for damages. Power exists in s 90-15(6) for the court to order that the trustee pay damages for any loss caused. This remedy was available under the former s 179. These sections apply also to the Official Trustee: IPSB, s 90-2. The exercise by the court under IPSB, s 45-1 in relation to a particular trustee also allows orders to be made against the trustee comparable to those under s 90-15. Penalty privilege

[2.355] It should be noted that penalty privilege, the right of a person to refuse to respond to a court disciplinary process that may lead to a penalty in the nature of a suspension or disqualification,87 has not been abrogated in respect of trustees, as it has been for liquidators.88 Creditor oversight [2.360] It is apparent that creditors have a significant role, if they choose, in the administration of a bankruptcy. They have the authority to oversight the trustee in several respects – in approving remuneration, giving directions, and if necessary, seeking orders from the court. Creditors may also vote to remove the trustee. 84 Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101 at [47]–[51]; see also Szepesvary v Weston [2017] FCA 344. 85 Re Partridge (unreported, FCA, 22 September 1982, Lockhart J). 86 Re Challen [1996] FCA 1414. 87 Rich v ASIC [2004] HCA 42; (2004) 220 CLR 129; as explained in Migration Agents Registration Authority v Frugtniet [2018] FCAFC 5. 88 Corporations Act, s 1349. See [10.635].

[2.370]

2 Introduction to Bankruptcy and its Administration

91

A committee of inspection is a means of more direct oversight, usually in large or complex bankruptcies, convened on the creditors so resolving: IPSB, s 80-10. It generally consists of between three and five persons elected at a creditors’ meeting. Its function is to advise and assist and if necessary direct the trustee and to monitor the conduct of the administration: IPSB, s 80-35. A committee can take its own advice, the cost of which can be payable by the estate: IPSB, s 80-50. While the trustee must report to the committee (IPSB, s 80-45), a committee also provides the trustee with more ready and timely access to the views of creditors. Committees are explained in more detail on Chapter 6.

Penalties for offences [2.365]

The Bankruptcy Act contains many offence provisions in relation to the civil and criminal misconduct of bankrupts and others, including imprisonment. There are also financial penalties imposed on trustees in relation to their breach of, or inattention to, the legal requirements. Most of these are strict liability offences. Common lesser offences are those relating to late filing of documents with AFSA. For example, s 153A(2) requires the trustee to notify AFSA of an annulment under s 153A(1) within two days, with 5 penalty units imposed for breach. Section 277B provides for an infringement notice regime for these offences, whereby payment of the penalty may be made by the trustee in order to avoid prosecution.89 Necessarily, the penalty is to be paid personally and not out of the bankrupt estate. Most are summary offences under s 4H of the Crimes Act 1914 (Cth). AFSA’s website contains a list of offences introduced or restated by the ILRA.

THE BANKRUPTCY COURTS AND TRIBUNALS [2.370] This chapter has referred throughout to the courts in various contexts, being the Federal Court of Australia and the Federal Circuit Court. Under s 27 of the Act, both courts have concurrent jurisdiction in bankruptcy.90 That jurisdiction is exclusive subject to the jurisdiction of the High Court under s 75 of the Constitution and the jurisdiction of the Family Court of Australia under ss 35 or 35A of the Bankruptcy Act. However, under s 10 of the Cross-Border Insolvency Act 2008 (Cth) only the Federal Court can hear international cross-border bankruptcy matters. State and Territory Supreme Courts can only incidentally deal with bankruptcy matters.91 Section 31 of the Act requires bankruptcy matters to generally be heard in open court. 89 See IGPS 18 – Issuing of infringement notices by the Inspector-General. 90 Except that jury trials are reserved to the Federal Court only: s 30(3); these rarely if ever occur. See further, Harding v Deputy Commissioner of Taxation [2008] FCA 1403; Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8. 91 For example, the Industrial Court of NSW was found to have jurisdiction to determine whether a trustee had abandoned a bankrupt’s cause of action in that court under s 60(3) of the Act: Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380.

92

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.370]

Proceedings which are before the Federal Court or the Federal Circuit Court may be transferred to the Family Court pursuant to s 35A of the Bankruptcy Act.92 A transfer may be ordered on the application of a party or on the court’s own motion; no appeal lies from such a decision: s 35A(5). This may be done if there are bankruptcy and family law issues intertwined. If a bankruptcy matter is referred, the Family Court exercises full jurisdiction in bankruptcy but any appeal lies to the Federal Court: s 35A(3)(e). Cross-vesting laws – the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) – also allow bankruptcy matters to be transferred to other courts: Beaman v Bond [2013] FCA 534; Truthful Endeavour Pty Ltd v Condon (Trustee), in the matter of Rayhill (Bankrupt) [2015] FCAFC 70. Section 35 of the Bankruptcy Act gives the Family Court direct jurisdiction in relation to certain bankruptcy matters involving family law property settlement proceedings, the variation or setting aside of property orders, and spousal maintenance where the trustee of the bankrupt’s estate is a party or applicant. This does not limit the Family Court’s bankruptcy jurisdiction given under s 35A: s 35(2).93 The Federal Circuit Court is the only court with original jurisdiction in both bankruptcy and family law. Most bankruptcy matters are now filed in the Federal Circuit Court with appeals being taken to the Federal Court; it also takes most family law matters, with appeals on family law going to the Family Court. The Federal Court’s Commercial and Corporations Practice Note (C&C-1) sets out the arrangements for the management of commercial and corporations cases within the National Court Framework. The Practice Note covers insolvency matters, both corporate and personal. The registrars of the Federal Court, the Federal Circuit Court and the Family Court carry out various legal and administrative tasks in bankruptcy proceedings, including on delegation from the court in respect of specified judicial tasks. An appeal from a registrar’s decision is in effect a review de novo, that is, a complete re-hearing.94 The AAT hears applications to review certain decisions of the Inspector-General, for example under s 139ZF in relation to reviews on income contributions. The role of the AAT is to make a decision afresh – de novo – based on the law and the evidence then available. The Commonwealth Ombudsman also has a role, by way of having the power to direct the Inspector-General to review an objection to discharge: s 149K(2), or an income assessment: s 139ZA(2). It also reviews decisions under Div 40, in relation to trustee registration and discipline. 92 For an example, see Horne v Tebb [2013] FCA 585. 93 The Civil Law and Justice Legislation Amendment Bill 2017 would amend s 35 of the Bankruptcy Act to clarify that the Family Court has bankruptcy jurisdiction in circumstances where a trustee applies to the Family Court to set aside a financial agreement under ss 90K and 90UM of the Family Law Act. 94 Section 35A of the Federal Court of Australia Act 1976 (Cth).

[2.370]

2 Introduction to Bankruptcy and its Administration

93

A court exercising jurisdiction in bankruptcy has full power under s 30(1) of the Act to “decide all questions, whether of law or of fact, in any case of bankruptcy … and may make such orders … as the Court considers necessary for the purposes of carrying out or giving effect to” the Act. This is “a facultative provision giving the Court full power, within the limits of its jurisdiction to be found elsewhere, to make such orders as it considers should be made in order to carry out and give effect to the Act. The words used are not words of limitation but of extension”: Talacko v Talacko [2010] FCAFC 54; (2010) 183 FCR 311. This extends to allowing the court to make orders granting injunctions or other equitable remedies. In Talacko, the court relied on s 30(1) to prevent a debtor leaving the country and to hand in his passport; he had been served with a bankruptcy notice and his property was subject to a s 50 restraining order. The subsection has also been used to order the appointment of trustees for the sale of co-owned real property and the distribution of the proceeds of that part of the property forming part of the bankrupt estate, and the issuing of a writ of possession in aid of that sale: Rambaldi v Woodward [2012] NSWSC 434. However, the power in s 30 cannot be used to order the sale of property in circumstances where the order would remove the interest of a person in the property who was not a bankrupt: Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450. Courts exercising bankruptcy jurisdiction have other general powers under the Act, for example to review the decisions and the conduct of trustees (IPSB, Div 45, Div 90) and of the Official Receiver (s 15(5)). These are further discussed in their respective contexts in later chapters. Rights of review of decisions of government officers, including those of AFSA, are also available under the Administrative Decisions (Judicial Review) Act 1977 (Cth), often in conjunction with rights of review under the Bankruptcy Act. However, these are subject to s 10 of that Act, which gives a discretion to a court to refuse administrative review if there is an existing right of review under other law; as is generally the case under the Bankruptcy Act. This table sets out the general position. COURTS AND TRIBUNALS EXERCISING BANKRUPTCY JURISDICTION Bankruptcy Family Law Appeals in Appeals in Cross-border bankruptcy family law bankruptcy Federal Court of Yes No Full Federal N/A Yes Australia Court Family Court of Australia Only as Yes Full Federal Full Family No referred Court Court Federal Circuit Court of Yes Yes Full Federal Full Family No95 Australia Court Court Supreme Courts Only as Only as Courts of N/A No96 incidental incidental Appeal

95 Except under s 29 of the Bankruptcy Act. 96 Supreme Courts have jurisdiction in corporate cross-border insolvency only.

94

Keay’s Insolvency: Personal and Corporate Law and Practice

[2.375]

COURTS AND TRIBUNALS EXERCISING BANKRUPTCY JURISDICTION Bankruptcy Family Law Appeals in Appeals in Cross-border bankruptcy family law bankruptcy Administrative Appeals Yes No97 Applications No No Tribunal/Commonwealth for review Ombudsman

LEGAL PRACTITIONERS [2.375]

Lawyers have no formal role under the Bankruptcy Act in that legal capacity although trustees themselves may well be legally qualified. Most lawyers are licensed and regulated as Australian legal practitioners (“lawyers”) under the Legal Profession Uniform Law (NSW) and the Legal Profession Uniform Law (Victoria), operative in those States. They act for trustees, creditors and others in court proceedings and in giving advice. Lawyers may be controlling trustees under s 188 of the Bankruptcy Act if they are admitted to practice, are members of ARITA or have satisfactorily completed a course in insolvency approved by the Inspector-General under reg 8.35(1)(t)(ii), although this is not common.

They have responsibilities under the Civil Dispute Resolution Act 2011 (Cth), the Federal Court of Australia Act 1976 (Cth) and equivalent State laws and rules in relation to the conduct of litigation and its resolution. They also have ethical responsibilities under the Legal Profession Uniform Laws in relation to conflicts of interest, for example, in acting for both a creditor and the trustee: Coshott v Burke [2013] FCA 553. Their ethical obligations extend to not advising debtor clients in relation to attempts to defeat creditors.98 Government lawyers acting for the Official Trustee or government creditors have model litigant obligations.99 They may act for a trustee even if they also act or have acted for a creditor, subject to the particular circumstances. Trustees are not “commercial or government clients” under s 170 of the Uniform Laws; full costs disclosure is therefore required from their lawyers under Part 4.3 of the Uniform Laws. The Uniform Laws prescribe the bases for charging fees. Lawyers’ fees are payable by the trustee as a disbursement, not remuneration, and are not subject to creditor approval. But they are a “bill of costs for services provided by a person” in relation to the administration of the estate and IPSB, s 65-46 provides for the Inspector-General to review their bill, including other service providers to the trustee. The trustee must apply for a review within 20 business days of the receipt of the bill but before it is paid. This time may be extended and is reviewable by the AAT. The review is then conducted according to processes in IPSB, Div 90. 97 Decisions of the Child Support Registrar are reviewable. 98 For members of ARITA, see the ARITA Code at 5.5 99 For example, see Legal Services Directions 2017 made by the Attorney-General pursuant to s 55ZF of the Judiciary Act 1903 (Cth).

[2.385]

2 Introduction to Bankruptcy and its Administration

95

Insolvency lawyers are represented through the Law Council of Australia, ARITA and the various law societies and bar associations.

CONCLUSION [2.385] More particular issues that are raised in this introduction are now described and explained in the following chapters in this Section. These proceed through the processes of bankruptcy administration, including voluntary and compulsory bankruptcy, mechanisms for the recovery of assets by the trustee, dealings with creditors and the payment of dividends, and, finally, the end of the bankruptcy through annulment and discharge. Deceased estates in bankruptcy are also explained under these various headings. Chapter 2 – Introduction to Bankruptcy and its Administration Bankruptcy Act Generally Bankruptcy Regulations Generally AFSA guidance, forms and AFSA guidance in relation to bankruptcy filing requirements Inspector-General Practice Statements IGPS 1 – Regulatory framework IGPS 2 – Regulation of bankruptcy trustees and debt agreement administrators IGPS 6 – Referral of offences under section 271 of the Bankruptcy Act 1966 (rash and hazardous gambling) IGPS 7 – Annual estate returns IGPS 8 – Involuntary cancellation of trustee registration IGPS 10 – Complaint handling process for complaints against bankruptcy trustees and debt agreement administrators IGPS 11 – Monitoring and inspection of bankruptcy trustees and debt agreement administrators IGPS 12 – Statutory reviews of trustees’ decisions under the Bankruptcy Act 1966 by the InspectorGeneral in Bankruptcy IGPS 13 – Trustee registration application process under the Bankruptcy Act 1966 IGPS 14 – Referring offences against the Bankruptcy Act 1966 to the Inspector-General in Bankruptcy IGPS 15 – Determination by the Inspector-General in Bankruptcy of a trustee’s remuneration IGPS 16 – Reviewing remuneration of trustees and costs of third party service providers IGPS 18 – Issuing of infringement notices by the Inspector-General in Bankruptcy Inspector-General Practice Directions

96

Keay’s Insolvency: Personal and Corporate Law and Practice

Chapter 2 – Introduction to Bankruptcy and its Administration IGPD 1 – Independence of personal insolvency practitioners IGPD 2 – Collection of realisations and interest charges IGPD 6 – Remuneration entitlements of a registered bankruptcy trustee IGPD 9 – Standards for trustees and controlling trustees IGPD 14 – Proper performance of duties of a bankruptcy trustee IGPD 18 – Trustee remuneration notifications IGPD 20 – Guidelines for the payment of monies to the Commonwealth pursuant to section 254 of the Bankruptcy Act 1966 IGPD 21 – AFSA website advertising of meetings of creditors IGPD 22 – Effective practitioner communication Official Receiver Practice Statements ORPS 1 – Declaration of intention to present a debtor’s petition ORPS 2 – Bankruptcy by debtor’s petition ORPS 3 – Bankruptcy by sequestration order ORPS 5 – Administration of Estates of Deceased Persons ORPS 6 – Applying for a bankruptcy notice ORPS 7 – Exercise of the Official Receiver’s powers to assist trustees ORPS 8 – The National Personal Insolvency Index ORPS 9 – Inspecting documents filed with the Official Receiver ORPS 10 – Filing of statements of affairs and issue of section 77CA notices by the Official Receiver Official Trustee Practice Statements OTPS 1 – Income contributions OTPS 2 – Application of section 25 of the Bankruptcy Act 1966 where an estate is administered by the Official Trustee OTPS 3 – Overseas travel in bankrupt estates administered by the Official Trustee OTPS 5 – Objections to discharge from bankruptcy OTPS 6 – Choses in Action OTPS 8 – Treatment of Debts in Bankruptcy AFSA Forms – Categories

[2.385]

[2.385]

2 Introduction to Bankruptcy and its Administration

Chapter 2 – Introduction to Bankruptcy and its Administration Forms for debtors • Forms for declaring bankruptcy • Forms for bankruptcy by sequestration order • Forms for declaring an intention to present a debtor’s petition • Forms for proposing a personal insolvency agreement Forms for creditors Forms for practitioners Forms for lodging a debt agreement proposal Complaint and review forms Request for permission forms Finance and credit forms Public document search form These forms are available at http:// www.afsa.gov.au. Filing requirements under the Bankruptcy Act The Bankruptcy Act and Bankruptcy Regulations and the Bankruptcy (Estate Charges) Act require various documents to be filed with AFSA in making applications or notifying events to the Official Receiver or the Inspector-General in Bankruptcy. These requirements are summarised in a table on the AFSA website which shows: • the party required to file/apply/notify • the preferred method of filing/application/notification • whether any time limits apply • whether any fees apply, and • any penalties for late or non-compliance. Courts’ Bankruptcy Rules

Generally

97

3

Going Bankrupt – Voluntary and Compulsory Bankruptcy [3.05] VOLUNTARY BANKRUPTCY .......................................................................................... 101

[3.05] Introduction ......................................................................................................... 101 [3.10] Moratorium provisions: Pt IV Div 2A ............................................................ 101 [3.15] Declaration of Intention to Present a Debtor’s Petition: s 54A ............................. 101 [3.35] Effect of a declaration for 21 days on frozen debts ................................................. 102 [3.40] Secured creditors are protected: s 54L ....................................................................... 103 [3.45] An act of bankruptcy .................................................................................................... 103

[3.50] Who may present a debtor’s petition? ............................................................ 103 [3.55] Debtors’ petitions of individual debtors ........................................................ 104 [3.65] Discretion to reject petitions ........................................................................................ 104 [3.70] Petitions that must be rejected .................................................................................... 105 [3.75] Stay imposed for farmers and rural producers ........................................................ 105 [3.80] Prescribed information must be given to the debtor .............................................. 105 [3.85] When a person becomes bankrupt ............................................................................. 105 [3.90] Trustee may consent ...................................................................................................... 105

[3.95] Petitions by partnership debtors: ss 56A – 56G ............................................ 106 [3.100] Referral of petition to the court: s 56C .................................................................... 106

[3.105] Petitions by joint debtors: s 57 ....................................................................... 107 [3.110] Referral of a petition to the court: s 55(3B) ............................................................. 107

[3.115] Debtor’s petition as an abuse of process ...................................................... 108 [3.120] Improper purpose etc .................................................................................................. 108 [3.125] Presentation of debtor’s petition when creditor’s petition pending ................... 108 [3.130] COMPULSORY BANKRUPTCY ORDERED BY THE COURT ................................. 109

[3.130] Introduction ....................................................................................................... 109 [3.133] Court process ..................................................................................................... 110 [3.135] Who may present a petition? .......................................................................... 110 [3.140] Against whom may a petition be presented? .............................................. 111 [3.140] Individuals ..................................................................................................................... 111 [3.145] Partnerships ................................................................................................................... 111 [3.150] Joint debtors .................................................................................................................. 111

[3.155] Debt owed of at least $5,000 ........................................................................... 111 [3.160] Australian connection ....................................................................................... 112

100

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.165] [3.170] [3.175] [3.180]

The debt .............................................................................................................. Act of bankruptcy within six months of presentation of the petition .... Acts of bankruptcy: s 40(1) ............................................................................. Particular acts of bankruptcy ..........................................................................

112 113 113 114

[3.180] Intent to delay or defeat creditors etc ...................................................................... 114 [3.185] Execution against the debtor ...................................................................................... 115 [3.190] Part X .............................................................................................................................. 115 [3.192] Other acts of bankruptcy ............................................................................................ 115

[3.195] Act of bankruptcy must be committed in Australia .................................. 116 [3.200] The most common act of bankruptcy – failure to comply with a bankruptcy notice ............................................................................................. 116 [3.205] Final judgment or order that has not been stayed ................................................ 117 [3.210] Joint creditors ................................................................................................................ 117 [3.215] Bankruptcy notice must claim a debt or debts of at least $5,000 ....................... 118 [3.220] Procedures ..................................................................................................................... 118 [3.225] Service ............................................................................................................................ 119 [3.240] Determination of the date of the act of bankruptcy .............................................. 120

[3.245] Challenging bankruptcy notices ..................................................................... 120 [3.250] Debtor must act within the 21 days ......................................................................... 121 [3.255] Application to set aside judgment ............................................................................ 121 [3.280] Application to set aside a defective bankruptcy notice ........................................ 123 [3.285] Validity of bankruptcy notices – their form ............................................................ 123 [3.300] Overstatement: s 41(5) ................................................................................................. 125 [3.305] The creditor can apply for a new notice ................................................................. 126 [3.310] Counter-claim, set-off or cross-demand: s 41(7) ..................................................... 126 [3.325] Solvency ......................................................................................................................... 128 [3.330] Abuse of process .......................................................................................................... 128 [3.335] Limits on the court’s powers ..................................................................................... 129

[3.340] Creditor’s petition ............................................................................................. 129 [3.345] Service ............................................................................................................................ 130 [3.350] Lapse of petition after 12 months – this may be extended to 24 months ......... 131 [3.355] Hearing of the petition ................................................................................................ 132 [3.370] Substituted creditor: s 49 ............................................................................................ 133

[3.375] The court may make a sequestration order ................................................. 134 [3.380] Court’s discretion: s 52 ................................................................................................ 134 [3.385] Technical defects ........................................................................................................... 134 [3.390] Going behind the judgment ....................................................................................... 135 [3.395] Solvency as a defence .................................................................................................. 136 [3.400] Other sufficient cause .................................................................................................. 137 [3.423] Stays of petitions .......................................................................................................... 140

[3.425] After the sequestration order .......................................................................... 140

[3.15]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

101

[3.430] Stay of a sequestration order .......................................................................... 140 [3.435] PROTECTING CREDITORS BEFORE BANKRUPTCY .............................................. 141

[3.440] Warrants: s 78 .................................................................................................... 141 [3.445] Interim trustee: s 50 .......................................................................................... 142 [3.450] BANKRUPTCY OF ESTATES OF DECEASED INSOLVENTS .................................. 143

[3.455] Petitions by the deceased estate of an insolvent debtor ............................ 144 [3.460] Petitions by the creditor .................................................................................. 144 [3.465] After the order ................................................................................................... 145 [3.470] CONCLUSION ................................................................................................................... 146

VOLUNTARY BANKRUPTCY Introduction [3.05] As we have discussed, a debtor may choose to go bankrupt voluntarily. This is done by the debtor presenting a “debtor’s petition” to the Official Receiver. Approximately 90% of bankruptcies are voluntary.1 There are three types of debtor’s petition which may be presented: one by an individual debtor; the second by joint debtors; and the third by partnership debtors. These are considered after examination of a preliminary matter, the moratorium provisions.

Moratorium provisions: Pt IV Div 2A [3.10] The Bankruptcy Act provides a breathing space for debtors contemplating bankruptcy in order to allow them to consider the various options for dealing with their financial predicament. A 21 day moratorium is available against any civil debt recovery processes that are being taken against them by their creditors. The moratorium recognises that going bankrupt is a serious step and that some debtors go bankrupt without understanding that there may be viable alternatives to bankruptcy in their particular circumstances, or without understanding the full consequences of bankruptcy. Their position may then be irreversible. In Re Smith [1999] FCA 1755 the bankrupt claimed to have received incorrect advice to the effect that a litigation claim against her former partner remained hers to pursue despite bankruptcy; an application by her to annul her bankruptcy based on that misunderstanding was refused. Declaration of Intention to Present a Debtor’s Petition: s 54A

[3.15] To obtain the protection of the moratorium, a debtor must present to the Official Receiver a Declaration of Intention to Present a Debtor’s Petition accompanied by a statement of the debtor’s affairs: s 54A, AFSA Form 5. The name of this declaration is something of a misnomer, as the policy behind the procedure is to give the debtor a chance to avoid bankruptcy. The debtor must be first given 1 AFSA administration statistics 2016-2017. The proportion varies around the States and Territories. In Tasmania, 96% of bankruptcies were voluntary.

102

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.20]

information on the alternatives to and the consequences of bankruptcy (Bankruptcy Act, s 54D; Bankruptcy Regulations 1996 (Cth), reg 4.11) which is the same information required to be given to a debtor before he or she presents a debtor’s petition. This aims to ensure debtors understand the options available and the consequences of going bankrupt during the period of grace provided by the section. While the moratorium is useful, there were only 511 such declarations in the 2014-2015 year, in the context of over 17,000 new bankruptcies.2 Debtors who may not present a declaration: s 54B

[3.20] Certain debtors are excluded from presenting a s 54A declaration. Section 54B excludes a debtor: (a) (b) (c) (d)

who is not entitled to present a debtor’s petition; against whom a creditor’s petition is pending; against whom a debtor’s petition has been presented but not yet accepted or rejected; whose property is subject to control under Pt X;

(e) who has within the previous six months signed a s 188 authority under Pt X; or (f) who has within the previous 12 months presented a s 54A declaration which has been accepted under s 54C.

The last one, s 54B(f) obviously serves the purpose of prohibiting a debtor from presenting a fresh declaration after the previous one runs out and thereby abusing the moratorium process. Similarly, a debtor is prevented from presenting a declaration after having been served with a creditor’s petition (s 54B(b)), and thereby trying to defeat that petition. Effect of a declaration for 21 days on “frozen debts”

[3.35] Once a declaration is accepted and signed by the Official Receiver, the creditors disclosed in the debtor’s statement of affairs are notified (s 54C) and the debtor can use the declaration for the purposes of s 54E – for example, it can be produced to creditors who were intending to execute on their court judgments, or to the sheriff. Both must take note of the declaration and put any action on hold during the 21-day period. The period of the stay is defined in s 5(1). The period will end when the first in time of the following events occur: (a) the period of 21 days ends; (b) a creditor’s petition is presented against the debtor or the debtor presents his or her own petition; (c) the debtor signs an authority under s 188; or (d) a sequestration order is made against the debtor.

The declaration is effective in respect of “frozen debts” (s 54E(1)) which are defined in general terms as a debt that would be provable in any bankruptcy: s 5. This does not include liability under a family law maintenance arrangement. 2 AFSA annual administration statistics.

[3.50]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

103

A creditor to whom a frozen debt is owed is unable to apply for the issue of “enforcement process” (as defined in s 5(1)) or to enforce a remedy against the debtor’s person or property: s 54E(2). But a creditor is not prevented from initiating or from taking a fresh step in legal proceedings in respect of the debt that are not connected with enforcing a judgment: s 54E(3). And importantly, the creditor is still able to commence bankruptcy proceedings against the debtor. Sheriffs, court registrars and those subject to garnishee orders are prevented from taking their respective enforcement or other such actions: ss 54F, 54G, 54H. Secured creditors are protected: s 54L

[3.40] These sections do not affect the rights of secured creditors to realise their security: s 54L. Secured creditors can generally stand outside the bankruptcy process, even at this pre-bankruptcy stage. An act of bankruptcy

[3.45] The presentation of a declaration under s 54A is an act of bankruptcy: s 40(1)(da).

Who may present a debtor’s petition? [3.50]

As we have seen, a petition may be presented by any individual debtor (s 7(2)) who must be insolvent: Re Mottee (1977) 16 ALR 129, 135. The Act expressly permits non-Australian citizens, members of Parliament and persons under 18 years of age to petition: s 7(1), (1A). A petition must be presented personally; for example, a petition may not be presented on behalf of a debtor under a power of attorney: Orix Australia Corporation Ltd v McCormick (2005) 145 FCR 244; [2005] FCA 1032. Some State laws allow administrators appointed to look after the affairs of mentally infirm or cognitively impaired persons to make those persons voluntarily bankrupt.3

A debtor presenting a debtor’s petition needs to show a connection with Australia. Section 55(2A) requires the Official Receiver to reject a petition unless, at the time when it is presented, the debtor: (a) was personally present or ordinarily resident in Australia; or (b) had a dwelling-house or place of business in Australia; or (c) was carrying on business in Australia, either personally or by means of an agent or manager; or (d) was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager.

Thus, an overseas resident without that residential connection may not present a petition in Australia in respect of their Australian liabilities. 3 In SAL and JGL [2016] WASAT 63, administration orders were made under the Guardianship and Administration Act 1990 (WA) allowing a son to present a debtors petition on behalf of his father, who had suffered a stroke leaving him with significant cognitive impairment. The father had significant debts and limited assets. See also NSW Trustee and Guardian Act 2009 (NSW) and “Mental Infirmity and Bankruptcy” (2011) 23 A Insol J 44.

104

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.55]

These territorial requirements for debtors’ petitions were only introduced in 2003; they have been a requirement in respect of creditors’ petitions for a long time. Hence the law on these provisions in respect of creditors’ petitions is more developed and is discussed shortly in that context. See [3.160].

Debtors’ petitions of individual debtors [3.55] Voluntary bankruptcy involves not only the debtor presenting a debtor’s petition (s 55(1), AFSA Form 6) but also filing a “statement of affairs” and a copy: s 55(2). The statement of affairs is a statutory form – AFSA Form 3 – in which the debtor is required to list all their assets and liabilities and give other information required under the Act. Petitions are presented to the Official Receiver in Bankruptcy, electronically or by post, who must accept them unless a decision is made to reject them under s 55(3). Under s 55(3) the Official Receiver may reject a debtor’s petition if it fails to comply with the approved form; it is not accompanied by a statement of affairs, or the Official Receiver is of the view that the statement of affairs is inadequate. In practice, petitions are rarely rejected. A debtor must also provide the Official Receiver with sufficient information to confirm their identity, for example a passport and driver’s licence. The simple process of entry into bankruptcy would otherwise be open to serious abuse. The Official Receiver is not acting judicially in accepting and endorsing a petition, and thereby making a person bankrupt; the process is purely administrative in character: Official Receiver v Walia [1997] FCA 1190. Discretion to reject petitions Capacity to pay debts etc

[3.65] Section 55(3AA) was introduced to give the Official Receiver a discretion to reject a debtor’s petition, broadly, in order to prevent abuse of the bankruptcy process. There have been cases of “serial bankrupts”, who have gone into bankruptcy a number of times, each time for relatively minor debts. The discretion to reject the petition can be exercised where it appears from the statement of affairs that the debtor would be likely (either immediately or within a reasonable time) to be able to pay all their debts and it appears the debtor is simply unwilling to pay a particular creditor, or the debtor had previously presented their petition at least three times, or at least once in the previous five years. The Official Receiver is not required to consider in each case whether there is a discretion to reject the petition: s 55(3AB). Even if the statement of affairs shows that the debtor would be able to pay all their debts, the Official Receiver need not reject the petition: Dubow v Official Receiver [2013] FMCA 217; and failure to reject a petition does not mean that the petition ought not to have been accepted, for the purposes of an annulment. Separately, a debtor’s petition may also be rejected if it is an abuse of the court process: S & J Promotions Pty Ltd v Hough [2014] FCCA 339. Section 55(3AC) provides the debtor with a right to apply to the Administrative Appeals Tribunal for a review of the Official Receiver’s decision to reject their petition: Drake v Jones [2009] FMCA 298.

[3.90]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

105

The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2002 (Cth) (paras 90-91), under which these powers of the Official Receiver were introduced, says that “[o]nly the more blatant and obvious cases that might come to the Official Receiver’s attention are likely to be considered as to the possible exercise of the discretion”. This has been borne out by the fact that there were only 21 instances in 2008–2009 where petitions were rejected under this provision, of over 20,000 petitions accepted, and none, apparently, have been rejected since then.4 Petitions that must be rejected

[3.70] Some petitions must be rejected, for example if the debtor does not have the requisite territorial connection with Australia.5 This would prevent a New Zealand debtor taking advantage of any shorter one year period of bankruptcy in Australia. As well, a debtor whose creditors have accepted a Pt X personal insolvency agreement or a debtor who is a party to a Pt IX debt agreement is unable to present a petition unless he or she obtains the leave of the court: s 55(6), (5A). Stay imposed for farmers and rural producers

[3.75] Finally – and this is rare – a debtor may be unable to present a petition without the leave of the court where a stay under a proclaimed law applies to the debtor: ss 55(6A), 56A(6), 57(8). Section 5 defines “a proclaimed law” and includes laws providing for the protection of farmers and other rural producers: see Pt XIA – Farmers’ Debts Assistance and ss 253E and 253F. Prescribed information must be given to the debtor

[3.80] Importantly, before accepting a petition an Official Receiver must ensure that the debtor has been given information on alternatives to and consequences of bankruptcy: s 55(3A). This is the same information that must be given to a debtor under s 54D who gives a Declaration of Intention to Present a Debtor’s Petition: see [3.15]. If that prescribed information is not provided, any purported acceptance of the debtor’s petition is of no effect: Orix Australia Corporation Ltd v McCormick (2005) 145 FCR 244; [2005] FCA 1032. When a person becomes bankrupt

[3.85] At the moment that the Official Receiver “endorses” the petition the debtor is bankrupt (s 55(4A)) and is deemed to be bankrupt “at the first instant” of that day: s 57A. When a bankruptcy actually “commences” is determined, as we have seen, by s 115(2): see [2.80]. Trustee may consent

[3.90] Some debtors may want to have a particular registered trustee to conduct their bankruptcy, in which instance the debtor must obtain the trustee’s consent in 4 Insolvency and Trustee Service Australia, Annual Report 2008–2009. 5 Before the introduction of s 55(2A) of the Act, requiring the debtor to have an Australian connection, the Official Receiver could not reject an overseas petition: Official Receiver v Walia [1997] FCA 1190.

106

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.95]

writing (s 156A, AFSA Form 12), which must be filed with the petition: reg 4.12.6 The Official Receiver must give that trustee a copy of the debtor’s statement of affairs: s 55(5). If there is no consent of a trustee, the Official Trustee automatically becomes the trustee: s 160. In most cases – over 80% – the trustee will be the Official Trustee, whose functions and powers are exercised by the Official Receivers: s 18.

Petitions by partnership debtors: ss 56A – 56G [3.95] As partnerships are not legal entities separate from their members, the creditors of partnerships may try to recover their debts against the individual partners. Although the Bankruptcy Act refers to a petition against a partnership7, the partnership itself does not become bankrupt; the partners in their individual capacities become bankrupt. The individual partners are therefore permitted to present their individual petitions under s 56A. The respective estates are administered separately although with joint assets being available for joint and several debts. Where partners seek to present what is in effect a debtors’ petition against their partnership special provisions apply. A petition may be presented by all of the partners or a majority of the partners resident in Australia (s 56A(1)); 50% of the partners is not regarded as a majority.8 Members of a partnership who have become parties to Pt IX debt agreements or who have entered an agreement under Pt X are unable to join in the presentation of the petition: s 55A(2) – (5). The provisions discussed above in relation to the presentation of petitions by individual debtors and their rejection largely apply: ss 56B, 56D, 56E. Besides the petition and a statement of the affairs of each partner (as well as copies of the statements) a statement (and a copy) of the partnership’s affairs must also be presented: s 56B(3). Referral of petition to the court: s 56C A petition must be referred to the court9 under s 56C where either or both of the following has occurred:

[3.100]

• not all of the members of the partnership join in the presentation of the petition, in which case the Official Receiver must give notice to all those who did not join in; 6 A consent may be revoked by the trustee before the hearing, for example if a potential conflict of interest arises, and may be impliedly revoked: see, for example, Osborne v Gangemi (No 2) (2011) 9 ABC(NS) 273; [2011] FCA 1278. 7 A petition cannot be presented by a partnership registered under a law providing for its winding up – s 7(2)(b), for example Pt 5 of the Partnership Act 1958 (Vic), which provides for the winding up of “incorporated limited partnerships”. But partners under a simple limited partnership - for example, under Pt 3 of the Victorian Partnership Act 1958, or under the Venture Capital Act 2002 (Cth) – can present a petition: s 7(3). 8 Re Henderson [1985] FCA 209; (1985) 9 FCR 353. 9 Courts’ Bankruptcy Rules, r 5.01.

[3.110]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

107

• at least one creditor’s petition is pending against at least one of the partners. This condition is not met if the petition is against all of the members of the partnership and no one else. If a petition is referred, the court is to direct the Official Receiver to accept the petition in the form presented; to accept the petition after it has been amended as directed by the court; or to reject the petition: s 56C(3). If the court’s direction is to accept the petition it must specify the date of commencement of bankruptcy of each of the persons who became bankrupt as a result of the acceptance: s 56C(5). If a person did not join in the presentation of the petition but became a bankrupt as a result of the acceptance of the petition (following a court direction) that person must, within 14 days of being notified of the bankruptcy, give the Official Receiver a statement of his or her affairs and a statement of the partnership’s affairs: s 56F(1). Copies of the documents must be given to the trustee of the member’s bankrupt estate: s 56F(3).

Petitions by joint debtors: s 57 [3.105] Section 57 enables joint debtors who are not in partnership to file a joint petition against themselves. This often applies in practice to married couples. As with an individual debtor, in addition to a petition, a statement of affairs for each debtor must be presented together with a statement of their joint affairs: s 57(2). The provisions governing joint petitions are largely the same as those governing individual petitions: s 57(3) – (7). A trustee may be the trustee of both estates, subject to any conflict of interest. Referral of a petition to the court: s 55(3B)

[3.110] Under s 55(3B) of the Act, the Official Receiver must refer a debtor’s petition to the court for a direction to accept or reject it if there is a creditor’s petition pending against a group of debtors (whether they are joint debtors or members of a partnership) that includes the debtor against whom the debtor’s petition is presented. The Act gives an example of A presenting a debtor’s petition against herself, when there is a creditor’s petition pending against both A and T as joint debtors. It is in that case that the Official Receiver must refer the debtor’s petition to the court. If the court directs the Official Receiver to accept the petition, s 55(3C) requires the court to state the date of commencement of the bankruptcy that results from that acceptance. The section leaves the discretion of the court unfettered, “but perhaps with an eye on the possibility that the filing of the debtor’s petition (in such circumstances) is an abuse”: Greater Building Society Ltd v Hill [2012] FMCA 431 at [9]. The court directed the Official Receiver to reject a debtor’s voluntary petition in circumstances of a pending creditors’ petition and where there was a real likelihood that the relation back period would alter if the debtor’s petition were accepted: L & H Group v Milton [2015] FCCA 3572.

108

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.115]

Debtor’s petition as an abuse of process [3.115] Given the protection offered a debtor by bankruptcy, the right to present a debtor’s petition does have the potential for being abused. In general terms, it is an abuse of process for a debtor to present a petition for a purpose other than to seek the protection of the bankruptcy laws. Improper purpose etc

[3.120] In BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611; [2004] 3 ABC (NS) 70, the debtors were facing the prospect of a large damages claim against them being brought by BWK. They presented their own petitions, although they were then solvent, with their only debts being to their respective spouses. On the creditor’s application, the court annulled their bankruptcies, firstly, because they were in fact solvent, and second because it was an abuse for a debtor to “present a petition for the purpose of placing his estate beyond the reach of a person who will imminently become a creditor”. While BWK was not a creditor with a provable debt when the petitions were presented, the object of the debtors was to thwart or override the effect of the judgment that was about to be obtained by BWK. In Re Moncada [1986] FCA 138; (1986) 11 FCR 205, the bankrupt husband had filed “a grossly untrue affidavit” purporting to show his insolvency to thwart a claim by his former wife as his only substantial creditor. He was in fact solvent. The court found that the petition was an abuse of process and it annulled the bankruptcy. In such cases the onus lies on the creditor to establish the debtor’s improper purpose; the court can make inferences from the circumstances: Re Zorbas [1994] FCA 1516. However, there is no abuse of process if a debtor presents a petition during a creditor’s litigation proceedings against the debtor, thereby effectively ending those proceedings: Zodiac Investments v Brelsford [1999] FCA 1482; nor if the debtor goes bankrupt to take advantage of the protection under s 116(2)(g) of damages paid to the debtor for personal injuries suffered: Re Heenan [1992] FCA 544; (1992) 39 FCR 428; nor, if a debtor presents their petition having a reasonable and honest belief of their insolvency, even if that belief is mistaken: Re Honeysett; Saxon Building Projects Pty Ltd v Donnelly [1998] FCA 1398. On the question of solvency, it is important to note that now, under s 153B of the Act, the court may annul a bankruptcy on a debtor’s petition “whether or not the debtor was insolvent when the petition was presented”. Presentation of debtor’s petition when creditor’s petition pending

[3.125] It is not necessarily an improper purpose for a debtor to present a debtor’s petition in order to prevent a creditor succeeding on a pending creditor’s petition.10 Such an action by a debtor once had the effect of bringing forward the date of “commencement” of the bankruptcy. This could then also bring forward the period within which the trustee could set aside voidable transactions, to the advantage of the debtor and the potential disadvantage of the bankrupt estate. 10 Re Cornish [1984] FCA 348; (1984) 6 FCR 257.

[3.130]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

109

Thus, transactions of the bankrupt might not be able to be set aside. For example, a debtor’s petition presented on 12 November 2013, at a time when there was a pending creditor’s petition presented on 13 August 2013, relying on an act of bankruptcy of 15 February 2013, could cause the bankruptcy to commence on 12 November 2013, when the debtor’s petition was presented. But if the creditor’s petition had proceeded to a sequestration order, the bankruptcy would have commenced earlier, on 15 February 2013. A debtor’s petition was presented in these circumstances in Clyne v DCT (1984) 154 CLR 589. However, this is now remedied by s 115(2) of the Act which provides that, if a debtor’s petition is presented when a creditor’s petition is pending, the bankruptcy still commences, in most cases, at the time of the act of bankruptcy on which the creditor’s petition relies. Thus, there may be no need for a creditor to apply to annul such a bankruptcy based on that debtor’s petition as an abuse of process. As explained at [3.110], s 55(3B) is a comparable provision applying in the circumstance of joint debtors.

COMPULSORY BANKRUPTCY ORDERED BY THE COURT Introduction [3.130] If a debtor is unable to pay a creditor, or has refused to pay, the creditor may choose to commence proceedings to bankrupt the debtor. The proceedings are commenced by the creditor presenting an application to the court called a “creditor’s petition”. The petition will seek a “sequestration order” against the debtor’s estate. If such an order is made then the debtor becomes bankrupt and a trustee will take over the estate of the bankrupt and administer it for the benefit of creditors. Before commencing bankruptcy proceedings, a creditor is likely to have obtained a civil money judgment against the debtor and to have attempted to enforce its judgment. However, a creditor need not pursue enforcement of a judgment before commencing bankruptcy proceedings. Although significant in the bankruptcy process, and in case law, only 10% of bankruptcies result from court orders, the remainder being voluntary bankruptcies.11 Typical timeline leading up to a sequestration order Judgment obtained against 4 January the debtor in a Local Court for $6,000 Bankruptcy notice issued 20 January by Official Receiver Bankruptcy notice served 27 January on the debtor Debtor fails to pay 17 February An act of bankruptcy, and “the commencement of the bankruptcy”: ss 5(1), 115(1) 11 AFSA Administration Statistics, 2016-2017.

110

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.133]

Typical timeline leading up to a sequestration order Creditor presents petition 17 March First hearing date before 20 April the court – adjourned Hearing – sequestration 20 May “the date of the bankorder made ruptcy”: s 5(1)

Court process [3.133] As we have explained, the relevant courts are the Federal Circuit Court and the Federal Court. No other Australian courts may make sequestration orders in bankruptcy although courts generally have a “sequestration” power in order to enforce orders for contempt.12 Registrars of the two courts hear applications for sequestration orders and other bankruptcy applications. An application to review the exercise of a power by a registrar is a hearing de novo, because of “the constitutional imperative”, that is, the requirement that the judicial power of the Commonwealth only be exercised by judges of federal courts or other courts exercising federal jurisdiction: see Zdrilic v Hickie [2016] FCAFC 101; (2016) 246 FCR 532; Kimber v The Owners Strata Plan No 48216 [2017] FCAFC 226. The Federal Court’s website has a useful Creditor’s Petition Checklist for both courts. This covers acts of bankruptcy, affidavits necessary for the petition, adjournments and costs. The Act requires a creditor to “present” a petition to the court and to “file” applications and affidavits and other documents. The date of presentation of the petition to the court is significant in determining the date of commencement of the bankruptcy under s 115 of the Act. In hearing bankruptcy applications, in particular in relation to challenges to bankruptcy notices and petitions, the courts have regard to the serious nature of bankruptcy and its impact upon a person’s rights. Compliance with process is usually strictly required. Many challenges to a bankruptcy are brought by self-represented litigants. In those cases, the lawyers for creditors are expected to bring all relevant matters to the court’s attention.13

Who may present a petition? [3.135]

Any creditor may petition (Re Oskar (1984) 55 ALR 717) and that may be an individual or corporate creditor or two or more creditors acting jointly: s 44(1)(a). If a debt is due to joint creditors, all of the creditors must join in the petition: Australian Workers’ Union v Bowen (No 1) [1964] HCA 24; (1946) 72 CLR 575. 12 See Supreme Court Rules 1970 (NSW), r 55.13(2) that “where the contemnor is a corporation, the Court may punish contempt by sequestration or fine or both”. 13 See Kimber v The Owners Strata Plan No 48216 [2017] FCAFC 226, referring to the lawyers’ duty under s 37N of the Federal Court of Australia Act 1976.

[3.155]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

111

A secured creditor can only claim to the extent by which the amount of the debt owing exceeds the value of the creditor’s security. However, if a secured creditor is willing to surrender its security to the trustee in the event of a sequestration order being made, the secured creditor is allowed to petition for the total of its debt.

Against whom may a petition be presented? Individuals

[3.140]

As we have seen (at [2.50]), s 7 describes the persons against whom a petition may be presented, including persons under the age of 18 years and non-Australian citizens. Partnerships

[3.145] There can be no petition against a partnership or association registered under a law which itself provides for its winding up: s 7(2)(b). However, the Act applies in relation to limited partnerships as if they were ordinary partnerships.14 Upon all the general partners of a limited partnership becoming bankrupt, the assets of the limited partnership vest in the trustee: s 7(3). A creditor is permitted to present a petition against a partnership provided that the creditor is entitled to present a petition against any one partner in respect of the partnership debt: s 45(1). Not all members of the partnership need to be included in the petition: s 45(2). This recognises the fact that partners are individually liable for partnership debts. Naturally, if a sequestration order is made it can only be made against partners in their individual capacities because partnerships are not legal entities separate and distinct from their members. Joint debtors

[3.150] A petition can be presented against two or more joint debtors whether or not they are partners: s 46(1). Creditors will often present one petition against a married couple who are jointly liable. A sequestration order may be made against one or more of those subject to the petition proceedings: s 46(2). It can occur that a sequestration order may be made against one of two joint debtors named in a petition, with the petition dismissed or withdrawn against the other; for example, the creditor may have been able to serve only one debtor.

Debt owed of at least $5,000 [3.155]

The debtor against whom the petition is presented must owe to the petitioning creditor(s) a debt or debts of not less than $5,000: s 44(1)(a). This need not be the debt upon which the bankruptcy notice was based (Emerson v Wreckair Pty Limited [1992] FCA 16; (1992) 33 FCR 581) but that amount must be owed by the debtor at the time of the commission of the act of bankruptcy relied upon (McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41; (2013) 210 FCR 149). 14 See s 7(3).

112

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.160]

The $5,000 threshold imposed under s 44(1) is in respect of any debt owing and is independent of the final judgment or order required for the issue of a bankruptcy notice under s 41(1): Autron Pty Ltd v Benk [2011] FCAFC 93; (2011) 195 FCR 404.15

Australian connection [3.160]

The debtor must have a specific connection with Australia at the time of the commission of the act of bankruptcy relied on by the creditor. The connections which satisfy this requirement are listed in s 43(1)(b) and are the same as those that apply under s 55(2A) in respect of a debtor’s petition, see [3.50]. These include being personally present or ordinarily resident in Australia, or having a dwelling-house or place of business in Australia. The usual connection with Australia relied upon is that the debtor has a home in Australia or is ordinarily resident here: s 43(1)(b)(i). It is not sufficient if the debtor owns a house in Australia but does not use it as a residence, but temporary absence with an intent to return – a place where the debtor “may repair at his whim at any time” – will be: Mathai v Kwee [2005] FCA 932. It is much dependent on the particular facts but the finding is ultimately a question of law for the court: Levene v IRC [1928] AC 217. A person can be ordinarily resident in more than one country at a time – see Re Taylor; Ex parte Natwest Australia Bank Ltd [1992] FCA 296; (1992) 37 FCR 194, 198; Battenberg v Restom [2007] FCAFC 195; 5 ABC (NS) 533. In relation to s 43(1)(b)(iii), it must be shown that the debtor was carrying on their own business. It is not sufficient that the debtor was merely engaged as an employee in someone else’s business; nor is it sufficient if the debtor merely controls a company which itself carries on the business: Turner v Trevorrow [1995] FCA 1091, (1994) 49 FCR 566. But if debts connected with the debtor’s business remain owing in Australia, the requirement of carrying on business is satisfied even if the business is ended and the debtor has left the country: Re Vassis [1996] FCA 21, (1986) 9 FCR 518.

The debt [3.165] A creditor applying for a sequestration order must establish that a debt is owed to the creditor. It is wise for a creditor to obtain a court judgment against the debtor requiring a judgment sum to be paid, usually from a state court; this avoids the debtor trying to dispute the existence or amount of the debt. This is why a bankruptcy notice, which must be based on a court judgment, is such a frequently used process. A bankruptcy court can “go behind” a judgment debt to determine if the debt is in fact owing, for example, if it is based on a default judgment, or there is evidence of fraud: see Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28. The debt must be a liquidated sum payable immediately or at some certain time in the future (s 44(1)(b)); hence, an unliquidated claim for damages in negligence may not be used as the basis for a petition. The debt must be liquidated both at the time 15 As to judgments or orders expressed in a foreign currency, see reg 4.04 and GE Commercial Australasia Pty Ltd v Tinkler, in the matter of Nathan Tinkler [2016] FCA 55.

[3.175]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

113

of the commission of the act of bankruptcy and at the date of presentation of the petition: McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41; (2013) 210 FCR 149. The debt can be payable in the future; thus an instalment order obtained by the debtor subsequent to the act of bankruptcy merely converts a debt immediately payable, to one payable in future by regular instalments; it does not make the debt any less payable at some certain future time: Re Padagas; Ex Parte Carrier Air Conditioning Pty Ltd [1977] FCA 12; (1977) 30 FLR 170; Re Nath; Ex Parte Ghysels (1996) 63 FCR 523. But it must not be one which only becomes payable if an event takes place. The fact that the debt is payable must be certain.

Act of bankruptcy within six months of presentation of the petition [3.170] Finally, the debtor must have committed an act of bankruptcy within the six months which immediately precede the presentation of the petition: ss 43, 44(1)(c); put another way, the petition must be presented to the court within six months of the date of act of bankruptcy. That time period cannot be extended or abridged pursuant to the court’s powers under s 33(1) of the Act: Shephard v Chiquita Brands (South Pacific) Ltd [2004] FCAFC 76; (2004) 1 ABC (NS) 610, 623-624. An act of bankruptcy is an indicator of a person’s insolvency. It is said that bankruptcy law is not to be used as a debt collecting procedure against those who owe money but who are solvent; before a petition may be brought there must be that indication of the debtor’s insolvency within the statutory period of six months.16 At [2.05] we noted the significance of the date of commencement of the bankruptcy. While an act of bankruptcy is required in order to initiate a creditor’s petition, it can also mark the date of commencement of the bankruptcy for the purposes of the doctrine of relation back and recovery of property. Thus, the date of commencement of the bankruptcy has a dual significance and relevance.

Acts of bankruptcy: s 40(1) [3.175]

Section 40(1) lists the actions or inactions which may constitute an act of bankruptcy upon which a petition can be based. Most of the matters listed in s 40(1) are rarely used by creditors as the basis for the presentation of a petition. Typically, this is because the most common act of bankruptcy – that is, the non-compliance with the requirements of a bankruptcy notice – is so easy to prove: s 40(1)(g). This is despite the fact that the law concerning bankruptcy notices is complex. Also, others may not actually commit any one of the other types of act of bankruptcy, or even if so, it may not come to the attention of a creditor who is ready and willing to initiate bankruptcy proceedings against that debtor. Non-compliance with a bankruptcy notice also has the advantage of being able to be initiated by the creditor who will then invariably rely on the act of bankruptcy to found a petition. However, any other creditor can rely on that or any other type of act of bankruptcy. This is subject to the reality that a bankruptcy notice is not a 16 See Slack v Bottoms English Solicitors [2002] FCA 1445 and cases there cited.

114

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.180]

public document and creditors other than the one who had the notice issued may not be aware that a notice has been issued and served. The creditor relying upon a bankruptcy notice will have had to have obtained a final judgment against their debtor. The other act of bankruptcy which requires the creditor to have obtained a judgment against the debtor is the failure of execution process issued against the debtor’s assets: s 40(1)(d). The problem with not obtaining a judgment is, as raised earlier, that it opens the way for a debtor to argue that no debt is owed to the creditor. Such an argument may be sufficient to cause doubt in the mind of a court which hears the creditor’s petition about whether or not there is a debt in fact owing to the petitioning creditor. Where there is a judgment, unless the debtor can convince the court hearing the petition that it should go behind the judgment and reopen the matter, which is difficult (see [3.165]), the creditor will have proved that a debt is owed. About 95% of petitions are founded on the failure to comply with a bankruptcy notice. As this is the most important act of bankruptcy, it will be dealt with in more detail than any other. We do, however, first examine some of the other acts of bankruptcy which are of practical importance.

Particular acts of bankruptcy Intent to delay or defeat creditors etc

[3.180] If a debtor, with an intention of delaying or defeating creditors, does any one of four separate acts under s 40(1)(c), he or she can be committing an act of bankruptcy. These acts are: • departing or remaining out of Australia; • departing from his or her home or usual place of business; • “absenting” himself or herself; or • beginning to “keep house”, that is, to remain in one’s home and refuse entry to those attempting to serve process or otherwise seeking to recover their debts. The creditor has the onus to establish the debtor’s intent to delay or defeat. This can be proved directly, through the use of statements of the debtor, or indirectly, by inference, by proving the existence of circumstances which must necessarily cause delay and which the debtor must be presumed to have foreseen and intended as a necessary result of what he or she was doing. Defeating or delaying creditors need not be a debtor’s sole intent in leaving or remaining out of the country: Edge Technology v Wang [2000] FCA 1586; Puels v Exelerate Funding Pty Ltd (2005) 3 ABC (NS) 660; [2005] FCAFC 38. And it is not enough to simply show that the debtor’s conduct has caused delay to creditors. Any departure or absence of the debtor from Australia may begin before the six-month period preceding the presentation of the petition provided that there is a continuation of the absence during this period: Re Smith; Ex parte Kern Corporation Ltd [1985] FCA 216. These acts of bankruptcy are continuing acts of bankruptcy, for example, while ever the debtor remains overseas with that intent: Edge Technology v Wang [2000] FCA 1586; Thai v DCT [1994] FCA 1071. The same applies to the act of

[3.192]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

115

bankruptcy of “absenting” oneself: In re Alice Alderson; Ex parte Jackson [1895] 1 QB 183, 186; Puels v Exelerate Funding Pty Ltd, or of “keeping house”. Execution against the debtor

[3.185]

A debtor commits an act of bankruptcy if execution under court process has been issued against the debtor’s property and has been returned by the sheriff “unsatisfied”; if execution has resulted in a sale of the debtor’s property by the sheriff; or if the debtor’s property has been held by the sheriff for 21 days: s 40(1)(d). Failure to satisfy the court process suggests that the debtor does not have sufficient property which can be realised easily to pay debts. The act of bankruptcy is complete when property is sold, or at the end of the 21 days (if property was held), or (if the process was unsatisfied) from the date of the return of the process. To establish that execution has been returned unsatisfied the creditor must prove that the warrant of execution was physically brought back to the court registry: Re Ousley [1994] FCA 883, (1994) 48 FCR 131; Lewis v Lamb [2012] FMCA 392. Part X

[3.190] The act of bankruptcy provided for in s 40(1)(i) involves the signing of an authority under s 188 of Pt X of the Act. As we will see in Chapter 8, a debtor who wishes to avoid bankruptcy, but who is being pressed by creditors, may try to persuade creditors to come to a Pt X personal insolvency agreement. To initiate such an agreement, the debtor must sign a “s 188 authority” which authorises a trustee or a solicitor to call a meeting of the debtor’s creditors. The signing of the authority usually leads to a creditors’ meeting at which the creditors may or may not accept the debtor’s proposal. If the proposal is not accepted, any one of the creditors is then entitled to petition for the debtor’s bankruptcy and the signing of the authority can be used as the necessary act of bankruptcy. However, if the s 188 authority is not effective for the purposes of Pt X, for example if it is found to be defective, the signing of that authority creates no act of bankruptcy: Re Curry (1992) 40 FCR 32; [1992] FCA 619.17 There are other acts of bankruptcy related to Pt X – including failure to attend the meeting of creditors, failure to execute an agreement or the setting aside or terminating of the agreement by the court: see s 40(1)(j) – (m). Other acts of bankruptcy

[3.192] One act of bankruptcy occurs if the “debtor gives notice to any of his or her creditors that the payment of debts owed has been or will be suspended”: s 40(1)(h). An example is found in Conn v Hanks [2001] FMCA 62 where a debtor said: “Look, mate, you know my wife and I have lost a bundle in this business. We have no money to pay anyone, not you or anyone else, and we can’t see when we’ll have it in the future …”. A more circumspect response from the debtor was found not to constitute an act of bankruptcy in Lawry v Mitrou [2009] FMCA 258. 17 See [8.40].

116

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.195]

Section 40(1)(o) was introduced in 2005 to create an act of bankruptcy if the debtor becomes insolvent as a result of a transfer of property under a family law financial agreement or a Pt VIIIAB financial agreement, both under the Family Law Act, to which the debtor is a party. The aim is to prevent or deter the use of financial agreements to transfer assets for the purpose of defeating or delaying creditors see Official Trustee in Bankruptcy & Galanis [2017] FamCAFC 20. The Harmer Report recommended the repeal of many of these “ancient” acts of bankruptcy as being fixed in 16th century concepts of acts of notoriety indicating insolvency. In fact those related to Part X agreements are a disincentive to pursuing that option.18 They no longer exist under English law. But while they remain, it can be that a trustee, on examining the bankrupt’s records, will find a letter from the then debtor to a creditor stating that “I have no money and cannot pay you”. If that was written at a date earlier than the act of bankruptcy relied upon by the creditor, but still within the 6 month period, it can usefully serve to extend out the date of commencement of the bankruptcy.

Act of bankruptcy must be committed in Australia [3.195] The act of bankruptcy relied on must be committed within Australia unless the Bankruptcy Act indicates that it can be committed elsewhere; for example, the act of bankruptcy in s 40(1)(a) is – “in Australia or elsewhere” conveying or assigning property for the benefit of creditors; or remaining out of Australia with the intent to defeat or delay creditors under s 40(1)(c)(i). The most common act of bankruptcy – failure to comply with a bankruptcy notice A bankruptcy notice is a document issued by the Official Receiver19 upon the application of a creditor who has obtained against the debtor a final judgment or order for payment of money which has not been stayed. The notice calls on the debtor to pay or secure the payment of the amount claimed in the notice within the time specified. The notice states the consequences of non-compliance (s 40(1)(g)), including that an act of bankruptcy may be committed.20

[3.200]

In considering the law on bankruptcy notices, it must be remembered that their purpose is to convey to the debtor the amount claimed by the creditor and to give the debtor the opportunity of paying or securing that amount: Re Pugliese; Ex parte Chase Manhattan Bank Australia Ltd [1993] FCA 454; (1993) 44 FCR 536. Whilst that may appear trite, a bankruptcy notice may be set aside if it misstates the amount of the debt or denies the debtor the proper opportunity of understanding the notice and complying with it. Hence, a bankruptcy notice should be prepared carefully. The courts require quite strict compliance with the Act and regulations; more so 18 Harmer Report, [359] – [363] 19 A notice altered after issue, say by a process server or lawyer, is not one issued by the Official Receiver and is invalid: see, for example, Anne v Ask Funding Ltd [2015] FCA 1111. 20 The issue of a bankruptcy notice by the Official Receiver is an administrative act which does not involve the exercise of judicial power: Clyne v DCT (1982) 45 ALR 323; nor is the issue of a notice a process for the enforcement of a judgment: Re Kassab [1994] FCA 1545; (1994) 55 FCR 305. See Chapter 2.

[3.210]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

117

than courts require of the equivalent document in corporate insolvency, statutory demands under the Corporations Act. Apart from the more lenient approach in the comparable corporate provisions, the reason for this is that an individual person is involved, rather than a corporate entity, and the bankruptcy notice sets in motion for that person the whole process leading to bankruptcy.21 That is quasi-penal in the sense that it imposes serious obligations and restraints on a person. Hence, if a bankruptcy notice is defective and cannot be remedied, any bankruptcy proceedings based upon the notice will be dismissed, even in circumstances where the debtor had originally taken no action to contest the notice.22 Final judgment or order that has not been stayed

[3.205] To have a bankruptcy notice issued, it is necessary for a creditor to ensure that it has a “final judgment or order” in money terms against the debtor (s 40(1)(g)), that is, one which finally disposes of the matter in dispute or one by which the rights of the parties are finally determined even if it may not dispose of the action or the proceeding in which it was made: Gardiner v Gardiner [1992] FCA 328; (1992) 39 FCR 259.23 The fact that the court’s order may be later varied or become the subject of a successful appeal does not prevent it from being final: Re Pannowitz; Ex parte Wilson (1975) 38 FLR 184. There can be difficulties in determining whether some orders are in fact final. Section 40(3) assists by deeming certain orders or judgments as being final. Thus, where leave is given by a court to enforce an award of money made pursuant to arbitration, the award is deemed to be a final order: s 40(3)(a). Also, certain orders involving arrears of maintenance made under the Family Law Act 1975 (Cth) are deemed to be final orders: s 40(3)(f). A costs order is a final order and if the costs have been quantified or subsequently taxed in a fixed amount, a bankruptcy notice can be issued: Gibbs v Triscott [1995] FCA 1723;(1995) 65 FCR 80. Execution of the judgment or order must not be stayed for any period: s 40(1)(g), see Ritson v Commissioner of Police, New South Wales Police Force [2018] FCCA 916 in which the authorities are usefully reviewed. If the leave of the court is needed to levy execution then the judgment is stayed.24 If the debtor has obtained an instalment order in relation to payment of the judgment debt, and thereby obtains a stay of execution, no bankruptcy notice can be issued on that judgment, as long as the debtor maintains the instalment payments. Joint creditors

[3.210]

If a judgment or order is in favour of persons jointly, all of those persons’ names must appear on the notice as authorising its issue, subject to any absolute assignment by all other creditors of their rights to the petitioning creditor: Australian Workers’ Union v Bowen (No 1) [1946] HCA 24; (1946) 72 CLR 575. 21 See the discussion of bankruptcy notices in “Values in public law” [2015] FedJSchol 17, J Allsop. 22 For example, see Buere v Commonwealth Bank of Australia [2014] FCCA 164. 23 See also Autron Pty Ltd v Benk [2011] FCAFC 93; (2011) 195 FCR 404. 24 Dennehy v Reasonable Endeavours Pty Ltd [2003] FCAFC 158.

118

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.215]

A notice may be issued against joint debtors, and it remains effective against one debtor even if it is invalid against the other or is not served on that other debtor: Dimasi v Nangiloc Colignan Farms Pty Ltd [2007] FCA 308; (2007) 157 FCR 387; see also Thorne v Ozibar Pty Ltd [2017] FCCA 3273. Bankruptcy notice must claim a debt or debts of at least $5,000

[3.215] Like a creditor’s petition – where the monetary claim must be at least $5,000 – the claim in a bankruptcy notice must also be at least $5,000. It may be based on one or more judgments or orders as long as the total amount owing is at least $5,000: s 41(1)(a), (b) and see Lewis v Nortex Pty Ltd [2013] FCAFC 56. The notice must be issued within six years of the date of the judgment or order: s 41(3)(c)(i). There is no need for the creditor to make an initial demand for payment before a notice is issued; the judgment of a court in favour of the creditor is sufficient to put the debtor on notice that he or she is legally obliged to pay the debt claimed: Cavoli v Etl [2007] FCA 1191. The debt owed to the creditor need not be a debt provable in bankruptcy. In ASIC v Forge (2003) 133 FCR 487; 1 ABC (NS) 429, the Full Federal Court upheld the validity of a bankruptcy notice based on civil penalty orders under the then Corporations Law. Such orders are not, by virtue of s 82(3AA) of the Bankruptcy Act, provable debts.25 The court noted that an act of bankruptcy is more than “a mere trigger” to allow a creditor to present a creditor’s petition; its wider significance lies in the timing of the application of the doctrine of relation back that may potentially assist all creditors. The relevant date for the determination of the amount owing is the date of the issue of the notice: Re Walsh [1982] FCA 250. Procedures

[3.220]

The application for the issue of a bankruptcy notice may be made online and must include a completed form of the notice itself.27 A copy of the sealed or certified judgment, order or award must be provided. A fee of $470 (in 2018) is payable. A creditor should search the NPII (National Personal Insolvency Index) beforehand to see if the debtor is already subject to bankruptcy proceedings. If so, the creditor may wish to await the outcome of those, or support them. 26

Strict compliance with the form is not required, substantial compliance suffices: reg 4.02(3). Until a creditor’s petition, based on a bankruptcy notice, is presented, the notice is not available for public inspection. However, a person mentioned in the notice, a party to a proceeding to which the notice relates, and their solicitors, can inspect the notice: reg 4.03. 25 The relevant provision in the Corporations Act is s 1317G. 26 See ORPS 6, Applying for a bankruptcy notice. 27 AFSA Form 1, s 41(2), reg 4.02(1).

[3.225]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

119

An issued notice that is ready for service will therefore be endorsed and dated by the Official Receiver and will have attached to it a copy of the sealed or certified judgment, order or award.28 Service

[3.225] A bankruptcy notice has to be served on the debtor. It may be served in accordance with reg 16.01(1) which, apart from allowing personal service, also permits a document to be: • sent by post or courier service to the debtor’s last-known address, being the last address which has been made known by the debtor; it does not matter whether the debtor lives there or not, nor whether it is a business address;29 • left in an envelope marked with the debtor’s name and any relevant document exchange number, at a document exchange facility which the debtor maintains; • sent by fax or other electronic mode to a facility maintained by the debtor. Given the strictness of bankruptcy practice, and establishing an act of bankruptcy on a particular date, it is preferable to have the debtor personally served.30 In any event, reg 16 provides only for prima facie evidence of service by the various means, to which the debtor can adduce evidence to the contrary under reg 16.01(2). This evidence is limited to proof of non-service or delivery of the notice, not its non-receipt: Skalkos v T & S Recoveries Pty Ltd [2004] FCAFC 321; (2004) 141 FCR 107. For example, the debtor may be able to show that the notice was never sent by post to her address; but if proof of posting is shown, the debtor’s proof that she did not in fact receive the notice will not be enough, she will be regarded as having been properly served. A bankruptcy notice, or any debt process, must be served properly, with the debtor clearly identified, and with some consideration given to the circumstances of the debtor; for example, service at the debtor’s workplace would generally not be appropriate.31 This will depend on any difficulties the debtor imposes, for example, by way of avoiding service. All the necessary documents must be served – both a complete copy of the bankruptcy notice and a sealed copy of the judgment or order.32 28 A bankruptcy notice which does not have the judgment or order attached to it is invalid: American Express International Inc v Held (1999) 87 FCR 583; see also Anne v Ask Funding Ltd [2015] FCA 1111, fn 1. But in the context of the electronic issue of bankruptcy notices by the Official Receiver, see Curtis v Singtel Optus Pty Ltd [2014] FCAFC 144. 29 Skalkos v T & S Recoveries Pty Ltd [2004] FCAFC 321; (2004) 141 FCR 107. See also Napiat Pty Ltd v Salfinger (No 7) [2011] FCA 1322; (2011) 202 FCR 264; appeal dismissed in Salfinger v Napiat [2012] FCAFC 77. 30 Issues with the date and place of service under reg 16.01 were raised in Fuller, in the matter of Alford v Alford [2017] FCA 782 and in American Express Australia Ltd v Michaels [2010] FMCA 103. 31 See generally, Debt collection guideline: for collectors and creditors, issued by both the Australian Competition and Consumer Commission (ACCC) and ASIC. There is no general prohibition on a bankruptcy notice or any court process being served in the precincts of the court; although it may be a contempt of court if service, or its likelihood, has such a deterrent effect as to obstruct the administration of justice: Phillips v Southage Pty Ltd [2015] FCA 332. 32 ANZ Banking Group Limited, in the matter of James v James [2016] FCA 332.

120

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.230]

Substituted service

[3.230] A creditor can apply for an order for substituted service under s 309 of the Act. This is an order which dispenses with personal service and substitutes some other form of service in its place, for example, by delivery to a particular address, or by email: Equititrust Ltd v Bosiljevac [2007] FCA 323. This may be appropriate where the debtor is itinerant or evasive. To obtain such an order the applicant must prove two things: • it is practically impossible to serve the debtor personally; and • the method of service sought will, in all reasonable probability, be effective to bring the notice to the attention of the debtor: Ginnane v Diners Club Ltd [1993] FCA 167; (1993) 42 FCR 90. Such an order is merely permissive and does not purport to exclude any other method of service: Skalkos v T & S Recoveries Pty Ltd [2004] FCAFC 321; (2004) 141 FCR 107. The Federal Court of Australia’s website has a guide to applications for substituted service of bankruptcy notices and creditor’s petitions. Service within six months, or as extended

[3.235] A bankruptcy notice must be served within six months of the date of its issue, or at such further time as the Official Receiver allows: reg 4.02A(2). If the debtor is difficult to serve, the creditor may need to seek an order extending time for service from the Official Receiver. In applying for an extension of time, or seeking an order for substituted service, the creditor is under an obligation of full and frank disclosure: Wasilenia v DCT [2003] FMCA 8; (2003) 52 ATR 279. Determination of the date of the act of bankruptcy

[3.240] The time allowed to a debtor for compliance with a bankruptcy notice served in Australia is 21 days,33 or such period ordered by the court if leave to serve the notice outside Australia is granted: s 40(1)(g)(i) – (ii). If a debtor fails to comply with the terms of a notice within the specified time, that is, by the end of the 21st day after the day of service (the day of service is excluded), the debtor commits an act of bankruptcy on that day: Swarbrick v Burge [2009] FMCA 985. The time for compliance with a bankruptcy notice may be extended under s 41(6A) or s 41(7). How an extension is obtained is discussed at [3.260]. Challenging bankruptcy notices [3.245]

The proper response of a debtor served with a valid notice is either to pay within the time specified, or to take steps to assess whether any challenge to the notice can be made. If the debtor does not comply, an act of bankruptcy is committed. 33 A notice specifying a shorter time, 14 days, will be invalid: Re Scerri [1998] FCA 403; (1998) 82 FCR 146.

[3.260]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

121

Debtor must act within the 21 days A debtor who wishes to challenge a notice should file court process34 within the time for compliance, in particular if the basis of setting the notice aside is to challenge the money judgment on which it is based. The debtor can challenge the notice later, which may prevent the creditor obtaining a sequestration order on a subsequent petition, but that may not reverse the effects of non-compliance with the notice.

[3.250]

The debtor can take one of a number of courses of action to contest the notice with a view to the notice being set aside. Application to set aside judgment

[3.255] As a bankruptcy notice must be founded upon a final judgment, it may be that the debtor can challenge that judgment. An example would be where a default judgment in the Victorian County Court was obtained and the debtor maintains that she was not served with the court process. In such a case, the debtor can, before the 21 days allowed to comply with the notice, commence proceedings to set aside the judgment in the County Court: s 41(6A)(a). Application to extend time for compliance with bankruptcy notice: s 41(6A)

[3.260] Immediately after doing this an application can then be made to the Federal Circuit Court or Federal Court under s 41(6A) for an order extending time for compliance with the bankruptcy notice. In the example raised, the debtor can apply for an extension until after the date set down for the hearing of the application to set aside judgment in the County Court. The power given to the court under s 41(6A) to extend time is given in aid of the courts’ jurisdiction to consider and determine applications to set aside bankruptcy notices, otherwise the application would be negated by the debtor’s commission of an act of bankruptcy. An extension order cannot be made under s 33; s 41(6A) is the sole source of power to extend time for compliance with a bankruptcy notice.35 Given the significance of the act of bankruptcy that is being deferred by an extension, an extension order should not be made without notice to the creditor who should have the opportunity to be heard on whether time should be extended at all, or at least further extended.36 The deferral of an act of bankruptcy may have consequences for the recovery of voidable transactions if the debtor is made bankrupt because it will affect the date of commencement of the bankruptcy. The court has a discretion whether or not to grant the extension of time. It is a discretion at large and one that does not require the court to generally review the merits of the appeal, unless the prospects or otherwise are clear: Byron v Southern Star Pty Ltd [1997] FCA 151; (1997) 73 FCR 264. Relevant considerations include the reasons for no stay of judgment having been obtained, the debtors’ solvency, the 34 See Courts’ Bankruptcy Rules, Pt 3. 35 McLean v ANZ Banking Group Ltd [1993] FCA 216; (1993) 42 FCR 300, 302. 36 Sockhill v DCT [2000] FCA 1028; Re Nguyen; Ex parte Commissioner of Taxation [1995] FCA 1036; (1995) 54 FCR 403.

122

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.265]

prospects of appeal, the prejudice to the debtors, the significance of the relation back period, and whether there has been any undertaking given in respect of the outstanding judgment: see Prins v Body Corporate For The Wave CTS [2012] FMCA 148; Council of the City of Sydney v Obeid [2013] FCA 149. The expression “proceedings to set aside the judgment or order” in s 41(6A)(a) of the Act includes an appeal from the decision in which the judgment was given upon which a bankruptcy notice is issued (Conway v Jackson [2001] FCA 230; (2001) 107 FCR 201), but not a mere holding appeal (Dennis v Cranitch [2005] FMCA 168), and includes an application for special leave to appeal to the High Court: Kalfus v Cassis [2005] FMCA 143; (2005) 3 ABC (NS) 649. If the court decides not to extend time, despite an appeal being pursued, it is open to the court to nevertheless take the appeal proceedings into account at the hearing of the petition; for that purpose, the judge may direct that he or she hear the petition: Jenkins v National Australia Bank [1999] FCA 1758; Porter v OAMPS [2004] FMCA 272; (2004) 207 ALR 635. An application for an extension of time for compliance may conceivably be made under s 41(6A) by a creditor, for example in circumstances where a debtor succeeds in having a notice set aside at trial and the creditor is successful in its appeal.37 The affidavit in support of any application to set aside a bankruptcy notice must generally be filed before the time for compliance with the notice has expired: La Pegna v Commissioner of Taxation [2006] FMCA 1643; (2006) 204 FLR 364. If time has already expired, time may still be extended

[3.265] A court still has the power to extend the time for complying with a bankruptcy notice where the original time set in the notice has expired, provided that the debtor has complied, before the expiry of the time for compliance with the notice, with either of the two preconditions in s 41(6A) – that is, that the debtor has taken proceedings to have the relevant judgment set aside, or has applied to have the bankruptcy notice itself set aside.38 The debtor must have done one or other of these for the court to then be able to consider whether to extend time.39 Application for extension may be refused: s 41(6C)

[3.270] An application under s 41(6A) will ordinarily succeed unless the debtor cannot meet s 41(6C), which lists matters of which the court must take account in exercising its discretion to extend time in circumstances where the debtor is taking 37 Shephard v Chiquita Brands (South Pacific) Ltd [2004] FCAFC 76; (2004) 1 ABC (NS) 610, 623-624. In that case, the creditor unsuccessfully applied to extend time so as to seek a later act of bankruptcy to validate its petition, which had been presented outside the six-month period. 38 Streimer v Tamas (1981) 54 FLR 253; accepted by the High Court in Guss v Johnstone [2000] HCA 26; (2000) 74 ALJR 884; further explained in Coshott v Prentice (No 2) [2016] FCA 1531. 39 It is not enough for the debtor to make an application which is dismissed before the time for compliance with the bankruptcy notice has expired: Re Udowenko; Ex parte Mitchell (1996) 69 FCR 299; Shephard v Chiquita Brands (South Pacific) Ltd [2004] FCAFC 76; (2004) 1 ABC (NS) 610. However, an appellate court may be able to extend time if the debtor’s challenge to the validity of a notice is ultimately upheld, despite an act of bankruptcy having been committed: Guss v Johnstone [2000] HCA 26; (2000) 74 ALJR 884 at [62]-[63]; Coshott v Prentice (No 2) [2016] FCA 1531.

[3.285]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

123

separate proceedings to set aside the judgment on which the notice is based. That is, an extension of time is not to be granted where the debtor’s proceedings have not been instituted bona fide or are not being prosecuted diligently. Act of bankruptcy remains even if judgment is set aside

[3.275] Once an act of bankruptcy has been committed because of a failure to comply with a bankruptcy notice it remains an available act of bankruptcy even if the judgment on which it is based is subsequently set aside.40 However, in reality the creditor will still need a debt, or debts, owing and in existence of at least $5,000 on which to petition. Application to set aside a defective bankruptcy notice

[3.280] An application to set aside the notice itself is the most common response by debtors. The court is not given explicit powers under the Act to hear such applications. The power appears to arise either from the general powers granted to the court under s 30(1)41 or, by implication, from the power of the court in s 41(6A)(b) to extend the time for compliance with a notice where “an application has been made to the Court to set aside the bankruptcy notice”: McLean v ANZ Banking Group Ltd (1993) 42 FCR 300, 305; ASIC v Forge [2003] FCAFC 274; (2003) 133 FCR 487. The debtor’s argument will be that the notice is defective in a substantive way or that the defect, while being of a formal nature, is capable of causing substantial injustice. If the debtor can assert either of these points, the creditor cannot make use of s 306(1), which provides that a formal defect does not invalidate any proceeding unless the defect would cause substantial injustice. The law in respect of the validity of bankruptcy notices and defects in their form provide continual grounds for application to the court for setting notices aside. We have explained that, given the severe consequences of a failure to comply with a notice, the courts interpret them strictly, sometimes with apparent injustice to the creditor. In Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490; (2004) 138 FCR 324, Weinberg J reluctantly set aside a bankruptcy notice, commenting that “bankruptcy law is often highly technical, and occasionally far removed from common sense”. At the same time, courts have stated that creditors who seek to use bankruptcy notices must be prepared to strictly comply with the Act. In Re Walsh [1982] FCA 250 it was said that: “A bankruptcy notice sets in motion the whole process leading to bankruptcy and must, since the proceedings are of a quasi-penal nature, be construed strictly.”

Validity of bankruptcy notices – their form

[3.285] Section 41(2) of the Bankruptcy Act provides that a bankruptcy notice must be in accordance with the form prescribed: see regulations. Regulation 4.02 and AFSA, Form 1. 40 McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41; (2013) 210 FCR 149 and cases there cited. 41 Re Sterling; Ex parte Esanda Pty Ltd (1980) 44 FLR 125; 30 ALR 77; Re Briggs (1986) 12 FCR 310.

124

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.285]

Section 306 relevantly provides that proceedings under the Act42 are not invalidated by “a formal defect or irregularity unless the Court … is of the opinion that substantial injustice has been caused by the defect”. A bankruptcy notice is a nullity in two circumstances, namely, “if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice”: Kleinwort Benson v Crowl [1988] HCA 34; (1988) 165 CLR 71; Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409. As to the first, the question has to be answered in light of the general purpose of the bankruptcy notice provisions, so that if the error could reasonably mislead a debtor as to what is necessary to comply with the notice it is essential and cannot be said to be merely a formal defect or irregularity in terms of s 306. As to the second circumstance, in cases where the notice could reasonably mislead the debtor as to what is required, “the notice is a nullity whether or not the debtor is in fact misled” and it is not relevant to ask whether the debtor was in fact misled. But even then, the question of whether the notice is misleading is not determined in a vacuum and the court can have regard to facts extraneous to the notice itself, including relevantly the surrounding circumstances from the perspective of the actual debtor served with the notice as opposed to a hypothetical debtor: Fuller, in the matter of Alford v Alford [2017] FCA 782. The relevant date for the determination of the amount owing, and up to which date interest can be claimed, is the date of the issue of the notice: Re Walsh [1982] FCA 250. An incorrect calculation of interest or statement of the provision under which interest is claimed will not necessarily invalidate the notice (Snelgrove v Roskell [2007] FCA 122; (2007) 157 FCR 313); nor will minor irregularities. But if the defect is one that can mislead the debtor, the notice will be set aside; for example where there was a wrong address of the creditor at which location the debtor was required to pay the debt (Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490; (2004) 138 FCR 324) or where the notice inaccurately described the judgment creditor under its former business name: Re Hansen (1985) 4 FCR 590. Other minor misdescriptions of an address have not resulted in invalidity (Fuller, in the matter of Alford v Alford [2017] FCA 782) nor have minor misspellings of the debtor’s given name (Viavattene v Birch [2015] FCCA 2676). The omission of words in the notice explaining an aspect of the debtor’s rights to raise a counter-claim did not invalidate the notice in Malek v Macquarie Leasing Pty Ltd [2007] FCAFC 14; (2007) 156 FCR 552. These were mere formal defects. In Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 itself, there was a miscalculation of interest on a judgment, understated by some $23,000 in the notice. That was treated by the court as a formal defect within s 306 and the error did not invalidate the notice. It should be noted that in the case of a bankruptcy notice issued to two or more debtors, the notice may be invalid in relation to one debtor but remain valid in respect of the other debtor or debtors. For example, in Dimasi v Nangiloc Colignan 42 The expression “proceedings under this Act” extends to any proceeding authorised by the Act, and not only those in court: Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447. Section 306 therefore applies to the interpretation of bankruptcy notices.

[3.300]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

125

Farms Pty Ltd [2007] FCA 308; (2007) 157 FCR 387, the substantial misspelling of the name of one of the joint debtors invalidated the notice against her, but it did not do so against the other. If the debtor had obtained an order for payment of the debt by instalments and a consequent stay of execution at the time of the application for the issue of the notice, it will be invalid: s 41(3)(b). The time for consideration whether a judgment has not been stayed is the time of issue, or at the latest, service of the bankruptcy notice.43

[3.295] Even if the identified defects in the bankruptcy notice are not matters made “essential” by the Act, they may still invalidate the bankruptcy notice if they are matters which “could reasonably mislead a debtor”. In that regard, it is irrelevant whether the debtor is in fact misled. The court must apply an objective test but the court is entitled to take into account the surrounding circumstances and should consider the position of the actual debtor served with the notice (Re Crisafulli; Ex parte National Commercial Banking Corporation of Australia Ltd (1985) 11 FCR 272) including the terms of an earlier bankruptcy notice served on that debtor: Snelgrove v Roskell (2007) 157 FCR 313. The essential point is that a debtor needs to understand by reading the bankruptcy notice what he or she must do to comply with its requirements and thus avoid the consequences of an act of bankruptcy. The debtor “is not expected or required to work … things out for himself”: Blackshaw Services Pty Ltd v Cureton (2003) 1 ABC (NS) 453, 458. In a dissenting judgment in Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33, Gyles J expressed concern that because the date of non-compliance with a notice creates an act of bankruptcy, which is important in challenging prior transactions of the debtor, if a notice is too readily set aside as invalid, the consequence is that those transactions which have the effect of improperly prejudicing creditors, may escape scrutiny. Since the decision of the High Court in Adams v Lambert (2006) 228 CLR 409, the law is at least clearer, although the fundamental need for acts of bankruptcy as a matter of policy remains in question. Overstatement: s 41(5)

[3.300] Section 41(5) states that a notice is not necessarily invalidated if the amount claimed in it exceeds the correct sum due.44 However, the debtor can give notice to the creditor that he or she disputes the notice on the basis of misstatement. In Croker v Commissioner of Taxation [2005] FCA 127; (2005) 145 FCR 150, the amount of the court fee for registering a costs certificate was incorrectly included in the certificate of judgment and also in the notice, which was set aside.

43 Schekeloff; Ex parte Schekeloff v The Hopkins Group Pty Ltd (1989) 22 FCR 407; compare Murdaca v Accounts Control Management Services Pty Ltd [2007] FCA 964. But see Girgis v Gells Lawyers Pty Ltd [2012] FMCA 669. 44 The legislative history of s 41(5) and (6) is explained in Re Walsh [1982] FCA 250.

126

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.305]

However s 41(5) does not apply to preserve the validity of a notice if the overstatement occurs because the notice does not record the amounts paid by the debtor in reduction of the debt: St George Wholesale Finance Pty Ltd v Spalla (2001) 181 ALR 682. While the subsection contemplates the invalidation of the bankruptcy notice merely upon the debtor giving notice to the creditor of the disputed amount, the debtor must do more than merely assert the overstatement; he or she must give the creditor proper details: Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120; James v DCT (No 2) [2010] FCA 677. Section 41(5) is not a source by which a bankruptcy notice might be set aside for misstatements. It and (6) “are ameliorating provisions. They do not either in terms or in substance themselves invalidate anything. They save some bankruptcy notices from what otherwise would be invalidity, but the subsections are not based on an assumption that overstatement necessarily leads in every case to invalidity of the bankruptcy notice”: Re Walsh; Olivieri v Stafford (1989) 24 FCR 413, 428; Nugawela v Deputy Commissioner of Taxation [2016] FCAFC 164. The creditor can apply for a new notice

[3.305] If a bankruptcy notice is contested by the debtor, and there is a defect in the notice, the creditor is entitled to simply issue a second bankruptcy notice, this one issued correctly: Abignano v Wenkart [1998] FCA 1468. But if a creditor adopts such a course the creditor must make it clear to the debtor on which bankruptcy notice the creditor intends to proceed so that the debtor knows with which notice he or she must comply. One disadvantage for a creditor in that situation, apart from time and cost, is the loss of the earlier date of act of bankruptcy, which, as we have seen, determines the date the bankruptcy commences and the period back from which voidable transactions may be challenged. Counter-claim, set-off or cross-demand: s 41(7)

[3.310] After receipt of a bankruptcy notice the debtor may, before the 21 days expires and pursuant to s 41(7), apply to the court for an order setting aside the notice on the basis that the court is satisfied that the debtor has a counter-claim, set-off or cross-demand referred to in s 40(1)(g). In contrast to an application granted on s 41(6A), an application under s 41(7) extends the time for compliance with the notice “until and including the day on which the Court determines whether” it is satisfied that the counter-claim, set off or cross-demand exists. Under s 40(1)(g), the counter-claim, set-off or cross-demand, which must be a monetary claim – Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135, 138: • must be equal to or exceed the amount of the judgment debt or amount of the final order – that must be the case at the time when the debtor’s application is heard, even on appeal: Patane v Asteron Life Ltd [2004] FCA 232; (2004) 2 ABC (NS) 85; and • it must be shown that it could not have been set up in the proceedings in which the judgment or order was obtained.

[3.320]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

127

The purpose of the provision is to allow the debtor to raise matters concerning the debt claimed by the creditor that the debtor could not have previously raised, before any bankruptcy proceedings against the debtor continue further. Initially, for the court to be “satisfied that the debtor has” such a claim, it is not necessary for the debtor to prove, as on a final hearing, the asserted entitlement to recover as against the creditor, only that the debtor “has a claim deserving to be finally determined”: Glew v Harrowell [2003] FCA 373. But the debtor cannot satisfy the court by simply showing that a claim is made and how the claim is made out.

[3.315] In relation to the meaning of the three terms, “cross-demand” has a wider meaning than set-off and counter-claim. A set-off provides a defence to a claim, in that it diminishes or wipes out the amount claimed. A counter-claim is not a defence but because it directly answers the claim, it can result in relief being ordered in favour of the counter-claimant against the claimant. A cross-demand is neither a set-off nor a counter-claim, but a more general term describing a claim which can be specified and which equals or exceeds the amount of the judgment debt.45 [3.320] Given the width of the term cross-demand, it can be a claim for unliquidated damages for breach of contract or a tort. It need not have any connection with the cause of action out of which the judgment debt arose: Massih v Esber [2008] FCA 1452. A cross-demand has been based on a claim by the debtor under the Industrial Relations Act 1996 (NSW) that the creditor pay the debtor any money that may be found owing by the Industrial Relations Commission: Re Zakrzewski [2000] FCA 1187; (2000) 178 ALR 694. But an application to the High Court for special leave to appeal against the judgment debt is not a relevant cross-demand: Re Thompson (1995) 61 FCR 544. A significant issue is whether the cross-claim “could not have been set up” in the proceeding in which judgment was obtained. This depends on whether it could not have been set up as a matter of law, not on whether it could not have been set up as a matter of practicality: Tzovaras v Nufeno Pty Ltd [2003] FCA 1152; (2003) 1 ABC (NS) 421. Hence, a mere failure to take advantage of setting up a counter-claim is not regarded as an inability to make a claim: Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135. But: • a cross-claim will be one that could have been set up in the action that produced the judgment on which the notice is based, notwithstanding that to do so the debtor may need to transfer the proceedings to another court, for example, because the cross-claim exceeded the jurisdictional limits of the court, and the debtor may need to seek the exercise of the court’s discretion before doing so;46 • the fact that the rules of court require a debtor to obtain leave before entering a defence or counter-claim does not render the counter-claim one which the debtor could not have set up in the action and which would allow the debtor to take advantage of s 41(7) (Re Willats [1991] FCA 407; (1991) 31 FCR 206); 45 This explanation in the 9th edition was endorsed in Tu v Chang (No 2) [2016] FCA 1568 at [61]. 46 Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319; (2010) 183 FCR 521; Tzovaras v Nufeno Pty Ltd [2003] FCA 1152; (2003) 1 ABC (NS) 421; Cassaniti v Alam [2006] FMCA 1320.

128

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.325]

• where an order for costs is made on an interlocutory application and it forms the basis for a bankruptcy notice, then any counter-claim or cross-demand that the debtor had in the substantive proceedings is one that could not have been set up in interlocutory proceedings.47 The filing of an affidavit under s 41(7) is not an application to set aside the bankruptcy notice. But it does operate as an automatic extension of time for compliance with the bankruptcy notice until the court can determine whether it is satisfied by the debtor that he or she has a claim or demand of the requisite kind. It is therefore unnecessary, in those circumstances, for an application to be made for the time for compliance with the notice to be extended: James v Abrahams (1981) 34 ALR 657. The onus of showing that the claim is not one that could have been set up in the creditor’s original proceedings is on the debtor. The “debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy”: Glew v Harrowell [2003] FCA 373; Guss v Johnstone [2000] HCA 26; (2000) 74 ALJR 884. Necessarily, if the court is satisfied that the debtor has a counter-claim etc, within either the time originally fixed for compliance by the notice or the extended time resulting from the operation of s 41(7), then the failure to comply with the requirements of the notice does not constitute an act of bankruptcy: Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135. Solvency

[3.325] It should be noted that the debtor’s solvency is no defence to a bankruptcy notice. A debtor able but unwilling to pay on a bankruptcy notice is unable to resist an act of bankruptcy occurring.48 This is in contrast to the petition hearing where, as we will discuss, the principle remains that solvency will generally provide a bar to a creditor seeking a sequestration order.49 Abuse of process

[3.330] A court may set aside a notice that is being used in abuse of process. As an example, traditionally, bankruptcy notices have been used as an integral part of debt collecting. Often they are issued by creditors who have no intention of taking bankruptcy proceedings against the debtor but who hope to persuade the debtor that they should pay just in case the creditor decides to issue bankruptcy process. In Brunninghausen v Glavanics [1998] FCA 230, the court said that the service of a bankruptcy notice in such circumstances where there was no intention of pursuing bankruptcy was an abuse of process, or where the debtor’s solvency is either obvious or susceptible of reliable verification. 47 Chesson v Smith [1992] FCA 64; (1992) 35 FCR 594; Bradbrook v Farrow Mortgage Services Pty Ltd [1994] FCA 896. 48 Re Athans; Ex parte Athans (1991) 29 FCR 302; queried, but followed in Amos v Brisbane TV Ltd (2000) 100 FCR 82; [2000] FCA 825. 49 Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372. See [3.395].

[3.340]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

129

In a case where the judgment debt was over five years old, was for a relatively small amount and the creditor knew the debtor owned assets which greatly exceeded the debts, it was inferred that the creditor’s purpose in issuing the bankruptcy notice was to put pressure to pay the debt rather than to genuinely invoke the court’s bankruptcy jurisdiction. In the absence of evidence from the creditor explaining the delay or demonstrating that the debtor’s financial position had deteriorated, the bankruptcy notice was set aside as an abuse of process: Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825; see also Cavoli v Etl [2007] FCA 1191. However there must be evidence above a mere assertion of unreasonable conduct by the creditor (Watts v Adelaide Bank Ltd [2009] FCAFC 169), and the improper purpose must be the predominant purpose of the creditor: Reid v Hubbard [2003] FCA 1424; (2003) 1 ABC (NS) 438. Apart from such cases, a notice has been set aside as an abuse of process where the judgment on which the notice was based had in fact been stayed by an instalment order which was not disclosed by the creditor when it applied for the notice to be issued (Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260), and other such instances of non-disclosure to the court. The time at which to assess whether the notice is an abuse of process is the time of its issue: Seller v DCT [2011] FCA 865. Limits on the court’s powers

[3.335] Unless there is an abuse of process, there is otherwise no general discretionary jurisdiction in the court to set aside notices, in contrast to the general discretion in the court, under s 52 of the Act, to decide whether a sequestration order should be made even though an act of bankruptcy exists.50 In ASIC v Forge (2003) 133 FCR 487; 1 ABC (NS) 429, the Full Federal Court explained (at 435) that: “… the Act gives no general discretion to set aside bankruptcy notices that are valid in form and not an abuse of process. The Act permits the issue of a bankruptcy notice and, if the notice is valid, prescribes the consequences to the bankrupt of non-compliance. The grounds upon which a bankruptcy notice may be set aside must relate to the form or content of the notice, service of the notice or the existence of the debt upon which the judgment, and, in turn, the notice, is founded. Reference to the existence of a debt includes the existence of a counter claim, set off or cross demand equal to or exceeding the amount of the debt [cased cited]. Since jurisdiction to set aside a defective bankruptcy notice is not a general discretionary jurisdiction, it differs from the jurisdiction to make a sequestration order under s 52(1), which is expressly discretionary.”

Creditor’s petition [3.340] Once an act of bankruptcy has occurred, and if the other prerequisites discussed earlier in this chapter can be satisfied, a creditor may present a petition seeking a sequestration order. A creditor has six months from the date of the act of bankruptcy in which to present a petition; that time cannot be extended. The petition must be in the court Form 6.51 It must establish a debt of at least $5,000 or more owing by a debtor. If the amount owing is less than $5,000 but is in respect 50 Earlier case law is reviewed in Barton v Malcolm Johns Legal Pty Ltd (No 2) [2015] FCA 166. 51 Section 47(1A); see Courts’ Bankruptcy Rules, Form 6.

130

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.345]

of a judgment which carries interest, accumulations of interest will be allowed to be added to the judgment debt in order to raise it to a sufficient amount to obtain a sequestration order.52 The creditor must show the debtor’s Australian connection. Also, and most importantly, the petition must establish and disclose a valid act of bankruptcy. A person or persons operating under a firm or business name can take proceedings under the Act, or be proceeded against, in that name: s 307. The court may order that the names behind the firm name be disclosed. The firm may be one person or several, and person may include a company: All Saints v Tahatos [2004] FMCA 477. If a partnership petitions in its firm name, and the partnership changes composition after the date of the judgment on which the petition is based and before the date of the presentation of the petition, then a sequestration order can still be obtained by the firm: Anderson Rice v Bride [1995] FCA 1627; (1995) 61 FCR 529. The petition must be presented at the relevant court registry – “presentation” refers to a petition being delivered by the creditor to the appropriate court officer and being received by that officer.53 The date of presentation of the petition is important for determining the date of commencement of the bankruptcy. A copy of the petition issued by the court must be given to the Official Receiver within two business days: reg 4.05. The Federal Court of Australia has a creditor’s petition checklist on its website to assist practitioners and litigants with the procedural requirements. Service

[3.345]

At the hearing of the petition, the creditor must prove the commission of an act of bankruptcy. That necessarily requires the creditor to prove the bankruptcy notice was properly served. In one case, while the petition was found to have been properly served, the petition was dismissed because the court was unable to be reasonably satisfied that the bankruptcy notice itself was properly served.54 Although reg 16.01 allows non-personal service of the bankruptcy notice, that regulation does not apply to a creditor’s petition: Skalkos v T & S Recoveries Pty Ltd [2004] FCAFC 321; (2004) 141 FCR 107; de Robillard v Carver [2007] FCAFC 73; (2007) 159 FCR 38. The petition must be served personally. But an order for substituted service of the petition may be made under s 309(2) of the Act. As referred to earlier there is a guide to applications for substituted service of petitions and bankruptcy notices on the Federal Court’s website. The making of a sequestration order is a serious issue, although debtors often do not attend court in response to a petition. However, courts are careful in ensuring that the debtor is aware of the proceedings, and personal service, or substituted 52 Autron Pty Ltd v Benk [2011] FCAFC 93; (2011) 195 FCR 404. 53 Re Purden [1982] FCA 127; (1982) 64 FLR 306; Re Ousley (1994) 48 FCR 131; Lancaster v Downes [2002] FMCA 40. 54 ANZ Banking Group Limited, in the matter of James v James [2016] FCA 332.

[3.350]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

131

service, ensures that. As with a bankruptcy notice,55 the petition must be properly served, in particular because it notifies the debtor of the date of the sequestration hearing and the debtor clearly identified. Lapse of petition after 12 months – this may be extended to 24 months

[3.350] The petition lapses “at the expiration of … the period of twelve months commencing on the date of presentation of the petition”: s 52(4). For example, a petition presented on 30 May 2016 expired on 29 May 2017, that is, at midnight between 29 and 30 May 2017: Roskell v Snelgrove [2008] FCA 427; (2008) 246 ALR 175. The court may, at any time before the expiration of the 12 months, extend time so that the petition does not lapse for a period not exceeding 24 months from presentation: s 52(5).56 The petition cannot be extended beyond that 24 months. In some cases, the court can invoke the “slip rule” and extend a petition after the 12 months period has expired, despite s 52(4). The slip rule is a rule of court that allows a court to remedy clerical or accidental omissions in orders made by the court.57 Its essential purpose is to avoid injustice to litigants by ensuring that the court’s order reflects its intention at the time the order was made, or reflects the intention that the court would have had but for the failure that caused the accidental slip. It may be exercised to prevent unintended consequences of the order and in this way give effect to the court’s intentions. It is not confined to errors or omissions of the court; it extends to errors or omissions resulting from the inadvertence of a party’s lawyer, or from the court itself: Flint v Richard Busuttil & Co Pty Limited [2013] FCAFC 131. In a case where a creditor’s petition expired under s 52(4) during the period of the court’s reserved judgment on a sequestration order, the slip rule could not be invoked and the order was set aside.58 But the court made orders under the Federal Proceedings (Costs) Act 1981 (Cth) in favour of the parties, and made orders for payment of the trustees’ remuneration.59 The slip rule has been questioned60 but has been applied in the case of creditors’ petitions where the 12-month period has been accidentally allowed to expire: Griffiths v Boral Resources (Qld) Pty Ltd [2006] FCAFC 149; (2006) 154 FCR 554; Boumelhem v Commonwealth Bank of Australia [2008] FCA 1568; (2008) 171 FCR 462. Relevant factors include whether the court itself was involved in allowing the petition to be adjourned beyond the limitation period, whether it has been an accidental oversight, and the period of time within which the party applying seeks to have the rule invoked, and the legal substance of the creditor’s petition itself. 55 See [3.225]. 56 Note the issues that can arise when a hearing de novo on review of a registrar’s decision proceeds, outside the period set by s 52(5): Totev v Sfar [2008] FCAFC 35; (2008) 167 FCR 193. 57 See Elyard Corp Pty Ltd v DDB Needham Sydney Pty Ltd (1995) 61 FCR 385, a decision on the equivalent provision in the Corporations Act 2001 (Cth), s 459R. 58 Wu v Li [2017] FCA 500. 59 Wu v Li (No 2) [2017] FCA 501. 60 Doubts about the decision in Elyard were expressed in Griffiths v Boral Resources (Qld) Pty Ltd [2006] FCAFC 149; (2006) 154 FCR 554 and in Amorin Constructions Pty Ltd v Kamtech Electrical Services Pty Ltd [2008] NSWSC 285; (2008) 73 NSWLR 627.

132

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.355]

Nevertheless, application of the rule is discretionary and courts exercising the rule are required to recognise the important policy, evidenced in both the Corporations Act61 and the Bankruptcy Act, that insolvency proceedings be speedily resolved. If the life of the petition is extended, the petitioning creditors must give a copy of the court’s order to the Official Receiver within two business days: reg 4.05(3). Hearing of the petition

[3.355]

A debtor may oppose the petition, and is required to file a notice of opposition at least three days before the date of the hearing.62 The notice will disclose the bases upon which the debtor challenges the petition, for example as to its service, or the existence of the act of bankruptcy, or whether the debt is in fact owing. Sequestration proceedings based on non-compliance with a bankruptcy notice are not subject to the requirements imposed on litigants under the Civil Dispute Resolution Act 2011 (Cth).63 At the hearing, the petition may either be dismissed, adjourned, withdrawn, or a sequestration order may be made. Dismissal and withdrawal

[3.360] The court will dismiss the petition if it is defective in such a way that the defect(s) cannot be remedied, for example, if the debt is below $5,000. However, the practice is also that a petition will be dismissed, by consent, if the creditor has been paid its debt or has otherwise been satisfied such that it does not wish to proceed to a hearing. Section 47(2) provides that leave of the court is required for “withdrawal” of a petition but in practice this is not generally sought or determined. Historically, a bankruptcy court would not allow a petition to be dismissed or withdrawn without evidence from the debtor that he or she was solvent, and that the creditor, in receiving payment of its debt, was not being preferred over other creditors. Thus, bankruptcy law traditionally said that if a person is not solvent, the petition should remain to allow another creditor to take it up and proceed with it. If a petition were to be dismissed or withdrawn because of payment by the debtor to the creditor without proof of solvency, it would work adversely to the interests of the body of creditors as a whole.64 Whether or not such an approach is legally correct, it is rarely applied. Bankruptcy proceedings are publicly heard and if another creditor does not seek to be substituted as petitioner, the practical approach adopted is to dismiss the petition. Such an approach does implicitly assist the use of the bankruptcy processes for debt recovery by creditors. However, the courts also say that a bankruptcy court is 61 See the re-evaluation of the slip rule in the corporate context in Newmont Yandal Operations Pty Ltd v J Aron Corporation [2007] NSWCA 195; (2007) 70 NSWLR 411. 62 Courts’ Bankruptcy Rules, r 2.06, Form 5. 63 See s 17 and reg 4(a), Civil Dispute Resolution Regulations 2011 (Cth). 64 See Murray, “The Courts and Debt Recovery” (2012) 12 INSLB 189.

[3.370]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

133

not there to facilitate the collection of debts from a solvent debtor who simply refuses to pay: Re Stubberfield [1995] FCA 1735; (1995) 134 ALR 169. In any event, while it can be legitimate for a creditor to take bankruptcy proceedings to recover a debt, that does not mean that bankruptcy should be seen merely as part of the process of execution of judgment debts. “It is the changing of the status of an insolvent person”: Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8. If the petition is dismissed, the petitioning creditor must give a copy of the court’s order to the Official Receiver within two business days: reg 4.05(3). That then is recorded on the NPII. Adjournment

[3.365] Although debt recovery is not in theory a purpose of bankruptcy, many petitions are in fact adjourned, and on several occasions, to give the debtor time to pay. That process in itself is consistent with the definition of insolvency, which does not necessarily require a debtor to have funds immediately on hand to pay a debt. On the other hand, many such cases may involve the debtor paying the petitioning creditor’s debt in preference to other creditors whose debt may remain unpaid If the petition is adjourned, the petitioning creditor must give a copy of the court’s order, or other evidence of the adjournment date, to the Official Receiver within two business days: reg 4.05(3). A petition that is defective should not, however, be adjourned, even by consent; it should be dismissed: American Express International Inc v Held [1999] FCA 321; (1999) 87 FCR 583. Substituted creditor: s 49

[3.370] If a petitioning creditor is paid its debt and seeks to have its petition dismissed, or if it is otherwise not pursuing the petition with due diligence, another creditor may apply to be substituted as the petitioner. The court can make such an order under s 49 provided the debtor is indebted to that creditor for $5,000 or more. Allowing substitution avoids a multiplicity of petitions, thereby reducing costs.65 It gives creditors a degree of protection against collusion between the debtor and the petitioning creditor. It also illustrates a fundamental principle of insolvency law, that a petitioning creditor brings the petition not only for itself but for all creditors. The person seeking substitution must claim the existence of a debt of $5,000 or more, and the substituted creditor’s debt must have existed at the date of the commission of the act of bankruptcy relied upon in the petition: McNamara v Langford (1931) 45 CLR 267; 4 ABC 8; McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41. It is relevant to a court deciding whether to permit substitution if the debtor disputes any indebtedness to the person seeking a substitution order. But it is not necessary that the original petitioner’s debt be proved to be valid, although there must be a valid act of bankruptcy: 2000 Olympic Games v Daly [2000] FCA 1286. Thus s 49 is available where the petitioning 65 Although the court allowed two concurrent petitions to stand in DCT v Perpetual Nominees Ltd [2013] FCCA 930 in circumstances where the right of the second petitioner to substitute was said to be problematic.

134

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.375]

creditor’s judgment is set aside after the petition has been filed: O’Meara v Hitwise Pty Ltd [2007] FCAFC 114; (2007) 160 FCR 518. If there is an order of substitution, the petition proceeds as if the substituted creditor had been the petitioning creditor from the commencement of proceedings. The substitution can occur even though more than six months have elapsed since the act of bankruptcy relied on in the petition.66

The court may make a sequestration order [3.375] If the petitioning creditor seeks a sequestration order at the hearing it must prove the matters stated in the petition; service of the petition; and that the debt relied upon is still owing: s 52. These matters are proved by relevant affidavit evidence. Court’s discretion: s 52

[3.380]

Section 52(2) of the Act is an important provision concerning the court’s discretion in deciding whether to make a sequestration order. It provides: If the Court is not satisfied with the proof of any of those matters (referred to in 52(1)), or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition.

The court has a discretion whether or not to make an order, expressed in the word “may”, broader than the power exercised by the court in setting aside a bankruptcy notice: ASIC v Forge (2003) 133 FCR 487; 1 ABC (NS) 429, 435. The exercise of that discretion must however have regard to the fact that the debtor has the onus of demonstrating to the court something that overrides both the public interest of addressing their insolvency and their incurring of further debt, and the rights of their existing and further creditors: see Rozenbes v Kronhill (1959) 95 CLR 409, 414. However, courts will not make sequestration orders lightly. They have acknowledged the serious consequences of bankruptcy and the drastic changes of legal status which it brings.67 The debtor therefore has the onus of proving that there is a sufficient reason for a sequestration order not being made.68 Apart from any issue of discretion, the court may dismiss a petition because it is technically deficient. Technical defects

[3.385] Most petitions are founded on the debtor’s failure to comply with the requirements of a bankruptcy notice, and often a defence to a petition is that there is some fatal flaw in that notice; this has been dealt with earlier. In that regard, it 66 Dean v QUF Industries Ltd [1981] FCA 71; (1981) 51 FLR 317. 67 Russell v ANZ Bank [1987] FCA 63, (1987) 14 FCR 72, 75. 68 Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 143 ALR 396; Deputy Commissioner of Taxation v Bayeh [1999] FCA 1223; (1999) 100 FCR 144.

[3.390]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

135

should be noted that even if a debtor does not contest the validity of the bankruptcy notice at an earlier stage, he or she is entitled to do so at the hearing of the petition. If the notice is flawed, the petition must be dismissed as there is no act of bankruptcy on which to found it; the court has no jurisdiction upon which to proceed: National Australia Bank Ltd v Westbrook [2000] FCA 246; Re Pollard; Ex parte Lensing Management Pty Ltd [1991] FCA 640; (1991) 33 FCR 284. But the appropriate course for a debtor is to promptly apply to the court to set aside the notice after it is served and a court may take the view that good reason should be shown why the debtor has waited until the petition hearing before raising the matter. In such cases, although the debtor may succeed in having the petition dismissed, there may be a costs penalty against the debtor. If the debtor obtains an instalment order, but after the act of bankruptcy has occurred, this is no defence to the petition proceeding.69 Other defences available to a debtor relate to flaws in the petition itself – as to omissions or defects in the form of the petition, or defects in its execution or its service: Australia and New Zealand Banking Group Ltd v Elferkh [1999] FCA 1049; (2000) 92 FCR 195; Burrell v Connell [1998] FCA 829; (1998) 84 FCR 383. A challenge to the incorrect form of the petition may be remedied by the application of s 306 if it is a mere formal defect or irregularity, being one that could not reasonably mislead the debtor (MacDonald v Official Trustee in Bankruptcy [2001] FCA 140; (2001) 107 FCR 72), for example a mere failure to show the date of the petition: Joan Freedom Rogers Pty Ltd v Prasad [2000] FCA 1049. But a petition presented more than six months after the date of the act of bankruptcy is defective and must be dismissed, as must a petition claiming a debt of less than $5,000. Going behind the judgment

[3.390] We have seen that a court may “go behind” any judgment on which the creditor relies to ascertain whether the judgment was founded on a real debt; this is because the courts are not just dealing with the judgment creditor and debtor, they are interfering with the rights of the debtor’s other creditors if the debtor is made bankrupt: Corney v Brien (1951) 84 CLR 343. In relation to bankruptcy notices, see [3.175]. The existence of a judgment is only prima facie evidence of a debt and a judgment is never conclusive in bankruptcy. In its discretion a bankruptcy court may decide not to accept the judgment as satisfactory proof of the debt claimed.70 Going behind a judgment is not done readily. Usually there must be substantial reasons which warrant the judgment to be questioned before the court will make the inquiry: see Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8. The courts exercising bankruptcy jurisdiction are more ready to do so where the judgment was obtained by default71 or compromise, or where fraud or collusion is alleged.72 But where the judgment is based on a compromise, there must be shown in the circumstances of the compromise such suspicion of unfairness or impropriety as to 69 Re Nath (1996) 63 FCR 523 and see [3.205]. 70 Corney v Brien (1951) 84 CLR 343; Wren v Mahony (1972) 126 CLR 212; Re Longo (1995) 57 FCR 523. 71 Olivieri v Stafford [1989] FCA 486; (1989) 24 FCR 413, Compton v Ramsay Health Care Australia Pty Ltd [2016] FCAFC 106. 72 Corney v Brien (1951) 84 CLR 343.

136

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.395]

justify the court inquiring into the consideration for the debt or the propriety of the compromise: Re Longo (1995) 57 FCR 523. In going behind the judgment, the court may find that only some of the judgment debt is not in fact payable but that the remainder is sufficient in amount – that is, under $5000 – to found the bankruptcy: Re Seghabi [1994] FCA 1178; (1994) 52 FCR 303. It is important to note that even in the case of a matter determined by a final hearing against the debtor, the discretion of a court hearing a bankruptcy petition to go behind that judgment remains: Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28. If the debtor has appealed from the judgment on which the bankruptcy notice, and ultimately the petition, is based, he or she may be able to have the hearing of the petition adjourned until after the appeal is determined. The courts often take the view that the appeal should be allowed to proceed and be determined, rather than make the debtor bankrupt: Ahern v DCT [1987] FCA 312; (1987) 76 ALR 137, a principle described as one of enduring importance: Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8. However, the appeal must be based on genuine and substantial grounds and the debtor must be pursuing the appeal bona fide. The onus is on the debtor to show this. If this onus is not discharged, an adjournment will not be allowed and a sequestration order will be made. It may then be a matter for the trustee to assess whether the appeal should proceed.73 Solvency as a defence

[3.395] Section 52(2)(a) of the Act provides that if the court is satisfied that the debtor is “able to pay his or her debts … then the Court may dismiss the petition”. That is, even if the debtor can show they are solvent, this does not entitle the debtor to the dismissal of the petition; it simply allows the court the discretion whether it “may” dismiss the petition: Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372, 376-377. The debtor’s claimed ability to pay his or her debts will often be argued in the context of the debtor being able to pay the petitioner’s debt but being unwilling to pay, often as a “matter of principle” based on some contention or dispute about the debt. As the court said in Australia and New Zealand Banking Group Ltd v Foyster [2000] FCA 400: “the respondent is perfectly entitled to adopt the role of a recalcitrant debtor, and to decline to pay a judgment debt if he wishes.”

This was the defence in Sarina v Council of the Shire of Wollondilly [1980] FCA 138; (1980) 48 FLR 372 where the debtor showed he was financially able to pay the Council but was simply refusing to pay. The Full Federal Court in that case emphasised the distinction between inability and unwillingness to pay. In situations like this, creditors may resort to other remedies, such as execution against property and garnishee proceedings, but not to sequestration. Its importance was restated in Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8 at [43]: 73 See, for example, Wealthsure Pty Ltd v Selig (No 2) [2013] FCA 847.

[3.405]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

137

Re Sarina demonstrates the centrality of the question of solvency to the jurisdiction of bankruptcy. Whilst one must recognise the permissive “may” in s 52(2), the circumstances where a sequestration order would be made if the debtor satisfied the Court of his or her solvency are difficult to imagine.

In such cases, the debtor necessarily has the onus of proving their solvency, and this must generally be on an ability to pay all their debts falling due, rather than on an excess of assets over liabilities on a cash flow basis. The Full Court in Trojan v Corporation of the Town of Hindmarsh [1987] FCA 276; (1987) 16 FCR 37 said (at 48): “the principle laid down in the Sarina case would not necessarily be satisfied by a sterile demonstration of an ability to achieve a payment which was not in reality at all likely to be compelled. Section 52(2)(a) envisages a situation which will probably bear fruit in payment. It is not easy to see any other reason why the legislature saw fit to make a demonstration of ability to pay only a discretionary ground of dismissal of a petition, and not an absolute bar to its success.”

A court may therefore make a sequestration order if the debtor cannot show that sale of their assets cannot be realised quickly enough so as to pay their debt within a reasonable time: Re Sanders [2003] FCA 1079; (2003) 1 ABC (NS) 408. Likewise, if the debtor’s solvency is based upon assets not available under execution or garnishment by creditors, such as a life insurance policy, that may not be enough to resist a sequestration order being made: Dunn, in the matter of Dunn v Vangsnes [2000] FCA 1051. Or, if the debtor has the capacity to borrow to pay the debt, but does not do so, the court may exercise the discretion against the debtor, payment “being withheld from (the creditor) at (the debtor’s) pleasure”: Re Capel; Ex parte Caram Finance Australia Ltd [1998] FCA 372. In addition, an assessment of the debtor’s solvency for the purposes of s 52(2) involves an examination of not only debts presently owing but debts falling due to creditors in the reasonably immediate future and the debtor’s anticipated ability to meet those: Australia and New Zealand Banking Group Ltd v Foyster [2000] FCA 400. “Other sufficient cause”

[3.400] The court may also dismiss a petition if it is satisfied by the debtor “that for other sufficient cause a sequestration order ought not to be made”: s 52(2)(b). The circumstances which may constitute “other sufficient cause” are extremely variable, and it is not appropriate to catalogue or circumscribe them: Clyne v DCT [1985] FCA 3; (1985) 5 FCR 1. Indeed, there are broad public interest considerations in relation to insolvents that the courts may take into account. But while the circumstances are variable, and subject to the judge’s discretion, a failure of the judge in applying a correct analysis under s 52(2)(b) can result in the sequestration order being set aside on appeal: Totev v Sfar (2008) 167 FCR 193; [2006] FCA 470; (2006) 4 ABC (NS) 325. It is useful to see what has been said by the courts in relation to the “other sufficient cause” ground in particular cases. Service

[3.405]

If it is proved that there was, in fact, no service of the originating process which led to the entering of a judgment on which the petition relied, then this may

138

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.410]

be “sufficient cause” not to make an order: Re Willshire-Smith; Ex parte Randle & Taylor Services Pty Ltd (1994) 48 FCR 371; Civic Video Pty Ltd v Warburton [2013] FCA 934; (2013) 216 FCR 61. Or indeed, if there was no correct service of the petition itself. Set-off or cross-claim

[3.410] The existence of a claim by the debtor to a set-off or cross-demand against the petitioner may be a sufficient cause not to make a sequestration order.74 It is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration, that is, if the debtor’s claim were to succeed: Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 74 FCR 19. The court’s decision will depend on whether the debtor’s claim has sufficient merit to justify either the adjournment or the dismissal of the creditor’s petition. If the court is satisfied that the debtor has a real claim, but is unable to be satisfied that the claim is one likely to succeed, then it may be more appropriate to adjourn the creditor’s petition in order to give the debtor an opportunity to fully litigate their claim. But there may be cases in which the court may still decide to dismiss the creditor’s petition even though it is not satisfied that the debtor’s claim will most likely succeed. Apart from the interests of the petitioning creditor and the debtor, the court should also consider the interests of any other creditors, and the public generally, arising out of the debtor’s insolvency.75 Proof of sufficient cause may be available even if the debtor raised the issue in earlier proceedings under s 41(7): Re James (1994) 51 FCR 14. However, the court generally cannot take into account monetary claims by the debtor against a third party other than the petitioning creditor, and whether or not that person is a creditor. And the court will not defer the hearing of the petition simply to allow the debtor to pursue such claims: Ling v Enrobook Pty Ltd (1997) 74 FCR 19. Nevertheless, “sufficient cause” may be found under this head in two sorts of cases. The first is where the debtor’s claim is so intimately associated with the debt on which the petition is founded as to require it to be regarded as substantially a claim against the petitioner.76 The second is where a debtor, although not solvent, is able to establish that there is a claim being diligently litigated, that it has good prospects of success, that it will be dealt with in the near future, and that it is likely, if successful, to produce adequate funds to enable the debtor to discharge all debts owing.77 But if either of these circumstances does not exist then a court is unlikely to say that there is a sufficient cause: see Re Ling (1996) 142 ALR 87; upheld on appeal in Ling v Enrobook Pty Ltd (1997) 74 FCR 19.

74 Re James (1994) 51 FCR 14; Totev v Sfar (2008) 167 FCR 193; [2006] FCA 470; (2006) 4 ABC (NS) 325. 75 Clapham v Commonwealth Bank of Australia [2013] FCAFC 84, which reviews all relevant authorities. 76 McLean v Biztole Corp [1996] FCA 773. 77 Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303; Radich v Bank of New Zealand (1993) 45 FCR 101; Re James (1994) 51 FCR 14.

[3.420]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

139

Payment offered by the debtor

[3.415] Even if the debtor offers payment to the creditor, the creditor may decline the money and proceed with a sequestration order: McIntosh v Shashoua (1931) 46 CLR 494; Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19. While that is the legal position, in practice payment of the debt by the debtor, and costs, will usually mean that the petition is dismissed, by consent; that is, unless any other creditor appears and applies to be substituted. Impecunious debtors

[3.420] In Re Capel; Ex parte Caram Finance Australia Ltd [1998] FCA 372, Finn J said that the “prospect of a derisory dividend” for creditors in the bankruptcy was not: “of any particular moment. It may be the case that at some future date one or other of his litigations could produce funds for the payment of his debts. But having no reasonable basis for concluding there is sufficient prospect of this occurring and in such a reasonable time as would justify adjourning the petition, I do not consider that the size of any prospective dividend provides cause for preventing [the creditor] from prosecuting its petition and from now seeking a sequestration order.”

This expresses a general judicial reluctance to refuse a sequestration order on this ground.78 For one thing, it may be that an investigation by a trustee will reveal undisclosed assets. So there must be sufficiently strong evidence of there being no existing assets and no reasonable prospect of future assets to override the prima facie right of a creditor to a sequestration order. In Re Field [1977] 3 WLR 937, Megarry VC said: “After all, if it were open to a debtor to avoid having a receiving order made against him simply by alleging utter destitution, both present and future, such pleas of destitution might become popular; and prospective bankrupts might hasten to rid themselves of any assets or prospects which might hamper them in making such a plea. A man may indeed be too poor to be made bankrupt: but the burden of proof is heavy.”

Many other varied pleas have been raised by debtors to avoid a sequestration order. A debtor’s illness is not necessarily a reason for a sequestration order not to be made; Collett v DCT [2001] FCA 426, in fact, bankruptcy may be seen as benefiting the bankrupt in such a situation. Nor is the effect of bankruptcy on the debtor’s reputation in the community relevant: Stedman v DCT [2000] FCA 336. Many debtors are self-represented in their attempt to resist bankruptcy. Particular duties arise for lawyers acting against litigants in person, and for the court.79 The courts provide useful online guidance on the law and court process. Legal aid services, pro bono schemes and bodies like JusticeConnect also provide direct assistance to debtors and other litigants. See www.justiceconnect.org.au. The Federal Court has a list of relevant organisations on its website. 78 Re Darcey [1988] FCA 165, the Full Court upholding a sequestration order made against a religious brother who had made a vow of poverty, even though expressing the view that “in the end this sequestration will prove to be a fruitless, time wasting and unmeritorious exercise which has little to do with the public interest”. 79 See Kimber v The Owners Strata Plan No 48216 [2017] FCAFC 226.

140

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.423]

Stays of petitions

[3.423] As with debtors’ petitions, a creditor may be unable to proceed without the leave of the court where a stay under a proclaimed law applies to the debtor: ss 253E, 253F. These sections broadly deal with the protection of farmers and other rural producers: see Pt XIA – Farmers’ Debts Assistance. Under s 22 of the Rural Adjustment Act 1992 (Cth), support provided directly to a farmer under the Rural Adjustment Scheme under that Act is “to be inalienable, whether by way of or in consequence of sale, assignment, execution, charge, bankruptcy or otherwise”.80

After the sequestration order [3.425]

The conduct of a creditor’s petition proceeding up to the making of the sequestration order is at the expense of the petitioning creditor: s 51. However, when the court makes a sequestration order it will normally award costs in favour of the petitioner, although this is discretionary. These costs, as taxed, will be a priority debt under s 109(1)(a) when the trustee arrives at the point of making distributions to creditors. A fixed amount of costs may be set by the court, or an amount claimed by way of a short form bill of costs under the court rules.81 On the day the sequestration order is made, the petitioning creditor must advise the trustee of his or her appointment and send the order – Court Form 7 – to the trustee and the Official Receiver.82

Stay of a sequestration order [3.430] If an order is made the court may stay all proceedings under it for a period of up to 21 days: s 52(3).83 The words “all proceedings under” are significant because the subsection does not allow the order itself to be stayed. A sequestration order is not an ordinary court order, nor is a proceeding in bankruptcy merely a matter between the debtor and the creditor. It is therefore “conceptually incoherent to contemplate a judicial stay order as being available to countermand” the automatic operation of the Bankruptcy Act.84 There is also power under court rules85 for a court to grant an extended stay (with no limit) where there is an appeal against the sequestration order.86 Stays are granted only reluctantly by the courts because of the legal significance of the making of a sequestration order, and for a short period.87 They are often made 80 Similar protection is provided to other payments under Commonwealth law, for example s 46A of the National Disability Insurance Scheme Act 2013 (Cth). 81 Courts’ Bankruptcy Rules, Pt 13; Federal Court Rules 2011, Sch 3 82 Courts’ Bankruptcy Rules, rr 4.08 – 4.10. 83 De Robillard v Carver (2007) 159 FCR 38 at [125]. 84 Mehajer v Weston [2018] FCA 608 at [8], citing Endresz v ASIC [2014] FCA 1139 at [8]. 85 Federal Court Rules 2011, Pt 26; Federal Circuit Court Rules 2016 (Cth), Div 13.3. 86 Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447; Coleman v Lazy Days Investments Pty Ltd [1994] FCA 1442, (1994) 55 FCR 297. 87 An extended stay of proceedings was granted in Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8.

[3.440]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

141

conditional upon the debtor completing and submitting a statement of affairs.88 Setting aside a sequestration order is considered in more detail in Chapter 7. If the petition is stayed, the petitioning creditor must give a copy of the court’s order to the Official Receiver within two business days: reg 4.05(3).

Bankruptcy Act Bankruptcy Regulations AFSA

Courts’ Bankruptcy Rules

Chapter 3 – Bankruptcy Law and Practice – Going Bankrupt Part IV – Proceedings in Connexion with Bankruptcy – ss 40 – 57A Part 4 – Proceedings in Connexion with Bankruptcy – regs 4.01 – 4.13 ORPS 1 – Declaration of intention to present a debtors’ petition ORPS 2 – Bankruptcy by debtor’s petition ORPS 3 – Bankruptcy by sequestration order ORPS 6 – Applying for a bankruptcy notice Part 3 – Bankruptcy Notices – rr 3.01 – 3.03. Part 4 – Creditors’ Petitions – rr 4.01 – 4.10. Part 5 – Debtors’ Petitions – r 5.01. Part 13 – Costs – rr 13.01 – 13.05. Schedule 1 – Forms

PROTECTING CREDITORS BEFORE BANKRUPTCY [3.435] A creditor who is pursuing the payment of a debt from a debtor may be concerned that the debtor might abscond or dispose of their assets before any sequestration order can be obtained and a trustee appointed. The Act provides for certain procedures which can prevent the scheme of the Act from being thwarted by debtors. While voidable transaction powers in bankruptcy may allow those assets to be recovered, the purpose of a warrant, or an order under s 50, is to try to prevent their disposal in the first place, in anticipation of a sequestration order being made; or, in some cases, where the debtor’s property is deteriorating or perishable. The trustee in bankruptcy will assume the benefit of the assets having already been seized or placed under their control and of inquiries having been made into the bankrupt’s affairs. Warrants: s 78 [3.440] A creditor may apply to the court for the issue of a warrant for the arrest of a debtor and for an order providing for the seizure of the debtor’s property. Such an application may be made where a bankruptcy notice has been issued, or a petition has been presented against the debtor, and the debtor has absconded, or is about to abscond, with a view to avoiding the payment of their debts or to preventing or delaying proceedings under the Act: s 78(1)(a). The same orders can be made where there is evidence that the debtor has concealed or removed, or is about to conceal or remove, any of their property: s 78(1)(b).89 88 For example, see Menzies v Paccar Financial Pty Ltd (ACN 005 592 049) [2010] FCA 692. 89 See Talacko v Talacko [2010] FCAFC 54; (2010) 183 FCR 311.

142

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.445]

Interim trustee: s 50 [3.445] In addition, or as an alternative, a creditor may seek an order from the court providing for the interim control of a debtor’s property and assets before bankruptcy. This is broadly equivalent to the appointment of a provisional liquidator to a company: see Chapter 12. Under s 50(1) of the Bankruptcy Act, a court may direct a trustee to take control of a debtor’s estate either “at any time after a bankruptcy notice is issued, or a creditor’s petition is presented” and make any other orders.90 The trustee will be either the Official Trustee or a registered trustee. In making a s 50 order, the court must specify when the control is to end: s 50(1B). The section goes on to say that such directions or orders may only be made on the application of a creditor, where the court is satisfied that it is in the interests of creditors to do so, and where “the debtor has not complied with the bankruptcy notice”. The latter requirement appears to require service of the notice and contradicts s 50(1), which refers to the “issue” of the notice: some doubt has been raised about when the court can in fact act.91 As an alternative, a court can make a freezing order under the court’s rules against the debtor’s assets.92 The form of the summons is Court Form 9 and Pt 6, Div 6.2 of the Courts’ Bankruptcy Rules contains relevant provisions concerning the application for a s 50 order and service of the summons. The applicant for the s 50 order may be required to deposit moneys with a trustee to cover the anticipated “fees and expenses” of acting as interim receiver. The trustee can apply for a court order requiring further moneys: see reg 4.07. Section 50 lays down no specific criteria for determining what particular circumstances must exist before a control order is made, save that they must be of such a kind as to make the appointment necessary in the interests of creditors: s 50(1A)(b). A trustee will be appointed when there is a strong likelihood that the debtor will dispose of assets or put them beyond the reach of creditors: DCT v Clyne (1983) 50 ALR 118. This may be based on evidence, for example, that the debtor is listing their property for sale: Malcolm Slater Pty Ltd v Thompson [2010] FMCA 120; Scott v Dimov [2012] FMCA 903. Orders were made in Trust Company (PTAL) Limited (Trustee for the LM Managed Performance Fund), in the matter of Drake v Drake [2014] FCA 1445 in circumstances where the debtor had “presided over a spectacular corporate collapse which resulted in the loss of many millions of dollars by investors in funds supposedly managed by him”, not all of which had been accounted for. The court also ordered, under s 30, that the debtor be prevented from leaving the country. Nevertheless, the section allows a significant intrusion into a debtor’s affairs and s 50 and related orders are not made lightly. In matters of urgency, where the debtor is in the process of removing assets, an order will be made ex parte, with orders then made for the debtor to be served: Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal [2017] FCA 599. 90 The creditor must serve the trustee and the Official Receiver: reg 4.06. 91 ACM Group Ltd v Achram [2017] FCCA 2558. 92 See, for example, the Freezing Orders Practice Note GPN-FRZG of the Federal Court.

[3.450]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

143

Given the potential negative consequence for the debtor, s 50 orders may allow the debtor access to funds from the restrained property for ongoing living and business expenses: Leondaris v KGB Design & Construction Pty Ltd [1998] FCA 1354. The court may make other particular orders in relation to the debtor’s property (s 50(1)(b)) and may also allow examinations of the debtor and of others: s 50(2) – (5); reg 4.07. But the trustee is essentially only to perform a supervisory role over the debtor’s property in the interests of all creditors. The trustee acts as an officer of the court93 and must account to the court for what he or she has received. The Bankruptcy Act does not expressly deal with payment of remuneration of, or expenses incurred by, a trustee appointed under s 50: Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal [2017] FCA 599. However, that trustee has an indemnity for his or her expenses and remuneration, secured by an equitable lien over the debtor’s property. The court has power under s 30 to refer the assessment of remuneration to the registrar: Taylor v Jarvie [2015] FCA 590. If the creditor’s petition is eventually dismissed, an appointment made under s 50 thereby terminates, although the appointment is treated as having had valid operation up until it terminated: Re Penning; Ex parte State Bank of SA [1989] FCA 385; (1989) 23 FCR 588. But ultimate dismissal of the petition illustrates the risk for a creditor in obtaining the appointment of a s 50 trustee because upon dismissal, the debtor may then apply to the court for payment of damages for any loss suffered from the property having been under the trustee’s control.94

Bankruptcy Act Bankruptcy Regulations AFSA Courts’ Bankruptcy Rules

Chapter 3 – Bankruptcy Law and Practice – Interim Control Section 78, section 50 Part 4 – Division 2 Petitions – regs 4.06 – 4.09 OPTS 7 – Section 50 interim control orders Part 6 – Division 6.2 Examination of debtor or examinable person – rr 6.02 – 6.06 Part 12 – Warrants – rr 12.01 – 12.02

BANKRUPTCY OF ESTATES OF DECEASED INSOLVENTS [3.450] Part XI of the Bankruptcy Act contains specific provisions dealing with deceased debtors or bankrupts, although these are largely based on the standard processes for living persons.95 At the outset it should be understood that the estate of an insolvent debtor who is deceased need not be administered under the Bankruptcy Act. It can be 93 Penning v Steel Tubes Supplies Pty Ltd [1988] FCA 200; (1988) 23 FCR 588. 94 Reg 4.08. See, for example, Coshott v Principal Strategic Options Pty Ltd [2004] FCAFC 50; (2004) 2 ABC (NS) 104. In contrast, an undertaking as to damages may be required in relation to the appointment of a provisional liquidator: see [12.25]. 95 See ORPS 5, Insolvent deceased estates; Courts’ Bankruptcy Rules, Pt 11.

144

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.455]

administered under the appropriate State and Territory legislation which governs the administration of deceased estates. That legislation imports certain bankruptcy principles, in particular as to paying creditors of the estate pari passu. For example, s 57 of the Succession Act 1981 (Qld) provides that subject to funeral expenses, the rules of bankruptcy are to be applied by those administering deceased estates as to “the respective rights of secured and unsecured creditors and as to debts and liabilities provable” and so on. See also Administration and Probate Act 1919 (SA), s 61. Generally, administration under the Bankruptcy Act is preferred where there are potential voidable transactions or the affairs are more complex, and which may require an independent and qualified trustee in bankruptcy, rather than an executor under a will, and there is need to protect the creditors’ interests.96 Part XI administrations are not that common, averaging about 20 each year. Those that have occurred tend to be significant in terms of profile of the deceased and complexity of the issues. The estates of the entrepreneurs the late Lang Hancock and René Rivkin are two examples. Either a creditor or the legal personal representative of the deceased estate may present a petition: ss 244, 247. In the case of the creditor, this is the equivalent of a creditor’s petition against a living person. In the case of the legal personal representative of the estate, this is the equivalent to a debtor’s petition, except that such an application must be made to the court.97

Petitions by the deceased estate of an insolvent debtor [3.455] Under s 247(1) the legal personal representative of a deceased person’s estate may present a petition for an order from the court that the estate be administered under Pt XI. It must be shown that the debtor had the necessary connection with Australia at the time of death: s 247(2). The personal representative must give a copy of the court order to the Official Receiver within two business days: reg 11.01A. The other prerequisites applicable to ordinary petitions and petitions presented by creditors pursuant to s 244 do not apply. Petitions by the creditor [3.460] A creditor may present a petition against a deceased estate: s 244. Ostensibly the same prerequisites need to be fulfilled as with the presentation of a petition against a living person. The debt must not be less than $5,000 and the territorial connection with Australia must have existed at the time of the debtor’s death: s 244(6)(b). In Rushton v Kaney (Executor), in the matter of Rushton (Dec’d) [2017] FCA 637, the petition was dismissed because there was no evidence the claimed debt existed. Petitions may be presented not only by those to whom the deceased debtor owed debts when he or she died, but also by persons to whom debts have later become owed by the deceased estate because of obligations incurred by the debtor in his or 96 Bonberra Pty Ltd v Hawksford (Administrator), in the matter of the Estate of Hawksford [2013] FCA 838. 97 See Courts’ Bankruptcy Rules, Pt 11 and forms 14 (s 244) and 15 (s 247).

[3.465]

3 Going Bankrupt – Voluntary and Compulsory Bankruptcy

145

her lifetime: s 244(1)(c). Further, a creditor who is owed money by the legal personal representative, when acting on behalf of the estate, can petition: s 244(1)(b). If administration of the deceased estate has commenced under State or Territory legislation, a creditor is unable to present a petition until the leave of the Federal Court or Federal Circuit Court is obtained (s 244(13)). This restriction does not apply if an application for probate is pending or has been granted: Meinhardt (Hong Kong) Ltd v William Edward Meinhardt (Deceased) [2006] FCA 1106. Such leave may be subject to conditions. It is important to note that there need be no act of bankruptcy for a creditor to petition under s 244. As to timing issues: • if a debtor dies after having been served with a bankruptcy notice, but before time for compliance has expired, the deceased estate commits no act of bankruptcy: Colquhoun v Graffione [2000] FCA 325; (2000) 97 FCR 376; • if a creditor’s petition was presented against the debtor before he or she died but it was not served, the petition lapses and fresh proceedings must be initiated under Pt XI; • but if a creditor’s petition was presented and served before the debtor died, the court may make an order for the administration of the estate under Pt XI: s 245.98 At the hearing, the court must be satisfied that the matters stated in the petition are true; that the petition has been served (unless service is dispensed with – see Bendigo & Adelaide Bank Ltd v Feldman [2013] FCCA 241); and the debt on which the petition is based is still owing: s 244(11). The onus is then on the administrator to prove that the estate is solvent or that there is some other cause justifying the refusal of the Pt XI order sought. But the court still has a discretion whether or not to make an order, akin to the one in s 52(1) where the court has a discretion whether or not to make a sequestration order.

After the order [3.465] The court’s order must be given to the Official Receiver within two business days of its issue for entry on the NPII: reg 11.01A. Upon the making of the order under either ss 244 or 247, the property of the deceased vests in the trustee: s 249. The trustee becomes the “trustee of the regulated debtor’s estate”: IPS, s 5-20. A description of how the deceased bankrupt estate is administered under Pt XI is given at [6.590].

98 As a further variation, the court in Valassis v Bernard [2003] FCA 22 annulled a bankruptcy of a person who had, unbeknown to the court, died after service but before the sequestration order was made, on the basis that the estate was solvent.

146

Keay’s Insolvency: Personal and Corporate Law and Practice

[3.470]

CONCLUSION [3.470] Having examined the processes leading to formal bankruptcy by both voluntary and involuntary means, we now examine the effects that the status of bankruptcy has on the debtor and on the debtor’s relations and associates.

Bankruptcy Act Bankruptcy Regulations AFSA Courts’ Bankruptcy Rules

Chapter 3 – Bankruptcy Law and Practice – Deceased Estates Part XI – Administration of Estates of Deceased Persons in Bankruptcy – ss 244 – 252C Part 11 – Administration of Estates of Deceased Persons in Bankruptcy – regs 11.01 – 11.02 ORPS 5 – Administration of Estates of Deceased Persons) Part 11 – Administration of Estates of Deceased Persons – rr 11.01 – 11.04

4

Impact of Bankruptcy [4.10] EFFECT OF BANKRUPTCY ON THE BANKRUPT ..................................................... 148

[4.15] Personal impacts on the bankrupt ................................................................... 149 [4.20] IMPACT OF BANKRUPTCY ON THE BANKRUPT’S PROPERTY .......................... 151

[4.25] Property of the bankrupt ................................................................................... 152 [4.35] Property overseas ........................................................................................................... 153 [4.40] Overseas bankruptcies .................................................................................................. 153 [4.45] Types of property ........................................................................................................... 154

[4.55] Property acquired during bankruptcy, and after .......................................... 156 [4.60] Income received during bankruptcy ............................................................... 157 [4.65] Protected property .............................................................................................. 157 [4.65] Property protected through lapse of time: 20 years ................................................ 157 [4.70] Protection for maintenance payments ........................................................................ 158

[4.75] Exempt property ................................................................................................. 158 [4.80] Household and personal property .............................................................................. 158 [4.85] Property used in earning income ................................................................................ 158 [4.90] Means of transport ......................................................................................................... 159 [4.95] Insurance policies and superannuation funds .......................................................... 159 [4.100] Protected money ........................................................................................................... 160 [4.105] Property transferred under Pt VIII of the Family Law Act ................................. 161

[4.110] Property held in trust ....................................................................................... 161 [4.115] IMPACT OF BANKRUPTCY ON LEGAL PROCEEDINGS INITIATED BY THE BANKRUPT ........................................................................................................................ 162

[4.120] Assignment of rights of action of a bankrupt ............................................. 163 [4.125] Personal rights of action .................................................................................. 164 [4.130] IMPACT OF BANKRUPTCY ON THE BANKRUPT’S FAMILY AND ASSOCIATES ...................................................................................................................... 165

[4.130] Public examinations .......................................................................................... 165 [4.132] The family home ............................................................................................... 166 [4.135] Family and related claims on the bankrupt’s property ............................. 168 [4.135] Family law claims ........................................................................................................ 168 [4.140] Other claims on property by family members ....................................................... 168 [4.145] IMPACT OF BANKRUPTCY ON CREDITORS ........................................................... 170

[4.145] The legal effect on a creditor’s claim ............................................................ 170 [4.155] Particular types of creditor claims ................................................................. 172

148

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.05]

[4.160] Protection for the bankrupt ........................................................................................ 172 [4.165] Reduction of costs of the estate ................................................................................. 172

[4.170] Recoveries from creditors ................................................................................ 173 [4.170] Voidable transactions ................................................................................................... 173 [4.175] Payment received by execution or garnishment: s 118 ......................................... 173 [4.185] Payments recovered and held by sheriffs and courts – ss 119, 119A ................. 174

[4.190] Protections for certain creditors ..................................................................... 174 [4.190] Secured creditors remain protected .......................................................................... 174 [4.195] Property of a bankrupt subject to criminal or penalty orders ............................. 175

[4.200] Protection of creditors and others from the doctrine of relation back ... 175 [4.205] Protected dealings ........................................................................................................ 176 [4.210] Section 123 ..................................................................................................................... 176 [4.215] Section 124 ..................................................................................................................... 177 [4.220] THE BANKRUPT’S CRIMINAL CONDUCT AND ITS CONSEQUENCES .......... 178

[4.220] Protection from criminal consequences ........................................................ 178 [4.225] Criminal liability ............................................................................................... 178 [4.230] Conduct during bankruptcy by a bankrupt ............................................................ 179 [4.235] Conduct by a person, before becoming a bankrupt .............................................. 179

[4.240] Criminal processes ............................................................................................ 181 [4.245] Offence reporting .............................................................................................. 181 [4.250] CONCLUSION ................................................................................................................... 182

[4.05] Once a sequestration order is made by the court or a debtor’s petition has been accepted by the Official Receiver, the debtor who is the subject of the order or petition becomes a “bankrupt”. All “divisible” property of the bankrupt passes to, or “vests” in, the trustee in bankruptcy. Until discharged from bankruptcy, that debtor remains known, in legal terms, as a bankrupt. Being in this position has a far-reaching impact upon the bankrupt, the bankrupt’s family, as well as on the bankrupt’s affairs and property. The bankruptcy will also of course have major consequences for the bankrupt’s creditors. As each bankrupt’s financial affairs and personal position are different, including the items and range of property owned, the impact and effects of bankruptcy will differ for each person. Deceased bankrupt estates also present different issues.

EFFECT OF BANKRUPTCY ON THE BANKRUPT Chief Justice Allsop has emphasised1 two things “which are central to every application in the bankruptcy jurisdiction almost without exception”.

[4.10]

The first is that “the jurisdiction is not about debt collection; it is about the change of status of insolvent persons. The question of solvency or insolvency is at the root of the jurisdiction. That said, however, insolvency can arise from a whole raft of reasons, and those reasons have a connection with the second matter which attends 1 Hutchings v ASIC [2017] FCA 858.

[4.15]

4 Impact of Bankruptcy

149

every single application, and that is not just the economic, but the human consequences that attend the change of status and the change of lives of people who are made bankrupt”. The Chief Justice then cited Justice Deane in his dissenting judgment in Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34, that “[m]any, and possibly most, of the petitions in the bankruptcy lists of this country seek the bankruptcy of honest, albeit unbusinesslike or naive, people whose indebtedness springs from causes which evoke sympathy rather than indignation. For such people, bankruptcy does not represent a game to be played to the frustration of their creditors. It represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment for what would otherwise be innocent conduct.” (citations omitted)

Allsop CJ had earlier described the substantial consequences of bankruptcy on the bankrupt this way: “The public and private importance of the change of status in making a party bankrupt is too well known to require detailed citation. It is not a matter merely between debtor and creditor. It affects creditors generally and the public. The bankrupt, while bankrupt, has his or her status changed. Conduct which might otherwise be innocent may become punishable at law. There remains a stigma to the person, often as a mark of failure in life, sometimes of a particularly humiliating character.”2

This is the case even though bankruptcy may have lost some of the stigma of the past, and most bankruptcies are routine. And of course, unlike corporate insolvency, bankruptcy deals with an individual person, “a human being whose life must continue before and after insolvency”.3

Personal impacts on the bankrupt [4.15] The following are some of the particular personal impacts of bankruptcy on the bankrupt: • The administration of bankruptcies can be protracted (even continuing well beyond the three years after which a bankrupt may be automatically discharged; or one year, as proposed), involving legal proceedings and recovery of assets. A bankrupt is required to assist the trustee throughout and even after their discharge from bankruptcy. • The bankrupt must attend any meeting of creditors the trustee requires: s 77(1)(c). At such meetings the bankrupt must answer questions concerning their conduct, property and financial dealings, including of their associated entities (other persons, companies, trusts and partnerships): s 77(1)(d). Apart from the time consumed, such meetings can be demanding and sometimes demeaning for the bankrupt. • The bankrupt is subject to the general power and obligation of a trustee to investigate their conduct and examinable affairs, and their relevant books, accounts and records: s 19AA. The bankrupt has to deliver to the trustee all 2 Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154. See also Allsop CJ, “Values in Public Law” [2015] FedJSchol 17. 3 In re Rae [1995] BCC 102.

150

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.15]

documents relevant to their bankruptcy, including relevant records of any associated entity (s 77(1)(a)(i)) and they may be required to give evidence under oath in an examination before an Official Receiver: s 77C. Their trustee is given reasonable access to their premises and records: s 77A. Section 81 allows a trustee to have the bankrupt examined before a registrar in open court under which process the bankrupt is asked questions, under oath, by the trustee about their financial affairs. Creditors may also ask questions. Prevarication or evasion by the bankrupt under questioning in an examination is an offence (s 264D) and if the bankrupt fails to attend they may be arrested and brought in for the examination: s 264B. More generally, bankrupts may be arrested and imprisoned by a court if they fail, without good reason, to comply with any order of the court or with any other obligation under the Act: s 78(1)(f). • A bankrupt must immediately notify the trustee of any change of their name or address: s 80(1).4 Failure to do this is an offence of strict liability and is a ground for an objection to discharge: s 149D(1)(j). • Many bankrupts are required to make contributions from their income, once it reaches a certain threshold level. Non-payment is likely to preclude the bankrupt from obtaining an automatic discharge from bankruptcy (s 149D) and it is an offence: s 139ZO. • Banks, building societies and other financial institutions where the bankrupt holds accounts must inform the trustee in writing of those accounts: s 125(1). The bank must not allow further payments out of the account except when ordered by the court unless the bank has not received any instructions from the trustee or been served with an order of the court within one month after informing the trustee: s 125(2).5 If the funds are nevertheless not secure, a trustee may apply to the court for a freezing order over the account: Melluish as Trustee of the Estate of Eriksson (A Bankrupt) [2015] FCCA 2235.6 • A bankrupt must surrender their passport (s 77(1)(a)(ii)), and if they wish to travel overseas they must have good reason and must obtain the consent of their trustee to do so. That consent may be subject to conditions, including prior payment of any income contributions: s 272(2). Leaving Australia without the permission of the bankrupt’s trustee, or even preparing to do so, is an offence: s 272. • Bankrupts must disclose to anyone to whom they apply for credit of over $5,613 (as at 2018, indexed, s 304A) that they are undischarged bankrupts: s 269. This requirement can effectively serve to exclude a bankrupt from carrying on a business. 4 Under proposed new s 80, the bankrupt must tell the trustee, within 10 business days, of any change in their name, their main residential and business address, and their phone number. The penalty is imprisonment for 6 months. This obligation would extend for defined periods beyond the end of the bankruptcy: Bankruptcy Amendment (Enterprise Incentives) Bill 2017. 5 For more detail, see OTPS 2 – Application of Section 125 of the Bankruptcy Act 1966 where an estate is administered by the Official Trustee. 6 A freezing order is available under all court rules. See for example Federal Court Rules 2011 (Cth), r 7.35(5).

[4.20]

4 Impact of Bankruptcy

151

• The bankrupt is prohibited by s 206B(3) of the Corporations Act, from “managing a corporation” in his or her own name. This includes not only being a director or promoter of a corporation but also taking part in its management: s 206A.7 • Bankrupts who practise in certain professions and trades, such as lawyers, veterinarians, builders and real estate agents may suffer working restrictions.8 Some State laws require those people to show that their bankruptcy arose without fault, according to set statutory criteria, in order for their licence to be restored.9 • A bankrupt cannot be the trustee of their self-managed superannuation fund10 and they will generally be replaced as trustee on their bankruptcy, under the terms of the trust deed or by the court.11 • If the bankrupt was a member of a partnership which continues to do business the bankruptcy will automatically dissolve the partnership unless the partnership agreement specifies the contrary.12 Despite the apparent severity of bankruptcy, the obligations of most bankrupts are limited, if only because their assets are minimal or their affairs are not complex. There are also positive outcomes, the main one being the relief from responsibility for their provable debts and from the claims and pursuit by creditors. This can of course be a significant source of personal and financial relief which is one of the main outcomes of bankruptcy. Whether the debts be $20,000 or $20 million, the bankrupt is ultimately discharged from them by bankruptcy. In the case of a bankrupt who has no divisible assets and limited income, and who is of limited focus of inquiry by the trustee, bankruptcy may have little negative impact at all.

IMPACT OF BANKRUPTCY ON THE BANKRUPT’S PROPERTY [4.20] One of the primary concerns of the trustee in administering a bankrupt estate is to ascertain what property is owned by the bankrupt and recovered and sold. In many estates this process will be relatively simple. It may involve the trustee taking custody of the certificate of title to real estate or share certificates and then proceeding with a sale. However, the trustee must also ascertain whether the bankrupt improperly or unfairly disposed of property before bankruptcy and whether that property should be recovered back from the persons to whom it was transferred or given. In this section we also discuss after-acquired property, and the sometime difficult distinction between income and property. 7 Subject to court leave: s 206G. Leave was granted, for example, In the matter of Endeavour Energy Network Management Pty Limited [2017] NSWSC 1825. 8 See http://www.afsa.gov.au for a comprehensive table of the trades and professions affected. 9 Queensland Building and Construction Commission Act 1991 (Qld), Pt 3A; see Dobson v QBCC [2015] QCAT 243. 10 Superannuation Industry (Supervision) Act 1993 (Cth), ss 17A and 120. 11 See for example, Trusts Act 1973 (Qld), s 80. 12 For example, Partnership Act 1958 (Vic), s 37.

152

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.25]

Property of the bankrupt [4.25] Apart from the substantial effects on the bankrupt personally, the effects on the property of the bankrupt are the most extensive. On the date of bankruptcy all of the bankrupt’s “property” vests in the trustee from the date of commencement of the bankruptcy: ss 58(1), 115, 116.13 “Divisible property” is a subset of the property of the bankrupt which the Act permits the trustee to take and, in effect, divide among the creditors: s 116(1). The remainder – non-divisible property – is explained in s 116(2), being those categories of property which can be retained by the bankrupt – a car, household needs, trade or professional items. These are considered in the next section. The vesting of property in the bankruptcy trustee is one of the major differences between corporate insolvency and personal bankruptcy. In the liquidation of a company there is no need for the property of the company to vest in the liquidator – it remains with the company over which the liquidator has control – although the liquidator may apply to the court for a vesting order under s 474(2) of the Corporations Act in particular cases: see further Chapter 14. The particular consequences for the bankrupt and their property are: (a) Property acquired by the bankrupt after the “commencement” of the bankruptcy but before discharge vests in the trustee as soon as the property is acquired by the bankrupt: s 58(1). This includes a bequest received by the bankrupt under a will,14 or a lottery win.15 If the bankrupt’s aunt dies for example, leaving the bankrupt her house, the trustee is able to take that property and sell it in order to pay out the creditors. (b) There is therefore an obligation on the bankrupt to disclose to the trustee details of all such property acquired before discharge: s 77(1)(f). In other words, the bankrupt must inform the trustee of the death of her aunt and of the bequest under her will. (c) A bankrupt is required to sign all documents relating to the sale of their property when asked to do so by the trustee: s 77(1)(e). (d) The trustee may obtain a court warrant to enable a search and seizure of property of the bankrupt in the bankrupt’s or another person’s possession. These warrants, if issued, are broad, and even grant to the trustee the right to break into premises: s 130. (e) Certain transfers of property made before bankruptcy may be set aside by the court on application by the trustee: ss 120 and 121, or the court may order a creditor who was paid their debt to refund it as a preference (s 122). (f) The trustee may be able to claim back any funds transferred by the bankrupt into a trust or a superannuation fund, even though such funds may otherwise be protected under the Act. 13 See the explanation of the interaction between ss 58 and 116 and other related provisions in Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380; also see Anscor Pty Ltd v Clout (2004) 135 FCR 469; 1 ABC (NS) 558. 14 Re Pevsner [1983] FCA 119; (1983) 68 FLR 254. 15 Randall & Albaugh [2009] FMCAfam 475.

[4.40]

4 Impact of Bankruptcy

153

Property vests under s 58 of the Bankruptcy Act subject to: • s 58A, which concerns property subject to certain criminal forfeiture orders; and • s 59A which makes vesting of property under s 58 subject to any family law property order, for example by way of an order by the Family Court that the non-bankrupt spouse receive a part of the bankrupt’s vested property. “The property of the bankrupt” referred to in s 58(1)(a) means both the property divisible among the bankrupt’s creditors and any rights and powers in relation to that property that would have been exercisable by the bankrupt if bankruptcy had not occurred: s 5(1). “Property” itself is separately defined in s 5(1) very broadly, to mean “real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property”. Property overseas

[4.35] Property located overseas is therefore included, and is recoverable depending on the law of the foreign country. A bankrupt in Australia may therefore find that their overseas assets and interests, perhaps deliberately sent or kept there by the bankrupt to avoid detection, can be investigated and recovered. There are two statutory processes available to an Australian trustee to investigate and recover property overseas: i. to apply to the Federal Court of Australia here for a “letter of request” to be sent to a court in a foreign country asking its assistance in recovering the assets, for example, by appointing a local trustee in that country to do so. That remedy is available under s 29(4) of the Bankruptcy Act. ii. to apply directly to a court in the overseas jurisdiction for “recognition” of the Australian bankruptcy in that country, so as to allow the Australian trustee to conduct their own investigations and recoveries. This is available under the Cross-Border Insolvency Act 2008 which applies the UNCITRAL Model Law on Cross-Border Insolvency but it depends on the overseas country having adopted the Model Law in its own legislation. As examples, Japan, Singapore and New Zealand have adopted the Model Law and the Australian trustee could obtain permission under the Model Law to pursue investigations and proceedings in any of those jurisdictions. Overseas bankruptcies

[4.40] Similarly, a person bankrupt overseas may find that their assets and interests can be investigated in, and recovered from, Australia, far away from their home country. The same two remedies are available: • one under s 29(3) of the Bankruptcy Act, whereby a foreign trustee can request an Australian court to assist; and • the other, under the Cross-Border Insolvency Act (Cth) which allows any foreign insolvency practitioner to seek recognition of their proceeding in Australia. That avenue is available because Australia has adopted the Model Law as being available for any overseas bankruptcy trustee to use. For further explanation on cross-border insolvency, see Chapter 6.

154

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.45]

Types of property

[4.45] All real property and most personal property vests in the trustee as divisible property and remains with the trustee for distribution to creditors even after discharge, assuming the property has not already been sold by that time. But where the bankruptcy is annulled the vested property, held by the trustee, is transferred back to the bankrupt once the trustee has taken their fees and expenses: s 154. Particular kinds of property that come within s 116 need to be considered on a case-by-case basis, depending on the legal nature of the property. Tax refunds present particular issues, for example: • a tax refund paid to the debtor during the period of the bankruptcy, in respect of income earned before bankruptcy, has been held to vest in the trustee as a chose in action, being property under s 58(1)(a): Re Evans (1995) 61 FCR 556. Such entitlement to a tax refund is a chose in action which vests in the trustee: DCT v Kavich [1996] FCA 1686; (1996) 68 FCR 519; • if a tax refund was paid to the bankrupt during the bankruptcy but it was in respect of income earned after the date of bankruptcy, it does not vest in the trustee and it passes to the bankrupt personally as income: FCT v Official Receiver (1956) 95 CLR 300; see also DCT v Dexcam [2003] FCAFC 148; (2003) 129 FCR 582. Such refund may then be calculated in determining the income contributions, if any, of the bankrupt. See s 139N(1)(b); [6.355]. Tax refunds payable to a taxpayer are also subject to the right of the Commissioner of Taxation to offset them against provable or subsequent tax liabilities owing.16 Capital gains tax (CGT) accrues on the sale of a relevant asset. If a trustee sells an asset of the bankrupt that involves a capital gain, the ATO takes the view17 that CGT liability is not a provable debt; rather it becomes part of the income of the bankrupt and is a personal liability of the bankrupt. This view is based on s 106-30 of the Income Tax Assessment Act 1997 (Cth) which provides that the CGT provisions apply to a sale of property by a trustee as if the sale had been made by the individual bankrupt, hence any capital gain or loss which arises belongs to the bankrupt personally, not the trustee. This reasoning is said to also apply to sales under s 73 arrangements (see [7.35]) or Part X personal insolvency agreements (see Chapter 8) that give rise to a CGT liability. Fees for services or work done by a debtor and outstanding at the date of the debtor’s bankruptcy may be income rather than property, because on receipt they become subject to the income contribution regime under the Act: Re Sharpe; Ex parte Donnelly [1998] FCA 6; (1998) 80 FCR 536. This is the case even though the bankrupt dies – the fees owing at death continue to be treated as income: Re Lee (dec) [2012] FCA 1046; 10 ABC (NS) 243. However, if the fees are received before the date of the bankruptcy, they will, to the extent they are unexpended and remain as a fund, vest in the trustee: Trustee of the Property of O’Reilly v Law Society of NSW [2001] FCA 701; (2001) 110 FCR 574. 16 See ATO’s PS LA 2011/21 – Offsetting of refunds and credits against taxation and other debts. 17 “Capital Gains Tax and Bankruptcy” (2015) 27(3) A Insol J 43.

[4.50]

4 Impact of Bankruptcy

155

Property held on trust

[4.50] Property held by the bankrupt as trustee on trust is not divisible amongst the creditors of the bankrupt: s 116(2)(a). A bankruptcy trustee may often find that property that appears to be owned by the bankrupt is in fact held on trust for others. There may or may not be a formal trust deed evidencing the trust. If there is a deed, it may provide that a trustee’s role ceases on their bankruptcy but pending the appointment of a new trustee the bankrupt will remain a trustee of the trust, as a bare trustee, and this will be a function capable of being carried out independent of the bankruptcy. Difficult issues arise where an individual is the trustee of a trust carrying on a business which holds assets and incurs liabilities. The trustee has a right of indemnity against the trust assets for debts properly incurred in the conduct of the business. Questions arise on the trustee’s bankruptcy as to whether that right of indemnity is divisible property, or whether it is trust property, and whether trust assets are available under the indemnity for payment of the bankrupt’s individual creditors. In Lane (Trustee), in the matter of Lee (Bankrupt) v DCT [2017] FCA 953, the Federal Court sought to “succinctly identify some general principles which ought to guide a bankruptcy trustee when dealing with a bankrupt trustee’s right of indemnity out of trust assets”. Those principles are the subject of conflicting decisions in relation to corporate trading trusts, which are a more common type of business arrangement, and are discussed in detail at [14.15] and [15.350]. In Lane, the court held that trust funds from the operation of the bankrupt’s business were available only to meet trust creditors, and were not available for the personal non-trust creditors of the bankrupt, in that case, the DCT.18 The s 109 priorities did therefore not apply. Where the bankrupt is the beneficiary of a trust, it will often be a discretionary trust, whereby the decision to distribute income or capital to the bankrupt is at the absolute discretion of the trustee. A trustee of the trust might well be reluctant to exercise that discretion in favour of a bankrupt beneficiary – which would in effect be a distribution for the benefit of the creditors. However, in cases where the bankrupt is both the appointor of the trust and the trustee, there had been some developing case law that the right of the bankrupt to exercise that discretion is property that vests in the bankruptcy trustee, thereby entitling the trustee to exercise that discretion in favour of the bankrupt and thereby the bankrupt estate. However the court in Fordyce v Ryan [2016] QSC 307 dealt squarely with what was tentative case law and rejected it.19 Entitlement to a share issue, prior to the allotment and issue of the shares, in respect of a demutualisation of an insurance company in which the bankrupt held policies, was found not to be property which vested in the trustee: Unicomb v Official Trustee in Bankruptcy [2000] FCA 457; (2000) 99 FCR 1. 18 Commented upon and approved in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 at [211]. 19 See also Pleash, in the matter of Equititrust Limited (In Liquidation) (Rec & Mgrs Appt) (No 3) [2017] FCA 1074; Agardy P, Risky Business (Federation Press, 2012) pp 49-54; P Agardy, Trading Trusts Explained (LexisNexis, 2018), at [23.7].

156

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.55]

“Books” or records of a bankrupt, which s 77(1)(a) requires the bankrupt to hand over to the trustee, are property and vest in the trustee: Griffin v Pantzer.20 While the courts tend to determine an asset of value as being divisible property, a bankrupt politician’s personal papers compiled during his term of office, containing correspondence with parliamentary colleagues, heads of State and members of ruling families, was found not to have vested despite its commercial value: Haig v Aitken [2000] 3 WLR 1117.21 The right of a bankrupt to maintain legal professional privilege is not property that vests in the trustee: Worrell v Woods [1999] FCA 242; (1999) 90 FCR 264.22 Whatever property vests in the trustee, it is fundamental that the property remains subject to the rights of secured creditors whose interests are properly secured. Also, where the law of a State or Territory requires the transmission of property to be registered and enables the trustee to be registered as the owner of the bankrupt’s property – such as real property – the property vests in the trustee in equity as a consequence of s 58(1), but it does not vest in law until those registration requirements have been complied with (s 58(2)). Even if there is a long delay in the trustee becoming registered on title, this will not necessarily affect the trustee’s claim to the property or to the proceeds of its sale, unless it is defeated by some equitable basis of waiver, estoppel or laches (delay), or by some detriment suffered by the bankrupt: O’Brien v Sheahan; Dixon v Riquero (2004) 1 ABC (NS) 474; [2004] FMCA 173. In that case, the trustee had not become registered on title because there was at that time no equity in the real property, the property being subject to a security. When the property was eventually sold, after discharge, the value of the property having increased, the trustee was found to be entitled to the proceeds of sale; the trustee’s delay and other conduct did not serve to defeat his claim. Nevertheless, the court left open the prospect that in some cases, the legal title of the trustee may be lost. Indeed, as we have seen, the trustee takes vested property subject to any valid equitable interest in that property. Apart from principles of equity, a bankrupt who has continued to live in the property and paid for its upkeep may be entitled to reimbursement of the costs involved, although not necessarily for a mortgage that has continued to be paid: Official Trustee v Frederiksen [2007] FMCA 1915; 5 ABC(NS) 671.

Property acquired during bankruptcy, and after [4.55] The trustee is also entitled to all property acquired by, or passing to, the bankrupt after the date of bankruptcy but before the discharge (s 116(1)), that is, 20 Griffin v Pantzer [2004] FCAFC 113; (2004) 137 FCR 209; 1 ABC (NS) 265 21 See Milman D “The Challenge of Modern Bankruptcy Policy: The Judicial Response” in Worthington S (ed), Commercial Law & Commercial Practice (Hart Publishing, 2003) p 385. Under Australian law, the creditors could have decided to exempt the personal papers as items of sentimental value under s 116(2)(ba). See [4.60]. 22 This is the position in England: Avonwick Holdings Ltd v Shlosberg [2016] EWCA Civ 1138; Leeds v Lemos [2017] EWHC 1825 (Ch).

[4.65]

4 Impact of Bankruptcy

157

throughout the time the person is bankrupt, which is generally three years (or one year, as proposed). This would typically include any bequests to the bankrupt, for example from a deceased relative, or money paid to the bankrupt that is not income.23 It may also include any windfall, such as a lottery win, or a bequest under a will. This extends to the receipt during bankruptcy by a bankrupt of an equitable interest in a business; such an interest comes within the definition of “property”: Official Receiver v Delaton Pty Ltd [1996] VSC 85; (1996) 130 FLR 207; Donnelly v McIntyre [1999] FCA 450. Assets acquired by a bankrupt after his or her discharge from bankruptcy do not vest and they remain the bankrupt’s own property. This is an aspect of the “fresh start” offered by bankruptcy, that a discharged bankrupt can resume their business, keep their full income, and again start acquiring assets, and try to restore their financial position.24

Income received during bankruptcy [4.60] The assessment of income contributions on income received during bankruptcy is discussed at [6.340] and following. As to whether fees for services provided by the bankrupt are property or income, see [4.45]. The question whether a bankrupt’s savings from their income during the period of their bankruptcy do not become after-acquired property is not clear. In practice, if the bankrupt is able to save money, even after paying income contributions, he or she is entitled to keep that money: Re Gillies; Ex parte Official Trustee [1993] FCA 289; (1993) 42 FCR 571. But it is otherwise if an asset is acquired with those savings; that asset becomes after-acquired property that vests in the trustee.25 There is some perceived injustice in such an outcome and the courts at times have raised the question whether the law is that strict. Judicial consideration has been given to finding that certain classes of assets might be able to be retained, or whether the right of the trustee to sell property under s 134(1)(a) prevails over the vesting of after-acquired property in s 58, and whether the trustee might exercise their authority under s 134(1)(ma) to make an allowance out of the estate as the trustee considers just.

Protected property Property protected through lapse of time: 20 years

[4.65] The trustee cannot make any claim under the doctrine of relation back after 20 years from the date of the bankruptcy: s 127: as to relation back, see [2.95]. In Madden v Official Trustee in Bankruptcy [2014] FCA 446 a trustee failed in trying to recover an interest in property held on resulting trust for the bankrupt about which 23 See Pascoe v Park [2009] FMCA 1244. 24 See N Howell and R Mason, “Reinforcing Stigma or Delivering a Fresh Start: Bankruptcy and Future Engagement in the Workforce” (2015) 38(4) UNSWLJ 1529. 25 Di Cioccio v Official Trustee in Bankruptcy [2015] FCAFC 30, special leave to appeal dismissed [2015] HCATrans 230; Rodway v White [2009] WASC 201; (2009) 233 FLR 262.

158

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.70]

the trustee only became aware after the expiry of the 20 year period. This is subject to the time limits on realising property under s 129AA: see [6.260]. Protection for maintenance payments

[4.70] Subject to ss 121, 128B and 128C, any transfer or payment under a child or spouse maintenance agreement or order made by a debtor before the date of their bankruptcy is protected (s 123(6)): see Combis v Jensen [2009] FCA 778; (2009) 179 FCR 150; 7 ABC (NS) 189.

Exempt property [4.75]

Some property, which would otherwise be available to the trustee under s 116(1), is made exempt by s 116(2). It is not intended to discuss each of the items of property exempted. Each is exempted for policy or practical reasons, obvious ones being household and personal property, and other items such as cars and items used to earn a living. The most important ones only will be discussed. Household and personal property

[4.80] Section 116(2)(b) allows the regulations to set out the household property which is protected. Regulation 6.03 provides that a bankrupt is allowed to keep “household property (including recreational and sports equipment) that is reasonably necessary for the domestic use of the bankrupt’s household, having regard to current social standards”. It sets out some details, including kitchen utensils, beds, linen, although not at this stage mobile phone and internet access, which may properly be or become protected under current social standards. The list is not to be taken too prescriptively. The bankrupt need not hand over their sporting and other non-monetary awards (reg 6.03A): see George v Fletcher [2012] FCAFC 148. In assessing these issues, the trustee must take into account the matters listed in reg 6.03(4), such as the number and ages of the members of the bankrupt’s family and any special climatic factors affecting the location of the bankrupt’s residence. In Re Vaughan [1996] FCA 1462; (1996) 71 FCR 34, one factor taken into account by the court in allowing the bankrupt to keep a box trailer for his car was that he used it to collect wood for heating his home in the cold Tasmanian climate. Creditors can decide to exempt additional household property by resolution: s 116(2)(b)(ii); and can also decide to exempt items of sentimental value to the bankrupt, such as sporting medals or items of jewellery, although a special resolution (s 5) of the creditors is required: s 116(2)(ba). Property used in earning income

[4.85] Section 116(2)(c) permits bankrupts to retain property used “in earning income by personal exertion”, formerly the “tools of the trade” exemption. There is a prescribed limit to the value of the property, which is around $3,700 (2018, indexed): reg 6.03B. The property must have a readily identifiable connection with the income-producing activities. This exemption supports the policy of allowing the bankrupt to continue to earn an income, including to a level at which income contributions may have to be paid. A

[4.95]

4 Impact of Bankruptcy

159

bankrupt is entitled to retain such items – from plumbers’ tools to lawyers’ libraries and computers – without taking into account the extent of their work or the income generated: Re Vaughan [1996] FCA 1093; (1996) 71 FCR 34. As with household property, creditors can exempt such property of any value by resolution: s 116(2)(c)(ii). The court can also exempt property on the bankrupt’s application (s 116(2)(c)(iii)): Tiver v Official Trustee [2010] FCA 620; (2010) 187 FCR 1. This exemption may be granted where it is in the interests of creditors for the bankrupt to have full access to their business facilities in order to earn an income, from which contributions may be made. Related to this are provisions that exempt moneys paid under certain government rural support schemes: s 116(2)(k); regs 6.04A and 6.04B. Means of transport

[4.90] A bankrupt may retain property used primarily as a means of transport – that is, a car or motorbike – and of a value not greater than around $7,800 (indexed, 2018): s 116(2)(ca); reg 6.03B(3). Transport is exempted because of the general acceptance of the need for personal mobility in Australian society: discussed in Re Vaughan [1996] FCA 1093; (1996) 71 FCR 34. If the value of the bankrupt’s car exceeds the monetary limit, the trustee may sell it and give the bankrupt the $7,800: s 116(2C). Again, the creditors may resolve that a bankrupt be allowed to keep their car even if it exceeds the statutory value. Insurance policies and superannuation funds

[4.95] Subject to ss 128B and 128C, s 116(2)(d) exempts: • policies of life insurance or endowment assurance in respect of the bankrupt’s life or that of their spouse, together with the proceeds of such policies received on or after the date of the bankruptcy; • the interest of the bankrupt in a regulated superannuation fund or an approved deposit fund within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth); and • a payment to the bankrupt from such a fund received on or after the date of bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993. Section 116(2)(d) also lists a payment to a bank of superannuation that is split between spouses under the Family Law Act 1975 (Cth), and money held by the bankrupt in a retirement savings account.26 But if superannuation is cashed in by a person before their bankruptcy, those cash funds are not protected: Section 116(2)(iv). The protection given to a bankrupt’s interest in a superannuation fund does not extend to contributions which are void: s 116(2)(d) which is expressed to be subject 26 “RSA” and see s 5(1) Bankruptcy Act for definition.

160

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.100]

to ss 128B and 128C, and s 139ZU. These sections were introduced in 2007 to address issues arising out of the failure of a trustee in bankruptcy to recover potentially voidable payments made by an insolvent debtor into their superannuation fund.27 See [5.105]. Funds in self-managed superannuation funds (SMSFs) are also protected as long as the fund is properly established and is compliant with its regulatory obligations. These funds raise issues when the trustee of the fund becomes insolvent. An individual trustee of a SMSF who becomes bankrupt or enters into a personal insolvency agreement is automatically disqualified from acting as a trustee. Similarly a corporate trustee of a SMSF that enters external administration is also disqualified, as is any director.28 A fund trustee who is faced with bankruptcy may transfer the assets into a complying fund, for example an industry or retail super fund, so that the fund trustee no longer controls the running of the fund or its investments. Contributions made to a superannuation fund may be open to being recovered by a bankruptcy trustee. This will depend on issues we explain in following chapters, including whether the debtor had made regular contributions to a superannuation fund over a number of years and there were no “one-off” lump sum contributions which were made shortly before going bankrupt. Protected money

[4.100] Certain moneys paid for the personal benefit of a person who is bankrupt are protected. Bankrupts may, before or during their bankruptcy, have been awarded damages for personal injury or other personal wrongs done to them (such as being defamed), or to members of their family, and used those damages to fund the purchase of property. If the property is paid for totally from the money representing the damages, then the property is protected and the bankrupt is entitled to retain it (s 116(2)(g)): Re Iskenderian [1989] FCA 184; (1989) 21 FCR 363. The bankrupt may bring his or her own legal proceedings in respect of that property. The Act provides that “the whole, or substantially the whole” of any money used in the purchase of particular property is protected money (s 116(2)(n), 116(3)) and is not divisible property. “Protected money” is defined in s 116(2D) as exempt money or exempt loan money. “Exempt money” (s 116(2D)) includes certain life policy and superannuation payments, and damages or compensation moneys, and moneys paid under rural support schemes. “Exempt loan money” is defined in s 116(2D) as the principal sum of a loan to the bankrupt or to the bankrupts and another person and which was repaid from exempt money. Where a trustee realises property which was acquired using partly protected money and partly other money, the trustee is to pay the bankrupt that part of the 27 Cook v Benson [2003] HCA 36; (2003) 214 CLR 370; see the Explanatory Memorandum to the Bankruptcy Legislation Amendment (Superannuation Contributions) Bill 2006 (Cth). 28 Superannuation Industry (Supervision) Act 1993 (Cth), s 120. SMP Consolidated Pty Limited (in liq) v Posmot Pty Limited [2014] FCA 1382.

[4.110]

4 Impact of Bankruptcy

161

proceeds as can fairly be attributed to the protected money (s 116(4)): Re Jemielita [1996] FCA 1208; (1996) 63 FCR 141; Foyster v Prentice [2008] FMCA 757; (2008) 6 ABC (NS) 103. Where property was purchased in 2002 by a husband and wife, and the bankrupt’s protected payments only commenced in 2007 by way of mortgage repayments, the court required a valuation of the property in 2007 and a current valution in order to value the bankrupt’s protected contribution: Reaper v Vrseck [2016] FCA 509. If the protected money accounts for nearly all of what has been used in payment for the acquisition of property then this will suffice to permit the bankrupt to retain the property. However, it is not sufficient for the bankrupt to show that the contribution of protected money could be in general terms described as “substantial” – the money must represent “substantially the whole”: Turner v Official Trustee [1996] FCA 1074; (1996) 71 FCR 418. Other moneys protected include any financial support paid to the bankrupt from the National Disability Insurance Scheme (as defined in the National Disability Insurance Scheme Act 2013 (Cth)) or a “NDIS amount”, being the amount payable to a disabled person and as defined in that Act. A proposed new law aims to protect compensation paid to eligible survivors of institutional child sexual abuse.29 Property transferred under Pt VIII of the Family Law Act

[4.105] Property of a bankrupt will be exempt and not be divisible amongst creditors where the trustee is required to transfer that property to the spouse or de facto spouse of the bankrupt under an order under Pt VIII of the Family Law Act by way of a property division under s 79 of that Act: Bankruptcy Act, s 116(2)(q) – (r). It should be noted that a bankruptcy trustee is taken to be a party affected by a property order under s 79 of the Family Law Act, and may apply to the Family Court to have the order set aside under s 79A of that Act: see further at [2.370] and ss 35, 35A of the Bankruptcy Act.30

Property held in trust [4.110] This is not so much an exemption as a recognition that the bankrupt has no beneficial interest in property which he or she holds on trust for another person: s 116(2)(a). The property must be able to be identified as trust property and be distinguished from the bankrupt’s property: Re Grey (1900) 26 VLR 214. It can often be a significant issue for a trustee to determine whether claims that property is held on trust are valid. In particular this is so in relation to claims made by spouses or partners of the bankrupt.31 Trust records may be minimal. If there is a formal trust deed, it may require termination of the trust on the trustee’s bankruptcy, in which case the trustee in bankruptcy holds the property on constructive trust for the beneficiaries: Bastion v Gideon Investments Pty Ltd (No 2) [2000] NSWSC 959. 29 Commonwealth Redress Scheme for Institutional Child Sexual Abuse Bill 2017. 30 In relation to Part X agreements, see [8.185]. 31 See Clout v Markwell [2001] QSC 91; (2001) 1 ABC (NS) 177; Lewis v Condon [2013] NSWCA 204.

162

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.115]

An odd outcome is that litigation taken by a person as trustee who then becomes bankrupt is stayed under s 60(2), in the same way as if the bankrupt brought the litigation in their personal capacity: Duckworth v Water Corporation [2012] WASC 30; 261 FLR 185. In that case, the property held on trust by the bankrupt did not vest: Duckworth v Water Corporation (No 2) [2015] WASC 411; s 116(2)(a). Property held on trust is distinguished from property held subject to an equitable charge, which does vest in the trustee, subject to the charge: Clout v Anscor Pty Ltd (2003) 1 ABC (NS) 44, 61; affirmed (2004) 135 FCR 469.

IMPACT OF BANKRUPTCY ON LEGAL PROCEEDINGS INITIATED BY THE BANKRUPT [4.115] As the bankrupt’s property vests in the trustee in bankruptcy (s 58(1)) and as legal proceedings initiated in relation to a bankrupt’s claims are rights in action which constitute property of the bankrupt, any claims that are the subject of such proceedings vest in the trustee. This is subject to certain exceptions in ss 60 and 116(2). The Act has particular provisions that apply to the bankrupt’s legal proceedings as a plaintiff. Section 60(2) provides that, except for certain limited actions, legal actions brought by the bankrupt before the bankruptcy are stayed from the date of bankruptcy until the trustee “elects” either to prosecute or discontinue the action: see Re Lofthouse [2001] FCA 25; (2001) 107 FCR 151 for a discussion of the section. If the trustee has not made an election, any party to the action (usually the defendant) may serve a notice on the trustee, and if the trustee does not make an election within 28 days the trustee is deemed to have “abandoned” the action: s 60(3).32 The trustee might elect to continue the action by securing an arrangement with someone to fund the litigation, or by selling the action to another person for a fee or a percentage of any proceeds recovered: see Meriton Apartments Pty Ltd v Industrial Court of New South Wales [2008] FCAFC 172; (2008) 171 FCR 380. The trustee is not generally required to give reasons for the decision to discontinue: Gray v Clout (1990) 27 FCR 141. Whether there is a decision to abandon or a deemed abandonment is not of significance, the trustee should make clear the terms of any decision to abandon the proceedings: Cole v Challenge Bank Ltd [2002] FCAFC 200.33 An “action” in s 60(2) is construed broadly. It is not necessary that the action or its subject matter be divisible property; a connection between the action and the estate is sufficient: Owens v Comlaw [2006] VSCA 151; (2006) 4 ABC (NS) 537 ; Garrett v Commissioner of Taxation [2015] FCA 665. It includes a right of appeal (Cummings v 32 The trustee can apply to the court under s 33 for an extension of time, even if the time has expired: Brien v P&E Phontos Pty Ltd [1999] FCA 1072; (1999) 91 FCR 209. Relevant factors include: (1) the reason for the trustee’s delay in making an election; (2) in light of the merits of the litigation, any prejudice to the trustee; (3) the reasonable expectation of finality in the trustee’s decision-making by other parties to the litigation, and (4) the prejudice to the interests of other parties to the litigation by further uncertainty: Newman v Bain [2013] FCA 558; (2013) 213 FCR 370. 33 Although s 60(2) and 60(3) serve to impose restraints on proceedings in State courts, they are not constitutionally invalid: Campbell v Metway Leasing Ltd [2002] FCAFC 394; (2002) 126 FCR 14.

[4.120]

4 Impact of Bankruptcy

163

Claremont Petroleum NL (1996) 185 CLR 124)34 leave to appeal: Healey v Prentice (No 2) [2000] FCA 1598, and an application for administrative review of a decision affecting the bankrupt: Fisher v Transport for NSW [2016] NSWSC 1888. The trustee who abandons an action is entitled to seek leave of the court to discontinue the application as may be required by the relevant court’s rules; or the court will generally dismiss the action: Fisher v Transport for NSW. It is a matter for the trustee to decide whether to pursue a bankrupt’s right of action but the bankrupt can challenge the trustee’s decision to abandon it, under IPSB, s 90-15: Jambrecina v Official Trustee in Bankruptcy [2003] FCA 1352; (2003) 2 ABC (NS) 58. The trustee has to take a number of factors into account, typical ones being noted in Haskins v Official Trustee in Bankruptcy [1996] FCA 242 where the court upheld the trustee’s decision not to pursue a right of action, based on the facts that: “there are no funds in the estates with which to pay for an application for leave to appeal; that the applicants have no assets with which to finance further proceedings; that other creditors are most unlikely to provide the Trustee with an indemnity in relation to the costs of further proceedings which the Trustee has been advised not to pursue, and the risk that the court might order the Trustee personally to pay the costs of an unsuccessful application.”

At the same time, the court in Freeman v National Australia Bank Ltd (2003) 2 ABC (NS) 51, 54-55 said that “the position of a trustee in bankruptcy is one of considerable responsibility”, involving the administration of the estate in the interests of the creditors, the bankrupt and the public interest: citing Adsett v Berlouis (1992) 37 FCR 201, 208. If the decision to decline to make an election to pursue proceedings was wrong, “justice and equity requires [the court] to compel the trustees to prosecute those actions, or to commence similar actions”: upheld on appeal in Freeman v National Australia Bank Ltd [2003] FCA 1233; (2004) 2 ABC (NS) 32. An example of a proceeding that the trustee may and often should elect to continue is one for recovery of a debt owing to the bankrupt that is undisputed but unpaid. If a trustee pursues a right of action and loses, a bankrupt is not entitled to appeal against the decision: Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124.

Assignment of rights of action of a bankrupt [4.120] An abandonment of a proceeding under s 60(3) by the trustee ends the particular proceeding brought by the bankrupt but not the cause of action itself: Stobbart v Mocnaj (1996) 16 WAR 318, 323; Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47. There is no bar to the trustee commencing a fresh proceeding on the same cause of action; or a bankrupt, on discharge, where there has been no determination of the issues: Freeman v Joiner [2005] FCAFC 149; (2005) 3 ABC (NS) 332. For that 34 The High Court held that a bankrupt has no financial interest which would confer standing to appeal against a judgment for a provable debt; see also Jackson v Health Services Union [2015] FCAFC 188. The right of a bankrupt to continue with an appeal commenced before bankruptcy is stayed under s 60(2).

164

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.125]

reason, a court will not generally dismiss the bankrupt’s abandoned proceedings which remain vested in the bankrupt estate: State of Queensland v Beames [2003] QSC 399; [2004] 2 Qd R 99. In many cases, if the claim has a real value, the trustee may formally elect to prosecute it and to then sell the claim to a purchaser: Meriton Apartments Pty Limited v Industrial Court of NSW [2008] FCAFC 172. The trustee has authority to sell the right of action under the power in s 134(1)(a) (to sell all or any of the bankrupt’s property). If the trustee assigns on the basis of a percentage of any successful outcome, there is a danger of the trustee being held liable for costs if the action fails. A court has a discretion to order that costs be paid by non-parties to an unsuccessful action if they support it and stand to gain from it: Knight v FP Special Assets Ltd (1992) 174 CLR 178. Alternatively, a court with insolvency jurisdiction might consider that the litigation claim should not to have been assigned in the first place and make orders against the practitioner accordingly. While such an assignment may have once been against the law of champerty and maintenance, such a sale by a trustee is excepted.35 However, a trustee should not sell a cause of action that demonstrably has little chance of success: Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550. The question whether a trustee can sell the proceeding to the bankrupt during the bankruptcy involves the issues raised earlier in this Chapter in relation to the vesting of property purchased with post-contribution income of the bankrupt: [4.60]. The proceedings may simply revert to the trustee as after-acquired property and they would then again be subject to the trustee’s election under s 60: Meriton Apartments Pty Ltd v Industrial Court of NSW [2008] FCAFC 172; (2008) 171 FCR 380. There may be other approaches taken to allow such a sale, discussed at [4.60]. In any event, the trustee can sell the proceedings to the former bankrupt after his or her discharge; or the proceedings would re-vest in the former bankrupt as surplus property after an annulment.36 Family law rights of action of a bankrupt cannot be assigned by the trustee to a third party: B Pty Ltd v Sykes [2013] FamCA 359; see also B Pty Ltd v Sykes [2014] FamCA 451. The assignment of the rights of action of a bankrupt contrasts with the right of the trustee to assign “any right to sue conferred on the trustee” by the Act, that is, for example, rights to bring proceedings to challenge voidable transactions: IPSB, s 100-5. These are considered in Chapter 6.

Personal rights of action [4.125] Section 60(4) provides that bankrupts may continue to pursue legal actions in respect of personal injuries or wrongs done to themselves, their spouses or family members. Any settlement or judgment amount will not pass to the trustee but remain the property of the bankrupt: s 116(2)(g). See [4.100]. 35 Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; (2006) 229 CLR 386. 36 Daemar v Industrial Commission (NSW) (No 2) (1990) 22 NSWLR 178; Theissbacher v MacGregor Garrick & Co [1993] 2 Qd R 223.

[4.130]

4 Impact of Bankruptcy

165

The test whether a claim is for personal injuries under s 60(4) was said in Cox v Journeaux (No 2) (1935) 52 CLR 713, 721 to be: “whether the damages or part of them are to be estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property.”

The subsection is interpreted broadly. So, while an action for defamation is clearly within the exclusion, so too is an action for professional negligence by the bankrupt against a lawyer for failing to bring a defamation claim: Moss v Eaglestone [2011] NSWCA 404; (2012) 9 ABC(NS) 622. Likewise, actions for damages for assault or for personal injuries resulting from a road accident can be maintained. However, if a claim is based on property interests – for example, a claim for breach of a contract relating to the bankrupt’s business – it is stayed. In that respect, if the bankrupt sues on a cause of action combining economic and personal claims, it either vests in the trustee or remains with the bankrupt; it is not divided up, part to the bankrupt and part to the trustee: Sands v State of South Australia [2015] SASCFC 36; Nyoni v Pharmacy Board of Australia (No 4) [2017] FCA 911. An appeal against a decision that a litigant be declared vexatious does not come within s 60(4): Garrett v Commissioner of Taxation [2015] FCA 665. But an application for an administrative review of a decision to cancel a bus driver’s licence was a personal right protected under s 60(4): Fisher v Transport for NSW [2016] NSWSC 1888. As other examples, the rights of a bankrupt to sue for wrongful dismissal, or termination of employment, are not personal rights of action; they vest in the trustee: Geia v Palm Island Aboriginal Council [2001] 1 Qd R 245; Fitzpatrick v Keelty (2008) 5 ABC (NS) 560. A bankrupt may be able to bring an environmental objection to a proposed property development as being a “personal right” vested in the public at large, but not if the proposed development affects property vested in the bankrupt estate: Stubberfield v Paradise Grove [2000] QCA 299. A bankrupt has a right to sue for unpaid income, given that income is not divisible property: Davey v Dessco Pty Ltd & Anor (Bankruptcy) [2017] VSC 744. While a bankrupt person’s claim under state family provision laws, invariably involving a challenge to the will of a deceased relative, does not pass to the trustee, any amount ordered to be paid to the bankrupt does vest: Mavridis v Andronescu [2018] VSC 227. A claimant’s bankruptcy can be a relevant factor in the court’s decision in such matters: Webster v Strang; Steiner v Strang [2018] NSWSC 495.

IMPACT OF BANKRUPTCY ON THE BANKRUPT’S FAMILY AND ASSOCIATES Public examinations [4.130] For the purpose of investigating the circumstances of the bankruptcy or, for example, transactions that might be challenged as voidable, the trustee, the Official Receiver or a creditor can apply to the court for the issue of a summons to have nominated persons attend for a public examination to be asked questions concerning the bankrupt’s financial dealings: s 81.

166

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.132]

Those who may be called for examination include the bankrupt’s spouse, family members, friends and business associates.37 Examinations can be onerous and demanding and if the examinee fails to attend pursuant to a summons they may be arrested: s 264B. Failure to answer a question during an examination can be an offence: s 264C and can also be a contempt of court: Nathan v Burness [2011] FCA 288; (2011) 193 FCR 360. Nevertheless, the right to ask questions is not unfettered: Karounos v Official Trustee in Bankruptcy (1988) 19 FCR 330. Examinees can be legally represented and there is provision for the lawyers’ costs to be paid (s 81(14)): see Scott (Trustee), in the matter of Price (Bankrupt) [2011] FCA 1478.

The family home [4.132] The family home is often the subject of conflict between the trustee and the bankrupt’s family. The home is often the only major asset owned by the bankrupt from the sale of which creditors may receive a dividend payment, subject to any mortgage. In many cases the amount payable under the mortgage may exceed the value of the property. In such cases, the trustee may defer any sale until the value increases, or sell the bankrupt’s interest to the non-bankrupt co-owner for a small amount. Where the home is owned solely by the bankrupt spouse, with no other presumption applying, both title and the right to possession of the property passes to the trustee on bankruptcy and neither the non-bankrupt spouse nor the bankrupt’s family has any right to continue to live in it.38 The trustee may need to formally register their interest on the title: s 58(2). If the home is owned jointly, as is typical, the bankruptcy of one of two joint tenants “severs” the joint tenancy with the interest of the bankrupt vesting in the trustee, and the remaining co-owner becoming a “tenant in common”.39 The trustee will usually give the non-bankrupt spouse the opportunity to purchase the half share vested in the bankrupt estate. If the non-bankrupt spouse cannot purchase that share, and does not consent to a joint sale, the trustee can obtain a “partition and sale” order from a court – that is an order that the whole property be sold and the separate interest of the trustee in the property be realised. From the proceeds of sale any mortgage will be satisfied and expenses of sale paid, and the balance will be divided between the non-bankrupt spouse and the trustee in bankruptcy: see for example Yeo v Collings [2012] FMCA 1060. 37 Persons who can be summoned under s 81 are those known to be (or suspected of) possessing the property of the bankrupt; believed to be indebted to the bankrupt; capable of giving information about the bankrupt or the bankrupt’s dealings, transactions, property or affairs; and those who possess books relating to the bankrupt or the bankrupt’s affairs. 38 In relation to issues concerning the family home, see Report on the Treatment of the Insolvency of Natural Persons (The World Bank, 2013). In the UK, the law allows some deferment and discretion in relation to sale of the family home: Insolvency Act 1986 (UK), ss 335A – 338; see for example, Claughton v Charalamabous [1998] BPIR 558; Grant v Baker [2016] EWHC 1782 (Ch). See also Sarmas and Fehlberg, “Bankruptcy and the Family Home: The Impact of Recent Developments” [2016] MelbULawRw 15; (2016) 40(1) MULR 288. The AFSA website has a useful section for bankrupts titled “What happens to my house”: www.afsa.gov.au. 39 Sistrom v Urh [1991] FCA 315; (1992) 40 FCR 550.

[4.132]

4 Impact of Bankruptcy

167

In the event the co-owner does not agree to a sale or does not cooperate with the trustee, a court may order the sale of the property under State property laws allowing the “partition” of property held in co-ownership. For example, s 66G of the Conveyancing Act 1919 (NSW) allows orders to be made appointing trustees for sale of the property and the division up of the proceeds: Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450.40 Where joint tenants of property are made bankrupt at the same time as joint debtors, a joint bankrupt estate is created and there is no severance of the joint tenancy – the property retains the character as jointly owned property that vests: Re Weber (2006) 154 FCR 80; [2009] FCA 636. Generally, in the case of a traditional matrimonial relationship it is presumed that the couple intended that each of them has a beneficial one half interest in the matrimonial home irrespective of the amounts contributed by each of them to the purchase price. Where the title is in the joint names of the spouses that principle is reinforced, such that there is no reason to assume that any different proportions exist: Trustees of the Property of Cummins (a Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278. However, that presumption may be rebutted and a court examining the matter should look to all the surrounding circumstances of the purchase, including subsequent conduct: Huen v Official Trustee in Bankruptcy (2008) 248 ALR 1; [2008] FCAFC 117. There can also be equitable claims on the property of the non-bankrupt spouse or other family members, for example where a person claims the property is held by the bankrupt on trust for them. The bankrupt may also have simply transferred the property or an interest in it to family members prior to bankruptcy in order to try to avoid the property falling into their creditors’ hands; or the transfer might have been made to a related third party, including a company or trust. This may have been by way of a straight gift of property or the property may be sold for a low price. Bankruptcy law can allow the trustee to recover property transferred in those circumstances. Any family member or associate of the bankrupt who received property from the bankrupt during the five-year period immediately preceding the commencement of the bankruptcy may have to return the property (s 120), and this may include the family home. If the property was given by the bankrupt with the purpose of defeating or delaying their creditors then s 121 of the Act may also apply. Such conduct can also involve a breach of the criminal law: s 263. The provisions which allow the trustee to recover property transferred in such circumstances are discussed at [5.05]. The trustee will often conduct public examinations of the bankrupt and their family members and other connected parties in order to obtain evidence about the circumstances of the property transfers.

40 The federal courts rely on s 79 of the Judiciary Act 1903 (Cth) to apply State laws.

168

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.135]

Family and related claims on the bankrupt’s property Family law claims Family law disputes and bankruptcy can often co-exist.41 The Family Court of Australia and the Federal Circuit Court each has general jurisdiction over matrimonial causes involving married spouses and de facto relationships.42 Under s 79 of the Family Law Act and other sections in Pt VIII of that Act, the Court can make orders against property of a spouse or de facto altering the interests in vested property of the bankrupt estate. There is a range of factors listed in s 75 of the Act to which the court exercising such jurisdiction must have regard in dividing up matrimonial assets, including the respective age and income of the spouses, their health and personal circumstances. Where one of the parties to property proceedings is an undischarged bankrupt, the trustee is entitled to represent the interests of the bankrupt estate. But the Family Court must still take the general s 75 factors of the bankrupt, and non-bankrupt spouse, or de facto, into account, even though the trustee in bankruptcy stands in place of the bankrupt spouse.

[4.135]

Section 75(2)(ha) of the Family Law Act does provide that in making a property order in favour of a spouse or de facto, the effect of those orders on creditors of the bankrupt spouse must be considered. The fact that the trustee becomes in effect a party to the proceedings allows the trustee to represent the creditors’ interests. Nevertheless, the interests of creditors are but one factor among many, including the needs of the non-bankrupt spouse and the children: see for example Trustee for the Bankrupt Estate of N Lasic & Lasic [2010] FamCA 682; Debrossard v Official Trustee in Bankruptcy [2011] FamCA 648. Where a party to a financial agreement has become bankrupt, a creditor of that party retains standing as a creditor to apply to set aside the agreement under s 90K(1)(aa) of the Family Law Act: Grainger & Bloomfield [2015] FamCAFC 221. To allow for the powers of the Family Court or the Federal Circuit Court, s 59A of the Bankruptcy Act provides that vesting of property of a spouse under s 58 has effect subject to an order of the Family Court for property, spousal maintenance and maintenance agreements in relation to that spouse under Pt VIII of the Family Law Act. Other claims on property by family members

[4.140] As we have seen, family members may be affected by a person’s bankruptcy and we have examined some issues arising in the interaction between bankruptcy and family law in circumstances of marital dispute. Even absent any family law claims, claims in equity can be made. 41 Sarmas, “Trusts, Third Parties and the Family Home: Six Years since Cummins and Confusion Still Reigns” (2012) 36 MULR 216 – offering “a very useful and insightful discussion of these issues”: Turner as Trustee of the Bankrupt Estate of Wallace v Wallace [2017] FCCA 3044 at [63]. 42 Matrimonial cause is defined in s 4, and de facto relationship is defined in s 4AA, of the Family Law Act. As to the varied interpretations of “de facto” relationships in other laws, see Baker v Landon [2010] FMCAfam 280. As to other courts that may exercise family law jurisdiction, including the Federal Circuit Court, see Pt V of the Family Law Act.

[1.142]

4 Impact of Bankruptcy

169

We have explained that the home may be owned by the bankrupt, in which case the trustee may take possession of it and sell it or, if the home is owned jointly, the trustee may partition and sell the bankrupt’s share. Equitable claims – express, resulting and constructive trusts

[1.142] However, the non-bankrupt spouse may be able to establish some equitable interest in the house beyond the interest shown on title. Such an interest may be claimed pursuant to an express trust, or trusts created without express and intentional declaration, primarily being resulting or constructive trusts. To constitute an express trust there must be certainty of intention, subject matter and object, and, from the trustee’s perspective, evidence of its existence, which may be by deed but need not be. A resulting trust can occur when property comes back to, or “results” to the person who transferred the property. For example, where property is purchased in the name of another, there is a resulting trust in favour of the person who advanced the purchase money. Where there are contributions to the purchase price of property, a presumption arises that the parties hold the property in trust for themselves as tenants in common in the proportions in which they contributed the purchase money: Calverley v Green (1984) 155 CLR 242; this presumption may not apply in the case of the traditional matrimonial relationship where wife and husband are presumed to have intended to acquire the property jointly, irrespective of their individual contributions: Trustees of the Property of Cummins (a Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278. A constructive trust is ordinarily determined to exist and imposed by a court in circumstances where it would be unfair of the party owning the property to deny the financial or other contributions to the property made by another party. Such a trust will be imposed upon the property owner only if there is neither an express nor a resulting trust, or some other remedy to assist the other party is not suitable or available: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89. Its existence therefore does not depend on the intention of the parties, such as is necessary for an express trust. The court assesses the circumstances of the parties existing at the time when the property is acquired although later events can be relevant: see Draper v Official Trustee in Bankruptcy [2006] FCAFC 157; (2006) 156 FCR 53. A finding that there is a constructive trust, necessarily in the absence of any express trust, is significant and mere repayment of the bankrupt’s mortgage debt does not give rise to a constructive trust. Such interests are often raised against a trustee in bankruptcy who must assess and respond to the claims that the other party makes to the property of the bankrupt.43 These claims can present problems for a trustee, particularly because they are not necessarily evident to the creditors or the trustee, and their proof, or disproof, can be difficult. In one bankruptcy case,44 the Queensland Supreme Court said, in finding in favour of the spouse’s interest in the bankrupt’s property and against the trustee, that: 43 Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120. 44 Clout v Markwell [2001] QSC 91; (2001) 1 ABC (NS) 177, 185.

170

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.145]

creditors should be expected in these times to be aware of the possibility of constructive trusts or of equitable interests which may arise when the debtor is married or in a de facto relationship.

However, as the court also pointed out, these equitable principles can also favour the trustee who can gather in as divisible property any equitable interest of the bankrupt.

IMPACT OF BANKRUPTCY ON CREDITORS The legal effect on a creditor’s claim [4.145] On the date of the bankruptcy, a provable debt owed by the bankrupt, whether by virtue of a litigation claim or a judgment, is converted from being a right of action of the creditor against the bankrupt to a right of the creditor to share in the distribution of the bankrupt’s estate. In Pitman v Pantzer45 the Court described this process: Upon a debtor becoming bankrupt, the remedies against the debtor’s person and property formerly available to a creditor are taken away and there is substituted a right to prove against the estate. From that time, a creditor is not a mere creditor, but a creditor whose claim is in proof. The claim is no longer a mere right of action for a debt. An action as for a debt could no longer be maintained. The debt had been, at any rate provisionally, merged in an equitable execution. Amounts which were owed by a debtor at the date of the bankruptcy may, notwithstanding the bankruptcy, still be described as debts, and, in a number of provisions, the Act refers to them as such. They are “debts” from which the bankrupt is not released until he is discharged from bankruptcy. However, they are not “still owing”, since the effect of bankruptcy is that the debtor is no longer obliged to pay creditors, but is disabled from doing so. If the bankrupt offered payment, creditors could not safely accept it, since their right is a right of proof against the estate.

[4.150] That fundamental effect of bankruptcy prevending a creditor from commencing or continuing proceedings against the bankrupt for payment of the creditor’s debt is the result of s 58(3) of the Act. Instead, that creditor’s right is converted into one allowing it to share in the bankrupt’s property through a process where the trustee, not the court, has the authority to determine the creditor’s claim. There are two components of s 58(3). One, s 58(3)(a) provides that a creditor is unable to enforce legal remedies against the person or the property of the bankrupt in respect of a provable debt.46 This extends to preventing a creditor seeking to enforce its Australian judgment overseas under the Foreign Judgments Act 1991 (Cth): Talacko v Bennett [2017] HCA 15. But if the bankrupt is a joint debtor, s 58(3) does not prevent a creditor taking action against the non-bankrupt joint debtor: Coshott v Barry [2015] NSWCA 257. 45 (2001) 115 FCR 361 at [10], referring to the decision of the High Court in Clyne v DCT (1984) 154 CLR 589, 594-595. 46 In a circumstance where A sued B for damages for personal injuries, and A then became bankrupt, B sought to set-off a debt owed by A. That was not the enforcement of a remedy under s 58(3)(a): Piccone v Suncorp Metway Insurance Ltd [2005] FCAFC 260; (2005) 148 FCR 437.

[4.150]

4 Impact of Bankruptcy

171

A remedy is “against the person” of the bankrupt only if it involves physical restraint: Fraser v DCT (1996) 69 FCR 99. And a remedy against “the property of the bankrupt” extends not only to divisible property, but also to exempt property excluded from the bankrupt estate: ss 5(1) and 116. That exempt property is therefore also protected from creditors. Second, s 58(3)(b) prevents a creditor commencing legal proceedings or taking a fresh step in existing proceedings (ACCC v The Bio Enviro Plan Pty Ltd (2004) 2 ABC (NS) 130; [2004] FCA 415) against the bankrupt in respect of a provable debt. One policy purpose of this is to relieve the trustee, and the estate, of the costs and time in defending legal proceedings. However, in this situation, the creditor may apply to the court for leave to commence or continue with proceedings, with the court in effect applying a screening process, balancing the interests of the creditors and of the estate. Hence, such leave should only be determined by the Federal Court or the Federal Circuit Court, and not, for example, in a State court in which the relevant proceedings are being brought: Mango Media Pty Ltd v Velingos [2008] NSWSC 202; (2008) 216 FLR 176. The bankrupt is not a necessary party to a creditor’s application for leave under s 58(3).47 The restriction on creditors’ claims is interpreted broadly. In Mango Media v Velingos an application for a declaration that the bankrupt’s property was charged in the applicant’s favour and that a receiver be appointed to that property, required leave. No leave is required if the proceedings involve a debt that is not provable. For example, a civil penalty under s 1317G of the Corporations Act is not a provable debt by virtue of s 82(3AA) of the Bankruptcy Act. Legal proceedings to recover the debt can still be taken against the bankrupt: see ASIC v Loiterton [2004] NSWSC 897; (2004) 50 ACSR 693. While creditors will generally seek to quantify and claim their debts through the proof of debt process conducted by the trustee, a creditor may apply and be granted leave to continue their litigation claim. This can be the case where the claim is factually complex, or the hearing of the proceedings was imminent or well progressed at the time of the bankruptcy, or where a contested legal determination is required: Commonwealth Bank of Australia v Prentice [2016] FCA 53. Generally, however, leave is not sought by a claimant or granted by the court – one practical reason being that it is often not cost effective to do so in terms of the claimant’s expected dividend, if any, from the bankruptcy. If a creditor does commence proceedings against a bankrupt without obtaining the leave of the court, the proceedings are unlawful48 although leave can be given retrospectively, from the date of commencement of the action: Commonwealth Bank of Australia v Prentice. If leave to proceed is granted, the court may limit it to obtaining, but not enforcing, judgment. 47 Kattirtzis v Zaravinos [2001] FCA 1158 at [5]; Commissioner of Taxation v Yeo [2018] FCA 635. 48 Re Spratt [1986] FCA 33; (1986) 10 FCR 544; although the continuation of an action against the bankrupt without leave does not invalidate a compromise of the action to which the trustee was a party.

172

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.155]

Section 58(5) makes it clear that the rights of a secured creditor are not affected by s 58(3). The creditor retains the right to realise or otherwise deal with the security which has been taken, whether that is personal or real property.

Particular types of creditor claims [4.155] A creditor may have been contemplating or may have brought proceedings against the debtor under State and Territory laws – Statute of Elizabeth 1 proceedings – allowing creditors to recover property transferred in order to defeat their claims: see [5.95].49 However, on bankruptcy, the creditor is unable to continue or commence such an action, because the property transferred has vested in the trustee: McNamara v San (No 3) [2010] FCA 227; (2010) 183 FCR 328; 8 ABC(NS) 161. In some cases, a creditor has been given leave to proceed under such provisions, in effect in place of any action by the trustee under s 120 or s 121, but on condition that any recoveries are for the benefit of the bankrupt estate, and thus available for all creditors: Green v Official Trustee in Bankruptcy, in the matter of Schneller (Bankrupt) [2001] FCA 1644; DCT v Yeo (2007) 66 ATR 428; [2007] VSC 29. Family law claims can be an exception. Bankruptcy does not stay proceedings being brought by a spouse, de facto or other person who is entitled to claim non-divisible property from the bankrupt pursuant to a maintenance agreement or maintenance order: s 58(5A)(a). The term “maintenance agreement” includes an agreement for the provision of financial maintenance of another person within the meaning of the Family Law Act but does not include financial agreements under ss 90B, 90C or 90D of that Act – agreements before, during and after marriage. A “maintenance order” includes an assessment under the Child Support (Assessment) Act 1989 (Cth). Protection for the bankrupt

[4.160] These restrictions on creditors pursuing their claims provide the bankrupt with protection that is one of the purposes of bankruptcy law. The bankrupt no longer has creditors serving court documents on them, sending demand letters or having the sheriff try to seize their possessions. The bankrupt can stop defending legal proceedings. All these concerns are now those for the trustee to resolve. This policy means that a plaintiff creditor cannot complain if a defendant debtor seeks to “protect himself from evils which he might otherwise suffer” by going bankrupt in the midst of the creditor’s proceedings: Re Mottee (1977) 29 FLR 406; Zodiac Investments v Brelsford [1999] FCA 1482. Reduction of costs of the estate

[4.165] Apart from the protection given to the bankrupt, one important policy and real purpose of this restriction on creditors is that it limits or eliminates the time and cost of a trustee responding to litigation claims. Bankruptcy law says that such claims should generally be dealt with by the trustee by way of the proof of 49 This right of recovery dates back to the law of Elizabeth I of England: see [2.05]. These provisions include s 37A of the Conveyancing Act 1919 (NSW), s 89(1) of the Property Law Act 1969 (WA) and s 172 of the Property Law Act 1958 (Vic).

[4.175]

4 Impact of Bankruptcy

173

debt process. A creditor then has the option to appeal to the court from any determination about its proof of debt with which it disagrees: s 104.

Recoveries from creditors Voidable transactions

[4.170] An often inevitable impact of bankruptcy can be on those who have in some way benefited in their dealings with the bankrupt before bankruptcy. Creditors, family members and others are liable to be pursued by the trustee under the voidable transaction sections of the Act, in particular s 120 or s 121. Although such proceedings brought by the trustee have a significant impact on the parties concerned, the topic warrants its own separate chapter: see Chapter 5 Beyond those types of recovery proceedings, the impacts of bankruptcy on other activities or actions by creditors are discussed here. Payment received by execution or garnishment: s 118

[4.175] A creditor that has obtained payment of its debt by way of execution against a debtor’s property or garnishment of moneys, may have to repay that money if the debtor goes bankrupt: s 118(1). That is the case if the moneys were received within six months before the presentation, or after the presentation, of the petition by which the debtor became bankrupt. A creditor has no defence to such a claim. It does not matter that the creditor had no notice of either an act of bankruptcy of the debtor or the presentation of a creditor’s petition, or that the creditor was acting in good faith. The creditor may prove as an unsecured creditor for the amount owed and repaid to the trustee, as if the execution or attachment had never occurred: s 118(3). Essentially, the same result occurs if the creditor obtained a charge or charging order against the property of the debtor, including charges created upon registration of a judgment or ordered by a court. These are void as against the trustee (s 118(9)): see Kanovics v Lean [2002] FCA 803; (2002) 122 FCR 195. Where a creditor is given notice of either the presentation of a creditor’s petition or a reference to the court of a debtor’s petition, the creditor cannot take any further action until the petition has been dealt with by the court or it has lapsed. If a debt has been attached, the creditor is to immediately give notice of the presentation of the petition to the person liable to pay the debt and the attachment is suspended until the petition has been dealt with by the court or has lapsed: s 118(5), (6). Such action is intended to ensure that the debt attached or about to be attached, is secured. If the debtor goes bankrupt, the trustee then recoups the money owing. Certain proceeds are protected if: • the moneys are received as a result of a maintenance order or agreement (s 118(2), (10)); or • the proceeds of execution would not have been divisible amongst the bankrupt’s creditors (s 118(4)); or

174

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.180]

• the relevant property is bought by a purchaser in good faith, in which case that purchaser acquires a good title to it as against the trustee: s 118(11). A creditor who became a secured creditor as a consequence of an execution process is not entitled to maintain that secured status: Re Smith [1985] FCA 253; (1985) 11 FCR 114. Time limit

[4.180] A trustee must take any action against a creditor under s 118 within six years after the date of the bankruptcy: s 127(2). Payments recovered and held by sheriffs and courts – ss 119, 119A

[4.185]

Section 118 is supplemented by ss 119 and 119A.

Section 119 deals with the situation where a creditor has issued a process of execution or has taken steps to attach a debt due to the debtor. A sheriff who is given written notice that a petition has been presented against the debtor must not take any action until the petition has been dealt with by the court or it has lapsed. The sheriff also must not pay the creditor any moneys already received: s 119(1), (2). There is an exception in relation to maintenance agreements or maintenance orders: s 119(3). Section 119A works in a similar way in the situation where it is the trustee who gives notice of the bankruptcy to the sheriff or a court – any moneys held must be paid to the trustee. The creditor on whose behalf execution was issued can lodge a proof of debt in the bankrupt’s estate as an unsecured creditor as if the execution or attachment had not occurred: s 119(4). Non-divisible property or money must be handed over to the bankrupt: s 119A(5). If any moneys relate to the enforcement of a maintenance agreement or maintenance order, these must be handed over to the creditor, that is, usually, the spouse or former spouse. If property or proceeds of sale are to be paid over to the trustee, the costs of execution have priority: s 119A(2). The sheriff or the court may, on behalf of the creditor, put aside what is believed to be sufficient to cover those costs: s 119A(3). Under s 119(8) and s 119A(7) failure by a sheriff to adhere to the terms of these provisions does not affect the title of a purchaser who acted in good faith.

Protections for certain creditors Secured creditors remain protected

[4.190]

As we have seen, secured creditors are protected in any insolvency, s 58(5) making it clear that the rights of a secured creditor are not affected by s 58(3).

[4.200]

4 Impact of Bankruptcy

175

Real property, in particular the family home, is usually purchased under a loan and then given as security by way of a mortgage to a bank as the secured lender. The bank’s mortgage should be registered on the title to the property in order to protect the bank’s secured interest. Where any property of the bankrupt is subject to a mortgage, the trustee can require the mortgagee to discharge or accelerate the mortgage, notwithstanding that the due time for payment of the moneys owing has not arrived: Bankruptcy Act, s 136. The trustee can give six months’ notice to the mortgagee of their intention to do so or pay six months’ interest in lieu of notice. The mortgagee is then bound to execute such documents as are necessary in consequence of the payment. In reality, this provision is little used, in particular given that cash in the amount generally required is not usually available. The definition of “secured creditor” in s 5 of the Bankruptcy Act means, in the case of a debt secured by a “PPSA security interest”, the “PPSA secured party” if the interest is “perfected”. In the case of any other debt, secured creditor means a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to that creditor from the debtor.50 Therefore, provided secured parties have perfected their security interest over personal property (as opposed to real property), it will not vest in the bankrupt estate and they retain the right to enforce without having to prove in the bankruptcy with unsecured creditors. If, however, the secured creditor has not perfected their interest at the date of bankruptcy, the property, the subject of the unperfected security interest, vests in the trustee on the debtor’s bankruptcy: PPSA, s 267. This has the serious consequence that the secured creditor would therefore become an unsecured creditor in the bankruptcy and their secured personal property can be sold to benefit all creditors. Property of a bankrupt subject to criminal or penalty orders

[4.195] If property of a bankrupt is covered by a “restraining order” or a “forfeiture order” under a “proceeds of crime law” (s 5) made before the date of the bankruptcy, such property does not vest in the trustee under s 58(1). The same applies to property subject to a pecuniary penalty order: s 58A. The policy here is that property gained by criminal means should not be available to creditors. Such property may be confiscated under the proceeds of crime legislation. Sections 114A, 114B and 114C of the Bankruptcy Act concern proceeds of crime orders made on or after the date of the bankruptcy, as well as applications for such orders. Proceeds of crime orders are handled by the Australian Federal Police.

Protection of creditors and others from the doctrine of relation back [4.200]

Before explaining property that is exempted from being divisible property under the Act, we examine the property available under the doctrine of relation back and what protections there are for those holding such property. 50 See s 5 of the PPSA. Note also the interests to which the Act does not apply: s 8 of the PPSA.

176

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.205]

As explained at [2.05], the trustee can claim all property of the bankrupt at the earlier date of “commencement” of the bankruptcy under s 115. This period is generally the most significant in the case of bankruptcies occurring on creditors’ petitions where the bankrupt committed an act of bankruptcy in the six months preceding the presentation of the creditor’s petition and the sequestration order is then made some months later. Protected dealings

[4.205] We have also explained that if this retrospective operation were applied strictly, it would be harsh for people who were involved in dealings with the debtor and who acted in good faith (see [2.97]). Sections 123 and 124 therefore provide that certain dealings are protected from the effect of the doctrine. Section 123

[4.210] Section 123 protects persons who acquired property from the debtor and who did not know at the time of the transaction that a petition had been presented against the debtor, that presentation marking the date of commencement of the debtor’s later bankruptcy. For the transaction to be protected it must have been in good faith and in the ordinary course of business. The person who relies on the validity of the transaction has the burden of proving these elements. The transactions covered by s 123 include payments by the debtor to creditors, transfers or assignments by the debtor for valuable consideration and contracts with the debtor for valuable consideration. In the context of s 123,51 “good faith” connotes honesty and requires proof of more than a lack of dishonesty. The person, usually a creditor, must not subjectively seek to benefit at the expense of other creditors or to collude with the debtor in prejudicing them. The requirement of good faith is often of little importance in view of the requirement for market value to have been paid. The phrase “in the ordinary course of business” is one that is common in law, and in insolvency law. It refers to regular transactions and activity that take place without any particular comment or issue arising. It does not refer to the particular business conducted by the parties but to a transaction which it would be usual for the parties to enter as a matter of business, uninfluenced by any apprehension that the debtor might be insolvent.52 For example, payments made as a result of certain pressures applied to the debtor, such as the sending of a solicitor’s letter of demand53 or the issuing of a 51 The meaning of “in good faith” in s 123 should not be confused with the particular meaning of that expression as given by s 122(4)(c): see [5.220]. See also [5.50] as to the meaning of good faith in the context of s 120(6). 52 See Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463, 480; Taylor v White (1964) 110 CLR 129, 136. For the historical development of the phrase, see Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204. 53 Re Bird; Ex parte Azzopardi [1979] FCA 95; (1979) 39 FLR 277.

[4.215]

4 Impact of Bankruptcy

177

summons,54 are not regarded as being in the ordinary course of business. However, payments made in response to threats of legal proceedings may be in the ordinary course of business if such threats are common in the business involved and there is a long history of no legal action actually being taken: Katoa Pty Ltd v Dartnall (1983) 74 FLR 202; Matthews v Tomasetti Paper Pty Ltd [1987] FCA 359. Merely being aware that the debtor has committed an act of bankruptcy does not necessarily mean that the transaction was not in the ordinary course of business, nor that it constituted a lack of good faith: s 123(3). Section 123(4) protects from recovery from the government, a debtor’s payment of a fine or penalty before bankruptcy. The protection extends only to a fine or penalty imposed by a court in respect of an offence: see also [5.05]. It is important to understand that s 123 is subject to ss 118 – 122 and ss 128B and 128C. Therefore, while a transaction may not be set aside under the doctrine of relation back, it could be set aside under one of these sections, for example, as a transfer to defeat creditors: s 121. Section 124

[4.215] This section protects persons who, in good faith and in the ordinary course of business, pay money or deliver property to the bankrupt or act in accordance with the bankrupt’s direction at some time before the date of bankruptcy: s 124(1)(a). A transaction taking place after the date of bankruptcy can also be protected if, in addition to acting in good faith and in the ordinary course of business, the person involved with the debtor in the transaction acted without negligence: s 124(1)(b). The onus lies on the person seeking to rely on the section: s 124(2). For the purposes of s 124, lack of good faith and the ordinary course of business are not shown merely if the person knew or had reason to suspect the debtor’s insolvency, or was aware of an act of bankruptcy of the debtor or the presentation of a creditor’s petition against the debtor: s 124(3). This protection is similar to that in s 123(3). To the extent that trustees rely at all on recovery of property under the relation back doctrine, s 124 would most likely be used by banks, solicitors and others who hold money or property for customers or clients. If it were not for this section a bank, which paid money of the bankrupt to a third party at the bankrupt’s direction, after the commencement of bankruptcy, would be liable to the trustee, who, according to the doctrine of relation back, would be entitled to the money. The section also protects a debtor of the bankrupt who pays money to the bankrupt after the commencement of bankruptcy; that money is due to the trustee, and the bankrupt’s debtor would not be discharged from their debt save for the protection in s 124. In relation to a payment or delivery after the date of bankruptcy, the person seeking to rely on s 124 must also show they were not negligent, for example in not being aware of the debtor’s bankruptcy. 54 Re Bird; Ex parte Gregoriades [1979] FCA 96; (1979) 39 FLR 295; see also Re Hoare [1972-1973] ALR 1134.

178

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.220]

The greater access nowadays to online reporting of insolvency and other information makes it more difficult for a person to show that they acted without negligence under s 124.55

THE BANKRUPT’S CRIMINAL CONDUCT AND ITS CONSEQUENCES Protection from criminal consequences [4.220] Bankruptcy offers a person some protection from the consequences of their criminal conduct, although, necessarily, only in limited ways. Section 60(1) allows the court to protect a bankrupt from the criminal consequences, including imprisonment, of not paying a provable debt. Some laws in fact impose a penalty of imprisonment on a debtor for not paying a debt. For example, a criminal conviction of a person may also involve a restitution order being made against them – by which the person is required to pay money – sometimes as a condition of a recognisance,56 with imprisonment imposed for non-payment. Section 60(1) is available to stay enforcement by way of sending the bankrupt to jail. This protection can extend to the enforcement of an order for payment of costs of the criminal action: Moore-McQuillan v Scot [2006] FCA 63. A protective order under s 60(1) may be made at any time after the presentation of a petition against a bankrupt: Storey v Lane [1981] HCA 47; (1981) 147 CLR 549. Otherwise, a bankrupt remains liable for the consequences of their criminal conduct – that is, to pay a penalty or fine that is not a provable debt, or to be subject to imprisonment. A bankrupt’s limited capacity to pay non-provable penalties or fines does not necessarily stop a court ordering that a fine be paid and ordering imprisonment for default: ACCC v Hartwich [2002] FCA 273. However, a fine should not be imposed as, in effect, a de facto order for imprisonment. In Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd [1999] FCA 179; 30 ACSR 339 the court had regard to potential rehabilitation of the defendant bankrupt, imposing no penalty order but giving, the then ASC, liberty to reapply to the court if there were any change in the defendant’s circumstances.

Criminal liability [4.225] Apart from prior criminal conduct, a person who becomes a bankrupt can be subject to criminal liability arising from their conduct as a bankrupt, or their conduct prior to bankruptcy. Prior conduct may only become an offence once bankruptcy has later occurred; one example is gambling: s 271. Most of the offences are contained in Pt XIV of the Act, ss 263 to 277B – though more specific ones are found throughout. The offences under the Act can be categorised in terms of conduct prior to bankruptcy and conduct during bankruptcy. 55 See Re Hasler (1974) 23 FLR 139; 3 ALR 61, where a bank was found to have been negligent for not reading of their customer’s bankruptcy in the Gazette. 56 A criminal defendant’s undertaking as a condition for some lesser penalty.

[4.235]

4 Impact of Bankruptcy

179

Conduct during bankruptcy by a bankrupt

[4.230] There are a number of criminal offences that may be committed by a person in their capacity as a bankrupt. Some of these were discussed earlier, in the general context of the impact of bankruptcy: see [4.10]. Section 265 lists a number of offences associated with the failure of a bankrupt to disclose information to the trustee, for example, information concerning after-acquired property or prior transfers of property, which offences are punishable by imprisonment for one year. In Rodway v White [2009] WASC 201, the bankrupt was convicted of an offence under s 265(1)(a) in failing to declare after-acquired property in the nature of shares purchased.57 Section 78 makes it an offence to conceal property. A significant criminal provision that serves to protect the business community is that a bankrupt is not permitted to obtain credit of over $5,61358 without disclosing to the credit provider that he or she is an undischarged bankrupt: s 269. Carrying on business under another name without disclosure of bankruptcy is an offence, as is paying a creditor with a cheque without such disclosure. Breach can lead to imprisonment for three years. This offence also applies to Pt IX debt agreements. Failure to file a statement of affairs is an offence under s 54; although that breach is also regulated by the fact that the three-year (or, as proposed, one year) period of bankruptcy does not commence until that statement is filed: s 149. See [7.115]. A related and more serious offence is committed under s 267B if the bankrupt fails to file a statement of affairs in response to a s 77CA notice issued by the Official Receiver: see [6.30].59 Failure of a bankrupt to comply with a court order can render the bankrupt liable to arrest and committal to prison: s 78(1)(f). The court also has general contempt powers under s 30(5); see also s 277. There is a general requirement in s 152 for a former bankrupt to assist the trustee after their discharge from bankruptcy; failure to assist can lead to imprisonment. Conduct by a person, before becoming a bankrupt

[4.235]

Conduct by a person before bankruptcy, which is not unlawful at the time but which becomes unlawful by virtue of the person becoming bankrupt, raises issues about the retrospective operation of the criminal law. This is generally only imposed in serious instances, again indicative of the retention, within the terms of the law itself, of the stigma of bankruptcy.60

57 See also R v Owen-Pearse [1996] SASC 5420; (1996) 66 SASR 344. 58 As at 2018. The figure of $3,000 in the section is subject to indexation, under s 304A. 59 See Commonwealth Director of Public Prosecutions – Bankruptcy Prosecutions, Instruction No 8, November 2017; and “Choice of Charge – Revised CDPP Guidelines for Prosecuting a Failure to File Statement of Affairs” (2018) 16(1) Personal Insolvency Regulator 4. 60 Ali, O’Brien, Ramsay, “‘Short a Few Quid’: Bankruptcy Stigma in Contemporary Australia” (2015) 38(4) UNSWLJ 1575

180

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.235]

Such conduct includes concealing or removing property or destroying documents, including transferring funds by electronic transfer: s 265.61 Concealing property at a time within 12 months of the presentation of the relevant petition: s 265(7) is an offence, a liability that continues throughout bankruptcy. There is a defence under s 265(9) for the bankrupt to prove a lack of intent to defraud creditors. An offence similar to the offence of insolvent trading by a company director (Corporations Act s 588G(3)) is committed, if within two years before bankruptcy, the bankrupt incurred a debt with no reasonable or probable grounds of being able to pay it: s 265(8). The penalty is one year imprisonment and there is no defence of having no intent to defraud.62 An offence is committed under s 266 if a debtor disposes of or creates a charge over any of their property “with intent to defraud his or her creditors” in a period up to bankruptcy: see R v Dunwoody [2004] QCA 413; (2004) 2 ABC (NS) 199. This is directed at those who, being pursued by their creditors, try to dispose of their assets to others. Upon their bankruptcy, those assets may be recovered under voidable transaction provisions; but at the same time, the bankrupt may be subject to prosecution. The recipient of the assets may also be liable if that person had an intent to defraud or assist the bankrupt to do so: s 263. The offence of gambling and hazardous speculation may be committed in the two years leading up to bankruptcy, or between the presentation of a petition and the date of bankruptcy: s 271.63 Departing Australia before bankruptcy with intent to defeat creditors can be an offence under s 272; this includes leaving the country during bankruptcy without the permission of the trustee.64 AFSA has reported the conviction of a bankrupt for attempting to leave Australia four times without his trustee’s consent, the police intervening each time. He was sentenced to a good behaviour bond for 12 months. There are comparable offence provisions concerning Pt X personal insolvency agreements: s 268. See [8.205]. There are also general offence provisions, not limited to any person, including: false claims as to an entitlement to vote (s 263C); the making of a false affidavit (s 263A); or failing to attend in response to service of a s 77C notice: s 267D. In addition to conduct amounting to an offence, failure to comply with orders of court or certain provisions of the Act may be punished as contempt of court. Furthermore, the bankrupt, a debtor or others may be arrested or imprisoned under ss 30(5) and 78: see Pearce (Trustee) v Mulhern (Bankrupt) [2011] FCA 930. 61 Explanatory Memorandum to the Civil Law and Justice Legislation Amendment Bill 2014 (Cth), [106] – [108]. 62 Former s 150 of the Act permitted a bankrupt to apply to the Court for an early order of discharge, and the incurring of a debt with no reasonable or probable grounds to be able to pay it was a relevant consideration: former s 150(6). See for example, Re Benda [1985] FCA 143; (1985) 6 FCR 346. 63 See R v Tu Van Be Nguyen [1996] ACTSC 86. See also IGPS 6 – Referral of offences for rash and hazardous gambling under section 271. 64 See AFSA’s Form to request permission to travel overseas while you are bankrupt.

[4.245]

4 Impact of Bankruptcy

181

Criminal processes [4.240] As we have explained at [2.370], s 27(1) of the Bankruptcy Act gives jurisdiction in bankruptcy to the Federal Court and the Federal Circuit Court. However, State and Territory courts have the authority to hear criminal proceedings under the Bankruptcy Act and to determine ancillary bankruptcy matters in those proceedings: s 27(2). The Federal Court and Federal Circuit Courts rarely if ever hear criminal matters in bankruptcy. The demarcation between summary and indictable offences in the Bankruptcy Act is governed by ss 4G and 4H of the Crimes Act 1914 (Cth). Section 4G provides that offences punishable by imprisonment for over 12 months are indictable – such as disposing of property with intent to defraud creditors (s 266). Section 4H provides that offences punishable by imprisonment for a period under 12 months – such as s 80 of the Bankruptcy Act – or not punishable by imprisonment at all – such as s 54 of the Bankruptcy Act – are summary offences, in respect of both sections, unless the contrary intention appears. A person may be prosecuted for an offence against the Bankruptcy Act even though their particular personal insolvency arrangement is finalised: s 275. The time limit for prosecution of most bankruptcy offences is one year, where the maximum penalty is less than six months’ imprisonment or is merely a fine. Where the offence involves a penalty of over six months imprisonment, there is no time limit. See s 15B(1) of the Crimes Act 1914. Chapter 2 of the Commonwealth Criminal Code, which sets out the general principles of criminal responsibility, applies to all offences against the Bankruptcy Act: Bankruptcy Act, s 7A. The Bankruptcy Act generally imposes penalties only by way of imprisonment; but provisions in the Crimes Act 1914 also, or instead of, allow pecuniary penalties to be imposed: see s 4B of the Crimes Act.

Offence reporting [4.245] Trustees are required to investigate and ‘consider’ whether the bankrupt has committed any offence against the Bankruptcy Act (s 19(1)(h)) and then to refer any offences to the Inspector-General or to any relevant law enforcement authority (s 19(1)(i)). AFSA’s Regulation and Enforcement then investigates each referral and, as the informant refers appropriate matters for prosecution to the Commonwealth Director of Public Prosecutions (CDPP),65 working also with the Australian Federal Police and other agencies. Trustees can be required to assist further in providing evidence in support of a prosecution. AFSA offers a process of pre-referral enquiries (PREs) which are available when a trustee considers that an offence may have occurred but it is unclear whether there is sufficient evidence to support an offence referral; or if the trustee queries whether 65 In 2016-2017, the CDPP dealt with 169 summary charges, and one indictable charge, under the Bankruptcy Act: CDPP Annual Report 2016-2017.

182

Keay’s Insolvency: Personal and Corporate Law and Practice

[4.250]

a suspected offence is too trivial to refer. In 2016-17, 568 PREs were received and assessed by AFSA of which approximately 418 (74%) did not require a detailed offence referral from the practitioner. AFSA also encourages public “tip-offs”, being information given to AFSA (either on a discrete/confidential basis or not) that is not usually part of a complaint or alleged offence referral but which may facilitate AFSA to administer the personal insolvency system or the operations of the PPSR. AFSA also publishes regular statistics on the number of offence referrals (in 2016-17, a total of 373 offence referrals were received from registered trustees, of which 263 (71%) were accepted for investigation1) and on convictions (81 offenders in relation to 126 charges, involving $1.3 million). One example66 is the case of a bankrupt who failed to declare his interest in a property owned with his wife, and to declare the sale of three properties within 12 months of his bankruptcy. He had also travelled overseas on eight occasions without obtaining written consent from his trustee. He pleaded guilty and was fined $3,000, plus ordered to pay court costs. Another withdrew $50,000 from his personal bank account, apparently gambling the amount away over six weeks. He was fined $2,500 plus costs, the Magistrate saying that had he any prior convictions, a community corrections order would have been imposed. Suspended sentences are imposed, imprisonment infrequently, but a bankrupt was sentenced to nine months jail for failing to account for cash proceeds of $164,000 following the sale of his home just before bankruptcy and other related offences, as well as a failure to file his statement of affairs; he was to be released after 3 months conditional upon his good behaviour and his filing of a statement of affairs.67 The bankrupt’s conduct both before and during the period of their bankruptcy therefore comes under review by the trustee. Most offences relate to the failure to file a statement of affairs68 or omissions from the statement of affairs filed, along with false declarations and disposing of property before bankruptcy.69

CONCLUSION [4.250] We have explained what immediate and long-term impacts there are on a person when bankruptcy occurs, and on the property that the bankrupt owns or in which he or she has an interest. But in many cases, on being appointed, the trustee will find that property has been disposed of prior to bankruptcy, and lies in the hands of third parties; or that some creditors have been paid their debts, such that there is little or nothing for the remaining creditors. Bankruptcy law, and insolvency law generally, addresses these issues by giving powers to a trustee to recover such property or payments, so as to bring them into the pool of assets 66 AFSA Media Release: http://www.afsa.gov.au. 67 “Recent Prosecution Outcomes” (2018) 16(1) Personal Insolvency Regulator 16. 68 See CDPP Practice Group Instruction Number 8, “Bankruptcy Prosecutions”, referred to in (2018) 16(1) Personal Insolvency Regulator 4. 69 See AFSA’s Personal Insolvency Practitioner Compliance Report 2016-2017.

[4.250]

4 Impact of Bankruptcy

183

available for all creditors. This is to ensure the maintenance of the essential basis of the “pari passu”, or equal sharing, policy of insolvency law. Chapter 4 – Impact of Bankruptcy Part VI – Administration of Property – ss 82 – 147 Bankruptcy Act Part XIV – Offences – ss 263 – 277B Family Law Act 1975 Crimes Act 1914, Commonwealth Criminal Code Part 6 – Administration of Property – Bankruptcy Regulations regs 6.01 – 6.22 Part 14 – Offences under the Act – regs 14.01 – 14.15 AFSA IGPS 6 – Referral of offences under section 271 of the Bankruptcy Act 1966 (rash and hazardous gambling) IGPS 14 – Referring offences against the Bankruptcy Act 1966 to the Inspector-General in Bankruptcy OTPS 3 – Overseas travel in bankrupt estates administered by the Official Trustee “Employment restrictions” Part 6.5 – Progress of a case after bankruptcy or Courts’ Bankruptcy Rules personal insolvency agreement –rr 6.16 – 6.22 Chapter 26 – Cases to which the Bankruptcy Act Family Law Rules 2004 applies – rr 26.01 – 26.31

5

Recovery of Assets for Creditors [5.05] AVOIDANCE PROVISIONS .............................................................................................. 186

[5.10] Corporate insolvency equivalents .................................................................... 188 [5.15] The nature of a voidable transaction .............................................................. 188 [5.20] UNDERVALUED TRANSACTIONS: S 120 .................................................................... 188

[5.25] The time periods ................................................................................................. 189 [5.30] Transfer of property ........................................................................................... 190 [5.35] Market value and consideration ...................................................................... 190 [5.37] What is not consideration: s 120(5) ............................................................................. 191

[5.40] Exemptions ........................................................................................................... 192 [5.45] A defence .............................................................................................................. 192 [5.50] Protection for a purchaser: s 120(6) ................................................................. 193 [5.55] Money back for the transferee: s 120(4) .......................................................... 193 [5.60] TRANSFERS TO DEFEAT CREDITORS – S 121 ........................................................... 193

[5.65] Transfer of property ........................................................................................... 194 [5.70] Transferor’s main purpose – to prevent or hinder or delay ....................... 194 [5.75] A defence: s 121(4) .............................................................................................. 196 [5.80] Exemptions: s 121(7) ........................................................................................... 196 [5.85] Protection for purchaser: s 121(8) .................................................................... 196 [5.90] Money back for the transferee: s 121(5) .......................................................... 197 [5.95] Transfers with intent to defraud creditors under State and Territory legislation ............................................................................................................. 197 [5.100] Consideration given to a third party: s 121A .............................................. 198 [5.105] RECOVERY OF SUPERANNUATION CONTRIBUTIONS ....................................... 198

[5.110] Section 128B: contributions by the bankrupt ............................................... 199 [5.115] Section 128C: contributions by another person for the bankrupt ............ 200 [5.120] Account-freezing notices and other remedies: ss 128E – 128L ................. 200 [5.125] PREFERENCES: S 122 ...................................................................................................... 201

[5.130] Reasons for paying preferences ...................................................................... 202 [5.135] What a trustee must prove ............................................................................. 202 [5.140] What a creditor must prove in its defence .................................................. 203 [5.145] Necessary elements of voidable preferences ............................................... 203

186

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.05]

[5.150] i A transfer of property ............................................................................................... 203 [5.155] ii The debtor was insolvent ........................................................................................ 203 [5.160] iii The payment was in favour of a creditor ........................................................... 204 [5.175] iv The preferential effect of the transaction ............................................................ 205 [5.180] v The time of the transaction ..................................................................................... 206

[5.185] Running accounts ............................................................................................. 206 [5.190] The defences to a preference claim ............................................................... 208 [5.195] Persons acquiring the property from the creditor ................................................. 208 [5.200] Maintenance and debt agreements ........................................................................... 208 [5.210] Section 122(2)(a) ........................................................................................................... 208 [5.220] Good faith ...................................................................................................................... 208 [5.225] Consideration ................................................................................................................ 209 [5.230] In the ordinary course of business ........................................................................... 209 [5.235] Payment to a secured creditor is not a preference ................................................ 210 [5.240] TAKING VOIDABLE TRANSACTION PROCEEDINGS AND THE REMEDIES GIVEN ................................................................................................................................. 210 [5.245] CROSS-BORDER BANKRUPTCY RECOVERIES ........................................................ 211 [5.250] PROPERTY OF ENTITIES CONTROLLED BY THE BANKRUPT: INCOME CHANNELLING ............................................................................................................... 211 [5.255] RECOVERING PROPERTY BY ADMINISTRATIVE MEANS ................................... 213

[5.260] The s 139ZQ notice ........................................................................................... 214 [5.265] Effect of the notice ....................................................................................................... 215

[5.270] Setting aside a s 139ZQ notice ....................................................................... 215 [5.275] Cross-claim by trustee ................................................................................................. 217 [5.280] CONCLUSION ................................................................................................................... 217

AVOIDANCE PROVISIONS [5.05] An important aspect of insolvency law is its ability to recover assets disposed of before the date of the formal insolvency. Insolvency law would not be effective if, in contemplation of a person’s bankruptcy or a company’s liquidation, assets could be transferred for nil or limited payment, to the benefit of the recipients and to the disadvantage of the creditors. The law provides redress for such situations so that such assets can be recovered and be made available for all creditors. In doing that, insolvency law can go back in time to have transactions challenged and property recovered. Those time periods differ depending on the transaction concerned. These are to an extent arbitrary periods of time but they are broadly determined by the nature and moral blameworthiness of the transaction. So, in the context of bankruptcy, a preference paid to a creditor by the debtor can be set aside if it occurred in the six-month period before the presentation of the petition against the debtor. A transfer of property at an undervalue can be set aside in the prior two-year period, but within five years prior if insolvency can be proved. Transfers

[5.05]

5 Recovery of Assets for Creditors

187

to related parties are allowed four years. Transfers to defeat creditors occurring indefinitely into the past can be set aside. While insolvency law allows such transactions to be challenged – to the disadvantage of the recipient who may have to hand back the property – it is important to note that such transactions do not necessarily involve unlawful conduct on the part of the recipient. The success of the trustee’s claim to set aside a transaction will often depend on whether the recipient knew of or suspected the debtor’s insolvency, or did not pay full consideration. Such a finding implies that the conduct of the recipient was contrary to the general interests of creditors. But a person buying property at an undervalue from a debtor before bankruptcy, or accepting payment of their debt is not necessarily acting unlawfully, even if the person may have known of the financial difficulties of the debtor when the property was received or the payment was taken. In both cases, they are simply transactions that are liable to be set aside if bankruptcy occurs. It is different if criminal intent to defraud creditors is involved by either party, but such prosecutions for such offences are rare: see s 263 of the Act, and Chapter 4. There is also an element of deterrence in the provisions, that a person engaging in transactions with an insolvent debtor is liable to have the payment or benefit they receive taken back by the trustee should bankruptcy occur. In reality, that deterrence impact would be minimal. While not diminishing the significance and usefulness of these provisions for a trustee, a reality is that trustees recover far more from the administratively efficient contributions regime, discussed at [6.265] than from taking legal or administrative action to challenge voidable transactions.1 Sections 120 – 122 (Pt VI, Div 3) of the Bankruptcy Act are often referred to as avoidance provisions because they provide that certain pre-bankruptcy transactions are to be regarded as void as against the trustee. They comprise: • undervalued transactions (s 120); and • transfers to defeat creditors (s 121); • both including transactions where the consideration passes to a third party (s 121A); • preferences (s 122); and • superannuation contributions made to defeat creditors: ss 128B, 128C. Each provision enables the trustee to challenge the relevant types of transactions, and if successful, the transactions are set aside and orders can be made to enable the trustee to recover property or money. For policy reasons, fines or penalties paid to the government by the debtor are generally not recoverable by a trustee: s 123(4).2 At the same time, they are often not provable debts (s 82(3)), and the bankrupt can remain personally liable to pay them. 1 By a factor of over three to one. See AFSA – Administration of personal insolvencies for 2016-2017. 2 There is no equivalent protection afforded to payment of such fines or penalties under the Corporations Act.

188

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.10]

Corporate insolvency equivalents [5.10] In corporate insolvency, the equivalent provisions of the Corporations Act originally relied upon the bankruptcy avoidance provisions but, since 1993, Pt 5.7B of the Corporations Act provides specific provisions for corporate insolvency. This explains why much of the case law on the bankruptcy provisions comes from corporate insolvency law. The Part 5.7B provisions are different in form but in substance the requirements for unfair preferences under s 588FA and uncommercial transactions under s 588FA are comparable with the bankruptcy provisions. These corporate insolvency provisions are dealt with in Chapter 14. Some common concepts remain between personal and corporate insolvency in this area but the wording is now sufficiently different to require separate consideration to be given to the bankruptcy and company law provisions. Avoidance provisions are fundamental to insolvency law, here and internationally, and their legal history is extensive.3

The nature of a voidable transaction [5.15] The term “void against the trustee” in relation to these provisions means “voidable”,4 not void ab initio. That is, on bankruptcy, the trustee assumes the right to apply to a court for a finding that the transaction is void: Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 44 WAR 1 at [2534]. But the transaction is not affected in any way until the trustee takes action to avoid it, both before bankruptcy and up until the time a trustee obtains such an order during the bankruptcy. Until a court finds in the trustee’s favour, the transaction remains operative. Ordinarily, the action taken by a trustee is by way of an application to the court for a declaration that the transaction is void. Even then, the transaction is avoided only so far as the trustee has an interest, that is, the transaction is avoided against the trustee and not otherwise. Once the trustee obtains payment in full of the debts and of the costs of the administration, the trustee’s interest is at an end and the relevant sections cease to affect the particular transaction.5

UNDERVALUED TRANSACTIONS: S 120 [5.20] Transactions entered into by a bankrupt may be set aside under s 120 on the basis that they were undervalued transactions; for example if the bankrupt, before bankruptcy, gives away his or her assets or sells them at a favourable low price. Section 120 focuses on the effect of the debtor’s transaction on the creditors, who have lost out by the fact that the asset has been transferred, rather than focusing on the type of transaction. It is not necessary to show that the bankrupt 3 See Assaf, Shields and Kincaid, Voidable Transactions in Corporate Insolvency, (LexisNexis, 2015) Chapter 1. 4 Anscor Pty Ltd v Clout [2004] FCAFC 71; (2004) 135 FCR 469; 1 ABC (NS) 558, Lindgren J, and cases there cited. 5 Houvardas v Zaravinos (2003) 202 ALR 535; affirmed Zaravinos v Houvardas (2004) 32 Fam LR 490; [2004] NSWCA 421. See also Grainger & Bloomfield [2015] FamCAFC 221.

[5.25]

5 Recovery of Assets for Creditors

189

had any purpose of avoiding creditors: Re Woods & Lombe as Trustees of the Bankrupt Estate of Ulusoylu v Ulusoylu [2017] FCCA 935 at [135]. The section uses the term “transfer” to cover all of the transactions that are able to be challenged by a trustee. The same term is also used in ss 121 and 122. Section 120 provides that such a transfer of property is void, meaning voidable on the court’s order, if it took place in the period beginning five years before the date of “commencement of the bankruptcy” up to the “date of the bankruptcy” and the transferee gave no consideration or less than market value for the property. The section then provides some qualifications as to time and as to the nature of the transferee.6

The time periods [5.25] The time period in which the trustee is able to challenge transactions is from five years before the commencement of bankruptcy to the actual date of bankruptcy; these terms were explained in Chapter 2. The trustee has the onus of proof. But in the period over two years prior and, in the cases of related entities, over four years prior, the onus is on the transferee to show that the transferor/ bankrupt was solvent at the time in order to avoid liability. The timelines are summarised as follows: • A transfer is not void if the transfer took place more than two years and up to five years before the commencement of the bankruptcy, and the transferee proves that the bankrupt/transferor was solvent at the time of the transfer: s 120(3)(b). • But the solvency of the transferor is not a relevant issue in relation to any transfers occurring within two years; the trustee can still recover: s 120(1). • A transfer is not void, in the case of a transfer to a related entity of the transferor, if the transfer took place more than four years and up to five years before the commencement of the bankruptcy, and the transferee proves that the transferor/ bankrupt was solvent at the time of the transfer. • Again, the solvency of the transferor is not a relevant issue in defence of a trustee’s claim in relation to any transfers to a related entity within four years: s 120(3)(a). A sample timeline illustrates the relevant period.

6 A declaration that the transfer is void may be made under s 30 of the Act: Re Woods & Lombe as Trustees of the Bankrupt Estate of Ulusoylu v Ulusoylu [2017] FCCA 935 at [165]. The history ofs 120 is usefully discussed in that decision.

190

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.30]

Timeline C: Time period in which a transaction can be avoided under s 120

Hence, a trustee could bring a claim in this 14 December 2017 bankruptcy in respect of a transfer of property that occurred in July 2012, subject to proof of the relevant matters. In practical terms, although the onus is on the transferee to prove the transferor’s solvency in the relevant periods, if the state of insolvency is apparent, a transferee will have no defence to a claim by the trustee on that ground. The main challenge may be confined to the market value of the property and the consideration paid.

Transfer of property [5.30] The transfer must have taken place in the relevant time period. The word “transfer” is broad in scope and has its ordinary legal meaning and “property” also has a wide meaning in bankruptcy (s 5(1)); and a transfer of property includes a payment of money: s 120(7).7 A gift of money by way of adjustment of accounts between two parties is a transfer of property: Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240 at [18]. Section 120(7) also provides that a person who does something so that someone else becomes the owner of property that did not previously exist is taken to have transferred the property to the other person. For example, if shareholders of a company decide to issue further shares to another person, the shareholders have done something that has resulted in the other person becoming the owner of property, the new shares, which did not previously exist: see Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653; (2010) 8 ABC (NS) 211.

Market value and consideration [5.35]

Section 120 requires the trustee to show that the transferee of property either gave no consideration, or that the consideration that was given was not equal to the market value of the property. Consideration on a transfer must be in fact given and not simply promised, agreed or intended to be given: Ambrose v Poumako [2012] FCA 889.

7 See the comments of Wilcox and Moore JJ in Anscor Pty Ltd v Clout (2004) 135 FCR 469, 472-473; 1 ABC (NS) 558, 563; Re Woods & Lombe as Trustees of the Bankrupt Estate of Ulusoylu v Ulusoylu [2017] FCCA 935.

[5.37]

5 Recovery of Assets for Creditors

191

Section 120(7)(c) states that the “market value” of property is its market value at the time of transfer. Market value is determined by establishing the price that a willing purchaser would at the date in question have had to pay to a vendor not unwilling, but not anxious, to sell.8 In the context of s 120, it is: “[I]ntended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the kind disposed of, without any sort of discount of incentive for purchase being offered … [it] is not intended to include a situation where the property was being disposed of at a ‘fire sale’, at discounted prices because of some immediate need on the part of the owner to liquidate his or her assets.”9

In actions brought by trustees under s 120, market valuations of assets can often be subject to challenge. Valuation evidence from the parties or from a court-appointed valuer may be necessary: Tyler v Thomas (2006) 150 FCR 357; 3 ABC (NS) 773; [2006] FCAFC 6. Once market value is established, a transfer of the asset for consideration less than that value will be a transfer at an undervalue under s 120. In relation to the consideration provided by the transferee, difficult issues have arisen in relation to the assessment of consideration given by a superannuation fund on transfers of money into the fund by the debtor prior to bankruptcy. In Cook v Benson [2003] HCA 36; (2003) 214 CLR 370, in relation to the previous s 120, the High Court considered that superannuation payments into a fund were made in return for rights and benefits provided by the fund which constituted valuable consideration; hence the payments were protected from recovery by the trustee. This has now been addressed by the introduction of specific provisions dealing with recovery of superannuation contributions, where consideration is not required to be provided.10 What is not consideration: s 120(5)

[5.37] In bankruptcy cases involving family law, a spouse’s financial and non-financial contributions to a marriage, in family law terms, do not comprise relevant consideration in bankruptcy: Combis v Jensen (No 2) [2009] FCA 1383; (2009) 181 FCR 178; 7 ABC (NS) 465. Further, s 120(5) sets out six items which are not to be regarded as consideration for the purposes of the section: a) the fact that the debtor and the transferee are related; b) the making of a deed by the transferee in the debtor’s favour, where they are spouses or de facto partners; c) a promise by the transferee to become the debtor’s spouse or de facto partner; and 8 Spencer v The Commonwealth of Australia (1907) 5 CLR 418. 9 Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 (Cth), [84.13]. It follows that the subjective value which the debtor may have placed on the property is not relevant: Sutherland v Brien [1999] NSWSC 155; (1999) 149 FLR 321; Anscor Pty Ltd v Clout [2004] FCAFC 71; (2004) 135 FCR 469; 1 ABC (NS) 558. 10 Part VI, Div 3, subdiv B of the Act. See [5.105].

192

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.40]

d) the love or affection of the transferee for the bankrupt transferor.11 Section 120(5)(e) provides that if the debtor, who later becomes bankrupt, allows his or her spouse or former spouse to continue to live in the property following the dissolution of their marriage, that has no value as consideration, for the purposes of determining whether it is void against the trustee, unless the transfer relates to a property settlement or agreement under the Family Law Act 1975 (Cth). Section 120(5)(f) provides for the same in relation to former de facto partners.

Exemptions [5.40]

According to s 120(2), there are four transactions that are exempt from the application of s 120(1): • a payment of tax payable pursuant to a Commonwealth, State or Territory law: see Peldan v DCT (2005) 218 ALR 658; [2005] FMCA 547; • a transfer in order to discharge, wholly or in part, liability under a maintenance agreement or order – s 120(2)(b); • a transfer pursuant to a debt agreement under Pt IX; and • a transfer where the costs of recovery of the transferred property would be likely to exceed the value to the creditors of the property: see reg 6.09. While s 120(2)(b) protects transfers pursuant to “maintenance agreements”, transfers pursuant to “financial agreements” under the Family Law Act are not protected. Financial agreements are those made under ss 90B, 90C or 90D of the Family Law Act (agreements between partners as to financial support etc made before, during or after marriage). See also [4.50].

A defence [5.45] While there is no initial defence for someone receiving property transferred where the trustee can prove the elements contained in s 120(1), s 120(3)(a) does provide a possible defence if the transfer was made within a twoto five-year period prior to the commencement of bankruptcy, or between four and five years in the case of a related party transferee. A defence is available if the transferee can establish that at the time of the transfer the debtor was solvent.12 A defendant to a s 120 claim may also resist the claim on the basis that he or she has an interest in the property, usually an equitable interest by virtue of there being a constructive or resulting trust in that defendant’s favour.13 This is not so much a 11 As to the consequence of the definition of “love or affection” as “having no value as consideration”, rather than “no consideration”, see Mogilevsky v Leroy (Trustee) [2017] FCAFC 52; Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240. 12 The time of transfer is the date of registration on the title, although an equitable interest is transferred at an earlier time: Lo Pilato v Kamy Saeedi Lawyers Pty Ltd, in the matter of Adzic [2017] FCA 34; (2017) 249 FCR 69; Camm v Linke Nominees Pty Ltd (2010) 190 FCR 193. 13 Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120; 1 ABC (NS) 188. See also Re Woods & Lombe as Trustees of the Bankrupt Estate of Ulusoylu v Ulusoylu [2017] FCCA 935.

[5.60]

5 Recovery of Assets for Creditors

193

defence to a s 120 claim as a response that the property, the subject of the challenged transfer, was not in fact held beneficially by the bankrupt at the time.14 The equitable principle of exoneration can also provide a defence to a s 120 claim. It recognises that effect should be given to what can be the intention of the parties in some cases that, as between them, the burden of a debt should be borne by one only, and the other should be “exonerated”. A simple example is found in Dickson v Reidy [2004] NSWSC 1200 where jointly owned property of a married couple was mortgaged to secure a loan wholly for the benefit of the wife. On her bankruptcy, the doctrine of exoneration applied so that her half interest in the property, which vested in the trustee, was held to be subject to a charge to secure her husband’s right of exoneration from liability for the loan.

Protection for a purchaser: s 120(6) [5.50] A person who acquires property from the transferee in good faith and for consideration that was at least as valuable as the market value of the property is protected from any claim by the trustee: s 120(6). That makes sense and is based on fairness. “Good faith” means conduct without knowledge that any fraud on creditors or preference in favour of that transferee contrary to the Act was intended.15 The onus of proof of the elements in s 120(6) rests on the trustee but this readily shifts to the transferee in so far as matters solely within their knowledge are concerned: Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653; (2010) 8 ABC (NS) 211.

Money back for the transferee: s 120(4) [5.55]

Even if a court finds in favour of a trustee and the transferee is required to return the property, the trustee is required to pay the transferee a sum equal to the value of any consideration given to the debtor/bankrupt for the property: s 120(4).16 Thus, if the transferee paid $100,000 for a property with a market value of $150,000, only the amount by which the market value exceeds the consideration paid – in this example $50,000 is recoverable by the trustee: Anscor Pty Ltd v Clout [2004] FCAFC 71; (2004) 135 FCR 469 at 479.

TRANSFERS TO DEFEAT CREDITORS – S 121 [5.60] Unlike s 120, s 121 focuses on the purpose of the transfer, the main purpose. To succeed under the section, the trustee has the onus of establishing that: • there was a transfer of property; • the property, if it had not been transferred, would probably have become part of the transferor’s bankrupt estate and would have been divisible among the creditors; and 14 See, for example, Turner as Trustee of the Bankrupt Estate of Wallace v Wallace [2017] FCCA 3044 (recipient’s claim of an equitable interest in transferred properties was rejected, and the transfers held void under ss 120 and 121). 15 See also [4.145] as to the meaning of good faith in the context of s 123. 16 See the discussion of possible orders in Poumako (Bankrupt) v Poumako (No 3) [2013] FCA 22.

194

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.65]

• the main purpose of the transferor in transferring the property was either to prevent the property’s division among the creditors or to hinder or delay making the property available to those creditors. This should be contrasted with the criminal provisions such as s 266(3), by which a person may commit an offence before bankruptcy if they dispose of property “with intent to defraud” their creditors.

Transfer of property [5.65] A “transfer of property” is the same kind of transaction that is void under s 120 and therefore includes a payment of money: s 121(9)(a). Similarly (see s 120(7)), a person who does something so that someone else becomes the owner of property that did not previously exist is taken to have transferred the property to the other person: s 121(9)(b). In Peldan v Anderson [2006] HCA 48; (2006) 227 CLR 471, a man who later became a bankrupt unilaterally severed a joint tenancy so that he and his wife became tenants in common in equal shares of their matrimonial home. Some months later his wife died and soon thereafter he was made bankrupt. The trustees in bankruptcy obtained declarations that the unilateral severance of the joint tenancy was void because its purpose had been to place one half of the matrimonial home out of the reach of the bankrupt’s creditors.17 When dealing with land, the relevant time of the transfer is the time of registration of the transfer.18

Transferor’s main purpose – to prevent or hinder or delay [5.70] The trustee must prove that the transferor’s “main purpose” in making the transfer was to prevent or hinder or delay the creditors (or any one or more of those creditors, see s 6) getting a share of the property transferred. The relevant purpose is in respect of creditors generally; the creditors at the time of the transfer therefore need not be those later proving in the bankruptcy.19 Establishing what a person’s main purpose was at some time in the past can be difficult. It is assisted by s 121(2), explained below, by which the purpose is taken to have existed if the person’s insolvency at the time can reasonably be inferred. Otherwise, it is a matter of the court being asked to infer from the facts that the bankrupt had that main purpose. In Posner v Gibb [2001] FMCA 93 a transfer of land document was signed by the debtor on the day that judgment was entered against him. The transfer was stamped and registered within four days. On these facts, the court drew an inference that the bankrupt had the requisite main purpose under s 121. In particular, it has been said that where all the facts concerning a particular transaction are within the knowledge of persons other than the trustee in 17 See other examples given in that decision at [26]-[28]. See also Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653; (2010) 8 ABC (NS) 211; Whitton v Regis Towers Real Estate Pty Ltd (2007) 161 FCR 20; [2007] FCAFC 125. 18 Lo Pilato v Kamy Saeedi Lawyers Pty Ltd [2017] FCA 34; (2017) 249 FCR 69 at [185]: “Although the definition of ‘property’ in the Act includes an equitable interest and, on exchange of contracts, an equitable interest was created, the transfer of property which [the trustee] seeks to have set aside is the transfer of the legal title”. 19 See Mathai v Nelson [2012] FCA 1448; 208 FCR 165; Mathai v Nelson [2013] HCASL 115.

[5.70]

5 Recovery of Assets for Creditors

195

bankruptcy, which would be in most cases, a “very slight degree of proof should be sufficient to shift that [evidentiary] burden”: Andrew v Zant Pty Ltd [2004] FCA 1716; Commissioner of Taxation v Oswal (No 6) [2016] FCA 762. Any action which aims to make it more difficult or costly for a trustee to recover against the debtor would generally support proof of that purpose. There is no time limit back beyond which a transaction can be challenged but there are inevitable difficulties in proving someone’s purpose at a time many years previous. However, in Trustees of the Property of Cummins (a Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278; 3 ABC (NS) 814 the trustee succeeded in setting aside transactions that occurred in 1987, relying upon inferences from the facts at that time that the then debtor was well aware at that time that he had not lodged tax returns for many years, and thus had substantial liabilities to the Australian Taxation Office which could be pursued at any time, that he divested himself voluntarily of virtually all his substantial assets in 1987, and that he thought the transfers would increase the chances that his assets would be protected from any ATO claims. The High Court said that the trustee needed to show that the evidence gave rise to a reasonable and definite inference, not merely to conflicting inferences of equal degree of probability, that, in making the transactions, the debtor had the main purpose required. In determining those inferences, regard was had to the substantial amount claimed and the seriousness of the consequences of his actions. Section 121(2) assists a trustee by way of allowing an inference of the main purpose to be drawn. It provides that a transferor is taken to have the necessary purpose if it can be reasonably inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent. The benefit to a trustee in relying upon this inference has been explained this way: “If reliance is placed on s 121(2), the transferor’s subjective intention is likely to be irrelevant: in other words if it can be reasonably inferred that the transferor was insolvent at the time of the transfer, it will not matter if his or her subjective intention was not to prevent, hinder or delay the process of making property available for division among creditors … On the other hand, if the trustee attacking a transfer does not rely on s 121(2), the trustee will need to establish that the transferor’s subjective purpose was that described in s 121(1)(b).”20

However, in order to trigger the deemed purpose, the inference of insolvency must be more than a matter of mere speculation: Whitton v Regis Towers Real Estate Pty Ltd [2007] FCAFC 125; (2007) 161 FCR 20. In that case, the bankrupt had relied on borrowings to continue with a business venture involving the management of serviced apartments within a residential and commercial building complex. After an investor withdrew from the project the bankrupt relied on short-term borrowings secured through a family arrangement and finances provided on the security of apartments purchased. The court found that at the relevant time these circumstances did not lead to an inference of his insolvency as there was no evidence that the borrowings were repayable at the relevant time. A trustee is not limited by s 121(2) as to the ways that a debtor’s main purpose may be proved: s 121(3). 20 Prentice v Cummins (No 5) [2002] FCA 2503; (2002) 124 FCR 67 at [95], explained in Lo Pilato (Trustee) v Kamy Saeedi Lawyers Pty Ltd [2017] FCA 34; (2017) 249 FCR 69.

196

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.75]

A defence: s 121(4) [5.75] If a trustee is able to establish all the elements in s 121(1), a person to whom property has been transferred may seek to rely on the defence contained in s 121(4). To do so successfully the transferee must establish that: a) the consideration given by the transferee for the transfer was at least as valuable as the market value of the property received; and b) the transferee did not know that the transferor’s main purpose was to prevent or hinder property being available to creditors; and c) it was not reasonable for the transferee at the time of the transfer to infer that the transferor was, or was about to become, insolvent.21 The concepts of consideration and market value were discussed earlier in this chapter in the context of s 120 and undervalued transactions. Also, as mentioned in the earlier section on s 120, a transferee defendant to a s 120 or s 121 action may resist the claim if they can show that the property was not in fact owned beneficially by the bankrupt at the time of the transfer: Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120; 1 ABC (NS) 188. That claim may go to the whole of the property or to a lesser interest in it: Prentice v Cummins (No 6) [2003] FCA 1002; (2003) 134 FCR 449. Section 121(6) accords with s 120(5) in that it sets out what is specifically excluded as being consideration for the purposes of the provision. This also extends to de facto partners of the bankrupt. See [5.35].

Exemptions: s 121(7) [5.80] The only particular transfers that are exempt from the potential application of s 121 are those made pursuant to a debt agreement under Pt IX of the Act: s 121(7). Transfers under family law “maintenance agreements”, “maintenance orders” and “financial agreements” (s 5(1)) are not protected. A trustee was therefore able to apply under s 121 to set aside a financial agreement under s 90C of the Family Law Act without the need to apply to the Family Court to set aside the financial agreement under s 90K of that Act: Combis v Jensen [2009] FCA 778; (2009) 179 FCR 150; 7 ABC (NS) 189. In contrast, s 120(2)(b) does protect transfers pursuant to maintenance agreements or orders; a trustee would have to first apply to the Family Court, for example, under s 79A of the Family Law Act, to set aside those agreements or orders: see [5.40].

Protection for purchaser: s 121(8) [5.85] As under s 120(6), a person who acquires property from the transferee in good faith and for consideration that was at least as valuable as the market value of the property is protected: s 121(8). 21 The transferee successfully invoked the defences in paragraphs (b) and (c) in Brown v Mikulski [2016] FCA 1037.

[5.95]

5 Recovery of Assets for Creditors

197

Money back for the transferee: s 121(5) [5.90] If a court finds in favour of a trustee and the transferee is required to return the property, then the trustee is required to pay to the transferee a sum equal to the value of any consideration paid for the property: s 121(5). As with s 120(4), this allows the trustee to recover only the amount of the shortfall in consideration so as not to require the transferee to pay more for the property than its market value: Schmierer v Smith (No 2) [2004] FMCA 856. However, while s 121 refers to a transfer being void, it is effective until set aside in court proceedings brought by the trustee. The transferee may deal with the property as owner and is not required to account for any profit made from it in the meantime. If the property is sold and the proceeds of sale are dissipated by the transferee before the trustee obtains orders avoiding the transfer, the transferee is not personally liable: Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372; Lo Pilato v Kamy Saeedi Lawyers Pty Ltd, in the matter of Adzic [2017] FCA 34; (2017) 249 FCR 69.

Transfers with intent to defraud creditors under State and Territory legislation [5.95]

Property legislation of the Australian States and Territories allows a creditor to challenge transfers of property made with intent to defraud creditors, making them voidable at the instance of a creditor who is prejudiced.22 These sections have their origin in the 16th century Statute of Elizabeth (13 Eliz I, c 5) which was in fact the precursor of s 121 of the Bankruptcy Act. Section 37A of the Conveyancing Act 1919 (NSW) provides: (1) Save as provided in this section, every alienation of property … with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced. (2) This section does not affect the law of bankruptcy for the time being in force. (3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.

The term “defraud” means “to delay, hinder or otherwise defraud” and it should be read liberally in accord with the case law that developed around the Statute of Elizabeth I. An intention to defraud must be proved and in that sense to show that the debtor had acted dishonestly. That intention may be inferred if the debtor voluntarily transferred their property: Marcolongo v Chen [2011] HCA 2; 242 CLR 546; 8 ABC (NS) 618; Saba v Plumb [2018] NSWCA 60; Commissioner of Taxation v Oswal [2012] FCA 1507. Section 37A and equivalent sections may be seen as an alternative to s 121 of the Bankruptcy Act. The obvious difference between the two sections is that there is a need to establish “an intent” in s 37A rather than a “main purpose” under s 121. “A case that would fall within s 121 would clearly fall within s 37A. The obverse is not true”: Andrew v Zant Pty Ltd [2004] FCA 1716 at [20]. 22 See for example the Conveyancing Act 1919 (NSW), s 37A; the Property Law Act 1974 (Qld), s 228; the Property Law Act 1969 (WA), s 89.

198

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.100]

If a trustee does not proceed under s 121, it is open to a creditor to apply under provisions such as s 37A. Such a situation occurred in Green v Schneller [2002] NSWSC 671; (2002) 29 Fam LR 346 where the court gave leave to the creditor under s 58(3) of the Bankruptcy Act to continue his proceedings against the bankrupt on condition that any recoveries were to be held for the trustee for the benefit of all creditors.23 A creditor may not necessarily be given leave (McNamara v San (No 3) [2010] FCA 227) and if the trustee has already proceeded under s 121, a creditor has no standing to bring such intent to defraud proceedings. As we noted earlier [5.60], s 266 creates a criminal offence based on a person’s disposal of property prior to bankruptcy “with intent to defraud” their creditors. Five years imprisonment may be imposed. A trustee has an obligation to refer such an offence to AFSA under s 19(1)(i) of the Act.

Consideration given to a third party: s 121A [5.100] Section 121A allows ss 120 and 121 to be applied to the payment of consideration from a transferee of the bankrupt’s property, to a third party. Thus in the situation where a transferee pays the market value consideration to the third party (instead of to the transferor who subsequently becomes the bankrupt), and the third party does not provide market value consideration to the transferor, the trustee would be able to use s 120 to recover the consideration received by the third party. Similarly, a transfer made to defeat creditors would not be protected from s 121 where s 121(4)(a) is not satisfied, that is, where the third party did not give market value consideration for the property that constituted the consideration. RECOVERY OF SUPERANNUATION CONTRIBUTIONS [5.105] Superannuation funds of the bankrupt are generally protected in bankruptcy, in support of the public policy reasons of ensuring people have sufficient income in their old age. This policy would, however, allow the potential for debtors to protect their money from creditors by placing large amounts in their superannuation fund as the reality of bankruptcy approached. Difficulties in a trustee recovering such moneys under ss 120 and 121 were brought to the fore in the High Court decision in Cook v Benson (2003) 214 CLR 370; [2003] HCA 36; see [5.35]. The Bankruptcy Act, Pt VI, Div 3, subdiv B – Superannuation Contributions, is a legislative response to that decision. Bankruptcy law now enables the recovery by the trustee of superannuation contributions before bankruptcy that were made to defeat the bankrupt’s creditors. There are two types of recoverable contributions: (a) contributions made by a person who later becomes a bankrupt (see s 128B); (b) contributions made by a third party for the benefit of a person who later becomes a bankrupt: see s 128C. Superannuation accounts may be frozen for up to 180 days pending a trustee taking recovery action under ss 139ZQ or 139ZU. 23 Green v Official Trustee in Bankruptcy, in the matter of Schneller (Bankrupt) [2001] FCA 1644. See also DCT v Yeo [2007] VSC 29; (2007) 66 ATR 428, a claim under s 172 of the Victorian Property Law Act 1958 (Vic).

[5.110]

5 Recovery of Assets for Creditors

199

Section 128B: contributions by the bankrupt [5.110] Section 128B describes when a superannuation contribution made by the person who later becomes bankrupt is void against the trustee. The section is based on s 121 (transfers to defeat creditors). The regimes under each of ss 128B and 128C are similar. Section 128B(1) is essentially the same as s 121(1) but it applies only to a transfer which is made by way of a contribution to an “eligible superannuation plan”, that term being defined in s 128N. Section 128B(2), (3) and (4) deal with ways of showing that the transferor’s main purpose in making the contribution was to defeat creditors. Section 128B(2) allows that purpose to be shown if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent. This parallels s 121(2). In determining whether the transferor had the requisite purpose in making the superannuation contribution, regard must be had to that person’s pattern of contributions and whether, in light of any such pattern, the contribution in question is “out of character”: s 128B(3). The Explanatory Memorandum to the Bankruptcy Legislation Amendment (Superannuation Contributions) Bill 2006 (Cth) (at [38]) says that: “It is not intended that an ‘out of character’ contribution will automatically be assumed to have been made with the intention to defeat creditors. Rather, an ‘out of character’ contribution could indicate that the transferor was aware of impending insolvency and, as such, the transferor should be put on notice that they may be required to explain the purpose to the Court’s satisfaction.”

Section 128B(4) provides that subss (2) and (3) do not limit the ways of showing the transferor’s main purpose. This is in line with existing s 121(3). There is a rebuttable presumption of insolvency where the transferor had not kept proper books and records relating to the time of the transfer: s 128B(5). This is in line with existing s 121(4A). Section 128B(6) seeks to protect the rights of another person who acquires property from the transferee in good faith and for at least market value consideration. This is in line with existing s 121(8). The definitions of “transfer of property” and “market value” in s 128B(7) are in line with existing s 121(9). Therefore, a payment by a person of all or most of their cash into their superannuation fund in circumstances where creditors are pressing for payment, may well be seen as an “out of character” contribution and recoverable from the fund by the trustee on the person’s bankruptcy.

200

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.115]

Section 128C: contributions by another person for the bankrupt [5.115] Section 128C describes when a superannuation contribution made by another person for the benefit of a person who later becomes bankrupt is void against a trustee. This is designed largely to cover arrangements under which the person agrees that money which would ordinarily be paid directly to them should instead be paid to a superannuation plan for that person’s benefit. The most common example would be payments made by that person’s employer, such as under a salary sacrifice arrangement. The conditions for such a contribution are similar to those in s 128B but subsection (c) provides that the transferor made the contribution “under a scheme to which the beneficiary was a party”. Section 128C(2) provides that a benefit that is payable in the event of the death of someone is to be disregarded, for example to the deceased’s spouse. This is potentially a contingent benefit to the bankrupt at the time the contribution is made. That contingent benefit is disregarded for the purposes of s 128C(1); the trustee cannot recover the contributions made for the benefit of the spouse. Also, and from another perspective, if an employer makes a contribution to a superannuation fund for the benefit of the bankrupt, whatever contingent benefit is available to the spouse/children is disregarded and the trustee is entitled to rely on the fact that the contribution was made to provide a benefit to the bankrupt only.24 Section 128C(3), (4), (5) and (6) all follow a similar regime to s 128B, but in this scenario, in showing the beneficiary’s main purpose in entering into the scheme; as well as a rebuttable presumption of insolvency and protection of the rights of third party acquirers. Section 128C(9) contains definitions of “transfer of property” and “market value” and is in line with s 121(9).

Account-freezing notices and other remedies: ss 128E – 128L [5.120] Sections 128E – 128K provide for a regime that allows an Official Receiver to issue a notice to freeze a contributor’s interest in a superannuation fund or a notice pursuant to s 139ZQ to recover void contributions, where the Official Receiver has reasonable grounds to believe the contributions are void. Such a notice may be revoked (s 128F) and there is power in the court to set aside such a notice (s 128J) and to enforce it (s 128K). The consent of the Official Receiver may be obtained by the member of the superannuation fund to cashing, rolling-over and other dealings with the fund, despite a notice being in force: s 128H. Superannuation fund trustees are protected if they act in good faith in relation to their failure to comply with an account freezing or s 139ZQ notice: s 128L. To what extent these provisions have allowed recoveries of moneys or deter payments to defeat creditors is not known, but the provisions serve to fill what was an obvious gap in the legislation that gave too much protection to superannuation payments. 24 This is explained at [37] of the Explanatory Memorandum to the Bankruptcy Legislation Amendment (Superannuation Contributions) Bill 2006 (Cth).

[5.125]

5 Recovery of Assets for Creditors

201

PREFERENCES: S 122 [5.125] Historically, the most commonly employed avoidance provision has been s 122 of the Bankruptcy Act which allows trustees to recover moneys paid by the debtor to his or her creditors before bankruptcy as “preferences”. That section also applied to company insolvency up until 1993, when a differently worded provision – s 588FA of the Corporations Act – was introduced.25 The trustee’s power to recover preferential payments reflects one of the purposes of any insolvency law – to ensure that the assets of a person who is insolvent are distributed equally among the creditors. When a preference is paid by a debtor, whether the debtor is motivated by commercial pressure, or sense of obligation or other reason, the recipient of the preference obtains an advantage over other creditors. They are being paid their debt while other creditors remain unpaid. Bankruptcy therefore requires that preferred creditor to refund the payment it received so that this sum can go into the pool of funds to be shared equally among all creditors. American commentary has said that the purpose of the preference provisions: “… is two-fold. First, by permitting the trustee to avoid pre-bankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. The protection thus afforded the debtor often enables him to work his way out of a difficult financial situation through cooperation with all of his creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally. The operation of the preference section to deter ‘the race of diligence’ of creditors to dismember the debtor before bankruptcy furthers the second goal of the preference section – that of equality of distribution.”26

Whether that is an accurate assessment of the reality of creditors’ conduct, as opposed to the theory, is questionable.27 Nevertheless, the law providing for the avoidance of preferences has a long lineage and the right of a trustee to recover them is fundamental. However, it should be said that the bankruptcy provisions in relation to the recovery of preferences do not appear to be much used in practice as a means of recovery for trustees, probably because preferences in personal insolvency are less common than in the context of a trading relationship that typically exists in 25 Section 565 of the Corporations Act applied s 122 and other voidable transaction provisions of the Bankruptcy Act in their pre-1996 form to corporations in respect of payments etc made before 23 June 1993. There is a question whether, as the legislature appears to have intended, it made any fundamental changes to the law of preferences: see Hoyer, “Section 588FA of the Corporations Act – Change of Wording But No Change to Meaning?” (2010) 18 Insolv LJ 77. See also “Unfair preferences” in company liquidations at [14.65] – [14.130]. 26 Quoted in Ferrier and Knight v Civil Aviation Authority (1994) 55 FCR 28 and cited by the High Court in G & M Aldridge Pty Ltd v Walsh (2001) 203 CLR 662, 674; Casebook [5.160]. 27 See Assaf, Shields and Kincaid, “Voidable Transactions” in Company Insolvency (LexisNexis, 2015), ch 4; Hoyer, “Section 588FA of the Corporations Act – Change of Wording But No Change to Meaning?” (2010) 18 Insolv LJ 77 at 79-81.

202

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.130]

corporate insolvency. The base personal motivations of an individual in financial difficulties are often more focused on transferring property to their relatives, rather than paying creditors back the moneys owing to them. That may explain why s 122 has not been the subject of much law reform review, unlike ss 120 and 121 and related sections concerning superannuation and income. Much of the following discussion, in particular in relation to business trading issues of “running accounts”, payments “in the ordinary course of business”, and the case law, explains bankruptcy law in the context of some decades ago; although with an increase in business as compared with consumer bankruptcies, this may change. This is also because, as earlier explained, corporate insolvency law itself relied upon s 122 before s 588FA of the Corporations Act was introduced. Nevertheless, it remains necessary to understand this important bankruptcy provision as it presently stands.

Reasons for paying preferences [5.130] The usual situation facing a trustee recovering a preference arises where a debtor has been in financial difficulty and the debtor chooses to pay one or more creditors fully, often because of pressure having been put on the debtor to pay, for example, by threatening legal action. Also, on occasions debtors have paid creditors haphazardly because their records are in disarray or because they had the money available at the time to pay one or two creditors. In this situation creditors have been preferred unintentionally but the intention of the debtor in making the payment is not relevant in any event. If the debtor was insolvent the effect of the payment is to worsen the position of the creditors who have not been paid and the law allowing recovery of preferences seeks to redress that. If a payment or other transaction is found to be a preference, the creditor preferred must pay the trustee the amount in question, or deliver to the trustee any property which the creditor received from the bankrupt. The amount paid or the property delivered may then be available for all of the creditors. As we explained earlier, the demand and receipt by a creditor of what is later found to be a preference, even if with full knowledge of the debtor’s insolvency, is not unlawful. It is simply a payment liable to be set aside when, or if, the person goes bankrupt within the requisite time period and when other requirements of the law are satisfied by the trustee. “There is nothing compelling a creditor somehow to remain pure by shunning a payment in respect of which there exists some theoretical future possibility of its proving to be preferential. A normally motivated creditor would be inclined to accept such a payment conscious of any risk of disgorgement, and with fingers crossed to the extent indicated by the circumstances”: Nationwide v Franklins [2001] NSWSC 1120.

Indeed, the creditor from whom the trustee recovers a preference is then permitted to lodge a proof of its debt in the bankruptcy: s 122(5).

What a trustee must prove [5.135]

The essence of a preference is that the transfer “had the effect of giving the creditor a preference priority or advantage over other creditors”: s 122(1)(a).

[5.155]

5 Recovery of Assets for Creditors

203

Under s 122(1), to have a transaction set aside as a preference, the trustee is required to establish: • a transfer of property; • that the debtor must have been insolvent when making the transfer; • that the transfer must be by the debtor in favour of a creditor; • that the effect of the transaction was to give the creditor, who was a party to the transaction, a preference priority or advantage over the other creditors; and • that the transfer occurred within the requisite time period mentioned in s 122(1). All five elements must be proved by a trustee who seeks to challenge a preference.

What a creditor must prove in its defence [5.140] However, even if a trustee can prove all of these elements, the creditor has the advantage of protective provisions in s 122(2)(a). Creditors will not have to repay an alleged preference if they can prove, in relation to the transaction under attack, that they: • were purchasers, payees or encumbrancers; • were acting in the ordinary course of business; • were acting in good faith; and • gave consideration at least as valuable as the market value of the property received. Besides the protection afforded to some preferred creditors, persons who acquire the title to property from a creditor are also given protection if they acquire title in good faith and for valuable consideration: s 122(2)(b). Likewise, a transaction which is related to the discharge of a maintenance order or maintenance agreement is protected from the trustee: s 122(1)(c).

Necessary elements of voidable preferences [5.145] Each of the five elements which need to be proven for a trustee to succeed in an action to recover a preference is examined below. i A transfer of property

[5.150] This is interpreted in the same manner as in ss 120 and 121. Typically, a preference involves the payment of money by the debtor to a creditor, but it could constitute a debtor’s transfer of assets in payment. Property or money held by the debtor on trust for the creditor and paid is not a preference.28 ii The debtor was insolvent

[5.155] At the time of the alleged preference the debtor must be proved to have been insolvent. The concept of insolvency has been explained earlier and in this context it is a retrospective assessment of insolvency that must be made at a period 28 As to property transferred being held on a Quistclose trust, see Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217; Barclays Bank Ltd v Quistclose Investments Limited [1970] AC 567.

204

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.160]

of time commencing six months before the date of presentation of the relevant creditor’s petition and ending on the date of the bankruptcy; this may be a considerable period. Insolvency is frequently the most difficult fact for a trustee to establish in recovering a preference payment. The trustee may need to reconstruct the debtor’s financial position at the date of the preference payment by way of examination of bank statements, cash receipts and payments, computer-based records, and any correspondence between the debtor and banks and other creditors. The trustee may also need to assess whether the debtor’s assets could have been readily sold or used to raise funds to pay creditors. If sufficient money is involved, a s 81 public examination of the bankrupt may be used to gather evidence of insolvency and information about the actual payment. The trustee can give expert evidence of the debtor’s insolvency based on information and documents and transcript of any examination. Such insolvency evidence may be contested by the debtor. Admissions of insolvency by the debtor may be obtained from a prior public examination. Insolvency ultimately involves a finding of fact by the court. iii The payment was in favour of a creditor

[5.160] Payment of money may be made by any commercial transfer of funds, including payment in cash. It may include a mere transfer of figures in an account without any money passing (Re Hardman (1932) 4 ABC 207, 210) including electronically. In establishing a payment transaction to be a preference, the trustee must prove that at the time of the transaction the relationship of debtor and creditor existed. In other words, it is necessary that the payment or transfer was made to a person in respect of past indebtedness and therefore made in favour of someone who was already a creditor and able to prove in the debtor’s bankruptcy, if that debtor became bankrupt immediately before the transaction was made.29 In contrast, payment by a debtor in advance for goods or services to be provided by the supplier in the future is not a preference, as the supplier is not at the time of payment a creditor.30 Similarly, the immediate discharge of a debt at the time of its creation – that is, by payment of cash on delivery – is not a preference: see Burns v Stapleton (1959) 102 CLR 97, 105 because at no time does a debtor-creditor relationship exist. A creditor may insist on cash on delivery for its supplies for ordinary commercial purposes or because it has concerns about the debtor’s ability or readiness to pay. The giving of a security interest over property by a debtor to a creditor can be a preference. For example, in Jones v Arcuri [1999] FCA 46, a mortgage was given by the debtor over his property in favour of family members who had lent money to him and who were thus, in the bankruptcy, his pre-existing, unsecured creditors. The court held that the mortgage had the effect of giving the family members a 29 Court v Hewett [1982] WAR 151; Yeomans v Lease Industrial Finance Ltd (1987) 5 ACLC 103. A contingent creditor is a creditor for the purposes of s 122: Re Timbatec Pty Ltd [1974] 1 NSWLR 613. 30 Robertson v Grigg (1932) 47 CLR 257.

[5.175]

5 Recovery of Assets for Creditors

205

preference over other creditors who existed at that time. The family members thus became ordinary unsecured creditors in the bankruptcy. Again, if the debtor had given security for new loans, they would not be regarded as preferences, as the family members were not then existing creditors. A security created in respect of past indebtedness as well as new advances can be challenged as a preference to the extent that it related to the past indebtedness. Third party payments

[5.165] Although s 122 refers to the debtor entering the transaction, a transaction entered into by others on behalf of the debtor (and with the debtor’s express or implied authority) with a creditor of the debtor, can nevertheless be sufficient: Quality Publications Australia Pty Ltd v Commissioner of Taxation [2012] FCA 256; (2012) 202 FCR 574; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407. There is therefore a preference if a party associated with the debtor paid the creditor with moneys provided by the debtor, or with moneys owed to the debtor by that third party. The same applies in corporate insolvency: Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; [1997] FCA 18. See [14.80]. Other creditors

[5.170]

Some remaining particular issues are that:

• a transfer of property to a creditor can be a preference even if the liability to the creditor is jointly owed with another person and even if the property is jointly owned: s 122(1A); • the fact that the transaction on which the preference claim is based is void or unenforceable under another law does not prevent the person being a creditor: s 122(4A); and • a transfer is deemed to have been made in favour of a creditor even if it is made in favour of a person in trust for that creditor: s 122(4)(a). iv The preferential effect of the transaction

[5.175] The trustee must prove that the transaction has “the effect of giving to the creditor a preference, priority or advantage over other creditors” of the debtor; that effect is one where, if it were allowed to stand, it would “dislocate the statutory order of priorities amongst creditors”: Burns v Stapleton (1959) 102 CLR 97, 104. One must therefore compare what the creditor actually received and what it would have received out of the bankruptcy if the debtor had gone bankrupt at that time; if what it received was more, then there is a preference.31 It is not relevant that the fund from which the creditor is paid was not available to other unsecured creditors,32 but there must necessarily be other creditors in the bankruptcy. 31 Burns v Stapleton (1959) 102 CLR 97, 104. 32 In G & M Aldridge Pty Ltd v Walsh [2001] HCA 27, (2001) 203 CLR 662 at 672 the High Court rejected earlier comments in Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37, (1997) 189 CLR 407, 424-425 that if the moneys paid to a creditor came from a fund not available to unsecured creditors, there could be no preference.

206

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.180]

v The time of the transaction

[5.180] There are three periods in s 122(1) in which preference transfers may be set aside. They are: • where the bankrupt was made bankrupt on a creditor’s petition, the period beginning six months prior to the presentation of the petition and up to the date the sequestration order was made. So, if a petition was presented on 3 August 2015, and the sequestration order was made on 10 March 2016, payments may be recovered as preferences if made any time after 3 August 2015; • where the bankrupt presented a debtor’s petition and it was presented at the time when at least one creditor’s petition was pending against the debtor or against a partnership of which the debtor was a member – from the date of the commencement of the debtor’s bankruptcy until the date of the bankruptcy. In this case, the “commencement” of the bankruptcy is the date of the earliest act of bankruptcy on which the creditor’s petition was based;33 and • where the debtor presented a debtor’s petition – the period beginning six months before the presentation of the petition until the date of bankruptcy, normally this will be the date of the presentation of the debtor’s petition. So, if a petition was presented and accepted on 1 March 2012, the payments may be recovered as preferences if paid any time after 1 September 2011. Also, the giving of a preference by the debtor before bankruptcy is an act of bankruptcy, under s 40(1)(b) of the Bankruptcy Act. Therefore, if the date of the payment of the preference to the creditor is the earliest act of bankruptcy within the six months before the presentation of the petition leading to the sequestration order, the bankruptcy will commence at the time the creditor is paid.

Running accounts [5.185] It can be difficult to determine whether there has been a preference where there are running accounts between the debtor and creditor. This can be illustrated by the situation in which a supplier of goods supplies those goods on credit to its customer and the price of the goods supplied and payments received are recorded on a running account statement; or the situation where a banker provides an overdraft facility to the debtor and substantial drawings are made on it by the debtor during a particular period, and during the same period payments are continually made by the debtor to reduce the overdraft. In these cases, moneys are paid on account by the debtor without differentiating between past goods (which may constitute a preference) or future goods supplied or loans made (which may not constitute a preference). In such cases, if s 122 were applied strictly, each and every payment by a debtor to their creditor’s account would constitute a preference. This would produce an injustice for creditors in these situations, because only some payments may relate to existing indebtedness; others may be made in order to induce the provision of further supplies or credit from the supplier or the bank. It is therefore open to the 33 This paragraph of s 122(1) appears to be incorrectly drafted. It appears it should read “period beginning 6 months before the commencement of the debtor’s bankruptcy…”.

[5.185]

5 Recovery of Assets for Creditors

207

creditor to in effect raise a running account defence that serves to reduce or eliminate the amount recoverable by the trustee.34 The creditor has to show that any one payment made to it by the debtor that is challenged under s 122 is not an isolated payment but is an inseparable part of some wider set of transactions.35 In determining this, and whether there is a running account, the courts look at the business purpose or character of the payments in the particular case, rather than the legal form. If the creditor can show that a running account operated, the law permits a quantification of the net advantage, if any, which has been received by the creditor during the relevant period, rather than the gross payments received; and the consequent decrease in the net value of the pool of assets available for other creditors. If at the end of the series of transactions the creditor has in fact supplied goods to a greater value than the payments, the law does not regard the general body of creditors as having been disadvantaged; nor has the supplying creditor received an advantage or preference over other creditors. But if goods or services supplied by the creditor were of a lesser value than the payments made, that net negative amount is recoverable. It is the ultimate effect of the transaction on the debtor, and on the creditor, which is critical.36 The doctrine does not extend to protect singular payments made for the delivery of goods or services that are not made to secure the continuing provision of those services or goods. The mere fact that as a practical matter the debtor made the payment to protect the debtor’s assets or to prevent harm to the debtor’s business is of itself not sufficient to protect the payment: McKern v Minister Administering Mining Act 1978 (WA) [2010] VSCA 140; (2010) 28 VR 1. As we discuss at [14.120], this doctrine of the common law of bankruptcy is codified in s 588FA(3) of the Corporations Act. It refers to a running account as arising from a continuing business relationship where the level of the debtor’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship; if that is shown, then all those transactions are treated as if they were a single transaction. The net outcome, if any, in favour of the creditor from that single transaction is the amount of the preference. This is calculated by way of determining the difference between the peak indebtedness of the debtor during the relevant preference period and the amount finally owed at the date of bankruptcy, this giving the trustee the maximum amount recoverable.

34 See generally Ferrier v Civil Aviation Authority (1994) 48 FCR 163; Rees v Bank of NSW (1964) 111 CLR 210, 220; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407. See also [14.120]. 35 Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110, 129, 132; Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266. 36 Rees v Bank of NSW (1964) 111 CLR 210, 220.

208

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.190]

Whether s 588FA(3) served simply to codify existing law or to extend it, for example, beyond running accounts, and whether the peak indebtedness rule should properly apply, is the subject of some debate.37

The defences to a preference claim [5.190] There are defences to preference claims in s 122(2). The defendant will only need to rely upon these defences if the trustee can make out a case and establish the five elements in s 122(1). However, once those five elements are proved, under s 122(3), anyone who seeks to rely on any of the defences has the burden of establishing the matters specified in them. Before dealing with the main defence provision, s 122(2)(a), other particular protections are discussed. Persons acquiring the property from the creditor

[5.195] The rights of anyone who bought the property from the creditor which is the subject of a preference are not affected, provided that they acted in good faith and gave consideration at least as valuable as the market value of the property received: s 122(2)(b). Maintenance and debt agreements

[5.200]

If a payment which is preferential is related to a family law maintenance order or maintenance agreement (see s 5) it is not subject to challenge by a trustee: s 122(2)(c). The same protection is given to payments under a Pt IX debt agreement: s 122(2)(d). Section 122(2)(a)

[5.210] Apart from these provisions, the main protection available is in s 122(2)(a). This provides a defence for a “purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property” that they received. Good faith

[5.220] Often this is a difficult element for a creditor to establish because of the broad scope of the phrase and the problem presented by s 122(4)(c), which will be discussed shortly. The onus is on the creditor to show its good faith: s 122(3). “Good faith” connotes honesty and propriety in the sense that there is absent, on the part of the creditor, any knowledge that a preference has been given.38 An objective standard is imposed on the creditor, by s 122(4)(c).39 Good faith is negated if the circumstances are such as to lead to the inference that the creditor 37 See fn 25 in [5.125] above. The New Zealand Court of Appeal decision in Timberworld Ltd v Levin [2015] NZCA 111 challenges the reasoning in the Australian High Court and later authorities. See [14.120]. 38 Official Trustee v Mitchell [1992] FCA 521, (1992) 38 FCR 364; PT Garuda Indonesia Ltd v Grellman [1992] FCA 188, (1992) 35 FCR 515. 39 Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463, 475.

[5.230]

5 Recovery of Assets for Creditors

209

knew, or had reason to suspect, that the debtor was insolvent and that the effect of the transaction would be to give the creditor a preference over other creditors. Such a creditor is regarded as having constructive knowledge of the debtor’s insolvency and that the payment was preferential. Debtors’ banks and financiers, because of their knowledge or constructive knowledge of the financial affairs of their debtors, find it harder to establish good faith, compared with other creditors, and this can also be the case with the Commissioner of Taxation. But if the court is otherwise satisfied of good faith and has no or insufficient material from which to draw the inference in s 122(4), then the creditor should remain protected from recovery of the preference: Clout v Sing [2005] FCA 1058; 3 ABC (NS) 121. Consideration

[5.225] The creditor must prove that it paid the debtor at least as much as the market value of what was received. This is the same requirement that exists for a transferee respondent under s 120(5) in an action by the trustee under s 120 (see [5.35], and under s 121(4) see [5.75]). In the ordinary course of business

[5.230] Whether a payment was made “in the ordinary course of business” can be difficult to assess. This led the legislature to remove the concept in the Corporations Act in relation to company preferences, even though a company is invariably operating a business.40 It remains as a concept, less relevantly, for bankruptcy purposes.41 After reviewing the various authorities, the court in Re Cummins42 accepted the correct meaning of the term as that “the transaction must fall into place as part of the undistinguished common flow of business done … calling for no remark and arising out of no special or particular situation”.43 In contrast to other decisions, the court said that issues of fairness and absence of indicators of insolvency are not so relevant; a fair transaction may be out of the ordinary course, and vice versa. In Re Cummins, the court found that payment by the debtor of a debt immediately due with a post-dated cheque which was then dishonoured was not in the ordinary course. The commencement of legal proceedings by a creditor followed by the debtor’s payment may, although not necessarily, show the payment was made outside the ordinary course; including a payment received in response to a bankruptcy notice.44 A debtor’s repayment to investors of their invested funds earlier than the due date at the investors’ insistence was found to be in the ordinary course: Clout v Sing [2005] FCA 1058; 3 ABC (NS) 121. 40 See Corporations Act 2001 (Cth), s 588FE. 41 See Keay A, “The “In the Ordinary Course of Business” Element in Preference Law: Has it Passed its Use By Date?” (1997) 5 Insol LJ 41; also Ross M, “Payments Made in the Ordinary Course of Business by an Insolvent Company” (2000) 8 Insolv LJ 157. 42 [1985] FCA 374, (1986) 62 ALR 129, 43 Citing Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) [1948] HCA 14; (1948) 76 CLR 463 at 477. 44 Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463 at 480.

210

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.235]

While the assessment must be made of business in general rather than the particular business of the parties, elements of the history of the dealings between the parties can be considered: Sheahan v Fabienne Pty Ltd [1999] SASC 355. Inconsistency exists in the case law as to whether an assessment must be made of the respective intentions and states of mind of the debtor and the creditor. In any event, those factors become relevant when assessing good faith. While good faith and the ordinary course of business are separate issues45 they each serve to complement the other, with evidence often common to both. That assessment is essentially concerned with the reasons which led the debtor to pay (was it in the ordinary course of business?) and the creditor to accept (was it in good faith?). So, while the debtor’s payment in Re Cummins with a post-dated and then a dishonoured cheque was not in the ordinary course, the court would have found that the creditor had nevertheless acted in good faith. Payment to a secured creditor is not a preference

[5.235] While a creditor can receive a preference if it takes a security in respect of an existing debt owed to it, (see [5.160], a payment by the debtor to a pre-existing secured creditor is not a preference, at least, to the extent that any payment does not exceed the value of the security.46 TAKING VOIDABLE TRANSACTION PROCEEDINGS AND THE REMEDIES GIVEN [5.240]

An action becomes available to the trustee to pursue under ss 120, 121 or 122 on the date of bankruptcy – that is, either the date of sequestration or the date of the acceptance of a debtor’s petition: Anscor Pty Ltd v Clout (2004) 135 FCR 469; 1 ABC (NS) 558. As to time limitations, any court proceedings that rely on ss 120 or 122 (and s 118(9)) must be commenced within six years from the date of bankruptcy: s 127(2), (3), (5). An action pursuant to s 121 may be commenced at any time: s 127(4). It is not relevant that the bankrupt has been discharged from bankruptcy: McVeigh v Long [2002] FMCA 53. Only a trustee is permitted to take preference proceedings because the transaction is void only as against that trustee. Proceedings can be commenced either in the Federal Court or the Federal Circuit Court or in some cases the Family Court: s 27. Specific remedies are not given by the Bankruptcy Act (compare s 588FF of the Corporations Act: see [14.170]) so the trustee must rely on common law remedies. Orders sought by a trustee in successful proceedings invariably are to the effect that there is a declaration that the transfer is void, with consequential orders that property be transferred back to the trustee, or that money be repaid. In the case of 45 Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204; Re Stecca; Ex parte Scott v Stevens Sheet Metal Pty Ltd [1994] FCA 1542 46 Court v Hewett [1982] WAR 151; (1983) 1 ACLC 768; Yeomans v Lease Industrial Finance Ltd (1987) 5 ACLC 103. As to when a partial payment is made to a creditor when the debt is secured, but the debt later becomes unsecured because of the impact of the PPSA, in corporate insolvency, see Sise, “Now You’re Secured, Now You’re Not” (2015) 27(3) A Insol J 36 at [14.85].

[5.250]

5 Recovery of Assets for Creditors

211

preferences, it is the effect of the transaction that is avoided, so that the creditor is required to repay the payment; the transfer by which the payment transaction occurred is not in itself avoided. Enforcement of those orders may involve, in the case of a transfer, proceedings brought for contempt in the event of the order not being complied with,47 or in the case of an order for moneys to be repaid, remedies of tracing into other property purchased by the defendant,48 or other equitable remedies: Ambrose (Trustee) in the matter of Poumako (Bankrupt) v Poumako (No 3) [2013] FCA 22. Interest on any successful judgment is generally awarded from the date of the demand for payment made on the creditor by the trustee. This is because a preference is void only as against the trustee so that until a trustee is appointed and a demand made, there is no cause of action, and there is no basis for an award of interest in respect of a period before the accrual of that cause of action.49

CROSS-BORDER BANKRUPTCY RECOVERIES [5.245] A foreign trustee has standing to bring actions under ss 120, 121, 121A, 122, 128B or 128C of the Bankruptcy Act before an Australian court. Those sections apply, with appropriate changes, in relation to an action for the purposes of a “foreign proceeding” in the same way they would apply if the action were for the purposes of a proceeding in relation to a bankrupt.50 Assistance is also available under s 29 of the Bankruptcy Act to foreign trustees pursuing assets or investigations in Australia, or to Australian trustees seeking assets or pursuing investigations overseas, as is explained at [6.120]. A foreign creditor can lodge a proof of debt in an Australian bankruptcy. But if that creditor has received part payment in respect of its claim in a foreign insolvency, it may only lodge a proof of debt here for the balance of its debt.51 A trustee of an Australian bankruptcy may use the processes of the Model Law on Cross-border Insolvency for the recovery of property in those overseas countries that have adopted the Model Law.52

PROPERTY OF ENTITIES CONTROLLED BY THE BANKRUPT: INCOME CHANNELLING [5.250] “Some bankrupts claim not to be in receipt of income, or indeed to be unemployed, but their lifestyle and activities are quite inconsistent with such 47 Official Trustee in Bankruptcy v Pastro [2001] FCA 234. 48 Anscor Pty Ltd v Clout [2004] FCAFC 71; (2004) 135 FCR 469; 1 ABC (NS) 558. 49 Airservices Australia v Ferrier (1996) 185 CLR 483; [1996] HCA 54; Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240. 50 Cross-Border Insolvency Act 2008 (Cth), s 17; Art 23(1) of the Model Law. 51 Article 32 of the Model Law, the rule of “hotchpot”. 52 See for example Official Trustee in Bankruptcy v Smith [2014] NZHC 1305, involving the Official Trustee in Bankruptcy successfully applying for recognition of an Australian bankruptcy in New Zealand under the Insolvency (Cross-border) Act 2006 (NZ). For the obverse situation, see Official Assignee in Bankruptcy of the Property of Cooksley, in the matter of Cooksley v Cooksley [2017] FCA 1193.

212

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.250]

claims. Usually in such circumstances, all the income generated by the bankrupt’s activities is channelled into another entity …”.53 Division 4A of Pt VI attempts to allow a trustee in bankruptcy to treat this as income of the bankrupt despite the attempt to disguise it as income of an “entity”, defined in s 5(1) as a “natural person, company, partnership or trust”. Its provisions allow recovery of assets or money from an entity that has benefited from such an arrangement. Division 4A applies where a person, prior to bankruptcy, worked for an entity which that person controlled and from which he or she received no income or less than a reasonable income. To the extent that the entity profited from the person’s lack of remuneration, the trustee has a claim against that entity if the person became a bankrupt during the four years subsequent to the work done for it. A person is in control of an entity if no act, omission or decision of substantial importance would have occurred that was inconsistent with the person’s directions or wishes. Thus, in Horne v Concore Australia Pty Ltd [1997] FCA 503, the court was prepared to grant an injunction to the trustee protecting assets that might be the subject of an application by the trustee under s 139D on the basis of evidence which indicated that the debtor was paid project management fees of $7,000 per annum by a company controlled by him that was engaged in property developments involving millions of dollars and produced a profit of at least $1 million in the relevant period. The court found there was a serious issue to be tried as to whether remuneration of $7,000 was less than would have been received in an arm’s length transaction. A trustee may obtain orders under either s 139D to acquire an interest in property, or under s 139E to be paid money, against an entity controlled by a bankrupt, at any time within six years after the date of the bankruptcy: s 139A. The same orders may be obtained against natural persons: ss 139DA or 139EA on the basis that just as a person can hide their own assets in a trust or company, they can also do so by placing them with a spouse or other relative or associate. So in Griffin & Khatri v Milne [2009] FMCA 680, the debtor bought a property from his own money for his daughter to live in and which he held on trust for her. On his bankruptcy, an order under s 139DA was made against the daughter. While this would cause hardship by forcing her to vacate the property – see s 139DA(2) – the rights of the bankrupt’s creditors prevailed. The court said that “the type of transaction in this case seems to be that which is targeted by s 139DA …”. The court must consider the nature and extent of the interest that any other person has in the property, and whether an order would cause that person hardship; as well as the entity’s current net worth and any hardship an order may cause that entity’s creditors: s 139F(1). Courts can make ancillary orders to support and assist in the carrying into effect of the primary orders: s 139D(3). If an order is made under s 139D, an order for the payment of money by the entity to the trustee may be made under s 139E. However, instead of referring to the 53 Explanatory Memorandum to the Bankruptcy Amendment Bill 1991.

[5.255]

5 Recovery of Assets for Creditors

213

acquisition of property by the entity, s 139E requires the trustee to prove that at any time during the examinable period the entity’s net worth exceeded, by a substantial amount, what its net worth would have been had the bankrupt’s services not been supplied. “Net worth” is therefore crucial to the application of s 139E and it is defined in s 5(1). In respect of a trust, “net worth” means the amount by which the total value of the trust property at the relevant time exceeds the total of the liabilities of the trust (not including what might be owed to beneficiaries). With those entities which are not trusts the net worth is the amount by which the value of the entity’s assets exceeds the total of the entity’s liabilities. A court would need to be satisfied that the entity’s net worth changed during the time when the bankrupt provided services. The “examinable period” is the period beginning either two years before the commencement of the bankruptcy or from the time the bankrupt became insolvent during the four years preceding the commencement of the bankruptcy: s 5(1). “Personal services” are defined broadly in s 5(1) as services of a physical, intellectual or other kind supplied by the bankrupt whether or not as an employee and whether or not the services served to fulfil the entity’s obligations to supply services. “Property” is also defined broadly in s 5(1), and may include loans to third parties and remuneration: Sheahan v Birdseye [2002] FMCA 41. In that case, remuneration was found to include the profit which the sole principal of a firm obtained from the services of his employees whom he was responsible for managing and in respect of whom he took an entrepreneurial risk. Although these provisions were introduced in 1987, trustees have not used ss 139D and 139E to any great effect. This, it appears, is due in part to the difficulty of proving some of the elements in the two sections: see Re Crawford; Ex parte Adcock v Tanalaw Pty Ltd [1992] FCA 611. In Donnelly v Edelsten [1994] FCA 992, (1994) 49 FCR 384, the court suggested that the deficiencies contained in Pt VI, Div 4A led to the enactment of Div 4B under which a bankrupt can be required to make income contributions and also under which a trustee may recover property by administrative means. That latter avenue is now explained.

RECOVERING PROPERTY BY ADMINISTRATIVE MEANS [5.255] These more useful are administrative recovery processes under Pt VI, Div 4B, subdiv J of the Act are available by way of service of a statutory notice of demand by a trustee, invariably based upon a claim under ss 120, 121 or 122. These notices, under s 139ZQ, can allow quicker recovery by trustees of transferred property. The provisions have been modelled loosely on the former s 218 of the Income Tax Assessment Act 1936 (Cth).54 The introduction of s 139ZQ notices recognised that litigation to recover assets can be expensive, complex and time consuming and that many potentially voidable transactions are not able to be challenged by the trustee because of the lack of available funds. Also, it was considered that debtors, being aware of this, were 54 Now s 260-5 of the Taxation Administration Act 1953 (Cth).

214

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.260]

arranging their affairs accordingly, for example by transferring assets to family members.55 Subdivision J was introduced to try to address these difficulties.

The s 139ZQ notice [5.260]

Hence, in a situation where a person has received money or property as a consequence of a voidable transaction (for example, a transfer to defeat creditors under s 121), a s 139ZQ notice can be issued and served on the person requiring them to pay to the trustee an amount equal to the money or the value of the property received: s 139ZQ(1). The amount payable is recoverable as a debt in court proceedings: s 139ZQ(8), and judgment by default may be ordered: Sampson (Trustee) v Taboada [2017] FCA 79. The notice must be issued through and then sent by the Official Receiver, who has a discretion whether to issue it and who therefore must assess the validity of the claim made: Tsakirakis v Official Receiver [2013] FCCA 106.56 The Official Receiver has that role in relation to estates being administered both by the Official Trustee and by registered trustees. In the latter case, the trustee must apply to the Official Receiver for the notice to be issued: s 139ZQ(1)(a), (b). A fee of $480 is payable. A notice sent pursuant to s 139ZQ must set out the facts and circumstances which have satisfied the Official Receiver that the transaction referred to in the notice is void against the trustee: s 139ZQ(2). As penal sanctions (s 139ZT) are provided if there is non-compliance with the terms of the notice, the Official Receiver must ensure that the notice is prepared carefully so that the matters which it sets out are clear. The notice should show that it is issued under s 139ZQ and should set out the facts upon which the liability is based. If, for example, a transfer is said to be void under s 120, the transfer must be shown to have occurred in that period, any consideration paid and the market value of the property. It should show the address where the money can be paid or the property delivered; that the recipient can apply to have the notice set aside; and it should state the effect of non-compliance. A s 139ZQ notice may require the recipient to pay the amount claimed at a time or within a certain period or by instalments: s 139ZQ(3). That time may be extended: Polgar v Official Receiver [2015] FCCA 1840. For the purposes of Pt VI, Div 4B (which includes s 139ZQ), s 139K defines value, in relation to property referred to in a notice, as the “market value of the property when the notice is given”. Therefore the “amount equal to the value … of the property received” for the purposes of s 139ZQ is to be determined as at the date of the notice and not as at the date of the transfer of the property: Vale v Sutherland [2009] HCA 26; (2009) 237 CLR 638. 55 See Explanatory Memorandum to the Bankruptcy Amendment Bill 1991 (Cth), [22]-[25]. 56 While a notice allows the exercise of a strong recovery power, there is no unconstitutional exercise of judicial powers involved: Re McLernon; Ex parte SWF Hoists & Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408, (1995) 58 FCR 391.

[5.270]

5 Recovery of Assets for Creditors

215

Effect of the notice

[5.265] A notice given in relation to any property results in that property being charged with the liability of the recipient of the notice to make the required payments to the trustee: s 139ZR(1)(a). The charge has priority over any existing or subsequent mortgage, lien, charge or other encumbrance over the property which is in favour of an associated entity of the bankrupt (as defined in s 5(1) and ss 5B – 5E), and this priority applies regardless of any provision in laws of the Commonwealth or a State or Territory: s 139ZR(2). The charge does not operate with priority if the associated entity can show that an encumbrance resulted from an arm’s length transaction for valuable consideration and that it is not void as against the trustee: s 139ZR(3). The trustee has the right to sell any property subject to the charge. If the property is sold, the proceeds of the sale will, subject to the satisfying of any prior charges, be applied (to the extent of the charge) in or towards the discharge of the liability of the recipient of the notice to pay the trustee: s 139ZR(6). This presupposes that the property continues to exist so that the power of sale relates to that property. While this is not the case where the interest transferred is that of a joint tenant, the charge under s 139ZR nevertheless applies to the whole property and the value to be realised by the trustee is the bankrupt’s half interest as at the date of the s 139ZQ notice: Aravanis & Roy v Destanovic [2016] FCA 388; compare Re Lucera; Ex parte Official Receiver v Lucera [1994] FCA 1380; (1994) 53 FCR 329 at [29]. If the party who has been served with a notice refuses or fails to comply with it, that party is guilty of an offence which is punishable by imprisonment for a period not exceeding six months: s 139ZT(1). That in itself is unusual and the prosecution of such an offence would apply only in relation to a contumelious refusal and a clear liability to pay. If the person were to be convicted, they may also be ordered to pay the trustee the amount claimed under the notice: s 139ZT(2).

Setting aside a s 139ZQ notice [5.270] A person who receives a notice, or any interested party, may apply to the court to set it aside (s 139ZS). The application must be made within 60 days: s 139ZS(1A); that time may be extended: Radnor Enterprises Pty Ltd v Nicholls [2017] FCCA 2313. The court needs to be satisfied that the alleged facts and circumstances set out in the notice are not adequate, in light of facts raised by the person in their defence: Re McLernon; ex parte SWF Hoists & Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408; (1995) 58 FCR 391. Even if the court is satisfied that the facts and circumstances contained in the notice are true, it will set aside the notice if it does not justify a conclusion that the transaction is void: Re Lucera; Ex parte Official

216

Keay’s Insolvency: Personal and Corporate Law and Practice

[5.270]

Receiver v Lucera [1994] FCA 1380; (1994) 53 FCR 329. The notice must state the basis of any property valuation; a notice may be set aside if the value of the property claimed is not correct.57 In the case of a notice based on a s 120 claim, the amount claimed for payment does not form part of the “facts and circumstances” that allegedly render the transaction void; hence an error in specifying the amount claimed does not give rise to a remedy under s 139ZS. In such cases, any dispute about the accuracy of the amount claimed by the trustee should be resolved in proceedings to recover the debt or to enforce the charge created by the notice: Vale v Sutherland [2009] HCA 26; (2009) 237 CLR 638. If the Official Receiver has issued a notice at the request of a registered trustee, then the trustee is the proper respondent to any application to set aside the notice. However, the Official Receiver, whose notice is in issue, should also be joined. There may be a challenge to the form of the notice, or the process of its having been issued, to which the Official Receiver would need to respond.58 The Official Receiver’s reasons for issuing the notice may be challenged: see for example Tsakirakis v Official Receiver [2013] FCCA 106; and in some circumstances, it may be ordered to pay costs: Tsakirakis v Official Receiver [2014] FCCA 517. Although a s 139ZQ notice is issued on the decision of the Official Receiver, a government officer, that decision is not subject to administrative law review: Kiem Dang Investment Pty Ltd v Mansfield [2017] FCCA 725; (2017) 320 FLR 14. The court there declined to review the Official Receiver’s decision on the basis of s 10(2)(b)(ii) of the Administrative Decisions (Judicial Review) Act 1977 (Cth) because the Bankruptcy Act itself makes adequate provision for the review of the issue of s 139ZQ notices. Subdivision J has not changed the traditional position that the trustee has the onus of proof in relation to a claim that a transaction is void.59 However, an applicant under s 139ZS must present to the court sufficient evidence to call the validity of the notice into question, otherwise the notice has full effect: Halse v Norton [1997] FCA 673; (1997) 76 FCR 389. Where an applicant under s 139ZS can make out a case that the alleged facts and circumstances relied upon in the notice either do not exist or do not disclose a void transaction, the onus of adducing evidence to show otherwise then shifts to the trustee. If the notice is set aside, it is treated as not having been given (s 139ZS(2)) and costs will usually be awarded in the recipient’s favour. Any caveat lodged by the trustee should then be withdrawn.

57 Vale v Sutherland [2009] HCA 26; (2009) 237 CLR 638; Caddy v McInnes [1995] FCA 1464; (1995) 58 FCR 570. 58 Re Wedgwood; Ex parte Bank of New Zealand [1993] FCA 368, (1993) 116 ALR 153; ; decision upheld on appeal Worrell v Power and Power [1993] FCA 551; (1993) 46 FCR 214; Re Stivactas; Citibank Ltd v Parker [2000] FCA 1914; (2001) 181 ALR 115. 59 Tsakirakis v Official Receiver [2013] FCCA 106.

[5.280]

5 Recovery of Assets for Creditors

217

Cross-claim by trustee

[5.275] When a recipient of a s 139ZQ notice applies to set it aside, the trustee may cross-claim, seeking a declaration that the relevant transaction was void against the trustee (for example, under ss 120 or 121 of the Act).60 The two matters may be heard concurrently: see Tsakirakis v Official Receiver [2014] FCCA 517 at [20] to [22]. This has been referred to as “the old-fashioned way of determining the matter”, rather than parties “becoming bogged down in difficulties arising out of the form of Subdivision J and the terms of the notice”: Re Pearson; Ex parte Wansley v Pearson [1993] FCA 533; (1993) 46 FCR 55, 60. While this is often how such contested matters proceed, s 139ZQ notices have proved useful in prompting early attention to resolving the trustee’s claim. The person served with the notice may accept the explanation of their liability in the notice and simply pay; or, the person may not respond to the notice at all, or to any judgment sought by the trustee under s 139ZQ(8), by default: Chamberlain v Tilbrook [2017] FCA 1586. The legal basis for a s 139ZQ notice was initially criticised because of the reversal of the onus of proof and the criminal liability imposed for failure to comply. Case law over time has given guidance on their limits. They accord with the increased obligations of trustees and lawyers under the Civil Dispute Resolution Act 2011 (Cth) to try to resolve disputes. A s 139ZQ notice can also be useful in circumstances where sale of property is under way at the time of bankruptcy and where service of a notice allows a charge to be quickly made on the title to the property, under s 139ZR.

CONCLUSION [5.280] We have examined the property of the bankrupt that is available to creditors in a bankruptcy, as well as the property that has been disposed of prior to bankruptcy which the trustee can seek to recover for the benefit of those creditors. On recovering and realising those assets, and having a pool of funds available, the trustee must then go through the processes under the Bankruptcy Act of calling in and assessing creditors’ claims and paying out dividends to them. This represents a fundamental aspect of insolvency law, the right of creditors to share in the proceeds of sale of the insolvent’s assets. It is to that part of a bankruptcy administration that we now turn. Chapter 5 – Recovery of Assets for Creditors Part VI Division 3 – Property Available for the Payment of Debts – ss 115 – 128N Part 6 – Administration of Property Bankruptcy Regulations AFSA ORPS 7 – Exercise of the Official Receiver’s powers to assist trustees OTPS 1 – Income contributions Bankruptcy Act

60 Caddy v McInnes [1995] FCA 1464; (1995) 58 FCR 570; Re McLernon; Ex parte SWF Hoists & Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408; (1995) 58 FCR 391.

218

Keay’s Insolvency: Personal and Corporate Law and Practice

Chapter 5 – Recovery of Assets for Creditors Courts’ Bankruptcy Rules General

[5.280]

6

Administration of the Bankruptcy [6.05] INTRODUCTION ................................................................................................................ 222 [6.10] INITIAL ACTIONS .............................................................................................................. 222

[6.12] Relevant dates ..................................................................................................... 223 [6.15] Examining the books and records of the bankrupt ...................................... 223 [6.20] Section 77(1)(a) ............................................................................................................... 223

[6.30] Statement of affairs ............................................................................................. 224 [6.35] Interviewing the bankrupt ................................................................................ 225 [6.40] Legal privilege ................................................................................................................ 225

[6.45] Giving notice of the bankruptcy ...................................................................... 226 [6.50] RELATIONS WITH CREDITORS ..................................................................................... 226

[6.50] Giving information etc to creditors and others ............................................. 226 [6.55] Initial notification and declaration required: IPRB, s 70-30 ........................ 226 [6.60] A report within three months ........................................................................... 227 [6.65] Requests by creditors for information etc ...................................................... 227 [6.70] Relevance and breach of duty ..................................................................................... 228 [6.75] Reasonable or unreasonable ......................................................................................... 228

[6.80] The decision of the trustee ................................................................................ 229 [6.85] Requests by the bankrupt: IPRB, s 70-56 ........................................................ 229 [6.90] Other rights of creditors .................................................................................... 230 [6.95] MEETINGS OF CREDITORS ............................................................................................. 230

[6.100] Division 75: meetings ....................................................................................... 231 [6.100] Notice of meetings ....................................................................................................... 231 [6.105] Particular meetings ...................................................................................................... 231 [6.110] Procedures at meetings ............................................................................................... 232 [6.115] Quorum .......................................................................................................................... 233 [6.120] Ordinary resolution – majority in number and value .......................................... 234 [6.125] The casting vote ........................................................................................................... 234 [6.130] Proposals put to creditors or contributories without a meeting – ordinary and special resolutions ........................................................................................................ 234 [6.135] Rules about proxies and attorneys ........................................................................... 235 [6.140] Additional rules for particular kinds of estates ..................................................... 235 [6.145] Directions from creditors for a meeting to be called ............................................ 235

220

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.150] Unreasonable creditors’ directions to call a meeting ............................................ 235 [6.155] Duties when presiding ................................................................................................ 236 [6.165] Committees of inspection ........................................................................................... 236

[6.170] Taking possession of property ........................................................................ 237 [6.175] CROSS-BORDER BANKRUPTCIES ............................................................................... 238

[6.180] Cross-Border Insolvency Act .......................................................................... 238 [6.182] Bankruptcy Act, s 29 ........................................................................................ 238 [6.185] INVESTIGATIONS ............................................................................................................ 240

[6.190] Preliminary inquiries and actions .................................................................. 240 [6.195] Search warrants: s 78 ........................................................................................ 242 [6.200] Other administrative processes ...................................................................... 242 [6.205] Access to books of associated entities: s 77A ......................................................... 242 [6.210] Access to premises: s 77AA ....................................................................................... 243

[6.215] Private examinations: s 77C notices .............................................................. 244 [6.220] Challenging statutory notices ......................................................................... 245 [6.230] Public examinations: s 81 ................................................................................ 246 [6.235] Persons who may be examined ................................................................................. 246 [6.240] Application for summons and affidavit in support of a summons .................... 247 [6.245] The examination ........................................................................................................... 247 [6.250] Nature of the power .................................................................................................... 248 [6.255] Restrictions on examinations ..................................................................................... 248 [6.260] Privilege ......................................................................................................................... 249 [6.265] Contemplated or existing proceedings .................................................................... 250 [6.270] Discharge of a summons ............................................................................................ 251

[6.275] Offshore information notices – s 81A ............................................................ 251 [6.280] DISCLAIMER OF ASSETS ............................................................................................... 251

[6.285] Example – leasehold, rural properties, contaminated sites ....................... 252 [6.290] Contracts ............................................................................................................. 253 [6.295] CARRYING ON BUSINESS ............................................................................................. 254 [6.300] DEALING WITH THE ASSETS ...................................................................................... 254

[6.305] Assignment of rights of action ....................................................................... 254 [6.305] Rights of action of the bankrupt ............................................................................... 254 [6.310] Rights of action of the trustee ................................................................................... 255

[6.315] Directions from the court ................................................................................ 256 [6.320] Consolidation of estates ................................................................................... 258 [6.325] Partnership dividends ...................................................................................... 258 [6.330] Realising the assets ........................................................................................... 258 [6.335] Interest ................................................................................................................ 259 [6.340] THE BANKRUPT’S INCOME ......................................................................................... 259

[6.345] Contribution assessment period ..................................................................... 260

6 Administration of the Bankruptcy

221

[6.350] Actual income threshold .................................................................................. 260 [6.355] Income ................................................................................................................. 261 [6.360] Process of assessment ....................................................................................... 261 [6.365] Review ................................................................................................................ 262 [6.370] Hardship ............................................................................................................. 263 [6.375] Payment .............................................................................................................. 263 [6.380] Collection from others ..................................................................................... 263 [6.385] The supervised account regime: subdiv HA ............................................... 263 [6.390] Supervised account notice .......................................................................................... 264 [6.395] Bankrupt’s income to be deposited to account supervised by trustee .............. 264 [6.400] Provisions aimed at alternative income arrangements ......................................... 265 [6.405] Regulation by the trustee ........................................................................................... 265 [6.410] Injunctions ..................................................................................................................... 265

[6.415] Review of trustees’ decisions .......................................................................... 265 [6.420] FINANCIAL SUPPORT FOR LEGAL PROCEEDINGS .............................................. 266

[6.425] Creditors’ indemnity ........................................................................................ 266 [6.430] Litigation funding ............................................................................................. 267 [6.435] Trustee funding ................................................................................................. 267 [6.440] Section 305 funding .......................................................................................... 268 [6.445] Inspector-General proceedings ....................................................................... 268 [6.450] Litigation in pursuit of remuneration ........................................................... 269 [6.455] Some remaining issues in litigation .............................................................. 269 [6.460] CLAIMS OF CREDITORS ................................................................................................ 270

[6.460] Debts provable in bankruptcy ........................................................................ 270 [6.465] Non-provable claims ........................................................................................ 270 [6.470] Provable claims ................................................................................................. 272 [6.475] Contingent liabilities .................................................................................................... 273 [6.480] Tax liabilities ................................................................................................................. 274

[6.485] Rule against double proofs ............................................................................. 274 [6.490] Set-off .................................................................................................................. 275 [6.495] Limits on set-off ............................................................................................................ 276 [6.500] Insured bankrupts – s 117 .......................................................................................... 277

[6.505] Secured creditors ............................................................................................... 277 [6.510] Purchased debt .................................................................................................. 278 [6.515] Proofs of debt .................................................................................................... 279 [6.520] Challenges to a trustee’s decision on a proof of debt ........................................... 280 [6.525] DISTRIBUTION OF THE ESTATE TO CREDITORS ................................................... 280

[6.530] Payment of dividends ...................................................................................... 280 [6.535] SPECIAL PRIORITIES ...................................................................................................... 282

222

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.05]

[6.540] Section 109 priority payments ........................................................................ 282 [6.545] Costs and expenses of administration: s 109(1)(a) ................................................. 283 [6.550] Remuneration and costs of a controlling trustee: s 109(1)(b) .............................. 283 [6.555] Liabilities from Pt X proceedings, or compositions or schemes: s 109(1)(c) ..... 284 [6.560] Wages of employees of the bankrupt – s 109(1)(e) ................................................ 284 [6.565] Priorities in favour of certain creditors – s 109(1)(j) .............................................. 284 [6.570] Court ordered priority – s 109(10) ............................................................................ 284 [6.575] Claims to which s 109 is subject ............................................................................... 284 [6.580] Final order of payment ............................................................................................... 285 [6.585] REPORTING ....................................................................................................................... 285 [6.590] ADMINISTRATION OF DECEASED BANKRUPT ESTATES ................................... 285 [6.595] CONCLUSION ................................................................................................................... 288

INTRODUCTION [6.05] This chapter deals with the major issues and matters which a trustee may need to consider in the course of administering the bankruptcy. These include finding out the reasons for the bankruptcy; locating and securing assets and funds; communicating with creditors; dealing with and selling assets, including any business operations of the bankrupt; collecting income contributions from the bankrupt; and ultimately assessing and paying out creditors’ claims. Every bankruptcy will be different and in particular the extent of assets will vary and many of the matters raised in this section will not be relevant to all bankrupt estates. In administering a bankruptcy, a trustee must keep in mind two of the purposes of bankruptcy law which were identified earlier: first, bankruptcy allows for an investigation of the conduct of the bankrupt with a view to reporting to the creditors or the regulator; and secondly, it provides for a fair and equitable distribution of the estate of the bankrupt after the orderly collection and realisation of the bankrupt’s property. It also protects a debtor from their creditors and allows the debtor a fresh start.

INITIAL ACTIONS [6.10]

What the trustee will do as a matter of priority will depend on the circumstances of the bankrupt’s affairs and the nature of their property. However, there are some matters which are of primary importance.

Section 42-30 of the Standards1 states the preliminary inquiries and actions that a trustee is expected to undertake at the start of each administration. This section goes into detail in relation to how a trustee should commence the administration of the estate with “a proactive and considered approach” that provides “transparency and consistency in relation to the high standard of professionalism expected of a regulated trustee”. 1 IPRB, Div 42 – Standards for Registered Trustees.

[6.20]

6 Administration of the Bankruptcy

223

The preliminary inquiries and actions include informing the debtor of their obligations under the Act and the penalties for failing to comply, obtaining and reviewing the statement of affairs and if necessary, interviewing the debtor to clarify any matters in the statement of affairs. That then leads to the obligation of the trustee to give certain minimum items of information to the creditors, including an outline of matters investigated and still to be pursued, a summary of the statement of affairs and details of any likely income contributions; IPRB, s 70-30. The trustee can choose when to send this but it should be seen in the context of creditors often having no information at all and hence the report, in whatever state it can be useful, being sent promptly. In any event, the trustee must report to creditors within three months on the likelihood of a dividend being paid: s 19(1)(c). See [6.50] and following.

Relevant dates [6.12] An important task is to determine both the date of the “act of bankruptcy” (s 40) and the consequent date of “the commencement of the bankruptcy” (s 5). As explained in Chapter 2, these dates will determine the period of relation back and timeframes for investigations and challenges to transactions and transfers of property. While there will often be a clear date of act of bankruptcy based upon non-compliance with a bankruptcy notice, the trustee may find another earlier act of bankruptcy, in the relevant six months time frame, based for example on an unsatisfied writ of execution.

Examining the books and records of the bankrupt [6.15]

The trustee will need to obtain access to the bankrupt’s financial and other records – defined as “books” in s 5 – as any “writing or document and any record of information however compiled, recorded or stored, whether in writing, on microfilm, by electronic process or otherwise” – which will allow examination of the relevant dates and which will show the circumstances leading up to the bankruptcy. The trustee may then be able to assess what actions can be taken to recover property or take legal proceedings to challenge voidable transactions. Section 77(1)(a)

[6.20] The bankrupt must deliver to the trustee all of the books that are in his or her possession and that relate to any of the bankrupt’s examinable affairs. Given the wide definition of “books”, computer records must be included. In difficult cases, where the bankrupt fails to comply, the trustee can ultimately apply for a warrant of committal under s 78(1) and for an order that the bankrupt’s books be seized. A warrant can also be sought under s 130 to search the bankrupt’s premises. The importance of s 77(1) to a trustee in bankruptcy was emphasised by the Full Federal Court in Griffin v Pantzer [2004] FCAFC 113; (2004) 137 FCR 209; 1 ABC (NS) 625 which was considering the right of a bankrupt to withhold documents that were subject to the privilege against self-incrimination. The court viewed “the character and purpose of s 77 as fundamental and central to the trustee’s task and

224

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.25]

duties …”, referring to the “impossibility of the trustee understanding the extent and nature of the affairs of a bankrupt were the bankrupt able to withhold documents about his or her affairs …”. In that context, the court held that the obligation of a bankrupt to produce books to the trustee under s 77(1)(a) is so serious an obligation that it abrogates and overrides the bankrupt’s right to the privilege against self-incrimination.2 Books of associated entity

[6.25] The trustee can also require the bankrupt to deliver up all the books of an associated entity: s 77(1)(a)(i). An “associated entity” is broadly defined as an entity or a private company that is, or has been, associated with the bankrupt at any time: s 5(1). The word “entity” is defined as a natural person, company, partnership or trust: s 5(1). Sections 5B – 5F set out the situations in which these various entities can be regarded as associated with the bankrupt. Suffice to say that they attempt to address the developments in the use of corporations and trusts by individuals as asset planning mechanisms to place assets under the bankrupt’s control beyond the reach of creditors. As a result of these definitions, trustees are permitted to investigate companies, trusts and other entities financially associated with the bankrupt.3 Section 77 is qualified to the extent that the bankrupt may be excused by the trustee from complying or may be prevented from complying “by illness or other sufficient cause”.4

Statement of affairs [6.30] If the bankruptcy occurred pursuant to a sequestration order, no statement of affairs will have been filed. This is unlike voluntary bankruptcy, where the debtor must file a statement of affairs prior to the Official Receiver accepting their debtor’s petition: ss 55(2), 56B(3) and 57(2). Where a sequestration order has been made, a bankrupt is required to file a statement of affairs with the Official Receiver within 14 days from the day on which he or she is notified of the bankruptcy, and give the trustee a copy (if there is a registered trustee appointed): s 54(1). Failure to do this is an offence of strict liability. A court order that the statement of affairs be filed may be obtained by the trustee: Scott, in the matter of de Varda [2015] FCA 239. Even if the statement of affairs is filed, if it is materially incomplete, it is not regarded by the law as a statement of affairs and it may be rejected by the Official Receiver and a complete statement must be prepared: Wangman v Official Receiver [2006] FCA 202. The bankrupt may remain in breach of s 54. The trustee has an initial obligation to inform the bankrupt of their obligations under the Act, including under 54, and the penalties for failing to comply. As a 2 But bankruptcy does not override the bankrupt client’s right to claim legal professional privilege. See [6.40]. 3 “Explanatory Memorandum to the Bankruptcy Amendment Bill 1987 (Cth)”, at [8]-[9]. 4 Discussed in Griffin v Pantzer (2004) 137 FCR 209; 1 ABC (NS) 625, 671; [2004] FCAFC 113.

[6.40]

6 Administration of the Bankruptcy

225

matter of practice, trustees request the statement of affairs in their original letter to the bankrupt enclosing the sequestration order. This amounts to a notification under the section if the bankrupt was not present in court, or represented, when the sequestration order was made. The statement of affairs will provide the trustee with particulars of the bankrupt’s assets and liabilities and it will act as the foundation for the administration of the bankrupt estate. The statement is a starting point for the trustee in determining what action needs to be taken. In reporting initially to the creditors, the trustee will comment on the situation disclosed in the statement. Assuming the bankrupt complies, the trustee must review it and, if necessary, interview the bankrupt about the details: IPRB, s 42-30. The Rules also require the trustee to provide creditors with a summary of the statement of affairs, among other information, at the beginning of the bankruptcy (IPRB, s 70-30) and the date of sending the initial remuneration notice is determined by reference to the trustee having received the SOA: IPRB, s 70-35. If the statement of affairs is not filed as required, or is incomplete or inaccurate, the trustee will be confronted with difficulties in identifying creditors and assets. A failure to submit a statement of affairs will also have significant consequences for the bankrupt because the time to automatic discharge does not start to run until the statement of affairs is filed: s 149(4): see [7.115]. The Official Receiver can assist the trustee in enforcing the bankrupts’ obligation to provide a statement of affairs, under s 77CA.5

Interviewing the bankrupt [6.35] The bankrupt must attend any interview with the trustee as requested: s 77(1)(b). This obligation extends throughout the period of the bankruptcy and even after discharge. If the bankrupt refuses to answer any questions or is deliberately unhelpful, the trustee may require the bankrupt to attend an examination by the Official Receiver (s 77C), at an AFSA office, or have the bankrupt subjected to a public examination in court: s 81. These options are discussed in greater detail at [6.150] and [6.170] respectively. Legal privilege

[6.40] As explained at [4.105] and [6.20], legal privilege is retained by the bankrupt despite bankruptcy and it can be relied upon by the bankrupt to deny a trustee access to legal advice the bankrupt has obtained. The privilege applies to documents evidencing confidential communications between the bankrupt and their legal adviser where the communications came into existence for the dominant purpose of either enabling the bankrupt to obtain legal advice or be given such advice, or of litigation that was in train or was contemplated by the bankrupt.6 Hence, communications prior to bankruptcy about the likelihood and consequences 5 See AFSA, Form 27 – Application for the issue of a 77CA notice. 6 Explained in Perazzoli v BankSA, a division of Westpac Banking Corporation Limited [2017] FCAFC 204.

226

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.45]

of bankruptcy are protected by the privilege. Third parties – such as a person to whom the bankrupt transferred property – can also rely on this privilege to refuse to give documents to the trustee. A trustee might, however, find that the bankrupt waives the privilege, for example, simply from a wish to assist the trustee. The bankrupt may also waive the privilege if the legal advice in question may go to persuade the trustee to continue a litigation claim of the bankrupt; or to reject a proof of debt upon which the bankrupt had earlier sought advice; or pursue some legal claim against property. The usual legal principles about waiver or loss of privilege apply.

Giving notice of the bankruptcy [6.45] The trustee should give notice of the bankruptcy to banks and other financial institutions at which the bankrupt has accounts,7 and debtors of the bankrupt, in order to ensure that they pay the trustee and not the bankrupt. If the trustee is aware of creditors not disclosed by the bankrupt in the statement of affairs, they should also be notified. The trustee should give notice to the Australian Taxation Office. Where an ABN is required, the trustee must obtain a separate ABN from that of the bankrupt.8

RELATIONS WITH CREDITORS Giving information etc to creditors and others [6.50] The trustee has the responsibility to try to maximise the ultimate dividend return to the creditors and is accountable to them for how the estate is administered. For one thing, it is the creditors who must approve the trustee’s remuneration: s 60-10. At the same time, the trustee has the ultimate discretion in how the bankruptcy is administered. The trustee should therefore take time to keep creditors informed, and in particular on such matters as the likely dividend payable, the results of investigations, and the recovery and realisation of assets. Also, creditors will often be a useful source of information for the trustee about the debtor, and their co-operation and interest should be maintained. Trustees will either mail or email written reports to creditors, or provide verbal reports at meetings of creditors, at appropriate points in the administration process. Website notifications may also be used.9

Initial notification and declaration required: IPRB, s 70-30 [6.55] As referred to at the beginning of this chapter, IPRB, s 70-30 requires a trustee to give certain minimum items of information to the creditors, “as many as 7 See s 125 of the Bankruptcy Act as to the obligation of a bank to inform the trustee if it finds out that their customer is bankrupt. See also OTPS 2 – Bank accounts – Application of section 125 of the Bankruptcy Act 1966 where estate is administered by the Official Trustee. 8 As to GST and other tax obligations, see PS LA 2011/16 at http://www.ato.gov.au. 9 See IGPD 22 – Effective Communication; and Div 42, s 42-15 of the Standards.

[6.65]

6 Administration of the Bankruptcy

227

reasonably practicable”. If a statement of affairs is available, this will be the list of creditors disclosed, and any more that may have been identified. Apart from basic matters about the details of the debtor and the bankruptcy, the items of information include an outline of matters investigated by the trustee and matters requiring further investigation, a summary of the statement of affairs, and details of any likely income contributions. Creditors are also to be informed about their various rights – to request information etc, to direct the holding of meetings, to give directions, to apply to the Inspector-General for a review of the trustee’s remuneration, and to remove and replace the trustee. The trustee is also to give a declaration about their and their firm’s relevant relationships within the preceding 24 months, and if so stating the trustee’s reasons for believing that none of those relationships result in the trustee having a conflict of interest or duty. The information and declaration must be given in writing at the same time as the trustee first communicates with the creditors in relation to the administration of regulated debtor’s estate.

A report within three months [6.60] Separately, the trustee is to report to creditors within three months on the bankruptcy on the likelihood of a dividend being paid to them: s 19(1)(c). None of this need be seen as onerous, and the trustee need only report to the level dependent on the size of the estate and the available information. From a creditor’s viewpoint, it is basic information that they should expect to receive early on in an administration.

Requests by creditors for information etc [6.65]

Throughout the administration of the estate, creditors may want further information, and are entitled to expect a reasonable response to any requests they make. The previous law (s 19(1)(d)) stated that the trustee had a duty to give information about the administration of an estate to a creditor who reasonably requested it. There is now a much expanded regime with which the trustee must comply unless specified circumstances exist, such as the request being “unreasonable” as defined in the Rules. IPSB, s 70-40 permits creditors, by resolution, to request the trustee to give them information, or provide a report or produce a document (“information etc”). The same applies to a request from an individual creditor: IPSB, s 70-45. The trustee must comply with the request unless: (a) the information etc is not relevant to the administration of the estate; or (b) the trustee would breach their duties if they complied with the request; or (c) it is otherwise not reasonable for the trustee to comply with the request.

228

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.70]

Relevance and breach of duty

[6.70] As to (a) and (b), it is a matter for the trustee, acting bona fide, to determine whether the request should be complied with. As a matter of practice, creditors’ requests should properly be met, unless there is a valid reason not to. Although creditors are central to any bankruptcy, it is ultimately a matter for the trustee’s judgment, on which legal advice or court directions may be required. Relevance can usually be ascertained by the trustee. As to whether a breach of duties may be involved can be difficult in some cases and legal advice may be required. Simply because the Act does not prevent disclosure is not enough, but some reason should exist not to disclose. If acting bona fide, and reasonably, a trustee should properly not be held to account by a court if, on challenge by the creditors, the court reverses the trustee’s decision. Reasonable or unreasonable

[6.75] Pursuant to IPSB, s 70-40(3), IPRB, s 70-10(2) then prescribes circumstances where it is, or is not, reasonable for a trustee to comply. That is the case if the trustee, acting in good faith, is of the opinion that: (a) Complying with the request would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the request. An example is if the information relates to potential recoveries in the estate, or concerns a third party witness to those proceedings; or (b) The information etc would be subject to legal professional privilege. This would be the case with legal advice obtained by the trustee concerning pursuit of a claim. The trustee can waive that privilege. The privilege of the bankrupt is separate and remains with them and does not pass to the trustee; again, the bankrupt can waive that privilege; or (c) Disclosure of the information etc would found an action by a person for breach of confidence. This is a tort the remedy for which can be an award of damages. In the context of the provision, information might be given to the trustee by a creditor about some voidable transaction of the bankrupt, on the express or implied understanding that the information is for the trustee’s investigation and possible recovery of moneys. To be confidential, the information must be clearly identifiable, and not a global expression of concern, and must also have the necessary quality of confidence, and is not, for example, common or public knowledge. Release of the information by the trustee must be able to be shown to breach that confidence. In most cases, anyone supplying information to a trustee would mark it as being in confidence, at least to show that intention in handing it over; or it may be confidential by its very nature; or (d) There is not sufficient available property to comply with the request. More precisely, the assets in the estate are not enough to cover the trustee’s remuneration in responding to the request; or

[6.85]

6 Administration of the Bankruptcy

229

(e) The information etc has already been provided. This has to be read according to its purpose; the trustee may have emailed the information, and need not respond to a request that it be delivered in hard copy; or (f) The information etc is required to be provided under the Act or Regulations within 20 business days of the request being made. Again, this needs to be read purposefully. Despite these last three paragraphs – (2)(d), (e) and (f) – it is reasonable for the trustee to comply if the creditors agree to bear the cost of doing so, and, if required by the trustee, security is given to the trustee beforehand: IPRB, s 70-10(5) The final criterion to refuse a request is that it is vexatious – (g). A request may be taken to be vexatious if the trustee receives the request within 20 business days of receiving a similar request from the creditors. There is no further definition of “vexatious” but the law in respect of vexatious proceedings in courts gives some guidance on whether claims should be assessed as vexatious, including an abuse of court process, one pursued to harass or annoy, or to cause delay or detriment, or for another wrongful purpose, without reasonable grounds.10 The Commonwealth may request information from the trustee in relation to its provision of financial assistance to employees under the Fair Entitlements Guarantee (FEG) scheme: IPSB, s 70-55. There is no “reasonableness” test for this, as there is with creditors’ requests although it would be expected that the Commonwealth would act reasonably. See also IPRB, s 70-55 as to the trustee’s costs of providing the documents. Such requests are more common in corporate insolvency, under IPSC, s 70-55, IPRC, s 70-55.

The decision of the trustee [6.80] For the sake of clarity, the section provides that it is reasonable for the trustee to comply with a request if none of these items apply: IPRB, s 70-10(4). On the other hand, it might be assumed that even if the request is “unreasonable” the trustee may properly choose to respond to the request; for example, to provide information in an assetless estate, or where an otherwise vexatious request for information may readily be met.

Requests by the bankrupt: IPRB, s 70-56 [6.85]

The same criteria apply for determining whether a bankrupt’s request should be actioned: IPRB, s 70-17. Their request also needs to be reasonable: see Haskins v Official Trustee in Bankruptcy [2000] FCA 691 under the old law. For example, a request for information by a bankrupt concerning investigations that the trustee is pursuing was found to be not reasonable under the old law (Dudley v White [2009] FMCA 1329) and would fall within exceptions of IPRB, s 70-17. Note that while the court can order a trustee to provide information to a bankrupt the Inspector-General does not have this power: Haskins v Official Trustee in Bankruptcy [2000] FCA 691.

10 See Federal Court of Australia Act 1976, s 37M.

230

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.90]

Other rights of creditors [6.90] Creditors lose money when their debtor goes bankrupt and their legal rights are significantly changed. Principally, these rights are converted from a right to recover money from the debtor to a right, only, to prove their debt in the bankruptcy. Bankruptcy law, and insolvency law generally, provides creditors with opportunities of involvement and certain rights and controls over the process. The most important of the opportunities and rights of creditors are found in the Schedule: • the creditors may, by resolution passed at a meeting, give the trustee lawful directions to which the trustee must have regard (IPSB, s 85-5);11 • a creditor may appeal to the court in relation to any action of the trustee which affects them (IPSB, s 90-10); • creditors may resolve to fix the trustee’s remuneration (IPSB, s 60-10), subject to the trustee’s minimum entitlement to fees under IPSB, s 60-15, presently set at $5,000 (indexed); • a creditor has the right to initiate and take part in public examinations under s 81; • a creditor can inspect books kept by the trustee (IPSB, s 70-10), and inspect the proofs of debt of other creditors (s 101), apply to the court to review the trustee’s decision on a proof of debt (s 104), and, having had their proof accepted, they are entitled to be paid a dividend (s 140); • certain creditors, like employees, are entitled to be paid their debts in priority to others (s 109); • creditors may, by resolution, remove a trustee as trustee of the estate (IPSB, s 90-35);12 and • creditors may indemnify the trustee in relation to the costs of litigation or other recovery actions. If they do this, and the litigation brings in funds, they may receive a priority dividend under s 109(10).

MEETINGS OF CREDITORS [6.95] Meetings of creditors are an important aspect of a bankruptcy, indeed of any insolvency administration. They provide an opportunity for creditors to group and meet about their respective dealings with the bankrupt, and to meet and obtain information from the trustee. From the administrator’s viewpoint, creditors may be a source of information about the insolvent, the location and the transfer of any assets. The administrator is also able to explain to creditors the consequence of the insolvency and the impact on those creditors and the restrictions that apply on them. Importantly, meetings are a source of advice and approval that the practitioner needs – advice whether certain proceedings should be pursued, approval of a funding agreement or of remuneration. 11 A trustee need not comply with a direction – IPSB, s 85(2). At general law, a trustee did not need to comply if it conflicted with the trustee’s duties: Re Weiss [1986] FCA 287. 12 As to notice requirements for such a meeting under the old law, see Cummings v Macks [2000] FCA 55; (2000) 96 FCR 345.

[6.105]

6 Administration of the Bankruptcy

231

The Standards set minimum levels of acceptable conduct for trustees in relation to meetings. These include the need for the trustee to consider whether some other form of communication with creditors, other than by a formal meeting, may be more cost effective. The law itself sets detailed rules in relation to insolvency meetings – as to notification to the creditors, quorums, voting rules, rights to vote, and so on. Beyond that, the general law rules of meetings may be called upon as necessary. The trustee may convene a meeting at any time (IPSB, s 75-10) and is required to do so when directed by the resolution of the creditors, or by a committee of inspection, when requested in writing by at least 25% in value of the creditors, or when requested in writing by less than 25% but more than 10%: see IPSB, s 75-15(1). The Inspector-General may direct the trustee to hold a meeting (IPSB, s 75-20) and may attend any meeting (IPSB, s 75-30), as may the Commonwealth if there are employees of the bankrupt making claims on FEG13 for unpaid entitlements (IPSB, s 75-35). A committee of inspection may be convened, if the size of the estate and the numbers of creditors require it: Div 80. Bankruptcies, by their nature however, rarely require committees to be convened.

Division 75: meetings Notice of meetings

[6.100]

The trustee can be directed to convene a meeting, under IPSB, s 75-15, by the creditor/s or the committee of inspection. Assuming the request is not unreasonable, the meeting must then be held “as soon as reasonably practicable”. Written notice (including electronically) must be sent to as many creditors of whom the trustee is aware and is able to contact, whether by business, residential or email address. The notice to convene a meeting must be sent by way of AFSA’s Notice of meeting of creditors and must include, date, time and place, the purpose of the meeting, the entitlement of a creditor to vote and a blank proxy form, and provide information regarding a creditors’ right to be represented at the meeting by an attorney. The notice must be given at least 10 business days before the meeting. Particular meetings

[6.105] In the case of certain meetings, the trustee is required to lodge with AFSA a notice of the meeting at least 10 business days before the meeting is held, with the notice published on the AFSA website. These are s 73 meetings (compositions and arrangements, Chapter 7) and Pt X meetings (personal insolvency agreements, Chapter 8). The reason for this requirement is that these particular meetings are decisive in whether the particular proposals are accepted, and they are regarded as requiring greater regulatory scrutiny. 13 Fair Entitlements Guarantee Act 2012 (Cth).

232

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.110]

AFSA’s criteria for attending such meetings in its regulator role include a suspicion that creditors have not been properly informed, either because the debtor has not provided complete or accurate information or the trustee’s report is deficient; or the debtor is “high profile” with sizeable debts and there is public interest in the administration; or there is concern about the validity of a creditor’s claim and the creditor can affect the outcome of the meeting. See Inspector-General Practice Statement (IGPS) 11 – Monitoring and inspection of bankruptcy trustees and debt agreement administrators. Procedures at meetings

[6.110] The following outline is based on the various provisions in the rules, some of which are technical and in the context of a complex or difficult meeting may be overlooked. Although close attention should be given, IPSB, s 75-270 provides that strict compliance with the rules is not required in order for a meeting to be validly held; substantial compliance is sufficient. A trustee or their representative – a senior staff member - must preside at a meeting: s IPSB, s 75-25, IPRB, s 75-50. Any agenda must be sent, allowing ‘other business’ to be raised. This can include the tabling of certain documents such as a proposal under s 73 or documents required for meetings under s 188. IPRB, s 75-65 specifies requirements of a trustee in the conduct of a creditors’ meeting. Attendees can ask questions of the trustee and the debtor (if present). Under IPRB, s 75-70, both the trustee and the attendees entitled to vote at a meeting may propose a resolution at a meeting. Attendees may move amendments to resolutions, including as to the trustee’s remuneration. The trustee must allow a reasonable time for debate before putting the resolutions to a vote. If the proposed amendments are passed, the amended resolution must then be put to vote. The trustee must also take all reasonable steps to ensure that the facilities are operating properly throughout the meeting: IPRB, s 75-7. Beyond that, it is the responsibility of the attendee to access the meeting. A creditor, proxy or attorney attending a meeting by electronic means is regarded as being present for the purposes of forming a quorum under IPRB, s 75-105(3) or casting a vote under IPRB, s 75-110. Each creditor must give a written statement to the trustee setting out the amount of their debt, how much any creditor paid to purchase a debt, and whether the creditor is a related entity of the debtor. There are additional requirements for the first meeting of the creditors to include in the written statement whether any security is held against the debt and its estimated value, and particulars of the debt.

[6.115]

6 Administration of the Bankruptcy

233

Only a creditor, or their proxy or attorney may vote.14 Each creditor will ordinarily have one vote although a secured creditor is not entitled to vote unless the debt owed exceeds the estimated value of its security. A creditor who has purchased a debt can vote only in relation to the amount paid for it; that is, if a $10,000 debt is purchased for $100, the value of the creditor’s debt for voting purposes is only $100: IPRB, s 75-110(4). That does not prevent the creditor from providing for the full amount for the purpose of claiming a dividend. The law continues to apply that the trustee must take an objective determination of value and may decide upon a nominal value of $1 if there is insufficient or no information about the consideration paid for the assignment: see Bechrose Pty Ltd v Jefferson (Trustee) [1999] FCA 1153; ABL Nominees Pty Ltd v Trinick [2016] FCA 996. The trustee determines any question as to the entitlement of a person to vote. If they need to adjourn the meeting to determine this, the trustee may do so as agreed by the meeting but not later than 15 business days: IPRB, s 75-140. The trustee must ensure that each creditor’s claim or proof of debt is marked as to its admission or rejection, and the reason, and its admitted amount: IPRB, s 75-90. If the trustee is uncertain about a debt, he or she must ask the creditor to give written evidence of the liability of the company for the debt, having regard to the cost of seeking that evidence. A trustee must have regard to the merits of a creditor’s claim when deciding whether a creditor is entitled to vote. At all times, the trustee must act impartially and independently. Quorum

[6.115] At the opening of the meeting the trustee must determine whether there is a quorum. A quorum consists of at least two people, including the trustee: • if the number entitled to vote exceeds 2, that is, 3 or more, at least 2 of those present in person, by proxy or attorney; • if 2 or less, then those 1 or 2 in person, by proxy or by attorney: IPRB, s 75-105.15 If there is no quorum within 30 minutes of the appointed time, the meeting is adjourned to the same day in the next week, or another day not less than 5 or more than 15 business days after the day it is adjourned: IPRB, s 75-105(3). Where a meeting is adjourned for lack of a quorum, notice of that fact must be given to as many creditors as reasonably practicable by the end of the next business day. This may mean that only those creditors who have provided the trustee with their email details will be notified in accordance with this requirement. A resolution put to a vote at a meeting may be decided “on the voices” unless a poll is requested, which must be taken immediately and in a manner determined by the trustee. A poll involves the trustee formally accepting and recording each vote of those attending, including as to the value of their debt. 14 False statements by creditors in voting documents can constitute an offence: s 263C. 15 See under the old law, Huynh v Pascoe [2002] FCA 309; (2002) 120 FCR 354; Re Foster; Ex parte Foster v Duus (1994) 49 FCR 309.

234

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.120]

Ordinary resolution – majority in number and value

[6.120] An ordinary resolution is passed where there is a majority in the number of votes and a majority in value voting in favour of the resolution. Fifty one per cent in number will not suffice if those creditors represent only 49% in value. The casting vote

[6.125] Where there is a deadlock, other than in relation to the trustee’s remuneration or the trustee’s removal, the trustee may cast a deciding vote. Reasons for casting or not casting a vote must be given to the meeting and those reasons must be minuted. For a deadlocked ordinary resolution in relation to a trustee’s removal, under IPRB, s 90-35, the trustee may only cast a deciding vote in favour of their removal. Proposals put to creditors or contributories without a meeting – ordinary and special resolutions Ordinary and special resolutions may be put to creditors16 and passed without a meeting unless at least 25% in value of responding creditors object within 15 business days to the proposal being so resolved: IPRB, s 75-130. • An ordinary resolution without a meeting will otherwise be passed if a majority in number and in value of responding creditors vote in favour of the proposal. • A special resolution without a meeting will otherwise be passed if a majority in number and 75% in value of responding creditors vote in favour of the proposal. Otherwise, the special resolution is not passed.

[6.130]

For both ordinary and special resolutions, responding creditors will only be counted where particulars of their debt or claim have been provided to the trustee prior to the vote and the trustee has admitted the proof. The trustee must include a written record of the outcome of the proposal in books required to be kept under IPRB, s 70-10. A meeting may be adjourned either by resolution or by the trustee but it must be held not more than 15 business days after the original meeting date. Unless resolved otherwise, the adjourned meeting must be held at the same place as the original meeting. The trustee must then provide notice to other creditors by the end of the next business day. If the meeting is adjourned for more than six business days, the trustee must give notice of where and when the adjourned meeting is being held at least five business days in advance. Within 10 business days after the end of a meeting, the trustee must prepare and sign minutes of the meeting, including an attendance list: see IPRB, s 75-145; AFSA Form – Record of persons present at meeting of creditors. These records should be available for inspection at the trustee’s firm. If the trustee is unable to sign the minutes, a creditor who attended the meeting may do so. 16 See AFSA’s Notice of Proposal to Creditors of IPSB s 75-40; IPRB, ss 75-130 and 75-137 .

[6.150]

6 Administration of the Bankruptcy

235

Rules about proxies and attorneys

[6.135] A creditor may appoint an individual (other than the regulated debtor) as their proxy, or someone acting under a power of attorney, who then has the same rights to speak and vote at the meeting as if they were the creditor. A proxy or attorney only has effect if the instrument of appointment has been given to the trustee. Proposals for approval of the trustee’s remuneration require a specific instrument appointing the proxy or attorney to enable that individual to vote. A company can nominate a proxy but it does not need to; an authorised company officer can attend and vote as the company: Pascoe v Prentice [2003] FMCA 198. Additional rules for particular kinds of estates

[6.140] For creditors’ meetings in joint bankruptcies, (see paras (a) to (d) of IPRB, s 75-170(1)) the trustee must explain the likely effect of s 110 of the Act on the distribution of dividends. That section determines how payments are to be applied to joint and separate estates. Where applicable, the trustee must also explain the likely effect of s 141 on the distribution of joint and separate dividends. Where a debtor lodges a proposal under s 73(1), the trustee must call a meeting and send a copy of the proposal and a report on the proposal at least five business days before the meeting. If at the meeting, the proposal is accepted by special resolution, the trustee must make the composition or scheme of arrangement available for inspection by the creditors. The trustee may refuse to call a meeting if the proposal does not adequately account for the trustee’s approved fees as accrued at the time the proposal is lodged and where those fees cannot be taken out of the debtor’s estate. Directions from creditors for a meeting to be called

[6.145]

Creditors can direct that a practitioner convene a meeting under IPRB, s 75-15. Where the creditors meet the thresholds in that section, the practitioner must comply with the request unless it is unreasonable. Unreasonable creditors’ directions to call a meeting

[6.150] Under IPRB, s 75-250(2), such directions will be considered unreasonable where the practitioner is of the opinion that one of the following applies, where: • complying with the request would substantially prejudice the interests of a creditor, group of creditors or a third party, and that prejudice outweighs the benefits of complying with the request. • there is insufficient available property to comply with the request. • a meeting on the same matters has already been held or will be held shortly. • the request is vexatious. The terms were discussed in more detail earlier: see [6.75]. If a practitioner rejects a request for a meeting to be held, he or she must do so in good faith.

236

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.155]

While a request will be deemed to be vexatious where a similar direction has been given within the past four weeks, this does not seek to limit the definition of the term “vexatious”. If the creditors are willing to bear the cost of calling and holding a meeting, the trustee must comply with their direction even if there are insufficient funds, or a meeting has already been or will be held: IPRB, s 75-250(5). Duties when presiding

[6.155] Under IPRB, s 75-260, the trustee has certain duties when presiding at a creditors’ meeting, including ensuring the various meeting requirements are complied with. It also requires that the trustee ensure those attending have adequate opportunity to ask questions. Removal

[6.160] IPRB, s 90-35 provides that the creditors can resolve to remove a trustee and appoint another trustee in their place. The incoming trustee must provide the outgoing trustee a written consent to act and a declaration of any relevant relationships, indemnities or other potential issues that could impact on their independence or that otherwise represents a conflict of interest or duty. At the meeting, both the outgoing and incoming trustees have a right to speak to the creditors. This assumes that there is an incoming trustee. If creditors resolve simply to remove a trustee, the Official Trustee becomes the trustee: s 160. Committees of inspection

[6.165] It remains to explain committees of inspection, which have been referred to throughout this and earlier chapters. A brief introduction to them was given to them in Chapter 2. In large or complex bankruptcies, creditors may resolve to have a committee of inspection: IPRB, s 80-10. It consists of between three and five persons elected at a creditors’ meeting, whose function it is to advise and assist and if necessary direct the trustee and to monitor the conduct of the administration: IPRB, s 80-35. It allows creditors to exercise greater control over trustees than is available through the general body of creditors. A committee is optional. A trustee may want to have a committee if some of the creditors have special knowledge or experience concerning the business in which the bankrupt was engaged or a trustee may seek a committee where an estate is difficult and advice may be needed, or where there is a large number of creditors for which meetings would be costly and time-consuming. Only creditors or their representatives are entitled to be a member of a committee, along with the Commonwealth if there is a valid FEG claim: IPRB, s 80-5. A large creditor, or group of creditors, representing at least 10% in value may appoint a person to a committee – IPRB, s 80-20; as may employees of the debtor

[6.170]

6 Administration of the Bankruptcy

237

representing at least 50% in value: IPRB, s 80-25. That creditor must then not purchase any part of the assets of the estate; IPRB, s 80-60, unless creditors permit it The rules provide details of the process, including for committee members’ resignation and replacement IPRB, Div 80. Members of a committee owe fiduciary duties to the creditors as a whole. In keeping with that, they are unable to purchase directly or indirectly any part of the estate of the bankrupt without leave of the court: IPRB, s 80-55 or in other specified circumstances. The trustee or a member is entitled to call a meeting of a committee at any time: s 70(6). The committee acts by a majority and can only act if a majority of its members is present: s 70(7). In reality, given the less complex nature of most bankruptcies, committees are rarely needed. IPRB, Div 80 gives power to a committee to request information or reports from the trustee, subject to the request being reasonable. The rules contain details of what is reasonable, the time within which the request must be met, and notification of unreasonable requests; IPRB, ss 80-15, 80-20 and 80-25. A committee may obtain its own advice or assistance, after first obtaining the trustee’s approval or that of the court: IPRB, s 80-50. Such an expense is an expense of the administration, unless the court orders otherwise: s 109. The Inspector-General may attend committee meetings: IPRB, s 80-65. The court has a general power to inquire into the conduct of a committee and make any orders that are needed to ensure the proper conduct of the committee: IPRB, s 80-70. Comparable powers are given to committees in corporate insolvency.

Taking possession of property [6.170] One fundamental feature of the trustee’s administration of a bankrupt estate is the location and recovery of property. The trustee must take possession of all of the bankrupt’s property immediately, where it is physically possible to do so: s 129(1). With items of property such as real estate the trustee should take possession of the title deeds and lodge a caveat on title.17 Naturally, if the trustee delays in acquiring possession, an uncooperative bankrupt is given more time in which to conceal or dispose of property. Therefore, the trustee will, in some cases, try to obtain possession of assets as a priority, to the extent of going out to secure them on the very date of the bankruptcy. If a bankrupt refuses to give up possession of any property, the trustee may apply to the court seeking an order for an order to force the bankrupt to hand over property: s 129(2). Trustees will usually only take such action as a last resort after making verbal and written demands. 17 The right to do this will depend on the particular law of the State or Territory where the real property is located.

238

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.175]

CROSS-BORDER BANKRUPTCIES [6.175] The “property” (s 5) of the bankrupt extends to property situated overseas, although the legal effect of that will depend on the rules of private international and the law of the overseas jurisdiction: Callender, Sykes and Co v Lagos Colonial Secretary and Davies [1891] AC 460. There are two regimes available for the recovery of assets overseas – the Model Law on Cross Border Insolvency and the traditional provisions under 29 of the Bankruptcy Act.

Cross-Border Insolvency Act [6.180] If an Australian trustee is pursuing assets overseas, in a country that has adopted the Model Law, the trustee can apply to the relevant foreign court for recognition of the Australian bankruptcy as a “foreign main proceeding”, based on Australia being the bankrupt’s “centre of main interest” (COMI). The Australian trustee may then be authorised to pursue remedies and recoveries in that foreign country. Similarly, a foreign trustee may apply to an Australian court for recognition of their foreign bankruptcy, to pursue investigations and proceedings here. An Australian trustee in bankruptcy may be appointed under Arts 19 or 21 of the Model law to assist in that process: Palmer (Trustee), in the matter of Slater (Bankrupt) [2016] FCA 780.18 If that is the case, the Australian trustee must file a consent to act – Court Form B19. That form requires a declaration that the trustee is not aware of any conflict of interest or duty that would make it improper for them to act, and it also must disclose the trustee’s and their firm’s hourly rates. In Kapila, Re Edelsten [2014] FCA 1112, the Federal Court recognised US bankruptcy proceedings on the basis that the debtor had business assets in the US sufficient to constitute an “establishment” under the Model Law. But the debtor’s COMI was in Australia where his companies had their registered offices, where the bulk of his assets were located and where he appeared to have a number of homes (although it was unclear exactly where he resided). The court found that the debtor’s “habitual residence” was in Victoria which meant that the COMI was not the US. The court imposed a moratorium preventing actions against the debtor or his assets and gave the US bankruptcy trustee the right to administer his assets in Australia with the assistance of an Australian insolvency practitioner.

Bankruptcy Act, s 29 [6.182] Particularly if the overseas jurisdiction has not adopted the Model Law, a trustee still has the traditional processes under 29 of the Bankruptcy Act. Under s 29(4) of the Act an Australian court, on behalf of an Australian trustee, may request a foreign bankruptcy court to assist in the recovery of overseas property of the bankrupt: Warner, in the matter of Rivkin [2007] FCA 2020; Re Lyons; Ex parte Official Trustee in Bankruptcy [2000] FCA 1428; (2000) 104 FCR 486. The country from 18 As to the registration of the foreign trustee over property in Australia, see Palmer v Registrar-General of Land Titles of the Australian Capital Territory [2017] ACTSC 407.

[6.182]

6 Administration of the Bankruptcy

239

which assistance is requested will often itself have reciprocal laws obliging it to assist the Australian trustee as a foreign trustee.19 Similarly, a foreign court may, on behalf of a foreign trustee, request an Australian court for assistance (see the Insolvency Act 1986 (UK), s 426), for example, to appoint a local Australian trustee to secure assets of the foreign bankrupt estate that are located in Australia: Dick v McIntosh [2001] FCA 1008; Levy v Reddy [2009] FCA 63. Under s 29(2), an Australian court must assist bankruptcy courts of prescribed countries but it has a discretion to assist courts of other countries. The prescribed countries are the United Kingdom, Canada, New Zealand, Jersey, Malaysia, Papua New Guinea, Singapore, Switzerland and the United States: s 29(5); reg 3.01. The power granted by s 29(3) in relation to courts of other countries that are not prescribed is discretionary and there is no initial assumption that the Australian court is bound to give all the assistance it can.20 However, if overseas bankruptcy proceedings are also involved, the international rules of comity between courts will generally mean that the Australian court will make the orders sought. In any event, s 29 of the Bankruptcy Act must be read subject to the impact of the Cross-Border Insolvency Act. The Model Law imposes a mandatory obligation on the Australian court to co-operate with courts or representatives of foreign jurisdictions, inconsistent with the discretionary decision available under s 29(3). Section 21 of the Cross-Border Insolvency Act provides that, in relation to s 29, the Model Law and the Act prevail. On receipt of a letter of request from a foreign court, the Australian court can exercise such powers it has as if the matter had arisen in Australia: s 29(3). In the case of a country that is not a signatory to the Model Law, s 29 continues to be available to an Australian trustee. The intersection between the two is illustrated by Gainsford v Tannenbaum [2012] FCA 904; (2012) 216 FCR 543, the Federal Court of Australia declined to recognise a South African bankruptcy under the Model Law (at [4.60]), because the bankrupt had neither a COMI or an establishment in South Africa. But the court acted on a letter of request under s 29(2)(b) even though South Africa is not a prescribed country. The Federal Court ordered examinations and production of documents in Australia to assist the South African trustee.21 On the other hand, a New Zealand bankruptcy was recognised in Australia allowing the Official Assignee to recover income contributions from a NZ bankrupt working in Australia: Official Assignee in Bankruptcy of the Property of Cooksley, in the matter of Cooksley v Cooksley [2017] FCA 1193. 19 See the judgment of the Royal Court of Jersey in Warner as trustee of the deceased estate of Rivkin v Equity Trust (Jersey) Ltd [2008] JRC 003. 20 Ayres v Evans (1981) 56 FLR 235; [1981] FCA 213; Rolfe v Transworld Marine Agency Co NV (1998) 83 FCR 323 (concerning ss 580 and 581 of the Corporations Act 2001 (Cth) which are the equivalent corporate insolvency provisions). 21 Australia’s approach to the adoption of the Model Law, and in the context of this decision, is criticised in McCormack and Hargovan, “Australia and the International Insolvency Paradigm” (2015) 37(3) SLR 389.

240

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.185]

Once assets are recovered, the trustee may realise them and pay dividends. One cross-border rule is that a creditor who levies execution on overseas assets of an Australian bankrupt is not permitted to prove and receive a dividend in the bankruptcy without first bringing into the “hotchpot” what has been recovered overseas.22 This old rule is now found in Art 32 of the Model Law.

INVESTIGATIONS [6.185]

Much of the role of the trustee is investigative, in attending to several of the duties listed in s 19(1). The trustee will examine the bankrupt’s books, cash receipts, title to assets, bank accounts, disposal of assets, and dealings with others. The trustee will generally interview the bankrupt personally, his or her family members and other relevant persons. Naturally, the extent of the investigations carried out by the trustee will depend on the nature of the estate of the bankrupt, the bankrupt’s attitude,23 and, in particular, the funds available. Only minimal investigations are possible if there are no funds to pay the trustee. The prime objective of the investigative work is to discover, and if necessary recover, assets to which the bankrupt’s creditors are entitled. There are a number of provisions in the Act which provide for and assist investigations by a trustee. As a general authority, s 19AA allows the trustee to carry out an investigation in relation to the bankrupt’s conduct and examinable affairs, and relevant books and other records. The Div 42 Standards set minimum levels of conduct in investigations and in locating and protecting assets: IPRB, ss 42-30 to 42-50. In small estates – “consumer bankruptcies” – which comprise a large percentage of bankrupt estates, little if any investigatory work needs to be performed. In addition, IPRB, s 42-30 provides for preliminary inquiries and actions that a trustee is expected to undertake at the start of each administration. This section goes into detail in relation to how a trustee should commence the administration of the estate with “a proactive and considered approach” that provides “transparency and consistency in relation to the high standard of professionalism expected of a regulated trustee”.

Preliminary inquiries and actions [6.190]

The trustee must undertake preliminary inquiries and actions at the start of each administration, including the following: (a) informing the debtor of their obligations under the Act and the penalties for failing to comply; (b) obtaining and reviewing the statement of affairs; (c) if necessary, interviewing the debtor to clarify any matters in the statement of affairs;

22 See Mason, “Hotchpot and Other Tasty Morsels in International Insolvency” (1995) 3 Insolv LJ 149. 23 As to the difficulties of dealing with an uncooperative bankrupt, see Gorkowski v Turner [2014] VSC 200; on appeal, see Turner v Gorkowski [2014] VSCA 248.

[6.190]

6 Administration of the Bankruptcy

241

(d)

identifying and making an assessment of realisable assets that could be expected to provide, on a cost-benefit basis, a return to creditors; or contribute to the payment of the costs and fees of the administration; (e) assessing the income contribution that the debtor is liable to pay calculated in accordance with s 139S; (f) determining the likelihood of the estate having property that can be realised to pay a dividend to creditors; (g) if the trustee has a genuine reason for believing that the debtor may not have disclosed an interest in real or other registered property, conducting appropriate searches; (h) if information obtained from those searches shows that the debtor has not made full and true disclosure, making inquiries, or otherwise explaining to the creditors why; (i) if the trustee considers that there may have been antecedent transactions, making relevant inquiries to identify them; (j) co-operating with the Inspector-General by, for example, responding to reasonable requests for information. The trustee is also required to “consider” the views of creditors regarding the extent to which investigations are undertaken and must inform creditors, as soon as practicable, of the outcomes of any such inquiries undertaken: IPRB, s 42-35. The trustee must realise only those assets: (a) that will give a cost-effective return to creditors; or (b) that contribute to the payment of the costs of the administration; or (c) that may be realised in accordance with any personal insolvency agreement: IPRB, s 42-40. In determining the ownership of divisible property, the trustee must act reasonably and claim only the amount that fairly represents the interest in, or value of, the property. One example is real property in which there is no equity. If the market value of divisible property is significant, but is not readily ascertainable; the trustee must obtain advice from an independent expert to assess the extent of the trustee’s interest in it and its value and the worth of any offers received. A trustee must act independently and impartially in undertaking transactions and dealings relating to the disposal of property debtor: IPRB, s 42-55. Under IPRB, s 42-60, in conducting an administration, a trustee must incur only those costs that are necessary and reasonable; and before deciding whether it is appropriate to incur a cost, compare the amount of the cost likely to be incurred with the value and complexity of the administration. When claims on assets or funds held by someone are made by trustees, there will inevitably be a period of time before a final order determining the trustee’s claim is made. Court rules generally allow “freezing orders” to be made against the assets of that person, so as to prevent “the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied”: Federal Court Rules 2016 (Cth), r 7.32. The

242

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.195]

order may restrain the person from removing, disposing of, dealing with or diminishing the value of those assets. A freezing order may be made without notice to the person holding the funds or assets, if there is a danger of their removal. Such orders will operate pending a final determination of the true ownership of the assets or funds: see Melluish as Trustee of the Estate of Eriksson [2015] FCCA 2235.

Search warrants: s 78 [6.195] A bankrupt is required by s 77(1)(f) to disclose to the trustee any divisible property acquired during the bankruptcy, and must not conceal or remove any of their property: s 78(1)(d). If a bankrupt does not comply, the trustee may apply for an order allowing the trustee to seize the property: s 78(1). In addition, the trustee may apply for a warrant for the committal of the bankrupt to jail. A search warrant is another alternative if the circumstances are serious. If the trustee suspects that certain property is at particular premises, whether owned by the bankrupt or someone else, the trustee may apply to an eligible judge (see s 129A)24 for a warrant authorising the search of the premises and the seizure of named property: s 130(1), (2). The warrant may also allow the seizure of property and books connected with the bankrupt’s examinable affairs. The “examinable affairs” of a bankrupt are widely defined in s 5(1) and extend to the books of an associated entity of the bankrupt in so far as these relate to the bankrupt or their conduct, dealings, transactions, property and affairs: s 5(1). Orders for arrest and search warrants are not given lightly and courts will require compelling reasons from the trustee for orders to be made.

Other administrative processes [6.200] The Act includes certain other administrative procedures which can be used by the trustee in the course of investigating a bankrupt estate. Some of the procedures are discussed briefly below. There are three categories: • the first being a demand notice issued simply by the trustee – the s 77A notice; • the second being notices issued only by the Official Receiver, on behalf of the trustee – being the ss 77AA, 77C and 81A notices; and • the third being the s 81 summons, which is issued by the court at the request of the trustee. Access to books of associated entities: s 77A

[6.205] When a trustee is conducting an investigation pursuant to s 19AA, the trustee may demand in writing that a person produce specified books of an associated entity of the bankrupt that are, “in the trustee’s opinion”, relevant to the investigation: s 77A(2). Section 77A is construed in a similar way to s 81 in relation

24 The reasons for issuing a warrant are not subject to administrative review: Trollope v The Honourable Justice Middleton [2008] FCA 564; (2008) 169 FCR 507.

[6.210]

6 Administration of the Bankruptcy

243

to public examinations: see [6.230].25 A purpose of s 77A is to permit the trustee to inspect books without having to incur the cost of an examination. The effect of non-compliance with a s 77A notice is stated in s 81G, to the effect that the information or books sought cannot be admissible in subsequent legal proceedings for the recovery of income contribution under s 139ZG, for the recovery of an amount a person is liable to pay under s 139ZL, or in voidable transaction proceedings, for example under s 120: s 81G(2). But that does not apply where the person served with the notice can prove that the information or books were not in their possession and there were no reasonable steps they could have taken to obtain them: s 81G(3). See Pascoe v Idameneo (No 123) Pty Ltd [2014] FCCA 650. Section 81G has an impact on other similar proceedings. A person served with a s 77A notice can refuse to produce documents that are subject to legal professional privilege: Re Steele [1994] FCA 905; (1994) 48 FCR 236. See [6.40]. Access to premises: s 77AA

[6.210] Section 77AA allows access by the trustee, with the assistance of the Official Receiver, to premises to search for books and records. It is based on the former s 263 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), an investigative provision available to the Tax Commissioner. This section significantly increases the scope of the powers of investigation of the trustee, who, along with staff, is entitled to accompany and assist the Official Receiver in the search, under relevant written authority. It is therefore a serious exercise of the discretion to decide to issue such a notice. An occupier or owner of premises is required to provide the Official Receiver with all reasonable assistance for the effective exercise of the powers given by the section. There is a penalty of $3,000 for non-compliance. If reasonably necessary, the Official Receiver may remove the books from the premises to take copies and retained until a decision is made that they are no longer needed or are not relevant to the bankrupt’s examinable affairs. The books may be inspected by their owner while the Official Receiver holds them. Notices may be used where parties are refusing to co-operate with the trustee or the trustee considers that the books are likely to be concealed or about to be destroyed.26 The notices may be directed to family members, advisers and associates of the bankrupt as well as to the bankrupt. The notices are of the same nature as search warrants. A person served with a s 77AA notice can claim legal professional privilege to prevent the trustee having access to documents subject to that privilege: Re Steele (1994) 48 FCR 236; [1994] FCA 905; Worrell v Woods (1999) 90 FCR 264. See [6.40]. 25 Re Simersall (1992) 108 ALR 375; [1992] FCA 221. 26 AFSA provides a template for a s 77AA notice on its website, see http://www.afsa.gov.au.

244

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.215]

AFSA’s practice statement on the issue of statutory notices by the Official Receiver,27 says that the issue of a s 77AA notice has to be justified by the trustee, including explaining why that notice is required rather than the less severe s 77C notice. In reality, s 77AA notices are rarely issued, as compared to s 77C notices, which we now discuss.

Private examinations: s 77C notices [6.215] Section 77C is a further provision issued by the Official Receiver on behalf of a registered trustee. It is founded on s 264 of the ITAA 1936, an equivalent provision giving powers to the Tax Commissioner to examine persons in relation to the affairs of taxpayers. Section 77C empowers the Official Receiver to give notice to a person, whether a bankrupt or not, requiring that person to give information and to attend before the Official Receiver to give evidence and produce all relevant books in their possession. The Official Receiver may require that the information or evidence be given on oath. The Official Receiver presides over the examination which is usually conducted at an AFSA office. The person being examined and the trustee attend, and their lawyers, and others at the discretion of the Official Receiver. According to ORPS 7 the Official Receiver will try to ensure that the examination is “conducted in an orderly manner and with enough flexibility and informality to ensure full, complete and truthful information to be obtained”. The power given under s 77C is an inquisitorial, investigative power which is administrative in nature: Re McKee; Ex parte Laroar Holdings Pty Ltd v Ross (1996) 71 FCR 156; [1996] FCA 1170. It is designed to permit the trustee to discover what assets the bankrupt had, what has happened to them, and whether proceedings should be initiated in order to recover them. The procedure to be followed at examinations is a matter for the Official Receiver and no parameters are laid down by the Act. Improper or irrelevant questions should not be asked. Interviews are flexible and permit persons conducting them to allow other interested parties such as the trustee or their lawyer to ask questions. A person being interviewed is entitled to be represented by a lawyer. A failure to give the information required by a s 77C notice or to attend before the Official Receiver are offences punishable by imprisonment: ss 267B, 267D. Persons attending these examinations are entitled to reasonable expenses incurred for transport, meals and accommodation, together with $20 per day conduct money: s 77D. As with s 77A notices, s 81G also applies in relation to the non-compliance with a s 77C notice. The information or books sought cannot be admissible in subsequent legal proceedings for the recovery of income contributions, or in voidable transaction proceedings, unless the person served with the notice can prove that the information was not in their possession and there were no reasonable means for them to obtain the information. See [6.250]. 27 ORPS 7 – Exercise of the Official Receiver’s powers to assist trustees.

[6.225]

6 Administration of the Bankruptcy

245

In the normal course a transcript of an examination cannot be admitted as a business record in proceedings: s 69 Evidence Act 1995 (Cth). See Fodare Pty Ltd v Shearn [2010] NSWSC 737. However, s 255 of the Bankruptcy Act provides that the tender of any transcript of a s 77C or a s 81 examination is admissible as evidence, unless the court makes an order to the contrary. There is no requirement that the person be a party to the proceeding. Inspector-General Practice Direction (IGPD) 11 – Trustees’ guidelines for issuing objections to discharge when statements of affairs not yet filed says of ss 77C or 81 that they may be used in order to obtain a statement of affairs, but the two sections “create an extra cost and require the trustee to exercise their discretionary powers and experience in the most efficient and effective manner”.

Challenging statutory notices [6.220] A person can apply to the court under s 30 of the Act to challenge a s 77C or other statutory notice of the Official Receiver, or under s 15(5) which allows the court to review an act done by an Official Receiver. On either of these bases, there is a hearing de novo of the Official Receiver’s decision to issue the notices. Also, application may be made pursuant to the Administrative Decisions (Judicial Review) Act 1977 (Cth), to review the administrative decision of the Official Receiver in issuing the notice: Tsakirakis v Official Receiver [2013] FCCA 106, subject to a discretion of the court to decide otherwise: see Kiem Dang Investment v Mansfield & Anor [2017] FCCA 725 (a decision in relation to a s 139ZQ notice). [6.225]

The court in Re Jonson; Ex parte Prentice [1997] FCA 868 said that the power given, in that case by s 77C, “is one with far reaching consequences and must be approached responsibly by applicants for summonses and controlled carefully by the Court”. The notice should convey to the recipient with reasonable clarity what information or documents are sought, and show on the face of the notice that it is issued for a proper purpose: CK Nominees Australia v Official Receiver (WA) [2007] FCAFC 118; (2007) 160 FCR 524. In that case, the court found that the notices were oppressive – they covered a period of over five years, and sought 16 categories of documents, many of which required judgment calls as to the nature of the document and connection with the subject matter, in respect of entities comprising 15 individuals and 39 companies. The court said that “compliance with notices in this form would inevitably impose an unnecessary burden of time and expense upon the recipients”. Hence any notice which requires the production of documents should indicate that the documents sought are restricted to those relevant to the bankrupt’s examinable affairs: Re Terry [1994] FCA 1531. A court may decide to sever invalid parts of a notice, but it is not possible to rewrite categories of documents or categories of evidence sought in the notice.28 A notice must specify a reasonable time within which the person must comply. This will depend on the circumstances, including the kind of documents sought, and their extent. 28 Re Terry [1994] FCA 1531; Re McKee; Ex parte Laroar Holdings Pty Ltd v Ross (1996) 71 FCR 156; [1996] FCA 1170.

246

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.230]

As to the privilege against self-incrimination, the court in Bond v Tuohy expressed some doubt as to the width of the privilege in respect of the production of documents in all circumstances but it accepted that an objection based on the privilege could be raised by a person being examined under s 77C.

Public examinations: s 81 [6.230] Section 77C examinations have made the need for the more formal public examinations under s 81 of the Act less frequent. Section 81 examinations involve the bankrupt or another person attending in a courtroom where they are asked questions by the trustee or the trustee’s legal representative, often a barrister. A registrar presides at the examination, although judges may also do so: Pollak v Lombe [2004] FCA 362. The examinations must be held in public (s 81(2)) and creditors in particular can attend and take part. The media often attend and report on examinations in significant bankruptcies or those of public interest. In considering whether to proceed to a s 81 examination, or rely on s 77C, the trustee would bear in mind the time and costs since s 81 examinations can be expensive to conduct, and whether these factors would outweigh the benefits. In any event, trustees will not usually resort to either type of examination unless they have first interviewed, or tried to interview, the person from whom they wish to obtain information. In the case of the bankrupt, the trustee will ordinarily first request them to attend for an interview to answer questions, and the law requires them to do so: s 77(1)(b). Also, trustees may also first proceed under s 77C before then resorting to a s 81 examination. Other factors which may be relevant to deciding upon a s 81 public examination include: • where the person whose evidence or information is required is expected to be difficult and there is a need for a registrar to be present to direct the answering of questions; • where it may be that the attendance by the person before a registrar might encourage the person to answer questions honestly and to provide complete answers; or • whether the publicity of an examination may cause creditors or others to come forward with information to assist the trustee. Persons who may be examined

[6.235] Besides the bankrupt (called a “relevant person” in the section), anyone who comes within the definition of an “examinable person” (defined in s 5(1)) can be examined. An examinable person includes the following, being persons: • known or suspected of possessing property of the bankrupt; • who are believed to be indebted to the bankrupt; • capable of giving information about the bankrupt or the bankrupt’s examinable affairs; and • who possess books relating to the bankrupt or to the bankrupt’s examinable affairs. While the trustee of the bankruptcy is the usual applicant for a public examination, any creditor and the Official Receiver (whether the trustee of the estate or not) may

[6.245]

6 Administration of the Bankruptcy

247

apply: s 81(1). Orders for examination may not be made against persons not resident or physically present in Australia, except perhaps in the case of Australian citizens: Southwell v Maladina [2002] FCA 802; (2002) 194 ALR 51; Park v Tschannen [2016] FCA 137. Application for summons and affidavit in support of a summons

[6.240] Applications for summonses are dealt with in the Courts’ Bankruptcy Rules, Divs 6.3 and 6.4. An examination for a summons to the bankrupt need only identify the bankrupt and state any records and books that are to be produced. In the case of a summons to an examinable person, an application (Court Form 10) must be supported by an affidavit that includes the facts relied upon to establish whether the person is an examinable person, and if books have been requested, what requests have already been made for those books and whether the person has refused to co-operate. Any such application is made ex parte to the registrar in chambers and there is an obligation of full and frank disclosure by the trustee as applicant in explaining in the affidavit why the summons should be issued.29 The affidavit itself is to be placed in a sealed envelope and is not open for public inspection: Courts’ Bankruptcy Rules, r 6.13(5). This is because the trustee will often be disclosing information and strategy in the affidavit, in support of the summons being issued, which the person to be examined should obviously not see. A s 81 summons in Court Form 9 is then issued by the court. It must be served at least eight days before the examination date and notice must be given to the creditors. The examination

[6.245]

The power to examine contained in s 81 is broad. The section allows a wide category of persons to be examined, together with a wide scope for matters which can be put to the examinee. It includes persons who are or may be associated with the bankrupt, and with corporations, trusts and partnerships with which the bankrupt is or has been associated. The scope of permissible questioning extends to all the financial activities – the examinable affairs – of the bankrupt, including the financial affairs of an “associated entity” of the bankrupt. See Karounos v Official Trustee [1988] FCA 180; (1988) 19 FCR 330. An application under s 81 can also seek to have included in the summons a requirement that the person to be examined produce at the examination relevant books, including those of an associated entity: s 81(1B). The bankrupt cannot rely upon the privilege against self-incrimination to refuse to produce the books: Griffin v Pantzer (2004) 137 FCR 209; 1 ABC (NS) 625, 672. However, the protection of legal professional privilege is available. An admission of indebtedness to the bankrupt by a person being examined can result in an order by the presiding registrar for payment by that person of that debt to the trustee under s 81(12): Nicholls as Trustee of the Property of Hills v Hills [2004] 29 Perazzoli v BankSA [2017] FCAFC 204 at [208].

248

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.250]

FCA 333.30 An order may also be made against a person who admits they hold divisible property of the bankrupt: s 81(13). As with s 77C examinations, s 255 of the Bankruptcy Act provides that the tender of any transcript of a s 81 examination is admissible as evidence, unless the court, or a court in which the transcript is sought to be introduced, makes an order to the contrary. Nature of the power The power to examine is administrative when exercised by registrars;31 they are unable to exercise judicial power because of the constraints of the Commonwealth Constitution: Cheeseman v Waters (1997) 77 FCR 221. It is inquisitorial,32 and the examinee is in fact, the witness of the court.33 Each question is put to the examinee on behalf of the court and not in order to make out or strengthen a party’s case. The traditional rules of evidence are not allowed to operate to limit the examination: Griffin v Pantzer (2004) 137 FCR 209; 1 ABC (NS) 625; [2004] FCAFC 113.

[6.250]

The primary purpose of the power under s 81 is to enable the trustee to discover assets of the bankrupt and gain evidence to assist in recovering them. An examination also assists the trustee to determine the bankrupt’s income and employment arrangements. The examination may reveal evidence that offences have been committed.34 As the power to examine is of a broad and inquisitorial nature, the courts have, out of concern for possible abuse, cautioned that care must be exercised in allowing examinations, and in the examinations themselves, so that examinees are not unfairly disadvantaged.35 The courts attempt to achieve a fair balance between two competing interests: the public interest of ensuring that the bankrupt estate is administered efficiently and openly; and ensuring that the entitlement of the examinee to confidentiality and privacy in respect of matters not relevant to the bankruptcy is respected. Having said this, the courts also assign considerable weight to the views of the trustee as the one most knowledgeable about the estate.36 A trustee will not be presumed to have acted unfairly or for an improper purpose in having a summons issued, except on convincing evidence. Restrictions on examinations

[6.255] The power to examine is not unlimited. It is limited by the terms of the summons and by the Act itself. A common and broad basis of challenge is that the 30 See also Nicholls as Trustee of the Property of Hills v Hills [2004] FCA 1627. 31 Re Weiss [1983] FCA 361; (1983) 74 FLR 259, 263; R v Zion [1986] VR 609, 614. 32 Re Csidei (1979) 39 FLR 387, 391; R v Zion [1986] VR 609, 614. 33 Re Andrews (1958) 18 ABC 181, 184. 34 For a discussion of whether s 81 may be used to examine a former trustee see: Vitek v Taheri [2012] FMCA 536. 35 Karounos v Official Trustee [1988] FCA 180; (1988) 19 FCR 330. See Keay, “The Parameters of Bankruptcy Examinations” (1994) 22 ABLR 75. 36 Re Csidei (1979) 39 FLR 387, 393; Re Rothwells Ltd (No 2) (1989) 7 ACLC 576, 587.

[6.260]

6 Administration of the Bankruptcy

249

trustee is acting in abuse of process in pursuing the examination, that the summons is oppressive, for example if it is too wide in requiring the extensive production of documents or documents over a long period of time.37 As the court said in Perazzoli v BankSA [2017] FCAFC 204 at [209]: “The compulsive power in s 81 is a power to further the Trustee’s performance of his role and must not be used for purposes foreign to those for which it is conferred”. During the examination, it may be alleged that the trustee is merely engaging in a “fishing expedition” for information or evidence, without real purpose or focus, simply hoping something will turn up;38 or is asking irrelevant questions at the examination, or questions that are not within the scope of the summons or indeed the Act.39 While the trustee should properly confine their examinations to relevant issues, it can be the case that questions are asked that may appear irrelevant or unfocused, but in reality are a legitimate process of the investigative element of the examination. Any challenges to questions asked are determined by the registrar presiding. At the beginning, objections may be taken to the summons itself, in particular by an examinable person, that the notice appears on its face to be too broad or to raise issues that do not appear relevant. Again, this has to be assessed in light of the fact that the summons is usually only issued after the trustee has conducted investigations; and the reasons for the scope and detail of the summons, as explained to the registrar in the trustee’s confidential affidavit, may not be apparent on the face of the summons. Nevertheless, if the summons is on its face too wide, the notice may be set aside by the court; indeed it may not be issued in the first place by the registrar for that reason. Privilege

[6.260] Another restriction on the use of s 81 is that it may not be used to require any non-bankrupt examinees to answer questions which may incriminate themselves or to deny the right of the examinee to claim legal professional privilege.40 While the bankrupt can claim the protection of legal professional privilege, the privilege against self-incrimination has been expressly abrogated as far as the bankrupt is concerned: s 81(11AA). Any questions which might tend to incriminate must be answered, and documents produced. Nevertheless, it is always a matter for the presiding registrar to excuse a bankrupt from answering any particular 37 See Karounos v Official Trustee [1988] FCA 180; (1988) 19 FCR 330. 38 Re Hodder (1965) 7 FLR 436, 437; Re Alafaci (1976) 9 ALR 262, 271. 39 Hamilton v Oades (1989) 166 CLR 486; 63 ALJR 352, 364. 40 See generally, Moore, “The Sanctity of Legal Advice: Legal Professional Privilege and Bankruptcy” (1997) 5 Insolv LJ 24. See also Lombe v Pollak [2004] FCA 264; Perazzoli v BankSA, a division of Westpac Banking Corporation Limited [2017] FCAFC 204.

250

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.265]

question that might be unfair, particularly if the question might prejudice a pending criminal trial, or to impose restrictions on access to documents.41 Contemplated or existing proceedings

[6.265] Claimed abuse of process by the trustee may be raised by those being pursued through litigation or contemplated litigation; they may challenge an examination on the basis, for example, that the trustee is unfairly using the examination process to assist in the trustee’s litigation claim. However, the law is that a trustee may in fact use the summons process to assist in the preparation or conduct of legal proceedings. In Crawford v Sellars (Trustee) in the matter of Hussen (Bankrupt) [2000] FCA 162, the trustee had commenced ss 120 and 121 applications against a company. In the course of those proceedings, he served a s 81 summons on the directors. The company sought to set aside the summons saying that it was an abuse of process, and that the trustee should use the normal litigation mechanisms of subpoena and discovery, available to both parties, rather than seek to use powers available only to himself as a trustee. The court reviewed the authorities in this area and stated the following propositions: • Discharge or adjournment of a summons may be appropriate where there is litigation pending or likely to be instituted and it is alleged that: (i) the summons is being improperly sought as an aid to that litigation, where ordinary procedures of discovery, interrogation or subpoena would be fairer and more appropriate; or (ii) it would be more just and equitable to defer the examination until the litigation has been disposed of. • There is no material difference in principle between cases where proceedings have actually been instituted and where they are merely in contemplation. • The court will give due weight to the fact that the summons is issued at the request of a trustee who is an officer of the court and who will not be presumed to have acted unfairly or for an improper purpose except on convincing evidence. • But an abuse of the examination process might occur if: (i) litigation is on foot or in contemplation, and a potential witness is summoned simply for the purpose of destroying his or her credit and thereby gaining a forensic advantage. In such a case, if it becomes apparent in the course of the examination before the registrar that the procedure is being misused as a rehearsal for cross-examination, the applicant’s legal representative can object and the registrar will rule on the matter; (ii) all that is intended is a “dress rehearsal” for cross-examination; (iii) de facto discovery is sought where discovery in the trustee’s existing proceedings has been refused; or 41 See the considerations taken into account in Sharma v Yeo [2013] FCCA 444; Yeo v Sharma [2013] FCCA 1946.

[6.280]

6 Administration of the Bankruptcy

251

(iv) the examination is designed to obtain evidence for use in existing or contemplated proceedings brought or to be brought by someone other than the trustee. In response to the applicant’s claim that there was no admissible evidence to support the trustee’s application under ss 120 and 121, the court said that “the examination procedure is designed to establish, amongst other things, whether action should be begun or continued to recover the bankrupt’s assets. It is not improper for a trustee to use the power in s 81 to strengthen his case or assess its continued viability” (at [8]). Discharge of a summons

[6.270] A person wanting to challenge a s 81 summons must apply to the court to have the summons discharged – that is, set aside – either in whole, or in relation to particular requirements of the summons. An interim application (Court Form B) is made under the Pt 6 of the Courts’ Bankruptcy Rules. An affidavit setting out the grounds of objection is required, for example that the summons is oppressive or is beyond the scope of what is permitted by s 81. The registrar before whom the public examination is to be conducted may hear and decide upon the application for discharge of the summons: Travaglini v Raccuia (2007) 211 FLR 127; [2007] FMCA 777. Offshore information notices – s 81A [6.275] It remains to mention s 81A of the Act which permits the Official Receiver to issue an “offshore information notice” to be served on any person outside Australia who the Official Receiver believes has relevant information or books, to produce them. The notice must specify a time period for compliance which can be extended: s 81B. The notice is valid for 90 days only. The effect of non-compliance with the offshore information notice is stated in s 81G, to the effect that the information or books sought cannot later be admissible in subsequent legal proceedings for the recovery of income contribution under s 139ZG, for the recovery of an amount a person was liable to pay under s 139ZL; or in proceedings involving a question whether a transaction is void as against a trustee, for example under s 120: s 81G(2). But that does not apply where the person served with the notice can prove that the information or books were not in their possession and there were no reasonable steps that could have been taken to obtain them: s 81G(3). See [6.205]. These notices have not been much used, with only seven having been issued in 2012-2013 and fewer in the previous years.42

DISCLAIMER OF ASSETS [6.280] Generally, the trustee is concerned with realising all of the bankrupt’s property. However, some property is not wanted because it is worth little or is 42 AFSA, Annual Report 2013-2014, showing only five such notices issued. No later figures are published.

252

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.285]

unsaleable, or its retention costs pending sale are too high, or it involves risk. Contaminated land, or a long term lease, are examples. In such circumstances, a trustee will want to be rid of the property in order to avoid responsibilities and costs in relation to it. The trustee may do this by a statutory sanctioned action of disclaimer: s 133. In disclaiming, notice may be given by the trustee of an intention to abandon the property. There may be persons who suffer financial loss as a result, and they can lodge a proof of debt for the amount of loss involved, but they must at the same time try to limit this, to “mitigate their damages”. For example, if the trustee disclaims the lease of a bankrupt tenant mid-term, the landlord must mitigate its loss by securing another tenant as soon as possible. The property which the law allows the trustee to disclaim is that described in s 133(1AA), (1AB) and (1A): • land burdened with onerous covenants, for example a restriction on the permitted use of the land, thereby limiting its value;43 • property that is unsaleable or not readily saleable, for example it may be contaminated, or be remote rural land; • property for which it is reasonable to expect the costs of realisation would exceed the sale proceeds; and • contracts that form part of the bankrupt’s property that the trustee does not wish to complete, for example a building contract. A notice of disclaimer under s 133(1) or (1A) of the Act must identify the property or contract being disclaimed and other information: Bankruptcy Regulations, reg 6.10. Notice must be given to each person who, to the trustee’s knowledge, has an interest in the property or who is entitled to a benefit of, or subject to a burden or liability under, the contract. The trustee is able to disclaim the legal title even though no transfer of the title to the trustee has been effected on the relevant register: ING Bank (Australia) Limited v State of Queensland, in the matter of Watson [2017] FCA 411.

Example – leasehold, rural properties, contaminated sites [6.285] Use of the right of disclaimer is common where the bankrupt leases real property, for example, an office or factory. Under s 58(1) of the Act, the lease would vest in the trustee and the trustee would become personally liable for the rent and responsible for complying with the lease. In such a case, unless the premises were needed to allow the trustee to carry on the bankrupt’s business pending its sale, the trustee would probably disclaim the lease, but with court leave: s 133(4). A trustee would also want to disclaim a rural property of little value over which there are accumulated statutory charges for unpaid rates: Re Buloke Shire Council [2005] FMCA 793. 43 As to what can be encompassed in land “burdened with onerous covenants”, see Re Middle Harbour Investments Ltd [1977] 2 NSWLR 652.

[6.290]

6 Administration of the Bankruptcy

253

The trustee of a bankrupt lessor also has to have the right to disclaim the tenant’s interest in the property: Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers appointed) (in liq) [2013] HCA 51; (2013) 251 CLR 592. A tenant may prove for their loss in their lease being disclaimed and having to find alternative premises. The effect of disclaimer is to “determine forthwith the rights, interests and liabilities of the bankrupt” and discharge the trustee from all personal liability in respect of the property disclaimed: s 133(2). The disclaimer does not affect the rights and liabilities of any aggrieved party. As explained, a landlord is entitled to claim in the bankruptcy for any loss sustained as a result of the disclaimer (s 133(12)) but at the same time must try to mitigate their loss, for example by finding a new lessee and re-letting the property, possibly at a higher rent. Freehold property that is disclaimed may revert to the Crown, that is, the relevant government: Cleland and Teesdale Smith [1960] SASR 199.44 A site contaminated by the unregulated business of the bankrupt, such as a mechanic’s workshop, may be disclaimed if the cost of remediation is beyond the value of the property, and would then revert to the State, or any mortgagee. A person claiming an interest in disclaimed property, or suffering some liability under it, may apply to have the property transferred to them, for example a non-bankrupt co-owner where the disclaimed land is heavily mortgaged: s 133(9); Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane (a Bankrupt) [2017] FCA 696; McMillan v Bidmonta Pty Ltd [2013] FCA 865.45

Contracts [6.290] In other cases, it may be better for the trustee to retain an existing contract, for example if the trustee wants to carry on the bankrupt’s business which relies upon that contract being maintained, so as to enable its profitable sale. The contract may contain a term allowing its termination in the event of one party going bankrupt, known as an “ipso facto” clause. In such a case, s 301 renders void a term in a contract, lease, hire purchase agreement, licence or PPSA security agreement whereby the particular agreement can be terminated on the bankruptcy of the contractor, or on the commission of an act of bankruptcy, or on the entry into a personal insolvency agreement. Section 302 applies in similar terms to bills of sale, mortgages, liens, charges and PPSA security agreements. In contrast, while there is no prohibition of ipso facto clauses in corporate insolvency, the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 44

However the title received by the Crown is subject to the existing charges on the land. The court said in ING Bank (Australia) Limited v State of Queensland, in the matter of Watson [2017] FCA 411 at [22] “this result is achieved in relation to Torrens system land has been, and remains, the subject of some controversy”.

45 For the “unfortunate dilemma confronting mortgagees” of land after a disclaimer, see National Australia Bank Ltd v State of New South Wales [2009] FCA 1066; (2009) 182 FCR 52, as to how the mortgagee could sell the land when there is no mortgagor on whom it can serve a notice of default and the bankrupt, trustee or the Crown is registered as proprietor. Further discussed in ING Bank (Australia) Limited v State of Queensland, in the matter of Watson [2017] FCA 411.

254

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.295]

will redress that, so as to resolve problems for a liquidator or an administrator in trying to preserve an on-going business which is reliant upon service contracts.

CARRYING ON BUSINESS [6.295] It will often be the case that by the time a business person becomes a bankrupt their business has ceased. If the business is still operating, the trustee may decide to continue with it, unless it is so disorganised or run-down that it is not salvageable. However, the trustee may carry on the business in the short term, to enable an assessment of its profitability; for a limited purpose, such as completing some work in progress for which moneys will be paid; while a buyer is located, on the assessment that is saleable; or for a longer term, if the business is profitable and time is available for its marketing and sale.46 But the trustee is entitled to carry on business only “so far as may be necessary to dispose of it or wind it up for the benefit of creditors”: s 134(1)(b). The trustee will be responsible for tax, and other liabilities incurred in carrying on the business, including responsibilities for employees, and hence will make such a decision carefully.47

DEALING WITH THE ASSETS [6.300] Once the trustee has taken possession or control of the property of the bankrupt and recovered any assets held by other persons, the trustee must deal with the property in such a way as to try to provide maximum benefit for the creditors.48 In most cases, the best course of action is for the trustee to sell the property, although the timing and process of the sale can be a matter of commercial judgment. As we have just seen, the trustee may decide to carry on and improve the bankrupt’s business in order to sell it as a going concern, which may be more productive than an immediate sale of the assets. The powers in s 134 include to lease the bankrupt’s property, to mortgage or charge any of it to raise money, or to employ the bankrupt to continue to carry on the business until it is sold, with the bankrupt being paid a salary. These and other powers are generally broad enough to support whatever commercial decision the trustee makes. Assignment of rights of action Rights of action of the bankrupt

[6.305]

This issue has been discussed at [4.120] in the context of the impact of bankruptcy on the bankrupt’s legal proceedings, which in effect vests in the trustee and can be sold. The power of sale under s 134 covers such an arrangement.49 The terms of the assignment can be that the bankrupt estate be paid an agreed 46 Murray & Taylor, Australian Insolvency Management Practice, (CCH) at [82-040]. 47 For example, a trustee must withhold an amount from payments made under Pt 2-5 (the PAYG provisions) in Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA 1953) to a former employee of the bankrupt estate. 48 Mannigel v Aitken (1983) 77 FLR 406; Adsett v Berlouis (1992) 37 FCR 201. 49 Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550.

[6.310]

6 Administration of the Bankruptcy

255

percentage of any successful outcome of the assigned action. It is not necessary for the trustee to be satisfied that there is a realistic chance of success in the litigation; the trustee will invariably not be in a position or have funds to adequately assess that. But because of the high standards of conduct expected of a trustee as an officer of the court, it would not be proper for the trustee to assign a cause of action which clearly had no prospects of success, even if someone were willing to purchase it. This would be the case if the trustee was aware that the action was vexatious or simply without merit: Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550. Such an arrangement will often be made where the trustee has no funds to pursue the claim: see [6.360]. There are cases where courts have permitted assignments of causes of action even where the likely defendant has a counter-claim against the bankrupt’s estate.50 And as we discussed earlier, the trustee may assign the right of action to the bankrupt, for payment, but only after the bankrupt is discharged.51 Rights of action of the trustee

[6.310] The other rights of action that can now be sold are those of the trustee as trustee of the estate, to recover moneys under voidable transaction claims; for example, under s 120 or s 121. IPRB, s 100-5 allows the sale of voidable transaction claims previously only able to be litigated by an insolvency practitioner. If the trustee’s action has already begun, court approval is required for the assignment. Before assigning, the trustee must give written notice to the creditors. Section 100(4) provides that if a right is assigned, a reference in the Bankruptcy Act to the trustee in relation to the action is taken to be a reference to the person to whom the right has been assigned. There are no other provisions dealing with the mechanics of a transaction and its assignment.52 However, many of the principles in relation to assignment of claims generally would apply, in particular that the claim must have some prospects of success. The fact that a claim of the practitioner is subject to a counter-claim or cross-claim should not of itself prevent it from being assigned, though it may affect the value. While trustees have strong powers of investigation and examination in order to gather evidence to bring a voidable transaction or other such claims, those powers would not be available to the purchaser – they do not refer to the trustee or liquidator “in relation to the action” assigned. An exception is that a creditor may conduct a public examination. However, the trustee may have already done some investigations, in fact would need to have done so in order to be satisfied that there is a valid claim to sell. The purchaser would want to have the benefit of those for 50 Re Nguyen (1992) 35 FCR 320; Re Capel (1994) 48 FCR 195. 51 Meriton Apartments Pty Ltd v Industrial Court of New South Wales [2008] FCAFC 172; (2008) 171 FCR 380; Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47; Freeman v Joiner (2005) 3 ABC (NS) 332. 52 See the various issues raised in Mullette, Hitch and McMahon, “Designated for assignment” (2017) 18 (3&4) INSLB 68.

256

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.315]

any action it may bring. But there may be issues as to the release of the books of the bankrupt and questions of legal privilege. The decision to assign, and the means of assignment, may be challenged. Legal advice should be obtained on whether there is in fact a cause of action; its merits, its value, the extent of evidence or investigations available, whether the proposed defendant might be prepared to settle and, ultimately, what it is in the best interests of creditors to do. That may extend to what further investigations might be done in order to improve the sale price, or the likelihood of settlement. A proposed defendant will make its own decision. But it may see an advantage in buying the right of action rather than having an unpredictable third party take it over. How the trustee determines the best price might be difficult. Although sale for a percentage of any proceeds might address this, this might expose them to an adverse costs liability as a result of having an interest in the outcome of the litigation: Knight v FP Special Assets Ltd (1992) 174 CLR 178. Alternatively, a court with insolvency jurisdiction might consider that the litigation claim should not to have been assigned in the first place and make orders against the practitioner accordingly. A potential assignee may challenge the practitioner’s decision not to assign a right of action on legal bases; for one thing, a right of action could not be assigned after the relevant limitation period has expired. However, a court will generally not interfere with what is a commercial decision of a practitioner, unless it be found to be in bad faith or was perverse. The trustee may need directions from the court, if some doubt is raised with the legality of the assignment: IPSB, s 90-15. Where the assignment is of a claim already commenced and court approval is refused, the litigation claim will need to be continued, or a decision made to discontinue. Discontinuance may mean that the company or the practitioner is ordered to pay the costs of the respondent. If the practitioner continues the claim, the attempted transfer may indicate to a prospective defendant a weakness in the practitioner’s case. IPRB, s 100-5 does not require the prospective or actual respondents to be notified. However, it would be wise to do so and would be directed under s 100-5(2) in any event. At that hearing, a prospective respondent may object to the assignment on the basis that it is without foundation, or that the interests of creditors are not being considered.

Directions from the court [6.315] Former s 134(4) allowed a trustee to seek directions from the court “in respect of a matter arising in connexion with the administration of the estate”. This is now replaced by the court’s power to make “orders as it thinks fit” in relation to the administration of an estate under IPSB, s 90-15, including, for example, “an order determining any question arising in the administration of the estate” and costs. The court may exercise this power on its own initiative, during proceedings before the court, or on application under IPSB, s 90-20.

[6.315]

6 Administration of the Bankruptcy

257

However, that section goes on to list other orders that might be made, most of which are hardly in the nature of directions assisting the trustee – that the trustee be removed and replaced, an order in relation to any loss that the estate has sustained because of a breach of duty by the trustee; an order in relation to remuneration, including an order requiring repayment of remuneration. The court may take into account whether • the trustee has faithfully performed their duties; and • an action or failure to act by the trustee is in compliance with the Act and Rules, or an order of the Court; and • the estate or any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the trustee; and • the seriousness of the consequences of the trustee’s conduct “including the effect of that action or failure to act on public confidence in registered trustees as a grou””. Costs orders may include an order that the trustee or another person is personally liable for some or all of those costs and that the trustee is not entitled to be reimbursed by the estate or the creditors in relation to some or all of those costs. This may include an order that the trustee is personally liable to make good some or all of the loss; and the trustee is not entitled to be reimbursed by the regulated debtor’s estate or creditors in relation to the amount made good. The court also has other powers under the Act. Directions may be needed where there is some issue of interpretation of the law or in relation to the manner in which the trustee should act in carrying out their functions under the Act. It is a fundamental option for a trustee to seek the court’s assistance, although the court is not bound to give directions and there are limits on how far it will assist. Directions cannot be sought in order to determine the substantive rights of creditors as against a trustee, or as regards the rights of creditors amongst themselves, or to determine factual disputes: Re Lofthouse [2001] FCA 25; (2001) 107 FCR 151; Sutherland (In the Matter of Scutts) [1999] FCA 147. Given the potential for directions to affect the rights and interests of a bankrupt and of others, the power is exercised with care: Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111. The courts tend to avoid giving advice on the manner in which a trustee’s discretion or commercial judgment might be exercised. There must be some legal issue that arises calling for a legal judgment. As an example, directions were given in Donnelly (Trustee), in the matter of Keddie (Bankrupt) [2012] FCA 1485 in relation to the admission of proofs of debt against both the joint and separate estates of the bankrupt, and consequential directions for the distribution of the joint and separate estates: see s 110. In an appropriate case, the court will give advice on a trustee’s discretionary or commercial judgment, for example concerning a trustee’s legal proceedings, where a legal issue or an attack on the propriety of the proceedings is raised: Reidy (Trustee), in the matter of Hawksford (Bankrupt) [2015] FCA 432.

258

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.320]

Directions have also been given as to whether a trustee should assign causes of action to a particular party; as to who is the actual trustee of a bankrupt estate; and under IPSB, Div 90, as to the right of a trustee to claim remuneration in relation to a “wide range of significant and complex issues” concerning claims on trust assets by the trustee for his remuneration and by non-trust creditors: Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953.

Consolidation of estates [6.320] Section 53 of the Act allows a court to order that the administration of the estates of two or more partners or two or more joint debtors be consolidated. In such cases, s 110 applies, by which is determined the order of payment of joint and several debts from joint and several assets: see Re Cosgrove and Cosgrove; Ex parte Nogueira and Lane [2013] FCCA 1110. The court may exercise its power of consolidation where estates are inextricably blended so as to render it impracticable to keep them distinct: see Anmi Pty Ltd v Williams [1981] 2 NSWLR 138; 52 FLR 309. See also Donnelly (Trustee), in the matter of Keddie (Bankrupt) [2012] FCA 1485. Where joint bankruptcies exist, the trustee must explain at any meeting of creditors the likely effect of s 110 on the distribution of dividends: IPRB, s 75-170.

Partnership dividends [6.325] Section 141 provides that a creditor indebted jointly with more than one partner of a firm will not receive a dividend out of a bankrupt’s separate property until all the separate creditors have received the full amount of their respective debts. At any creditors meeting where s 141 is relevant, the trustee must explain the likely effect of the section on the distribution of dividends: IPRB, s 75-170(2). Realising the assets [6.330] Assets of the bankrupt may be sold by whatever method will return as good a price as possible, given the market conditions, including by private contract, public auction, tender or online.53 If an asset is the subject of a creditor’s secured interest, the trustee will have to pay out that creditor first. Often a secured creditor will have already sold the property, under its power of sale, because of the debtor’s failure to maintain mortgage payments. In such a case, the creditor must pay to the trustee any money received on the sale, which is over and above the amount of its debt. That money will then be available for the unsecured creditors. The trustee has 20 years from the date of the bankruptcy to claim property: s 127(1).54 This is subject to s 129AA which requires a trustee to realise assets disclosed in the statement of affairs within six years of the date of discharge from bankruptcy. In relation to after-acquired property disclosed by the bankrupt during 53 As to the bankrupt’s interest in vested real property and expectations of trustees when there is nil equity in the property, see “Dealings with vested real property and compliance requirements under sections 58(2) and 132(3) of the Bankruptcy Act”: (2017) 15(4) Personal Insolvency Regulator 6. 54 In Madden v Official Trustee in Bankruptcy [2014] FCA 446, the trustee was unable to base a claim, made after the expiry of the 20 years, for property held on resulting trust for the bankrupt.

[6.340]

6 Administration of the Bankruptcy

259

bankruptcy, the realisation must occur within six years of discharge or if it was disclosed after discharge, the period is six years from the date of disclosure. These times may be extended by the trustee on notice being given to the bankrupt: s 129AA(4). While the trustee should sell to whoever offers the best price, a member of a committee of inspection cannot do so, unless the leave of the court is obtained: s 72(1). Nor can the trustee purchase estate assets, without court leave: s 165(1)(d).

Within 20 years of bankruptcy Within six years of date of discharge Within six years of date of discharge Within six years of date of disclosure Variable on notice from the trustee

Time periods for selling property Period within which property may be sold

s 127

Period within which property in the statement of affairs may be sold

s 129AA(3)(a)

Period within which after acquired property disclosed before discharge may be sold

s 129AA(3)(b)

Period within which after acquired property disclosed after discharge may be sold

s 129AA(3)(c)

Up to three years

s 129AA(4), (5), (6)

Interest [6.335]

A trustee must pay all money received on account of the bankrupt estate into an interest-bearing bank account: IPRB, s 65-5. The trustee can retain any interest earned, and that interest is not subject to taxation (IPRB, s 65-31), but the trustee must then pay that interest as a charge to the Commonwealth under s 5 of the Bankruptcy (Estate Charges) Act 1997 (Cth).

THE BANKRUPT’S INCOME [6.340] Division 4B of the Act provides for the collection of monetary contributions by trustees dependent on the level of income of the bankrupt. Prior to the introduction of this scheme in 1991, bankrupts were only required to make contributions from their income on order by the court on the trustee’s application: former s 131 of the Act. Division 4B was a significant change in bankruptcy law and was introduced in response to legislative concerns that bankrupts on large incomes

260

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.345]

were not being required to make repayments to creditors, as well as concerns that some bankrupts could channel income away from themselves through the use of associated entities.55 This regime was strengthened by introduction, in 2005, of the “supervised account regime”. For those bankrupts not “employed” as such, including high-income professionals, and with no bank accounts in their own names, the trustee may determine that the regime applies and serve a notice – AFSA Form 20 – pursuant to s 139ZIC. The bankrupt is required to open an account from which the trustee may withdraw funds on account of contributions before the money reaches the bankrupt: s 139ZIEA. See AFSA’s Supervised Account Regime. In the case of bankrupt’s who are employed, the Official Receiver can issue a notice to the bankrupt’s employer in effect garnisheeing the wages being paid to the bankrupt in order to collect the contribution amount assessed. Income contributions in excess of $38 million were paid in 2016-2017, by far exceeding the amount of $12.5 million recovered by trustees by way of voidable transactions.56

Contribution assessment period [6.345] A trustee may assess a bankrupt’s income in a period known as the “contribution assessment period” (CAP), and if the income exceeds “the actual income threshold amount” applicable, the bankrupt is liable to pay to the trustee a monetary contribution from their income: s 139P(1). The CAP means a period which: • begins on the day the bankrupt becomes a bankrupt or a one year anniversary of that day during the bankruptcy; and • ends one year after that day or anniversary, as the case requires, or if the bankrupt is discharged or the bankruptcy is annulled within that year, ends upon the discharge or annulment: s 139K. Actual income threshold [6.350] The “actual income threshold amount” is defined in s 139K. The starting point for calculating this is to take the “base income threshold amount” (BITA) and increase it by percentages, depending on the number of the bankrupt’s dependents, if any. The BITA is defined by reference to a pension rate calculator in the Social Security Act 1991 (Cth): Bankruptcy Act, s 139K, and to the Consumer Price Index. The BITA is the minimum income set for compulsory contributions. At January 2018 it was $55,837.60. A bankrupt’s income is assessed against the BITA every 12 months in order to determine their liability to make contributions. The contribution to be paid by a bankrupt is calculated by taking the actual income threshold amount from the assessed income and dividing the result by two: s 139S. 55 “Explanatory Memorandum to the Bankruptcy Amendment Bill 1991 (Cth)”, at [8]. See OTPS 1 – Income contributions. See also Symes and Wellard, “After-acquired Income and Contributions by Australian Bankrupts” (2014) 14(3) QUT Law Review 53. 56 AFSA administration statistics, 2016-2017.

[6.360]

6 Administration of the Bankruptcy

261

“Assessed income” is the income which the bankrupt is likely to derive, or did derive, during the contribution assessment period: s 139S.

Income [6.355] “Income” is defined broadly in s 139L to include both income according to ordinary concepts and income defined by a number of other criteria.57 The ambit of s 139L was broadened substantially by the Bankruptcy Legislation Amendment Act 1996 (Cth) to overcome the decision involving the late Alan Bond – Bond v Trustee of Property of Bond (1994) 52 FCR 304 – where the court said that the value of gifts, including housing, the use of an office, secretarial services, telephone and legal expenses were not covered by s 139L.58 The section now says that such assistance to a bankrupt constitutes income. Section 139L also provides that loans to the bankrupt by associated entities are regarded as “income” even where the loans are not loans in the strict legal sense; for example, where the loan money is not paid to the bankrupt but is paid at their direction. Also, amendments in 2005 specified that income was to include, for the purposes of the regime, income of a person who was discharged from bankruptcy: s 139L(2). Family maintenance payments are excluded from the definition if they are for the maintenance of children of whom the bankrupt has custody: s 139L(1)(b)(i)(B). If payments are made to a bankrupt as a beneficiary under a trust, distributions out of the income of the trust will constitute income under s 139L(1)(a)(iv). Where there are multiple trust distributions it is necessary to assess the character of each distribution to determine if it is out of trust income or capital and hence whether it is income or not under s 139L: Combis v Harding [2014] FCA 1391). In that case the bankrupt was a beneficiary under a testamentary trust that involved the sale of a residential property and a proportion of the income from the proceeds of sale were paid as an annual distribution to the bankrupt which was held to be income under s 139L. As an adjunct to s 139L, s 139M specifies circumstances in which a bankrupt is to be taken to have “derived” income, even though the bankrupt has not actually received it. The income that is likely to be derived is taken to be reduced by items such as income tax which is likely to be paid (s 139N), including any tax refund that is payable to the bankrupt: Pattison v Schiffer [2007] FMCA 319.

Process of assessment [6.360] The trustee is to make an assessment of the contribution liable to be paid for the relevant period: s 139W(1). In certain circumstances a trustee may make a fresh assessment of the bankrupt’s income and of the contribution required. This can be done at any time, including after the bankrupt is discharged: s 139WA. 57 The concepts are usefully discussed in Skalkos v Nicols [2009] FCA 346; (2009) 175 FCR 547. See also Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies [1993] FCA 289; (1993) 42 FCR 571. 58 That outcome caused some outcry and the law was changed soon thereafter: see M Murray, “Lifestyles of Undiminished Splendour – Bankrupts on Fringe Benefits” (1994) 6(4) Journal of the Insolvency Practitioners Association of Australia 6.

262

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.365]

If a bankrupt is engaged in employment or other work, but is receiving no, or less than reasonable, remuneration, the trustee may determine that the bankrupt receives or received a sum equal to “reasonable remuneration” as defined in s 139Y. This is intended to circumvent attempts at channelling income generated by the bankrupt into other entities. For example, there may be an arrangement whereby the bankrupt works for less than reasonable remuneration, thereby benefiting the employer, and in return the bankrupt is given non-cash benefits by the employer. If a bankrupt does not provide information concerning their income, or claims not to derive any income, the trustee may, if there are reasonable grounds for believing otherwise, assess the bankrupt regardless: s 139Z(1). The bankrupt must give the trustee, as soon as practicable, and in any event within 21 days of the end of the contribution assessment period, a statement of the bankrupt’s income, what is expected to be derived during the next period, and the books evidencing the derivation of that income: s 139U. The trustee can claim additional information if the trustee has reasonable grounds to suspect the giving of false or misleading material: s 139V.

Review [6.365] Any decision by a trustee to assess a bankrupt may be reviewed by the Inspector-General in Bankruptcy, either on his or her own initiative or if requested to do so by the bankrupt or the Ombudsman: s 139ZA(1), (2). The Inspector-General may confirm the trustee’s assessment, set it aside or make a fresh assessment: s 139ZD. An application may be made to the AAT to review the Inspector-General’s decision: s 139ZF. The parties in such proceedings are the Inspector-General and either the trustee or the bankrupt. An appeal may then be taken to the court. In Inspector-General in Bankruptcy v McGushin (2009) 178 FCR 27; 7 ABC (NS) 178; [2009] FCA 662, the AAT had set aside the determination of the Inspector-General that ten-elevenths of the net income through which the bankrupt, a doctor, conducted his medical practice, was his assessable income by virtue of s 139L – this being the value of the income earned by the company because the bankrupt provided services for the company for which the company received payment. The Tribunal found that it was income of the company not income of the bankrupt, and that this income was not income “derived by the bankrupt” for the purposes of s 139W, nor could it be deemed to be derived under s 139M. The Federal Court upheld the Tribunal’s decision.59 It should be noted that a bankrupt may also apply directly to the court under IPSB, s 90-15.60

59 See also, Bilios and Inspector-General in Bankruptcy [2012] AATA 873. 60

See Peled v Roufeil [2017] FCCA 2342, in relation to a challenge to an income contribution assessment under s 139Y.

[6.385]

6 Administration of the Bankruptcy

263

Hardship [6.370] If a bankrupt is liable to pay a contribution, but will suffer hardship if required to pay, they may apply to the trustee for the contribution to be varied. Section 139T(2) specifies the criteria for hardship. Under s 139T(12), the trustee’s decision is reviewable by the Inspector-General under Subdiv G. Payment [6.375] The bankrupt must pay any contribution assessed to the trustee at a time the trustee specifies. The trustee may permit payment by way of instalments: s 139ZG(1). Any contributions or instalments not paid by the bankrupt can be recovered by the trustee as a debt due to the estate: s 139ZG(3). It should be noted here that a bankrupt must obtain written permission from their trustee to leave Australia and the trustee may impose conditions where consent is given. These conditions may include payment of any contributions liability as assessed before the permission is granted: s 272(2).

Collection from others [6.380] Section 139ZL enables the Official Receiver to collect contribution moneys from persons other than the bankrupt. The persons against whom a claim can be made are set out in s 139ZK.61 As an example, such a person may be holding money for or on account of the bankrupt: s 139ZK(1)(b). Any amount payable to the trustee under s 139ZL is recoverable as a judgment debt: s 139ZL(10). A person may apply to the court within 60 days to have the s 139ZL notice set aside: s 139ZM. If they fail to comply they are guilty of an offence: s 139ZO.

The supervised account regime: subdiv HA [6.385] The objects of the subdivision set out in s 139ZIA are listed as being, to improve the likelihood that a bankrupt will have sufficient money to pay contributions; to ensure that all monetary income received by the bankrupt is deposited to a single account (the supervised account); and to enable the trustee to supervise any withdrawals from the account. The effect of s 139ZIC is that the bankrupt should have the opportunity to comply voluntarily with the obligation to pay contributions on time. A trustee should only activate the supervised account regime in cases where there is recalcitrance or delayed payments by the bankrupt;62 in which case written notice must be given to the bankrupt (AFSA Form 20). Section 139ZID allows the trustee to revoke a s 139ZIC determination (AFSA Form 22) but the trustee must not do so unless satisfied that the bankrupt will pay 61 See AFSA’s “Schedule to s 139ZL” notice template. There were 119 such notices issued by the Official Receiver in 2013-2014 (later figures are not published). 62 See the Revised Explanatory Memorandum to the Bankruptcy and Family Law Legislation Amendment Bill 2005 (Cth), at [24].

264

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.390]

current and future contributions on time, having regard to the bankrupt’s past payment record and any explanations from the bankrupt. Changes in the bankrupt’s employment situation may be a relevant factor. The trustee may revoke a determination on their own initiative or on application by the bankrupt: s 139ZID(3). Where the bankrupt applies for revocation and the trustee refuses, a review of that decision lies to the Inspector-General. A trustee’s determination ceases to be in force on annulment of the bankruptcy and discharge from bankruptcy where there is no further liability to pay a contribution: s 139ZIDA. Where the bankrupt is discharged and has an outstanding contributions liability, the determination ceases to be in force only when the bankrupt is no longer liable to pay a contribution. Supervised account notice

[6.390] Section 139ZIE describes the requirements of a supervised account notice (AFSA Form 21) and the bankrupt’s obligations upon receiving it. The notice requires the bankrupt to open an account that complies with the features listed in the section, including that it be kept with an ADI (authorised deposit-taking institution as defined in s 5(1)) in Australia. It cannot be an overdraft or similar facility. The notice can require the bankrupt to open the account within 10 “working days” after the notice is given. The bankrupt must then notify the trustee of the account details within two working days. Failure to comply is an offence: s 139ZIE(6). The trustee can revoke the notice and/or issue a fresh notice for a new account if circumstances require it: s 139ZIEA. Bankrupt’s income to be deposited to account supervised by trustee

[6.395] Section 139ZIF requires the bankrupt to ensure that all their monetary income is deposited into the account; income received in the form of cash or cheque must be deposited to the account within five working days of its receipt. The bankrupt cannot withdraw from the account except under conditions: s 139ZIG. The trustee can agree to withdrawals including daily or weekly withdrawals up to a nominated limit. This allows the bankrupt to meet their living expenses while ensuring that the balance of the account remains sufficient to meet the bankrupt’s liability to pay contributions. The trustee may also consent to additional withdrawals to meet unexpected liabilities or where the account balance starts to exceed the amount required to meet the bankrupt’s contributions liability. Withdrawals to meet the bankrupt’s tax obligations are permitted. The trustee’s consent may be varied or revoked. A bankrupt who makes unauthorised withdrawals from the account is guilty of an offence. The Bankruptcy Act notes that this provision does not affect the operation of other garnishee powers such as those available to trustees under s 139ZL and to the Commissioner of Taxation under the TAA 1953 (Cth). However the ATO says it will

[6.415]

6 Administration of the Bankruptcy

265

usually not use its garnishee powers where the trustee indicates that this would have a detrimental effect on the trustee’s ability to collect income contributions.63 Provisions aimed at alternative income arrangements

[6.400]

Despite the width of the term income, a bankrupt may arrange for alternative ways to be paid in order to avoid payment of income contributions. The Bankruptcy Act attempts to address this in at least three ways: i) Constructive income receipt arrangements. Section 139ZIH restricts the bankrupt’s ability to be paid under an arrangement where income is not actually received by the bankrupt because it is reinvested, accumulated or capitalised, or dealt with on behalf of the bankrupt or as he or she directs. However such arrangements can be legitimate and can be permitted by the trustee, on giving written consent. ii) Non-monetary income receipt arrangements. Section 139ZIHA restricts the use of “non-monetary income receipt arrangements”, whereby the bankrupt’s income is paid in a non-monetary form, so that income derived by the bankrupt is actually received by the bankrupt as money. iii) Cash income. Section 139ZII seeks to ensure that income received by the bankrupt is able to be identified by the trustee and deposited into the supervised account. The bankrupt is permitted to receive income in the form of cash with the consent of the trustee. However, there will always be means whereby a bankrupt is paid money without the trustee’s knowledge, and with the consequences that income contributions are not paid or not paid in the full amount. Regulation by the trustee

[6.405] A bankrupt subject to the supervised account regime must keep proper income records, and this continues until that regime ceases to apply: s 277A, s 139ZIIA. Injunctions

[6.410]

Sections 139ZIJ – 139ZIN give the trustee power to apply for a range of injunctions to ensure that a bankrupt who is subject to the supervised account regime complies with their obligations. It appears that there has been little call for these provisions to be used.

Review of trustees’ decisions [6.415] Sections 139ZIO – 139ZIT deal with the processes of review of trustees’ decisions; these are subject to review by the Inspector-General and then to further review by the AAT. Section 139ZIO(2) addresses the situation where the Inspector-General may defer or refuse to conduct a review if the court is exercising powers under IPSB, ss 45-1, 90-5, 90-10 or 90-15. 63 ATO’s Practice Statement Law Administration – PSLA 2011/16.

266

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.420]

FINANCIAL SUPPORT FOR LEGAL PROCEEDINGS [6.420] A trustee who brings proceedings will be personally liable to pay the respondent’s costs if the proceedings are not successful. An order for legal costs to be paid by an unsuccessful party usually “follows the event”. Also, if a trustee decides to discontinue litigation, court rules automatically impose a costs order, unless there is some agreement with the respondent, or unless the court orders otherwise. A trustee can be ordered to pay costs even where the proceedings were properly brought but for some reason the trustee could not continue with them: Travaglini v Raccuia [2012] FCA 620. It is not unusual for trustees to be faced with the situation in which they have a good cause of action against someone, and that cause of action may, if pursued, produce funds for creditors but there are no or insufficient funds in the estate to fund the litigation. Taking court proceedings inevitably costs money in terms of lawyers’ fees and other disbursements, as well as the time and cost of the trustee and staff in preparing the case for hearing. If the trustee has only limited or no funds, there are broadly three options available: see [6.425] – [6.435].

Creditors’ indemnity [6.425] The trustee can approach the creditors and ask one or more of them to agree to indemnify the trustee in respect of costs associated with an investigation or litigation. The trustee will need to be able to say to creditors that, usually on legal advice, there is a good action to pursue and that funds are likely to be recovered. To provide an incentive for creditors to assist with funding, s 109(10) enables a court, in its discretion and where court proceedings have been successful, to, in effect, reward the creditor for funding the action. This reward may be an order that the creditor be fully repaid their debt out of the recovered property or expenses. Such a payment will thereby displace the usual order of priorities that normally applies in a distribution of the property under s 109. The result is that an indemnifying creditor can receive a higher dividend than they would otherwise receive, if any at all.64 The clear policy behind s 109(10) is both to encourage creditors to indemnify trustees and to reward those creditors for taking that risk. “It is in the public interest that the property of a bankrupt should be available to the creditors of the bankrupt, including where the property of the bankrupt may be secured only through litigation”: Official Trustee in Bankruptcy v Pastro [2004] FCA 713.65 Section 109(10) is interpreted widely and the court’s decision to reward a funding creditor, and in what amount, much depends on the nature of the claim, the extent of the indemnity for funding, the risk involved, the absence of other funding, the proportion of the debt to other claims in the estate, and any other particular 64 The authorities are reviewed in Grandsky Pty Ltd v Horne [2014] FCA 119. 65 A detailed review of s 109(10) is given in Low v Barnet (Trustee) [2017] FCAFC 60.

[6.435]

6 Administration of the Bankruptcy

267

issues.66 In the Deceased Bankrupt Estate of Laurie Connell [2001] FCA 51, the court granted the whole amount recovered to the funding creditors, whose assistance resulted in recovery of $2.7 million. In other decisions – Official Trustee in Bankruptcy v Pastro – the indemnities offered by the relevant creditors were more limited, hence the order made under s 109(10) was that they would receive 60% of the available funds in priority to other creditors. Section 109(10) has also been applied in a case where a creditor made an application under s 50 for the appointment of an interim trustee to take control of the debtor’s property; the creditor was granted priority for its legal costs and for half its judgment debt: Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal (No 2) [2017] FCA 1186. Any such distributions are paid only after the deduction of legal costs and expenses related to the recovery.

Litigation funding [6.430] Another increasingly available option is for the trustee to approach a litigation funder, a company which is in the business of underwriting the legal and other costs of proceedings in exchange for a portion of the proceeds of any successful action. This has been sanctioned in corporate insolvencies67 and it is available for trustees, although the monetary threshold for funding of claims can be high. Voidable transaction proceedings can be pursued under this funding arrangement. As we have seen, an alternative is for the trustee to in effect sell a right of action available to the bankrupt often for a proportion of the proceeds of any successful outcome: [6.305]; or to sell a right of action of the trustee, under IPSB, s 100-5. While a trustee would not generally be asked to provide security for the defendant’s costs, the presence of a litigation funder may cause the court to make such an order: Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371.

Trustee funding [6.435] The reality is that if there are no funds to pursue claims then the trustee is under no obligation to do so. However, the trustee, often in conjunction with his or her lawyers, may decide to bring a claim “on spec”, in effect self-funding the action, with their remuneration and fees being paid from any successful outcome, and the remainder being available for the creditors. Such a claim might be one where there is a clear case for recovery of an asset transferred to a family member before bankruptcy, and the asset remains in their possession, or the family member is assessed as otherwise being able to meet any judgment against them. Prior transfers of property in the face of the strong powers of a bankruptcy trustee invariably have little legal effect, but only if the trustee has funds to exercise those powers to challenge those transfers. Section 77C examinations and s 139ZQ notices 66 See the factors listed in Re Woodgate, in the Matter of Eaton (a Bankrupt) [2010] FCA 550 at [5]. 67 Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; (2006) 229 CLR 386.

268

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.440]

are useful actions that can be funded more inexpensively before any final commitment to litigation is made and they may in themselves lead to an offer to settle the claim.

Section 305 funding [6.440]

The right of a trustee to apply for government funding under s 305 of the Bankruptcy Act should be mentioned although in reality it is inconsequential. LGG2 – Guidelines relating to the provision of funding for trustees under section 305 of the Bankruptcy Act sets out the terms and conditions of funding. It is not available unless the creditors have been approached and are unwilling to indemnify the trustee in any proceedings. The guidelines say that the provision is designed to facilitate the proper carrying out of the trustee’s statutory and fiduciary duties. Funding is to enable inquiries in relation to the bankruptcy, and the pursuit or defence of appropriate legal proceedings. Investigations into Pt X agreements are only funded in exceptional circumstances. Funding can also be used to support proceedings before the AAT where there is a review of a decision or determination of a trustee or the Inspector-General. Funding is only available for future costs and expenses and cannot be given for past expenditure. The litigation for which funding is sought must be consistent with the Div 42 Standards, in particular those standards concerning the realisation of assets and the incurring of only necessary and reasonable costs. A monetary limit is set and other detailed conditions are attached to the funding. The trustee is required to reimburse the Commonwealth from any recoveries made, as though the funding amount provided were an “expense” incurred by the trustee, giving the Commonwealth priority under s 109(1)(a) of the Act. In reality, little s 305 funding is available. Funding in the 2014-2015 year totalled just over $39,000 for 21 applications approved, with underwriting costs of $175,766. This compares with over $250,000 being paid in 2004-2005 and the much higher amounts paid under ASIC’s Assetless Administration Fund.68

Inspector-General proceedings [6.445]

It remains to be mentioned that the Inspector-General can bring court proceedings in relation to a a particular trustee, under IPSB, s 45-1, and in relation to a particular estate, under IPSB, ss 90-10 or 90-20, as can the trustee and the creditors. The Inspector-General has comparable powers in relation to Pt X personal insolvency agreements and the Official Receiver in relation to Pt IX debt agreements. 68 ASIC’s 2016-2017 Annual Report states that ASIC received more than 740 AA Fund applications, and committed just over $3.43 million to liquidators in that financial year.

[6.455]

6 Administration of the Bankruptcy

269

Litigation in pursuit of remuneration [6.450] A trustee has an obligation to act in the interests of creditors and the pursuit of litigation or other recoveries should be made for that purpose. There may be criticism where the outcome of litigation is that only the trustee’s remuneration and expenses are able to be paid. This issue has arisen in corporate insolvency.69 In bankruptcy, a trustee has a specific duty to act “in a commercially sound way” (s 19(1)(k)) and the trustee must also “realise only those assets that give a cost-effective return to creditors or contribute to the payment of the costs of the administration”: IPRB, s 42-40. Beyond that, a trustee has similar responsibilities to a liquidator. In Boensch v Pascoe [2007] FCA 1977, the court rejected an application for an inquiry into the trustee’s conduct, based in part on the fact that pursuit of property would provide the only source of funds from which the trustee’s fees might be paid, the court saying that a “trustee does not thereby become disabled from an efficient and, if necessary robust, administration of an estate because his own fees may depend on the outcome”. The pursuit of a preference claim in itself serves a purpose beyond the immediate issue of whether a dividend will result for creditors. In family law cases, the issue of costs should also be considered where the competing parties are spouses and creditors.70 In any event, an outcome such as occurred in Boensch v Pascoe is one that a trustee should not necessarily seek to achieve without some other factors applying. Similar consideration apply in relation to the remuneration of liquidators: see Chapter 16.

Some remaining issues in litigation [6.455] The availability of the administrative recovery procedure under s 139ZQ of the Act should mean that trustees are not required to seek financial support as frequently as they have been accustomed. That was an intended purpose of that and its related sections. Whether that purpose has been achieved is subject to debate. See [5.275]. Nevertheless, a claim may be able to be made and an amount recovered without recourse to litigation. Lawyers have obligations to try to negotiate and resolve claims under various laws and court rules. Trustees must also act commercially in recovering money. A final point is that circumstances may arise in the conduct of a bankrupt estate where the trustee is faced with the need to seek court directions or declarations. The fact that directions are needed should mean that there are issues that need to be resolved in relation to assets or funds and that funding is available. But in some cases, the court’s decision may be required even where funds are not available, or insufficient, for example, if an issue of the trustee’s independence arises, or the trustee needs to respond to some litigation to protect their position. 69 Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99. 70 Lasic & Lasic [2007] FamCA 837; 5 ABC (NS) 584.

270

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.460]

CLAIMS OF CREDITORS Debts provable in bankruptcy [6.460]

Before creditors can participate in the distribution of moneys from the bankrupt’s estate they must “prove their debt”. This means that a creditor has to provide sufficient proof to the trustee that it has a claim entitling it to a share of the estate. A creditor who has proved its debt is regarded as having a “provable debt”. The criteria for determining whether a creditor has a provable debt are contained in s 82(1), which provides: “Subject to [Division 1, proofs of debt], all debts and liabilities,71 present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.”

Re Hide (1871) 7 Ch App 28, 31 explained the broad concept of provable debts, and the reason for it: “Every possible demand, every possible claim, every possible liability except for personal torts is to be the subject of proof in bankruptcy, and to be ascertained … by the court … The broad purview of the Act is, that the bankrupt is to be a freed man, freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind. On the other hand, all the persons from whom claims and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets.”

A creditor is said to have proved a debt when the trustee admits the debt to proof. The nature of provable debts and particular issues that can arise will be discussed after we examine what the Act says are not provable debts.

Non-provable claims [6.465] Not all of the bankrupt’s debts are provable in the bankruptcy. If they are not provable, then the bankrupt remains personally liable for them. Section 82(2) provides: “Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.”

That is, a claim for unliquidated damages against a debtor who becomes bankrupt is not provable unless the claim arises out of a contract, promise or breach of trust.72 An unliquidated claim is one that has yet to be quantified, as opposed to a liquidated fixed monetary claim. Claims on the bankrupt for personal injuries arising out of industrial or road accidents for which the bankrupt is liable are unliquidated and are not provable; the bankrupt remains personally liable to pay them. It may be that the unliquidated claim then later becomes liquidated, by way 71 The term “debts and liabilities” refers to debts due both in law and in equity: Wilson v Official Trustee in Bankruptcy [2000] FCA 282; (2000) 97 FCR 196. Generally, see OTPS 8 – Treatment of Debts in Bankruptcy. 72 This is to be contrasted with the position applying in liquidations: Corporations Act, ss 553 and 554A – see [15.05].

[6.465]

6 Administration of the Bankruptcy

271

of a judgment sum being ordered to be paid by the bankrupt. That is too late; it remains a personal liability of the bankrupt if it is of a type of debt in s 82(2). But if a court has quantified a creditor’s unliquidated claim before bankruptcy, and ordered payment of a monetary sum, the claim is provable because it has become liquidated. A claim for loss suffered by a person as a result of misleading and deceptive conduct of the bankrupt is not a provable debt73 even though the person’s reliance on the misleading representations occurred prior to bankruptcy: ACCC v Black on White Pty Ltd [2004] FCA 363; (2004) 138 FCR 314; (2004) 2 ABC (NS) 183. And the term “breach of trust” has a technical legal meaning and is not satisfied merely based on conduct exhibiting moral turpitude: Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 128; (2011) 10 ABC (NS) 24. A claim for damages for misleading and deceptive conduct inducing the making of a contract brought by contracting party X against contracting party Y may be a debt provable in the bankruptcy of Y – as a demand in the nature of unliquidated damages arising by reason of contract. But a similar claim arising out of a tripartite transaction – where X is induced by Y to enter a contract with Z – is not: Coventry v Charter Pacific Corporation Ltd [2005] HCA 67; (2005) 227 CLR 234; 3 ABC (NS) 354. The High Court accepted that the result was anomalous but this arose from the unequivocal language of s 82 and the nature of claims for unliquidated damages.74 In Coventry v Charter Pacific Corporation Ltd, the High Court rejected the view of the Victorian Court of Appeal in Aliferis v Kyriacou (2000) 1 VR 447 that a claim based on a contract or promise would only be provable under s 82(2) if it were an essential element of the cause of action. For example, a claim under home warranty laws based on a contract of building construction may be sufficient.75 A claim against the bankrupt for insolvent trading under s 588G of the Corporations Act is a provable debt: Taylor v Rudaks (2007) 166 FCR 451; 5 ABC (NS) 501; [2007] FCA 1962.76 That claim may be lodged by the liquidator of the company in the bankrupt estate of the director. Certain fines and penalties imposed for criminal or civil misconduct of the bankrupt are not provable. The law considers that the bankrupt should remain personally responsible for the consequences of that misconduct, and that the creditors should not themselves be penalised in their dividends being reduced by those claims being provable by the state.77 Thus the following are not provable debts: 73 Re Kritharas; ACCC v Kritharas [2000] FCA 1442; (2000) 105 FCR 444. 74 At [72]. See also Pattinson v Bellwether Agriculture Pty Ltd (In Liq) [2018] NSWSC 38. 75 Owners of Strata Plan 80647 v WFI Insurance Ltd (t/as Lumley Insurance) [2015] NSWSC 1161Coventry v Charter Pacific Corporation Ltd. 76 Query where no determination of insolvency or other elements of the breach had been made: DCT v Clout [2004] FMCA 195; (2004) 2 ABC (NS) 120; affirmed in George v DCT [2004] FCA 1433, (2004) 212 ALR 495. A cross-claim by director A against co-director B for equitable contribution to A’s exposure to liability under ss 588G and 588M of the Corporations Act can also be provable: Buzzle v Apple Computer [2007] 5 ABC (NS) 322; [2007] NSWSC 930. 77 Victoria v Mansfield (2003) 130 FCR 376; [2003] FCAFC 154.

272

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.470]

• penalties and fines imposed by a court in respect of offences against a law (s 82(3));78 • amounts payable under a “proceeds of crime law” (as defined in s 5 – see s 82(3A)); • civil penalties under the Corporations Act, s 1317G (Bankruptcy Act, s 82(3AA)).

Provable claims [6.470] Some debts are not provable as a matter of social policy, for example income-contingent loans to tertiary students and trade apprentices: s 82(3AB).79 A claim must be in monetary terms or must be capable of being estimated: s 82(6), (8). An obligation of a personal nature, which cannot be estimated in money terms, cannot be proved. A claim must be legally enforceable, so a creditor cannot lodge a claim in relation to a statute barred debt: Motor Terms Co Pty Ltd v Liberty Insurance Ltd [1967] HCA 9; (1967) 116 CLR 177; James v Woodgate [2012] FMCA 1214, or a money lending debt that is not enforceable under law: Re Kongonis (1963) 19 ABC 96. Generally speaking, both contingent and future debts are provable: s 82(1), (8). The former is a liability dependent on the occurrence of a contingency, so that the debt is only payable if a certain thing happens – for example, a liability under a guarantee. To be provable, a contingent debt must be capable of being estimated at the date of bankruptcy: s 82(4), (6). A contingent creditor must estimate the amount owing accurately and the trustee will either record that amount or make their own estimate: s 82(4). If the creditor is dissatisfied by the estimate of the trustee it may appeal to the court within 28 days of it being notified: s 82(5). A future liability is one that will become payable at some definite time in the future. An example is the bankrupt’s obligation to repay a loan after the date of the bankruptcy. A guarantor in relation to a liability of a bankrupt can prove in the bankruptcy as long as the guarantee under which the liability arose was given prior to bankruptcy and the guarantor has paid the entire liability due under the guarantee. Periodical payments, such as rent, constitute a provable claim but only on a proportionate basis. The creditor may claim in respect of the period from the date when the last payment became due up to the date of bankruptcy as if the payment accrued due from day to day: s 96. A similar approach is adopted in respect of accrued income tax liabilities: see [6.400]. The legal costs of a creditor are provable only if they were the subject of a court order made prior to the date of bankruptcy, but they are then provable even if they 78 As to whether a “court” has imposed the fine or penalty, see Victoria v Mansfield; as to whether an “offence” is involved, see Mathers v Commonwealth [2004] FCA 217; (2004) 134 FCR 135; 2 ABC (NS) 78, decided on the comparable provision in the Corporations Act, s 553B. 79 Under the Higher Education Support Act 2003 (Cth) and the Trade Support Loans Act 2014 (Cth) and other laws.

[6.475]

6 Administration of the Bankruptcy

273

were untaxed as at that date: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52; 5 ABC (NS) 419; Panorama Investments v Summit Tower (Costs against a bankrupt) [2017] VSC 390. Interest up to the date of bankruptcy is provable if the creditor was in fact entitled to claim interest – for example, pursuant to a contract or under the judgment of a court. However, interest accruing on a provable debt for the time after the date of bankruptcy is not provable: s 82(3B), s 107. Creditors with such claims may claim the money due from the bankrupt. This right continues after the discharge of the bankrupt from bankruptcy. Where a claim is made for a debt payable in Australia but expressed in terms of a foreign currency, the general rule is that the conversion from that currency to Australian currency must be made at the rate of exchange operating as at the date of the bankruptcy: Re Griffiths [2004] FCAFC 102; (2004) 139 FCR 185. Section 82(1A) provides that both periodical sums which become payable within a year before the date of bankruptcy and lump sums which become payable before the date of bankruptcy pursuant to a maintenance agreement or maintenance order, are provable claims. Contingent liabilities

[6.475] Difficulties can arise when determining whether a liability is “contingent” within s 82(1). The relevant principles that apply were summarised in Health Insurance Commission v Alekozoglou:80 • To be provable in a bankruptcy, a debt need not be due and payable at the date of bankruptcy, but there must be an obligation upon which the debt is founded, being an obligation which was incurred before the date of bankruptcy. • For a debt to be “contingent”, “there must be an obligation upon which the contingency can operate”, being an obligation which “must exist as at the date of bankruptcy”. • Where discretion is required to be exercised, impacting on or relevant to a debt, there is no obligation to pay until the discretion is exercised. • For a debt to be provable in bankruptcy, there must be: “… existing circumstances which (give) rise to a contingent debt or liability, and which would crystallise by the happening of some future event”. • A contingent liability within s 82 can include a potential liability arising from an obligation. • “The questions for determination must be decided by reference to the language of the relevant statutes, rather than by resort to consequences which … would appear to produce injustice …”. A creditor was held to have a provable debt arising out of vendor finance he provided in support of the sale of his pharmacy businesses to the purchaser who then went bankrupt. It was an express term of the agreement that the debt would be repaid when the pharmacies returned to profitability. As such the indebtedness 80 (2003) 1 ABC (NS) 365; [2003] FCA 848 at [50], case references omitted.

274

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.480]

was contingent, and it was provable. The amount of the claim was the unpaid purchase monies: Singh v Khatri & Griffin [2011] FMCA 804. Whether a claim is a provable debt is an issue to be considered when proceedings require leave to be continued against the bankrupt under s 58(3)(b) of the Act. If the debt is not provable, no leave is required: Otvosi v Ferella [2008] FMCA 1250. If the trustee admits a contingent liability as a proof of debt, s 82(4) requires the trustee to make an estimate of its value. The creditor can appeal from that decision to the court. However, if the court considers that the value of the liability cannot be fairly estimated, the debt can be deemed not provable: s 82(6). Tax liabilities

[6.480] Proofs of debt based on tax liabilities raise particular issues. We have briefly explained whether tax refunds are property of the estate under s 58 of the Act: see [4.45]. Whether a tax liability is a debt provable will be determined by the impact of s 82(1) of the Act. Income tax relating to the period from the commencement of the year prior to the date of bankruptcy up to that date is a provable debt in bankruptcy: Commissioner of Taxation v Jones (1999) 86 FCR 282; [1999] FCA 308. In such circumstances, the ATO may be required to issue split assessments relating to both the pre and post-sequestration parts of the financial year. If the debtor’s taxation affairs are not up to date, the ATO will ask the bankrupt to lodge outstanding returns, activity statements or other documents to enable their total taxation liability to be determined. If the debtor is uncooperative, or delayed, the ATO may lodge a proof of debt based on default assessments being raised: ITAA 1936, s 167. A tax refund can be taken into account in determining the “income” of the bankrupt for the purposes of assessing whether the bankrupt is required to make an income contribution under Pt VI, Div 4B of the Bankruptcy Act. See [6.355]. But liabilities under family assistance legislation, whereby moneys are paid in advance to a beneficiary subject to a later reconciliation against actual income, do not arise as a debt until that reconciliation occurs.81 The Commissioner may provide information to a trustee about the bankrupt’s tax affairs that are relevant to the bankruptcy.82

Rule against double proofs [6.485] There cannot be two claims by a creditor in relation to its one debt. This is a significant and well-established rule known as the rule against double proofs, or more precisely, a “rule against double dividends” for the creditor.83 If this were not the rule “a creditor could always manage, by getting his debtor to enter into several distinct contracts with different people for the same debt, to obtain higher 81 A New Tax System (Family Assistance) (Administration) Act 1999 (Cth), s 105. Re Secretary, Department of Families, Community Services and Indigenous Affairs and Pollock (2006) 92 ALD 501. 82 Division 355 of Sch 1 to the TAA 1953. 83 Day and Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85.

[6.490]

6 Administration of the Bankruptcy

275

dividends than the other creditors, and perhaps get his debt paid in full … there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts”.84 For example, joint creditors are obliged to lodge a joint proof and not separate ones. Both the guarantor of the bankrupt’s debt and the principal creditor to whom the bankrupt owed the debt cannot both lodge proofs as creditors in relation to what is one debt.85 But until paid in full, the principal creditor is entitled to prove for the whole of the debt even if part of it has been paid by the guarantor – it need not deduct from its proof any sum paid.86 Ultimately, the question whether two proofs are in respect of the same debt will depend on substance and not form. A surety who guarantees only part of a debt is not subject to the rule against double proofs if they have paid their guaranteed amount in full.87 However, the more common situation is for guarantee contracts to provide that the surety guarantees the entire debt even if their individual liability is limited to a specific sum. In such a case, the rule against double proofs will apply to the surety even where they have paid to the creditor their entire amount guaranteed.88 The rule was applied in a case where partnership creditors had lodged proofs of debt in the bankruptcy of bankrupt partners of a failed business in respect of partnership debts. The rule prevented the remaining non-bankrupt partners lodging a proof based on the bankrupts’ contingent liability to them arising out of the same debts: see Staples v Milner (1998) 83 FCR 203. Another general rule of proof is known as the “doctrine of election” by which a creditor to whom the bankrupt is liable both individually and jointly with other debtors must elect whether to prove against the separate estate of the debtor or the joint estate. This doctrine has been abolished in so far as it relates to claims arising from distinct contracts (s 95), but it is still applicable in other circumstances, such as claims arising from tort or breach of trust: see Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653.

Set-off [6.490] If a creditor and the bankrupt had mutual financial dealings, such that each owed the other money, s 86 allows the creditor to set off against the debt which it is owed any sum which the creditor owes to the bankrupt. A creditor does not need to claim set-off as it is automatically applicable by force of the section. 84 Re Oriental Commercial Bank; Ex parte European Bank (1871) 7 LR Ch App 99, 103. 85 Western Australia v Bond Corporation Holdings Ltd (1992) 8 ACSR 352. For a discussion of the rule against double proofs in relation to guarantees, see Loeskow v Avokah Irrigation Pty Ltd and Commonwealth Bank of Australia [1996] FCA 1420. 86 Westpac Banking Corp v Gollin [1988] VR 397. 87 It is also possible for the guarantee agreement to prohibit the surety from submitting a proof until the principal debtor’s entire liability to the creditor is paid: see J Phillips, J O’Donovan, W Courtney, The Modern Contract of Guarantee (3rd ed, Thomson Reuters, 2016) at [12.850]. 88 Re Sass; Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12. The rationale for this principle has been described as “elusive”: Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd [2001] NSWCA 479 at [167].

276

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.495]

The purpose of s 86 was explained in Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 where the High Court said: “Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt’s debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him.”

It therefore can assist a creditor, at least in avoiding further losses from the bankruptcy of its debtor and it avoids what would otherwise be unfairness to the creditor. Under s 86(3), the mechanics of set-off work this way: • If the creditor is owed more – say $100,000 – than it owes – say $60,000, the creditor will prove in the estate for the difference after the set-off – that is, $40,000; • If the creditor owes more to the bankrupt – say $50,000 – than it was owed by the bankrupt – say $30,000, the creditor will be liable to pay the difference to the trustee after the set-off – that is $20,000. If this were not the case the creditor would have to pay their debt in full to the trustee and then only be able to claim a dividend in respect of the debt owed by the bankrupt. In the first example, the creditor would otherwise have to pay the trustee $60,000, and lodge a proof for $100,000 from which a minimal or no dividend might be paid. This would be an unfair outcome. The term “dealings” in s 86 is given a broad ambit although it applies to matters having more of a a commercial or business flavour: Gye v McIntyre (1991) 171 CLR 609. It includes debts or liabilities which are present or future, certain or contingent, fixed or liquidated or capable of being ascertained, provided that the right to the claim and the corresponding liability existed at the date of bankruptcy: Stein v Blake [1995] 2 WLR 710. While s 86 is self-executing, in the sense that it produces a balance which is the amount only that can be claimed in the bankruptcy, that balance may remain to be quantified in litigation between the parties: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85. Limits on set-off

[6.495] There are limits to a creditor availing itself of a set-off. First, where a debtor becomes a bankrupt, the creditor cannot claim a set-off if at the time of granting credit to, or receiving credit from, the debtor, the creditor had notice of an available act of bankruptcy committed by the debtor: s 86(2). Secondly, the right of set-off only exists where there have been mutual credits, debts or dealings: s 86(1). “Mutuality” broadly means reciprocity; it does not mean “identical”. The claims in relation to which a set-off can be sought must be between the same parties and in the same right: Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609. For instance, X may set off a claim she has against Y where Y’s claim is against X. But X could not do so if Y’s claim was against X personally and X’s claim against Y

[6.505]

6 Administration of the Bankruptcy

277

was based on X’s role as trustee of a trust estate. In this latter situation while the same parties are involved (X and Y) their claims are not the same, that is, Y has a personal claim against X but X’s claim is not founded on a personal right but upon her right as a trustee: see Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division [1993] 2 VR 506. It is not necessary that both claims are in tort, or in contract, and a liquidated claim of a creditor can be set off against an unliquidated claim of the bankrupt. Thirdly, to be entitled to a set-off the claim has to be provable in bankruptcy. It does not matter whether the claim is liquidated or unliquidated, provided that it is a monetary claim: Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609. Granting a security interest (which is a statutory proprietary interest in personal property) is sufficient to destroy mutuality of interest for set-off purposes: Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd [2017] WASC 152; (2017) 320 FLR 259 at [394]. Insured bankrupts – s 117

[6.500] The right of a bankrupt to make claims upon, and to receive, payment from a liability insurer vests in the trustee. Section 117 then provides the bankrupt’s right of indemnity under an insurance policy for protection against liabilities to third parties. The section applies whether the bankrupt incurred such a liability either before, or after, becoming bankrupt. The section requires the trustee to use any amount received from the insurer to pay the claim of the particular creditor in respect of which the liability policy responds: Tapp v LawCover Insurance Pty Ltd [2013] FCA 35. This is in effect an exception to the pari passu rule but it is a valid one. An equivalent provision exists in corporate insolvency: Corporations Act, s 562. See [18.375]. In Akron Roads Pty Ltd (in liq) (No 3) [2016] VSC 657, a liquidator was found to be entitled to rely on Section 117 in respect of a claim against a director for insolvent trading, for which the director claimed indemnity from his insurer.

Secured creditors [6.505] A secured creditor is defined in s 5 as one who holds a perfected PPSA security interest or holds “a mortgage, charge or lien on property of the debtor as a security for a debt due from the debtor”. A secured creditor has two rights – a right of action against the property over which it has security and a right of action against the debtor personally. Bankruptcy does not interfere with the rights of a secured creditor: s 58(5). One of the main purposes of security is to protect the creditor in the event of the debtor’s insolvency. Naturally, a secured creditor is unable to retain its security and prove for the full amount of the debt owed. If the debtor becomes a bankrupt, a secured creditor is entitled to remain apart from the bankruptcy and realise the property over which it has security, provided

278

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.510]

that property will realise sufficient money to satisfy the amount which is owed. If this is the case, once the creditor has realised the property and deducted from the proceeds its debt and associated costs and expenses the creditor must pay the trustee any surplus. This surplus, of course, represents the bankrupt’s equity in the property, which automatically vested in the trustee on the date of bankruptcy: ss 58, 116. If the secured creditor so chooses, it may prove in the bankruptcy: s 91(1). A creditor will not generally contemplate such an action unless the security is of insufficient value to cover the amount which is owed. If that is the case, the creditor is presented with three options. • First, the creditor may wish to prove for the whole debt in which case the creditor must surrender their security: s 90(2). A secured creditor will usually only do this where the security is valueless or where to hold on to it presents some difficulties. • Secondly, a creditor who realises their security is entitled to prove in the bankruptcy for any balance owing: s 90(3). The only proviso is that they sold the secured property in good faith and in a proper manner, at a reasonable price and at arm’s length. • Thirdly, the secured creditor may estimate the value of their security and prove for any balance owing: s 90(4). In this situation, the trustee is entitled to redeem the security by paying to the secured creditor the amount of the estimate: s 91(1). This provision is designed to deter improper estimates that seek to give the secured creditor an unfair advantage; an unscrupulous creditor could value their security well below the market price and then prove as an unsecured creditor for an amount larger than they should. This option is rarely pursued. As an example, if the property over which a creditor has security is worth $100,000 (and the creditor’s claim is for $110,000) the creditor should prove in the estate as an unsecured creditor for $10,000. However, if the creditor estimated the value of the security as only $60,000 they would then seek to prove for $50,000 (the difference between the estimate and the claim). The trustee may, if dissatisfied with the estimate, require the secured property to be offered for sale: s 91(2). A creditor who lends money to a person for the purchase of any personal property may take a security interest in that asset. As long as the interest is registered on the PPSR, the creditor’s rights to the property will be protected in that person’s bankruptcy as a “purchase money security interest” (PMSI), with priority over other secured creditors, and as against the trustee in bankruptcy.

Purchased debt [6.510] A person may purchase from a creditor a debt owed to that creditor. Collection houses or finance companies will often purchase unpaid or “delinquent” debt from credit providers. The purchaser then assumes the obligations and benefits of the original credit provider through managing the collection of these accounts. In a bankruptcy of the debtor, such a creditor can vote only for the value paid for the debt, not the original amount of the debt: IPSB, s 75-80, IPRB, s 75-110.

[6.515]

6 Administration of the Bankruptcy

279

Although many such arrangements are quite legitimate, the law is designed to prevent parties who are friendly to the bankrupt buying debts inexpensively and then being able to vote the full value of the debt on issues affecting the bankrupt.89 The section does not affect the value of the debt which that new creditor would otherwise be entitled to claim in the estate. It may therefore lodge a proof of debt for the full amount of the amount owed by the debtor to the original creditor.

Proofs of debt [6.515] Any creditor who wishes to prove in a bankruptcy must lodge a written proof of debt with the trustee: s 84(1). If a proof is lodged and is accepted the creditor is said to have been “admitted to proof”. A proof may be lodged at any time after the date of bankruptcy, including after discharge (Tarea Management (North Shore) Pty Ltd v Glass [1991] FCA 72; (1991) 28 FCR 93) but often it will be lodged in response to the trustee’s call for proofs with a view to a dividend being paid. The trustee may also make such a call when a meeting of creditors is imminent and voting rights must be determined or when the trustee wants to know the extent of claims against the estate. There is no process of informal proof, but a proof does not have to be verified by a formal statutory declaration unless the trustee requests it: s 84(3). The proof of debt must be in accordance with the approved form: s 84(2)(b) (AFSA Form 8). It must contain the particulars of the debt and refer to any documents (such as invoices) supporting the claim: s 84(2). The trustee may require a proof to be verified by statutory declaration: s 84(4). When in receipt of proofs the trustee must admit the proof in whole; admit it in part and reject it in part; reject it in whole; or the trustee may require further evidence: s 102(1). In deciding upon a proof of debt, a trustee, or liquidator, acts in a quasi-judicial role: Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332. The trustee is in effect replacing the court as the arbiter of the creditor’s claim. The trustee may administer oaths and take affidavits in obtaining evidence in relation to a proof: s 106. The trustee may even go behind a judgment obtained against the bankrupt to determine whether the proof should be accepted. In Re Van Laun; Ex parte Chatterton [1907] 2 KB 23, 31 it was said: “the trustee … is not the judgment debtor, but is entitled to say, ‘It is my business to see that those who seek to rank against this estate are persons who are really creditors of that estate.’ If there be a judgment it is not necessary to [show] fraud or collusion. It is sufficient … to [show] miscarriage of justice – that is to say, that for some good reason there ought not to have been a judgment.”

89 Under the Corporations Act, the value of the voting power is the original value of the debt. An alignment with the bankruptcy provision was recommended by the Senate Economics References Committee Report – ’I just want to be paid’ – Insolvency in the Australian Construction Industry (December 2015), recommendation 42. The government’s response, of May 2017 rejected that recommendation for corporate insolvency.

280

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.520]

And even if the debtor admits owing the debt, the trustee must make his or her own judgment upon the value of any such admission in the same way as a court would assess evidence: James v Woodgate [2012] FMCA 1214; (2012) 273 FLR 22. Challenges to a trustee’s decision on a proof of debt

[6.520] If the trustee decides to reject the proof wholly or in part, the creditor must be informed in writing of the grounds for the rejection: s 102(2). A dissatisfied creditor may request the trustee to reconsider, and the trustee may revoke the original decision: s 102(4). If the trustee does not amend the decision the creditor may apply to the court to review it: s 104(1). The application for the review must be brought within 21 days from the date when the trustee made the decision (s 104(3)); that time may be extended under s 33(1)(c) of the Act, on good cause being shown: Rocom International Pty Ltd v Prentice [2002] FCA 604.90 It will be relevant if the estate has not been distributed so that there is no prejudice to the other creditors if the extension of time is granted: Official Trustee in Bankruptcy v Pastro [2004] FCA 713; (2004) 2 ABC (NS) 257. The court’s power under s 104 is to confirm, reverse or vary the trustee’s decision on the proof of debt. It is not the function of the court to consider the correctness or otherwise of the trustee’s decision in the light of the material before the trustee, but to determine in light of the material before the court whether the applicant for review has a debt that should be admitted to proof. The court can therefore take into account inconsistencies in the material provided to the trustee and in the evidence before the court: BDT Holdings Pty Ltd v Piscopo [2009] FCA 151. A proof of debt must be rounded down to the nearest dollar: s 103.

DISTRIBUTION OF THE ESTATE TO CREDITORS [6.525] Naturally, the distribution of the estate, that is the realisations of assets and any monetary or other recoveries, is a main concern of the creditors. It also constitutes one of the major tasks of a trustee. The trustee will, once the estate is finalised, pay a final dividend to creditors, assuming funds are available to do so. However, during the course of the administration of the estate the trustee will realise assets and often the trustee will pay interim dividends. Section 140(1) ultimately requires trustees to declare and pay dividends “with all convenient speed”. A creditor can receive as a dividend no more than its full debt plus interest: s 107, s 82(3B). This is subject to the operation of s 91, in relation to secured creditors: see [6.505].

Payment of dividends [6.530] Before declaring a dividend the trustee must consider the position of priority creditors. These are creditors who are given, under the Act or under a court 90 The authorities are reviewed in Daevys v Official Trustee in Bankruptcy; in the matter of Daevys [2011] FCA 398.

[6.530]

6 Administration of the Bankruptcy

281

order, a priority for the repayment of their debts. Such creditors will be considered at [6.450]. Once priority creditors have been satisfied in full, the balance of the estate is distributed to the unsecured creditors. If the bankrupt has not filed a statement of affairs, but the trustee has been able to realise assets and determine who are the creditors, leave of the court must be obtained under s 146 to pay dividends.. This process provides judicial oversight of the administration where there is potential for some creditors to be prejudiced. In one case, where a late claim for an interest was made by the bankrupt’s de facto partner, the court deferred the s 146 hearing until after the claim was heard and determined: Application in the matter of Kelly (No 2) [2015] FCCA 3036. The s 146 process also supports a principal object of the legislation to have the payment of dividends to creditors made “with all convenient speed”: s 140(1); see also s 145. The court will assess the measures taken by the trustee to try to obtain the statement of affairs. But in the end, sometimes a bankrupt will simply “not want to engage with the bankruptcy process”: Barnet v Zhang [2017] FCA 924. Consistent with that, there is no need to serve the bankrupt or name them as a party. The outcome of this is that the person is not discharged from their bankruptcy at all, or unless and until they file their statement of affairs: s 149(4). However, if a statement of affairs is filed but is not complete, no s 146 order is necessary: Nicols v Geekie [2007] FMCA 1576; (2007) 214 FLR 188. However that may raise separate issues as to whether the bankrupt has complied with their obligation under s 54 to file the statement: see [6.30]. Dividends can only be paid to creditors who have proved their debts: s 140(1). Before the first dividend is declared, the trustee is required to give written notice to any creditor who has not yet lodged a proof giving them a reasonable period to do so: s 140(3), (4). When a final dividend is to be declared notice must also be given to creditors but the trustee may pay the dividend without regard to any debt that has not been proved: s 145. It has been said of a liquidator, and no less a trustee, that the duty is “… not merely to advertise for creditors, but to write to the creditors of whose existence he knows, and who do not send in claims, and ask them if they have any claim”.91 A trustee need not pay any dividend in an amount less than $25.92 In that instance, the unpaid moneys are to be distributed to the other creditors with debts over $25. A creditor cannot issue legal proceedings against the trustee for payment of a dividend but if the trustee “neglects or refuses to pay a dividend”, the creditor may apply to the court and it may order the trustee to pay the dividend, plus interest and costs: s 147(1). 91 Pulsford v Devenish [1903] 2 Ch 625, 631; see also Harry Goudias Pty Ltd v Port Adelaide Freezers Pty Ltd (1992) 7 ACSR 303, 306-307. 92 See s 140(9); reg 6.21. See Re One.Tel Ltd; Walker and Sherman [2002] NSWSC 1081; (2002) 43 ACSR 305.

282

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.535]

That section is subject to any restraining order made against the trustee by the Family Court under ss 90SS or 114 of the Family Law Act 1975 (Cth): Bankruptcy Act, s 140(11). Section 114 of the Family Law Act allows the Family Court, on the application of the non-bankrupt spouse, to grant an injunction restraining the bankruptcy trustee from declaring and distributing dividends. Section 90SS provides that, if the trustee is a party to a proceeding before the Family Court, the court may order that any necessary document be executed by the bankrupt, or that documents of title be produced or such other things be done as are necessary to enable any order of the court to be carried out. Any dividends unclaimed for at least six months are paid to the Commonwealth: Bankruptcy Act, s 254. Those entitled to the dividends may apply to the court, which can order that they be paid to the applicants (s 254(3)): Application of Tsantis (in the Matter of Bauer) [2010] FMCA 112.93 This in effect means that only large amounts of moneys unclaimed can be recovered, given the cost of court and legal fees involved. In contrast, unclaimed moneys in corporate insolvency can be claimed on application made to ASIC.94

SPECIAL PRIORITIES [6.535] As we have seen, one of the purposes of bankruptcy law is to provide for the fair and equal distribution of the bankrupt’s estate among his or her common creditors. This, the fundamental “pari passu” principle, is stated in s 108: “Except as otherwise provided by this Act, all debts proved in a bankruptcy rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately.”

As discussed previously, secured creditors are “otherwise provided” for, in that they can recover their claims out of the proceeds of the property over which they have security. As to unsecured creditors, s 109 is the primary section that sets these priorities, to which s 108 is subject. The notion of equality among creditors in s 108 is much altered by the law in s 109, with the result that certain groups of persons, including certain types of creditors, are accorded preferential status.

Section 109 priority payments [6.540]

Section 109 commences:

“[s]ubject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order: …”

It then lists those priority payments to be satisfied before unsecured creditors receive any dividends. Often the priority payments dealt with in s 109 exhaust the total funds available and the ordinary unsecured creditors receive nothing. 93 See IGPD20 – Guidelines for the payment of monies to the Commonwealth pursuant to Section 254 of the Bankruptcy Act 1966. 94 See Corporations Act, Pt 9.7. See [15.335]. This deficiency in bankruptcy is proposed to be remedied by Schedule 5 to the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 (exposure draft, January 2018), by allowing the Official Receiver to determine applications for unclaimed moneys, subject to court review.

[6.550]

6 Administration of the Bankruptcy

283

The policy rationale for the existence of these priorities is that certain persons warrant some form of protection, and should be more insulated from the bankrupt’s failure than others. For instance, it is a policy decision that employees should receive their entitlements before other ordinary creditors. The Harmer Report questioned whether this was still a valid basis for granting such a priority given the fact that we now have a developed and sophisticated social welfare system to take care of those in need.95 Nevertheless, the priority remains and in fact is supplemented by the Fair Entitlements Guarantee (FEG), the Governmentfunded arrangement providing payments to employees of insolvent businesses up to certain limits.96 The Government takes the benefit of – is subrogated to – the employee’s entitlement to any dividend out of the bankruptcy. Section 109 provides for a number of priorities and only the major ones will be mentioned here. For ease of consideration the matters will be referred to in the order in which they are found in s 109. Costs and expenses of administration: s 109(1)(a)

[6.545] This section is the first priority and it includes the taxed costs of the petitioning creditor (if the bankruptcy arose through a sequestration order) and then the remuneration of the trustee. If there are insufficient funds to pay all of the items specified, reg 6.01 and Sch 3 apply and provide a scheme of priority payments. The major expenses are to be paid in the following order under Sch 3: • the expenses reasonably incurred by or on behalf of the trustee in protecting the assets of the bankrupt, carrying on of the bankrupt’s business or by way of an advance made to the trustee for payment of properly incurred expenses of the estate for any proper purpose (other than the trustee’s remuneration); • other costs, fees and expenses incurred by the trustee in the course of administering the estate; • the taxed costs of the petitioning creditor in obtaining a sequestration order;97 and • the remuneration of the trustee. The costs of an audit under IPSB, s 70-15 or s 70-20 are accorded a high priority. Remuneration and costs of a controlling trustee: s 109(1)(b)

[6.550]

Section 109(1)(b) gives a high priority to the remuneration and costs of a controlling trustee who was authorised by the bankrupt (before their bankruptcy ensued) under s 188 of the Act to convene a meeting of creditors under Pt X. This may have occurred where a debtor either tried unsuccessfully to initiate a Pt X agreement with creditors, or actually entered an agreement but it was terminated and subsequently the debtor has become a bankrupt. 95 Harmer Report, [722]. 96 See Fair Entitlements Guarantee Act 2012 (Cth). 97 Under the Courts’ Bankruptcy Rules, Pt 13, Div 13.2, these costs may be claimed in a fixed amount found in Sch 3 to the Federal Court Rules 2011 (Cth), being $2,426 (as at 2018) plus the costs of adjournments.

284

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.555]

Liabilities from Pt X proceedings, or compositions or schemes: s 109(1)(c)

[6.555] Liabilities under a failed Pt X agreement or Pt VI scheme or composition can be provable debts in the subsequent bankruptcy: s 114. These are given priority if the relevant Pt X or Pt VI arrangement was made within two months of bankruptcy and has since been terminated. If these last two items were not given priority trustees might be reluctant to agree to take on Pt X administrations, because if the debtor were to go bankrupt, trustees would have no priority in relation to the payment of their remuneration and expenses. However, for reasons of policy or otherwise, the remuneration of an interim trustee appointed under s 50 is given no priority, nor is there any mechanism for their remuneration to be fixed otherwise than by the court.98 Wages of employees of the bankrupt – s 109(1)(e)

[6.560] The amount claimable by an employee on account of unpaid wages is limited to around $4,450 (2018, indexed). As stated earlier, employees can claim on FEG, the Fair Entitlements Guarantee, in respect of unpaid entitlements due by their bankrupt employer. The wages due in respect of an employee of the bankrupt include superannuation (s 109(1B)) and amounts due as a superannuation guarantee charge (within the meaning of the Superannuation Guarantee (Administration) Act 1992 (Cth)) or the general interest charge in respect of non-payment of the superannuation guarantee charge: s 109(1C). Priorities in favour of certain creditors – s 109(1)(j)

[6.565] Priorities in favour of a creditor or group of creditors may be agreed by a special resolution at a meeting of creditors, or for costs incurred by a trustee before the date of the bankruptcy: s 109(1)(j). The meeting notice must contain a copy of the specific proposed resolution: IPSB, s 75-137. Payment must be delayed for 28 days during which period any creditor or the bankrupt can apply to the court to have the decision reversed: s 109(8), (9). Court ordered priority – s 109(10)

[6.570] We have seen that s 109(10) permits the court to provide a higher dividend return to a creditor where that creditor has indemnified the trustee in respect of legal costs. In making such an order, the court is displacing the priorities we have been discussing. See [6.365]. Claims to which s 109 is subject

[6.575] Section 109 provides that it operates “[s]ubject to this Act”, that is, subject to any other provisions that may override it. This preserves the discretionary power of the court under s 32 to make any orders as to costs as it thinks fit: Kerr (Trustee), in the matter of Cross (Bankrupt) v Bechara (No 2) [2015] FCA 444. That discretion may be exercised to direct a trustee not to admit a proof of debt that arises out of unlawful conduct. In Perthmetro Pty Ltd (in liq) [2015] FCA 671, the 98 Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal (No 2) [2017] FCA 1186. Such a trustee is not the “trustee of a regulated debtor’s estate” under IPSB, s 5-20.

[6.590]

6 Administration of the Bankruptcy

285

employees’ employment contracts directed their salary to their wives so as to reduce the employee husbands’ rate of tax. This involved misrepresentations to the Commissioner for Taxation in respect of their earned income and was offensive to the tax regime. The court directed the liquidator not to admit the proof of debt. Final order of payment

[6.580] In the end result, if there are insufficient funds to fully satisfy a particular class of priority creditors, the remaining funds are divided proportionately among the creditors of that class. On the other hand, if all priority creditors are paid in full, the balance of funds will be available for distribution proportionately among the unsecured creditors. REPORTING [6.585] IPSB, s 70-5 requires a trustee to give the Inspector-General an annual administration return (AAR) in relation to each bankrupt estate administered during the year. The return must be given within 25 business days after the end of the financial year. This legal requirement is addressed by AFSA’s AAR Online, which allows trustees to lodge their returns at any time, such as upon finalisation, or at the end of the financial year. It also shows details of all of the estates of a trustee, and allows realisations and interest charge payments, among other things. The AAR provides the Inspector-General with necessary information relating to the operation of the Act generally, as well as the trustee’s compliance with it, in relation to specific estates. There are various reporting and filing requirements under the Act many of which are the subject of penalty for non-compliance. IGPS 7 – Annual estate returns (AERs, sets out details of the processing and timelines of the returns.

ADMINISTRATION OF DECEASED BANKRUPT ESTATES [6.590] Pt XI deals with the bankrupt estates of deceased persons. The term “legal personal representative” is defined to generally mean the executor appointed under the deceased’s will or, where there is no will, the administrator appointed under letters of administration or court order.99 On an order being made under Pt XI of the Act, on the petition of either the creditor or the deceased estate, the legal personal representative of the estate loses all powers and duties in favour of the trustee (s 249), the divisible property of the estate passes to the trustee (s 249) and creditors’ claims against the estate become rights to prove in the administration of the deceased estate.100 Section 82 is made applicable to deceased estates by s 248. Apart from divisible property, afteracquired property vests as soon as it is acquired by the estate. As in bankruptcy, non-divisible assets of the deceased do not vest. However, if no legal personal representative is yet appointed, a trustee may recover, protect and 99 Bankruptcy Regulations, Sch 7. 100 See Hannan, “Bankrupt Deceased Estates” (2012) 24 A Insol J 28.

286

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.590]

realise any non-divisible assets and may claim remuneration and expenses in doing so. The trustee must account to any legal personal representative later appointed for those assets: McDonald v Young [2012] FCAFC 137; 10 ABC (NS) 254. What divisible property in fact vests depends on when the administration is deemed to have commenced. In that regard, there are particular dates of commencement of the bankruptcy for deceased estates, depending on the circumstances outlined in s 247A. If the deceased was insolvent on the day of death and had committed any act of bankruptcy within the six-month period before death, the date of commission of the first of those acts of bankruptcy is the date of commencement of the administration under either s 244 or s 247. If in that situation there was no act of bankruptcy, the date of death is the commencement date of the administration. If the deceased was solvent at the time of death, the administration is deemed to commence at the time of presentation of the petition. This contemplates a situation where the legal personal representative, through debts incurred after death, renders a solvent estate insolvent. A s 245 bankruptcy (that is, one that occurs when the debtor dies after the presentation of the petition) is deemed to have commenced on the date of the earliest act of bankruptcy within the six months prior to the presentation of the petition, which is the case with Pt IV bankruptcies. The extent of property that vests in the trustee depends on the date of commencement of the bankruptcy. Under s 247A, the administration under Pt XI of the Act can commence before death, at the time of death, or after death. Section 249 provides that divisible property of the estate of the deceased, determined as at the commencement of the bankruptcy, vests in the trustee on the order being made; provision is also made for the vesting of after-acquired property. • If the administration is deemed by s 247A(1)(a) or 247A(2) to have commenced before the death of the deceased: s 249(6) lists the divisible property. This includes property that formed part of the estate upon the death of the deceased, but excludes non-divisible property and certain life insurance and superannuation proceeds, includes property that vested in the deceased at the commencement of the administration and includes property acquired after the commencement and before death. • If the administration is deemed by s 247A(1)(b) to have commenced at the time of the deceased’s death: s 249(7) lists the divisible property. This is the same as under s 249(6) except that as the administration commences at the time of death, there is no property vesting at any time before the death of the deceased. • If the administration is deemed by s 247A(1)(c) to have commenced after the death of the deceased: s 249(8) lists the divisible property. This is the same as under s 249(7) subject to the situation that applies in respect of property held in a joint tenancy. The protective provisions safeguarding those who deal with bankrupts, or who take title through them, are made applicable to Pt XI by s 248.

[6.590]

6 Administration of the Bankruptcy

287

The legal personal representative can be personally liable to the trustee in bankruptcy for a payment or transfer of property of the deceased after service or presentation of a petition and before an administration order is made: s 252. There is a defence of having acted in good faith: s 252(2). The administration of a deceased estate in bankruptcy is conducted like that of an ordinary bankruptcy. In that respect, the trustee is the “trustee of a regulated debtor’s estate” under IPSB, s 5-20(d) and is subject to the various provisions in the Schedule and Rules. The trustee will carry out similar procedures and the deceased is treated as if he or she were alive and bankrupt, being represented by the legal personal representative. For this purpose, many of the general provisions of the Bankruptcy Act are made applicable to Pt XI administrations by s 248. These general provisions are modified for the purposes of deceased estates pursuant to reg 11.02 and Sch 7 of the Bankruptcy Regulations. So, examinations under s 81 are available, as are the voidable transaction provisions in ss 120 – 122. Part VI, dealing with debts provable in bankruptcy, manner of proofs of debts, and mutual credit and set-off apply, as do ss 109 – 110, 113 – 114, relating to creditor priorities. Proper funeral and testamentary expenses have a priority under s 109(1)(d). Sections 115 and 116, relating to relation back and the commencement of the bankruptcy do not apply, Pt XI having its own specific provisions for these, although many of the exclusions from divisible property in s 116(2) do in fact apply. In the same way as under s 58(3), s 249(3) prevents a creditor from seeking to enforce any remedy against the deceased estate in respect of a provable debt, or to, except with the court’s leave, commence or continue with legal proceedings against the estate. Maintenance orders are still enforceable against non-divisible property (s 249(4A)) and secured creditors remain protected: s 249(5). Creditors can prove in respect of claims arising before the date of the administration order, not only in respect of those claims arising before the date of death. Section 248 equates the date of bankruptcy as the date of the administration order for the purposes of determining claims under s 82 of the Act. The Australian Taxation Office has particular rules for bankrupt deceased estates. It requires a trustee or executor to lodge all outstanding tax returns on behalf of a deceased person, up to the date of their death. Any repayment assessment that relates to the period before the person’s death is to be paid as a dividend from the estate but neither the deceased’s family, nor the trustee, is required to pay any remainder of the debt.101 The trustee of an insolvent deceased estate becomes liable, like a legal personal representative, for compliance with State or Territory laws regulating deceased estates, for example as to registration of the probate and transmitting title to property, except to the extent that these laws conflict with bankruptcy requirements. The “end of an administration” under Pt XI is the day three years after the day on which the administration is taken to have commenced under Bankruptcy Act, 101 See www.ato.gov.au – Deceased estates and bankruptcy.

288

Keay’s Insolvency: Personal and Corporate Law and Practice

[6.595]

s 247A: IPSB, s 5-5. This then determines the commencement of the seven year period for the retention of books by the trustee, and their destruction, under IPSB, ss 70-35 and 70-36. The Official Receiver Practice Statement, ORPS 5 – Administration of Estates of Deceased Persons describes the way that AFSA performs its functions and exercises its powers under the Bankruptcy Act in relation to deceased estates.

CONCLUSION [6.595]

When a bankruptcy has progressed to the point of assets having been realised and dividends paid to creditors, the bankruptcy will come to an end. Of course many bankruptcies realise no assets but come to a stage where there is no useful purpose in the administration being continued. The trustee determines these issues. The term of bankruptcy of the bankrupt runs parallel with this. Whilst the bankrupt estate may continue to be administered, the law may allow the bankrupt to be automatically discharged from bankruptcy and the status of being a bankrupt. These issues are discussed in Chapter 7.

Bankruptcy Act Bankruptcy Regulations

AFSA

Courts’ Bankruptcy Rules

Chapter 6 – Administration of the Bankruptcy Part VI – Administration of Property – ss 82 – 147 Part XI – Administration of Estates of Deceased Persons in Bankruptcy Part 6 – Administration of Property – regs 6.01 – 6.22 Part 11 – Administration of Estates of Deceased Persons in Bankruptcy; Schedule 7 – Modifications under Part XI of the Act – Administration of Estates of Deceased Persons IGPD2 – Collection of realisations and interest charges IGPD9 – Standards for trustees and controlling trustees IGPD14 – Proper performance of duties of a bankruptcy trustee IGPD20 – Guidelines for the payment of monies to the Commonwealth pursuant to section 254 of the Bankruptcy Act 1966 IGPD21 – AFSA website advertising of meetings of creditors IGPD22 – Effective practitioner communication IGPS7 – Annual estate returns IGPS12 – Statutory reviews of trustees’ decisions under the Bankruptcy Act 1966 by the Inspector-General in Bankruptcy ORPS 5 – Administration of Estates of Deceased Persons OTPS 8 – Treatment of Debts in Bankruptcy Part 6 – Examinations – rr 6.01 – 6.18 Part 12 – Warrants – rr 12.01 – 12.02 Part 13 – Costs – rr 13.01 – 13.05 Part 11 - Administration of Estates of Deceased Persons – rr 11.01 – 11.04

7

End of a Bankruptcy and Beyond [7.05] INTRODUCTION ................................................................................................................ 290

[7.10] The end of a bankruptcy ................................................................................... 290 [7.15] Overview .............................................................................................................. 291 [7.25] ANNULMENT ..................................................................................................................... 292

[7.30] Annulment by operation of law: s 153A ........................................................ 292 [7.35] Annulment following a scheme of arrangement or composition: s 73 .... 293 [7.40] Process of initiating an arrangement .............................................................. 294 [7.45] Meetings of creditors ..................................................................................................... 294

[7.50] Effect of an arrangement ................................................................................... 295 [7.55] Variation of an arrangement ............................................................................. 296 [7.60] Setting aside and terminating an arrangement ............................................. 296 [7.65] Annulment by court order: s 153B .................................................................. 296 [7.70] Who can apply ............................................................................................................... 297 [7.75] Trustee’s report ............................................................................................................... 297 [7.80] Grounds ........................................................................................................................... 298

[7.95] Consequences of annulment ............................................................................. 300 [7.100] Validation of prior acts etc ......................................................................................... 300 [7.105] DISCHARGE FROM BANKRUPTCY ............................................................................ 301

[7.110] Process and consequence of discharge .......................................................... 301 [7.115] Automatic discharge – general ....................................................................... 302 [7.120] Automatic discharge – objections on general and special grounds ........ 303 [7.125] Rationale for the special grounds ............................................................................. 305 [7.130] Grounds of objection ................................................................................................... 305 [7.135] Extension of bankruptcy to five or eight years ...................................................... 307

[7.140] Withdrawal of objection .................................................................................. 307 [7.145] Review of objection decision .......................................................................... 308 [7.145] Review by Inspector-General and the AAT ............................................................ 308 [7.150] Review by the court .................................................................................................... 309

[7.155] After discharge .................................................................................................. 310 [7.160] Effect of discharge on liabilities and property ............................................ 310 [7.165] SETTING ASIDE A SEQUESTRATION ORDER, AS AN ALTERNATIVE TO A COURT ANNULMENT .................................................................................................... 311

290

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.05]

[7.170] Appeals or new hearings ................................................................................. 311 [7.175] ANNULMENT OF DECEASED BANKRUPT ESTATES ............................................ 312 [7.180] SUBSEQUENT BANKRUPTCIES ................................................................................... 312 [7.185] CONCLUSION ................................................................................................................... 314

INTRODUCTION [7.05] While bankruptcy is a status imposed on a person for a period of time, it is not meant to be permanent. It is a defined three year period during which the bankrupt must attend to various obligations and be subject to various restrictions, after which the former bankrupt may fully pursue their consumer and business life. Also, it can be that bankruptcy needs to be ended other than by the statutory period finishing, for example, if the bankruptcy occurred in error, or resulted in all the bankrupt’s debts being paid in full.1 The three year period is seen by the government, and others, as being too long in today’s society. A decision has been made to reduce the period of time to one year. Although this might not seem to be a major issue, and it is one that has been adopted in comparable jurisdictions, it creates a division in Australia between those who see a need to reduce the social and business stigma and consequences of bankruptcy, and those who see an inability to pay back one’s debts, and their discharge, as requiring some accounting and consequence for the benefit provided. The reduction in the period of bankruptcy to one year would be effected by the proposed Bankruptcy Amendment (Enterprise Incentives) Bill 2017, the title of which itself gives a signal as to the policy reasons behind the change. Throughout this chapter, notations are made where this change will impact the commentary. At the time of writing, the Bill was subject to a 2018 Senate Committee review. Any comments in this chapter are made in respect of that Bill as introduced into Parliament in 2017.

The end of a bankruptcy [7.10] Under IPSB, s 5-5, the “end of an administration” of a bankruptcy means “the day on which the bankrupt is discharged or the bankruptcy is annulled, whichever happens first”. There is broadly one avenue of discharge, and three avenues for annulment. In addition, bankruptcy may be ended by order of the court, rather than being annulled. There are a number of circumstances where the court will do this, using powers under court rules. For example, a sequestration order made in error is reversed, or is set aside by an appeal court. Such discretionary orders have different legal consequences than a formal annulment. These other options will be discussed but at this point it is important to give an overview of both annulment and discharge and explain the key differences. 1 See generally AFSA’s Official Trustee Practice Statement (OTPS) 4 – The End of a bankrupt’s period of bankruptcy.

[7.20]

7 End of a Bankruptcy and Beyond

291

Overview [7.15] Annulment of a bankruptcy may occur or be granted: • when all the debts in the bankruptcy are paid out because there is enough divisible property to do so – s 153A; or • when all the debts are paid in a compromised amount with the creditors’ agreement – s 73; or • where the court determines that the bankruptcy should never have occurred because of some error, whether or not any debts have been paid out – s 153B. Annulment purports to place the bankrupt in the same position as they were in prior to the bankruptcy, as if the bankrupt had never been bankrupt. It has been described as a “retrospective annihilation” of the bankruptcy (Theissbacher v MacGregor Garrick & Co [1993] 2 Qd R 223) although that is a legal fiction separate from the reality of the fact of the bankruptcy having occurred: Union Club v Battenberg [2006] NSWCA 72; (2006) 66 NSWLR 1. Property which was vested in the trustee will generally re-vest in the former bankrupt. The bankrupt estate does not continue. Importantly, an annulment on grounds other than payment of all debts does not release the former bankrupt from any debts; he or she remains liable for them.

[7.20] Discharge of a person from their bankruptcy is quite different. It occurs, in the case of most bankruptcies, three years after the date of bankruptcy (or, one year), unless the bankruptcy is extended by way of their trustee lodging an “objection” to the bankrupt’s discharge, for example if the bankrupt has not co-operated in their bankruptcy: s 149. That can extend the period of a bankruptcy up to eight years: s 149A. Like annulment, discharge serves to release the person from the status of bankruptcy. Unlike annulment, the bankrupt estate may continue to be administered by the trustee after the date of discharge. This can be the case if there is ongoing litigation after the date of discharge or complex creditors’ claims or protracted recoveries of assets. The discharge does not affect the trustee’s title to property which has already vested; that property does not re-vest in the bankrupt. However, it is important to emphasise that the person is no longer a bankrupt even if the administration of the estate continues, and creditors are yet to be paid any dividends. It follows that a person can obtain and may in fact seek an annulment of their bankruptcy, under either s 153A or s 153B, even after they have been discharged.2

2 Re Oates; Ex parte DCT (1987) 17 FCR 402.

292

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.25]

This table broadly summarises how a bankruptcy may be ended, including a bankruptcy set aside by a court order, or on appeal. Different times when bankruptcy can end Period of bankruptcy 1 2 3 4 5 6 7 – years Annulment Any time after the date of the bankruptcy, including after discharge Discharge 1 2 3 Any time after three years (or one year) of the date of the bankruptcy, subject to an objection to discharge (up to 8 years in total), or non-filing of a statement of affairs (indefinite) Set aside / appeal Any time after the date of the bankruptcy, including after discharge; subject to timing limitations under court rules.

ANNULMENT [7.25] The inherent power of a court to annul a bankruptcy – now found in s 153B – has existed in English law since the 19th century.3 Annulment without court order, under s 153A, or by creditor agreement, under s 73, is a more recent development, and is now more common.4 In the 2014-2015 financial year, there were 146 annulments under s 74 of the Act, 379 under s 153A, but only 8 granted by the court under s 153B.5 Annulments are, therefore, not high in number given the total number of bankruptcies each year – under 17,000 – but they represent a significant aspect of bankruptcy law and are an important means of redressing the injustice of a bankruptcy that should not have occurred.

Annulment by operation of law: s 153A [7.30] Section 153A provides that where the trustee is satisfied that all of the bankrupt’s debts have been paid in full, the bankruptcy is annulled automatically from the date of the last payment. The term the “bankrupt’s debts” is defined in s 153A(6) to mean all of the debts proved in the bankruptcy, including the interest payable on each of the debts bearing interest, up to the date of payment (s 153A(1A)), and the costs, charges and expenses of the administration of the bankruptcy. These costs and charges include the remuneration of the trustee. The circumstance of such an annulment can arise from the fact that the debtor may well have been solvent on a balance sheet basis when made bankrupt, although not on a cash flow basis, and, on sale of their assets by the trustee, there are sufficient funds available to pay all creditors and the trustee, with a surplus being returned to the debtor. Such an annulment can also occur, for example, where the trustee is able to recover assets or moneys through successful challenges to voidable transactions. 3 The history is explained in Oates v Commissioner of Taxation (1990) 27 FCR 289; [1990] FCA 510. 4 “Explanatory Memorandum to the Bankruptcy Amendment Bill 1991 (Cth)”, [29.2]. 5 AFSA Annual Report 2014-2015, p 73 (the latest data recorded).

[7.35]

7 End of a Bankruptcy and Beyond

293

The trustee cannot be satisfied that all the bankrupt’s debts have been paid in full until a final decision has been made on proofs of debt lodged, including the determination of any application by a creditor who is challenging the rejection of their proof: Re Wong (1995) 63 FCR 426, [1995] FCA 1466; Coshott v Burke [2012] FCA 517. That may delay the annulment. Once an annulment occurs under s 153A, the trustee must notify the Official Receiver within two days (s 153A(2)) so that the NPII can be promptly updated.

Annulment following a scheme of arrangement or composition: s 73 [7.35] The other basis of automatic annulment occurs where a special resolution at a meeting of creditors of the bankrupt accepts a scheme of arrangement or a composition under s 73. Even though a person has become a bankrupt, the law allows them to come to some financial arrangement with their creditors whereby the creditors are paid some of their debts, more than they would receive from the bankruptcy, in exchange for the bankruptcy being annulled. The money usually comes from a third party friend or relative of the bankrupt. The bankrupt’s money or assets are not available, as they have vested in the trustee. The court is not involved although up until 1991, an annulment could only be made on a court order, after the creditors’ meeting had approved the proposal.6 Nothing much turns on the old terms composition or scheme of arrangement, which we refer to as arrangements; they generally encompass proposals whereby the creditors agree to accept something other than full payment of their debts. In reality, many s 73 arrangements by debtors are accepted on the basis of minimal dividend payments.7 As one well known example, the creditors of Alan Bond voted to accept his proposal of $3.25 million in full payment of his $599 million worth of personal debts in his bankruptcy. There was a down payment of $1 million followed by $750,000 a year for the following three years. After expenses, most creditors received around $1 for every $600 they were owed, or one sixth of a cent in every dollar.8 It should be noted that while a discharged bankrupt can apply for an annulment of their bankruptcy, they cannot put forward a s 73 arrangement – the word “bankrupt” in that section does not include a discharged bankrupt: Quinn v Official Trustee in Bankruptcy [1996] FCA 443; (1995) 63 FCR 129.

6 The reasons for this change are explained in the “Explanatory Memorandum to the Bankruptcy Amendment Bill 1991 (Cth)”, [15.2]. 7 The Act does not itself allow proposals from joint bankrupts, whether or not there are separate creditors: Re Edwards (1987) 14 FCR 113; Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154. 8 Barry, Going for Broke, How Alan Bond Got Away With It (Bantam Books, 2000), p 238.

294

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.40]

Process of initiating an arrangement [7.40] To initiate an arrangement, the bankrupt must lodge a proposal in writing with the trustee which must specify the terms and particulars of any sureties or securities forming part of the proposal: s 73(1). The trustee must then give a copy of that proposal to the Official Receiver, within 2 business days: s 73(1A). This serves to “put the Inspector-General on notice that a proposal has been made which will allow the Inspector-General to decide whether there are matters to investigate or whether to attend the creditors’ meeting to ensure creditors are fully informed before making their decision”.9 This oversighting role of the Inspector-General exists because the creditors exercise significant authority to decide whether to allow the bankruptcy to be annulled. Similar authority is exercised by creditors in deciding whether to accept a Pt X personal insolvency agreement: see Chapter 8. The role of the Inspector-General is supported by the authority under IPSB, s 75-30 to attend the meetings of creditors.10 Meetings of creditors

[7.45] The provisions in respect of creditors’ meetings generally are contained in IPRB, Div 75, with particular sections applying to s 73 arrangements – IPRB, ss 75-27, 75-40, 75-60 and 75-175. The trustee must lodge notice of the meeting and publish it on the AFSA website (IPRB, s 75-40), and call the meeting and send a copy of the s 73 proposal and the trustee’s report on the proposal to the creditors at least five days before: IPRB, s 75-175.11 Creditors who have proved their debts can vote by written notice to the trustee before the meeting. They are deemed to have been present at the meeting and to have voted accordingly.12 But the trustee may first require the proposal to make adequate provision for payment to the trustee of any accrued fees that are owing at the time the proposal is lodged, but are not able to be taken out of the estate; and have been approved by the creditors before the proposal is considered: IPRB, s 75-175. Under the old law, if that money were provided, the trustee was generally then bound to call a meeting if the proposal was bona fide and genuine: Re Bendel; Ex parte Bendel v Pattison [1997] FCA 1295; (1997) 80 FCR 123. However, if the trustee considered that the proposal was not genuine or feasible, or the trustee did not have sufficient information upon which to make a recommendation to creditors, there was no obligation on the trustee to call a meeting: Wenkart v Pantzer [2003] FCA 432; (2003) 1 ABC (NS) 236. 9 Revised “Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 (Cth)”, [128]. 10 See IGPS 11 – Monitoring and inspection of bankruptcy trustees and debt agreement administrators. 11

This lesser period prevails over the 10 days required generally, under IPRB, s 75-20.

12 IPRB, s 75-75(4).

[7.50]

7 End of a Bankruptcy and Beyond

295

The s 73 proposal must be tabled at the meeting (IPRB, s 75-60) along with various other documents, including the statement of affairs and the trustee’s declaration of relationships: IPRB, s 75-180.13 The report of the trustee must indicate whether the arrangement would benefit the creditors generally and it must name all related entities of the debtor shown in the statement of affairs: IPRB, s 75-175(2D). That report should include: • the source of the funds being provided; • particulars of any assets, realisations and dividends already paid; • an estimate of the dividend payable; • details of the bankrupt’s personal and business activities; • details of the bankrupt’s conduct before and during the bankruptcy; • any relationships held by the proposed trustee of the composition or scheme of arrangement. The general rules about the conduct of meetings apply, including as to the trustee’s prompting of discussions and inviting questions: IPRB, s 75-65. The debtor may amend the terms of his or her proposal, but not in a way that reduces any provision for payment of the trustee’s remuneration: IPRB, s 75-175(4). Any creditor which has proved its debt may assent to or dissent from the proposal by written notice given to the trustee before the meeting. In such a case, the creditor is taken to have been present at the meeting and to have voted accordingly. At the meeting the creditors may, by special resolution (see IPRB, s 75-132), accept the proposal. The trustee must make the arrangement available for the creditors’ inspection. Once a special resolution is passed the bankruptcy is automatically annulled; hence there is no need for any order of annulment to be obtained from the court.14 The trustee must then advise the Official Receiver within 2 days: s 74(5A).

Effect of an arrangement [7.50] If the arrangement is approved by creditors, then it is binding on all of the creditors who are owed provable debts by the bankrupt: s 75(1). The debtor is not released from a provable debt from which they would not be released on a discharge: s 75(2)(a). Further, any third party is not released from liability if it would not have been so released on the discharge of the bankrupt: s 75(2)(b). Otherwise, all debts are released for whatever dividend return the creditors are willing to accept. The provisions of an approved arrangement may be enforced by the court upon the application of an interested person: s 75(3). 13 Section 73B requires a new trustee, replacing the trustee of the bankrupt’s estate, to make their own declaration of relationships. It must be tabled at the meeting: IPRB, s 75-180(5). 14 Up until 1991, a court order annulling the bankruptcy was required, followed the creditors’ meeting approving the proposal.

296

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.55]

Variation of an arrangement [7.55] The law allows variations in approved proposals, if the arrangement proves unworkable, or circumstances change. Section 74A allows the creditors to vary the arrangement by special resolution at a meeting called for the purpose, with the debtor’s consent. The trustee must give notice of the proposed variation to all the creditors. The variation may be approved if no creditor notifies the trustee of any objection to it: s 74A(6).

Setting aside and terminating an arrangement [7.60]

The debtor’s arrangement may also be challenged in court. The provisions in Pt X relevant to the setting aside or terminating of a personal insolvency agreement are applied to s 73 arrangements by s 76B.

As applied by s 76B, ss 222 to 222D of the Bankruptcy Act provide for circumstances in which an arrangement may be set aside (s 222) or terminated (s 222A to 222D). The court may “set aside” an arrangement on the application of the InspectorGeneral, the trustee or a creditor, on stated grounds. The annulment is then thereby also set aside. The termination of an arrangement may be initiated: (i) by the trustee putting the proposed termination to the creditors (s 222A); (ii) by resolution of the creditors on their initiative (s 222B); (iii) by the Court on application of the trustee, the debtor or a creditor (s 222C); and (iv) automatically, by the occurrence of any circumstance or ‘terminating event’ provided for in the arrangement (ss 222D and 76B).15 The distinction between setting aside and terminating an arrangement, and other relevant provisions, are discussed in detail in Chapter 8. The setting aside of a s 73 arrangement results in the s 74 annulment of the bankruptcy being itself nullified. The parties are restored to their pre-arrangement positions – that is as bankrupt on the one hand, and creditors of the bankrupt on the other: Australia and New Zealand Banking Group Ltd v Shilton [2015] FCCA 1783; Hingston v Westpac Banking Corporation [2012] FCAFC 41; (2012) 200 FCR 493; 9 ABC (NS) 678.

Annulment by court order: s 153B [7.65] Section 153B provides that the court may order the annulment of a bankruptcy.16 There are three bases for such an order; these are, if the court is satisfied that:17 15 The terms of s 222D provide for automatic termination on the occurrence of any circumstance or event, the Full Court in Perovich v Whitton (No 2) [2016] FCAFC 152 rejecting an interpretation that the section only applied to circumstances or events beyond the control of the debtor. 16 Courts’ Bankruptcy Rules, Pt 7 apply. 17 See the summary of principles in Francis v Eggleston Mitchell Lawyers Pty Ltd [2014] FCAFC 18; (2014) 12 ABC(NS) 25 at [16]; adopting Bulic v Commonwealth Bank of Australia Ltd [2007] FCA 307; (2007) ABC(NS) 122.

[7.75]

7 End of a Bankruptcy and Beyond

297

• a sequestration order ought not to have been made; • a debtor’s petition ought not to have been presented; or • a debtor’s petition ought not to have been accepted. Thus, the claim is that for some reason to do with the circumstances of the bankruptcy occurring, the bankruptcy should be ended. Typically, in the case of a claim that a sequestration order should not have been made, there will have been some procedural irregularity, for example as to the fact that the petition was not personally served and did not come to the then debtor’s attention, which the bankrupt claims should cause the court to annul the bankruptcy. Alternatively, a creditor might apply for an annulment, on the basis that the bankruptcy is an abuse of process affecting the creditor’s rights. In the case of a debtor’s petition, debtors have claimed that they misunderstood the nature of bankruptcy such that their bankruptcy should be annulled. The court’s inherent jurisdiction to address a denial of natural justice in its hearing processes can exist in tandem with the statutory power under s 153B.18 The power to annul is to be exercised cautiously and only in special circumstances: Cameron v Cole (1944) 68 CLR 571, 594. The court will take into account all of the facts that existed at the time the bankruptcy commenced, including facts that were available at the time but which were not disclosed to the court or to the Official Receiver: Re Williams (1968) 13 FLR 10 (see further Hacker v Weston [2015] FCA 363). In exercising its discretion to annul, the court must have regard both to the interests of the various parties and to the interests of the public; neither is paramount over the other: Beaman v Bond [2017] FCAFC 142. Who can apply

[7.70] As a matter of practice it will usually be the bankrupt who applies for the annulment. However, other persons can apply, even without the consent of the bankrupt. Hence a trustee may apply, an example being where the debtor was made bankrupt twice in error; as might a creditor, (see [7.65]), for example where some abuse of process is alleged, or alternatively, if the creditor was at fault in the process leading to the sequestration order, for example by not realising that the debtor had paid its debt. The creditor must then take on the responsibility for having the bankruptcy annulled. Applications for annulment should be made promptly as any delay becomes a discretionary factor in whether the court grants the annulment. Trustee’s report

[7.75] The application for annulment must be served on the trustee and notice (Court Form 11) must be given to the creditors. The trustee may be directed by the court to prepare a report on the bankrupt’s conduct and examinable affairs both before and during the bankruptcy, and on the administration of the bankrupt’s estate: r 7.06. The court may rely on that report for the purposes of deciding on the annulment application. 18 Shaw v Buljan [2016] FCA 829.

298

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.80]

The trustee’s report, and any opinion as to solvency, are admissible both as expert evidence from someone with specialised knowledge, and as evidence from the trustee as an independent officer of the Court assisting it: Quick v Stoland Pty Ltd [1998] FCA 1200; (1998) 87 FCR 371; Beaman v Bond [2017] FCAFC 142. Grounds i) Sequestration order ought not to have been made

[7.80] Section 153B is available to a bankrupt who can prove that in light of the facts existing at the time, the court ought not to have made the sequestration order – for example, if the petition was not served, or the debt was not in fact owed, or had been paid. This includes facts about the bankrupt’s affairs which existed but which were not known at the time of the sequestration order even by the bankrupt, and by the court, but which subsequently became known; that is, if the court had known of those facts, it would not have made the order. But the court cannot take into account facts occurring subsequent to the order, that is, during the bankruptcy: Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179; 4 ABC (NS) 419. An annulment application may involve a question about the validity of the judgment debt upon which the petition was based. In such a case, the court may find that no amount was in fact owed. But it is not enough to go behind the judgment if this would only mean that the amount of the debt owing is reduced, rather than the debt not existing,19 unless the result was that the amount owed was less than $5,000, as the creditor would not have been able to present the petition. A court has granted an annulment where the debtor was denied natural justice in not having notice of the hearing of the petition; in that case, the court ordered a re-hearing of the creditor’s petition: Re Anasis (1985) 11 FCR 127; [1985] FCA 458. But even a lack of natural justice in the process may not be enough to cause a court to annul the bankruptcy if there was no doubt about the debt or the facts upon which the petition was based: Pollock v DCT [1994] FCA 953. At the hearing of an annulment application, the court broadly adopts a two-stage process to determine first, whether the sequestration order should have been made and secondly, if the court is satisfied of that, whether in the court’s discretion the order should be annulled: Rigg v Baker [2006] FCAFC 179; (2006) 155 FCR 531 at [59], 543. The applicant necessarily bears a heavy onus at both stages. For example, while a serious procedural irregularity may allow a bankruptcy to be annulled, this will not necessarily be the case. The court can take into account the conduct of the bankrupt during the bankruptcy, including in relation to any offences committed. Other discretionary matters include delay in making the application, especially if unexplained; whether or not the bankrupt is solvent; whether the bankrupt has made full disclosure of their financial affairs; the reason for their lack of opposition to the creditor’s petition; their preparedness to pay the costs of the annulment proceedings; the rights and interests of the creditors; the work already done by the trustee; the bankrupt’s degree of co-operation with the 19 Miller v Bondi Securities [1994] FCA 654.

[7.85]

7 End of a Bankruptcy and Beyond

299

trustee; the nature of any proposed arrangement alternative to bankruptcy; considerations of fairness and justice to the bankrupt; and above all, the public interest. In that respect, while the views and interests of creditors will be relevant, the court will not grant an annulment simply because all of those creditors consent; the public interest may call for the annulment to be refused: Francis v Eggleston Mitchell Lawyers Pty Ltd [2013] FCA 564. ii) A debtor’s petition ought not to have been presented by the debtor

[7.85] An annulment may also be granted where the court finds that a debtor’s petition ought not to have been presented by the debtor or accepted by the Official Receiver. These are the two less frequent grounds of annulment and do not generally involve any significant exercise of the court’s discretion. As to the first, given that the debtor presents a petition voluntarily, there are only limited circumstances where a bankruptcy can be annulled because the debtor ought not to have presented their petition. For example, a debtor will not succeed in an annulment application based on a lack of understanding of the consequences of bankruptcy, on the basis that their home was not protected. In Re Almassy [1999] FCA 1004; (1999) 92 FCR 597 the debtor’s lack of appreciation of the extent of statutory and other fees imposed on bankrupt estates was not a good enough reason to annul the bankruptcy; nor in Official Trustee, In the Estate of Smith [1999] FCA 1755 where the debtor had gone bankrupt thinking she would still be allowed to pursue a right of action that in fact vested in the trustee. Annulment was granted on the trustee’s application where the bankrupt had gone bankrupt by presenting petitions twice, in error: Re Official Receiver (NSW), in the matter of D’Elboux [2002] FCA 510. In such cases the court will require evidence that there have been no debts incurred since the first bankruptcy. A creditor may obtain an annulment on the grounds that the debtor’s presentation of their petition was an abuse of process, often directed at that creditor. In BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611, the court annulled bankruptcies on debtors’ petitions presented when the debtors were solvent, but with a view to defeating a then pending judgment for unliquidated damages. Similarly, a bankruptcy on a debtor’s petition was annulled because the debtor’s purpose was to place beyond the reach of the trustee, property which would otherwise vest: Re Cornish (1984) 6 FCR 257. But that ground failed in Beaman v Bond because although the debtor’s possible purpose was to frustrate pending family law orders that he pay money to his former spouse, another purpose was to ensure that she was treated equally as a creditor with his other creditors. The fact that the bankrupt is insolvent is not determinative: De Robillard v Carver [2007] FCAFC 73; (2007) 159 FCR 38. Conversely, in the case of a debtor’s petition, an annulment may be granted whether or not the debtor was insolvent when the petition was presented: s 153B(2). The law had previously been that an annulment would generally not be granted to someone who was insolvent. The reason given for the change in the law was that “high-income debtors … maintaining an expensive lifestyle” could previously go bankrupt in order to avoid paying a

300

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.90]

particular creditor, such as the ATO. If the court considered that the debtorbankrupt could make arrangements to pay the creditor, it could annul the bankruptcy as an abuse of process.20 iii) A debtor’s petition ought not to have been accepted by the Official Receiver

[7.90] As to the second ground, a narrower approach again is adopted in relation to the expression “ought not to have been accepted by the Official Receiver”. This annulment power is limited to cases where the Official Receiver has accepted a petition notwithstanding the fact that the conditions precedent in s 55(3)(a) (namely, the Official Receiver believed that the petition complied substantially with the approved form and there was an accompanying statement of affairs which was adequate), were not satisfied: Orix Australia Corporation Ltd v McCormick [2005] FCA 1032; (2005) 145 FCR 244. In that case, the petition had been presented by someone purporting to exercise a power of attorney given by the debtor which the court found could not be done. In addition, the Official Receiver had failed to comply with s 55(3A) because the required information under reg 4.11 about the consequences of bankruptcy was given not to the debtor but to the debtor’s attorney. This rendered invalid any purported acceptance of the debtor’s petition under s 55(4A).

Consequences of annulment [7.95]

However a bankruptcy is annulled, the main consequence of annulment is that the former bankrupt is restored to their pre-bankruptcy position, subject to any orders made under s 154. See [7.100]. Also, subject to s 154, the property of the bankrupt, vested in the trustee at the time of annulment, reverts to the former bankrupt (s 154(1)(c)), as will any surplus funds remaining after all the bankrupt’s debts have been paid. However, the effect of bankruptcy is not avoided for all purposes by an annulment. It will depend on the particular law. For example, any offence committed by a person during his bankruptcy was not undone because there was a subsequent annulment; at the same time, as a taxpayer, he had never “become a bankrupt” within the meaning of the then tax laws in relation to the allowance of his tax deductions: Oates v Commissioner of Taxation (1990) 27 FCR 289.21 In a case where membership of a club was forfeited on bankruptcy, the subsequent annulment of the bankruptcy did not, on a construction of the club’s constitution, revive the membership: Union Club v Battenberg (2006) 66 NSWLR 1. Validation of prior acts etc

[7.100] Section 154(1)(a) validates anything done during the bankruptcy to the date of the annulment, such as realisations of property or payments made by the trustee, or orders of the court. 20 “Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2002”, [55]-[56]. See Beaman v Bond [2017] FCAFC 142. 21 See also Bond v Rozenes (1995) 67 FCR 122; [1995] FCA 1231; ASIC v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267.

[7.110]

7 End of a Bankruptcy and Beyond

301

The trustee is permitted to make use of any divisible property which remains available in order to pay the costs, charges and expenses of the administration of the bankruptcy, including the trustee’s remuneration: s 154(1)(b). If that property is insufficient, the amount of the deficiency is a debt due by the former bankrupt to the trustee, and the trustee can recover it through court proceedings: s 154(2).22 In that circumstance, the right of a trustee to use the remuneration provisions in the Act continues after an annulment.23 However, the best course is for such remuneration to be approved and paid before the annulment occurs. Any surplus property reverts to the former bankrupt. But anyone who claims they have an interest in that property may apply to the court for an order that the property be transferred to them instead: s 154(3). If a bankruptcy is annulled under s 153B, and no dividend payment was made to the creditors, those creditors’ rights against the former bankrupt are necessarily revived.24

DISCHARGE FROM BANKRUPTCY [7.105] The bankruptcy laws intend that a bankrupt will ultimately be discharged from bankruptcy, in most cases “automatically”, by the operation of law, after three years. This is a fundamental outcome of bankruptcy, that the former bankrupt is released from their liabilities and their status as a bankrupt. There are said to be two purposes of the discharge regime. The first is that discharge allows the bankrupt’s “rehabilitation” by the ending of the restrictions of bankruptcy, with the bankrupt being restored to full capacity, including the ability to retain all their income and to acquire and retain property – the bankrupt has a “fresh start”. The second is to regulate the bankrupt’s behaviour – discharge can be delayed where a bankrupt’s conduct during bankruptcy is unsatisfactory and they may be perceived as a continuing risk to the community; and the threat of a delayed discharge also provides the bankrupt with an incentive to co-operate. This is a significant issue in relation to the proposed reduction in the period of bankruptcy to one year, under the Bankruptcy Amendment (Enterprise Incentives) Bill 2017. One argument against the change being that it would limit the trustee’s rights to enforce the debtor’s on-going obligations under the proposed law, such as the payment of income contributions for two years after the date of discharge from bankruptcy, and thereby the integrity of the bankruptcy regime.

Process and consequence of discharge [7.110] There is one process of discharge, that is, automatic discharge three (or one) years after the filing of the bankrupt’s statement of affairs: s 149, subject to the trustee lodging an objection to discharge and thereby extending the period of bankruptcy. This is explained in more detail at [7.160]. 22 See further, Doulman v ACT Electronic Solutions Pty Ltd (No 2) [2015] FCCA 1664. 23 Pantzer v Wenkart [2006] FCAFC 140; (2006) 153 FCR 466. 24 Other scenarios, including under English law, are discussed in Oates v Commissioner of Taxation (1990) 27 FCR 289; [1990] FCA 510.

302

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.115]

Discharge means that the bankrupt is released from all provable debts except for those few mentioned in s 153(2), as explained at [7.125]. It also means that the bankrupt is no longer subject to the many limitations imposed upon them while they were bankrupt, for example, the need to disclose bankruptcy when obtaining credit (s 269) or certain employment restrictions. Significantly, the former bankrupt may start to again acquire property and assets in his or her name, and retain all their income. However, the bankrupt will remain liable for debts that were not provable, for example for an unliquidated damages claim (s 82(2)), which may, after the date of the bankruptcy, have become a judgment debt, or certain criminal penalties (s 82(3)). The former bankrupt will also remain liable for any debts incurred by “fraud”, for example a tax or welfare benefit overpayment obtained by deception: s 153.25 These types of debts are explained in this table.

Debts not provable in the bankruptcy

Debts that are provable but which are not discharged by bankruptcy

Debts for which the former bankrupt may remain liable s 82 Some may become provable after the date of the bankruptcy and then be discharged by a later bankruptcy. For example, a claim for unliquidated damages which then becomes a judgment debt: s 82(2). Other debts will never be provable in any bankruptcy; for example, a HELP debt: s 82(3AB)(a). s 153 Some fraud and other debts may be part-discharged by a dividend paid in the bankruptcy; the balance of the money owed will remain provable in a subsequent bankruptcy; and so on: s 153(2). A maintenance debt may be released by court order: s 153(2A).

Automatic discharge – general [7.115] The general rule stated in s 149 is that a bankrupt is automatically discharged three years from the date on which they filed their statement of affairs (SOA) with the Official Receiver: s 149(4).26 There is no power in the court to abridge that time under s 33 of the Act: Nilant v Macchia [1997] FCA 966; (1997) 18 FCR 419. Where the bankrupt presented a debtor’s petition, the date of the filing of the SOA will be the same as the date of bankruptcy. However, if the bankruptcy was brought about by sequestration order, s 54 requires the bankrupt to make out and file their SOA within 14 days of being notified of the bankruptcy. The date of filing of the statement will therefore generally be some days or weeks after the date of the sequestration order. It is from that date of filing that the three year period of bankruptcy begins.

25 See Principled Regulation, Federal Civil & Administrative Penalties in Australia (ALRC 95, December 2002), ch 32. 26 Under the proposed Bankruptcy Amendment (Enterprise Incentives) Bill 2017 – the one year bankruptcy law – s 149(5) would provide that “if the bankrupt becomes a bankrupt after the commencement of this subsection, the bankrupt is discharged at the end of the period of 1 year from the date on which the bankrupt filed his or her statement of affairs”.

[7.120]

7 End of a Bankruptcy and Beyond

303

The trustee has an initial obligation to inform the bankrupt of their obligations under the Act, including under s 54, and the penalties for failing to comply. Assuming the bankrupt complies, the trustee must review it and if necessary interview the bankrupt about the details: IPSB, s 42-30. The Rules also require the trustee to provide creditors with a summary of the SOA, among other information, at the beginning of the bankruptcy (IPSB, s 70-30) and the date of sending the initial remuneration notice is determined by reference to the trustee having received the SOA: IPSB, s 70-35: see [6.30]. Therefore, if the bankrupt fails or refuses to file the SOA, this causes difficulties for the trustee, who needs the statement promptly in order to know personal and financial details of the bankrupt, who the creditors are, and what assets exist. Section 149 seeks to encourage the bankrupt to co-operate and file the statement within the period required – until the bankrupt does file it, the three-year (or one year) period to automatic discharge will not begin to run.27 Therefore, a person made bankrupt on a sequestration order made on 1 December 2017, who files their statement of affairs late, on 1 June 2018, would not be automatically discharged from bankruptcy until at least 2 June 2021. Whether and on what date the bankrupt has filed their statement of affairs with the Official Receiver is therefore significant. In cases where the bankrupt reasonably but mistakenly believes that they filed the statement at a particular date, even though it was not actually filed until later, s 33A of the Act allows the court to order that “the statement is to be treated as having been filed at a time before it was actually filed”, thus allowing discharge at an earlier time: see Wangman v Official Receiver [2006] FCA 202. A woman made bankrupt in 2000 who did not file her statement of affairs until 2011 because she claimed she was unaware of the bankruptcy until that time could not rely on the section; she was not a person who mistakenly believed “that the statement had been filed”: Matteucci v Gollant [2013] FCA 6. Her bankruptcy would in the ordinary course extend from 2000 to 2014. See also Jovanovski v Official Receiver [2018] FCCA 1193. Section 33A(3) allows a period of grace of 30 days before the court’s order takes effect in order to allow the trustee to disengage from the role of trustee of the estate. It is understood that there is a significant number of bankrupts who have never filed their statements of affairs over the years and who therefore remain bankrupt.

Automatic discharge – objections on general and special grounds [7.120] The bankruptcy of a person may be prolonged if an objection is filed by the trustee against the discharge at any time before a bankrupt is discharged: s 149B. This action must be taken if the trustee believes that doing so will help make the bankrupt attend to some responsibility and there is no other way for the trustee to induce the bankrupt to co-operate: s 149B(2).

27 “Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1991 (Cth)”, [19].

304

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.120]

The various grounds of objection are listed in s 149A(2). They are divided into “general grounds” and “special grounds”. The special grounds are found in s 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (ia), (k) and (ma) and are generally the more serious bases of objection. The effect of filing an objection on a special ground is to extend the period of bankruptcy to 8 years: s 149A(2)(a)(i). If an objection is lodged in respect of one of the general grounds of objection, the bankruptcy is extended to 5 years: s 149A(2)(ii) Whether the objection is based on a general or special ground, it must set out a ground or grounds of objection listed in s 149D(1) and must refer to evidence which establishes the ground(s). There is no need for the notice to “set out” the evidence or to refer to it in detail: Prentice v Wood (2002) 119 FCR 296; [2002] FCAFC 48. Where the objection is based on a general ground, it must state the reasons of the trustee for objecting to discharge on that ground: s 149C(1). However, where the objection is based on a special ground, the objection need not state the trustee’s reasons for objecting (s 149C(1A)). These reasons may be apparent from the nature of the special ground – for example the bankrupt refused to return to Australia as requested by the trustee (s 149D(1)(h)) – but the trustee may have other reasons that support the lodging of the objection, as long as those reasons are directed to the achievement of a purpose of bankruptcy law: Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169. A bankrupt can therefore challenge an objection because of the inadequacy of the trustee’s stated reasons based on a general ground, and because of the inadequacy of reasons for on objection based on a special ground. For notices of objection based on general grounds, lack of stated or valid reasons is one of the bases upon which the Inspector-General may cancel the objection, that is, that the reasons given for objecting on the particular ground do not justify the making of the objection: s 149N(1)(c). Although the reasons need not necessarily be technically precise the law requires issues of substance to be addressed that justify the making of an objection on the ground stated (Prentice v Wood (2002) 119 FCR 296; [2002] FCAFC 48. There must, for example, be more than a simple recitation of the s 149D ground: Re Hall (1994) 14 ACSR 488; [1994] FCA 1319. As to the validity of those reasons, the Full Federal Court in Inspector-General v Nelson (1998) 86 FCR 67 said that in order to keep a person bankrupt beyond the then ordinary three-year period, a trustee must have reasons directed to achievement of a purpose of the law of bankruptcy, for example, the recovery of assets for creditors. Punishment of an uncooperative bankrupt of itself is not valid, or permissible; but the possibility of a benefit flowing to creditors, however slight, may be enough to support a trustee’s objection: Khoury v Pascoe [2009] FMCA 676. In 2014-2015, there were over 700 new objections to discharge lodged, over 570 of which were lodged by registered trustees, perhaps indicating the more contentious

[7.130]

7 End of a Bankruptcy and Beyond

305

nature of bankruptcies taken by the private profession. In 2016-2017 this had fallen to only 519 objections, in relation to nearly 58,000 persons bankrupt during that period.28 Most objections served to potentially extend the bankruptcy for five rather than eight years. In many cases, objections may be withdrawn once the purpose of the objection to have the bankrupt cooperate – has been achieved. Rationale for the special grounds

[7.125] The special grounds relate to deliberate actions of the bankrupt which can disrupt a trustee’s administration or which are intended to defeat creditors. Before these were introduced into the law in 2002, a number of court challenges showed that trustees had difficulty in properly giving reasons for lodging an objection. For example in Re Ansett; Ex parte Ansett v Pattison [1995] FCA 1173; (1995) 56 FCR 526, the trustee’s expressed “reasons” for objecting were simply that the “amount has not been paid”, which the court said merely restated the ground of objection.29 As earlier explained, a trustee still needs to have valid reasons for an objection on a special ground, even if these need not be stated. A review of the trustee’s conduct in lodging an objection can be taken to the court, under s 178 of the Act, if the bankrupt considers that the continuation of the objection serves no basis: see [7.115]. However, while an objection can serve to secure on-going co-operation from the bankrupt, reasons directed to the achievement of a purpose of bankruptcy law or the general public interest may cause a court to allow an objection to remain: Alia v Pattison [2006] FMCA 690; (2006) 231 ALR 656; Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169. Grounds of objection

[7.130] The only grounds upon which a trustee can base an objection are found in s 149D(1), and of these, a number are special grounds. Section 149C(1A) identifies the special ground paragraphs. The special grounds are available if, as paraphrased: (ab) any transfer is void against the trustee under s 121; (d) the bankrupt failed to comply with a request from the trustee to provide information about the bankrupt’s property, income or expected income; (da) the bankrupt intentionally provided false or misleading information to the trustee; (e) the bankrupt failed to disclose any particulars of income or expected income as required by the Act; (f) the bankrupt failed to pay to the trustee an amount the bankrupt was liable to pay under s 139ZG; 28 AFSA Annual Administration Statistics 2014-2015; 2016-2017. 29 The “Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2002 (Cth)”, which introduced these new provisions into Pt VII Div 2 of the Act, explains the changes at [47] – [54].

306

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.130]

(g) during the period five years immediately before the commencement of the bankruptcy or during the bankruptcy, the bankrupt spent money or disposed of property without proper explanation being given to the trustee; (h) the bankrupt failed to return to Australia when requested by the trustee; (ha) the bankrupt intentionally failed to disclose to the trustee a liability that existed at the date of the bankruptcy; (ia) the bankrupt failed to comply with s 77(1)(a)(ii), that is, to give to the trustee his or her passport; (k) the bankrupt refused or failed to sign a document after being lawfully required by the trustee to sign it; (ma) the bankrupt intentionally failed to disclose to the trustee the bankrupt’s beneficial interest in any property. Other grounds of objection include (a) leaving Australia and not returning; (aa) a transfer that is void under s 120 or s 122; (ac) and (ad) a transfer void against the trustee because of s 128B or s 128C; (b) contravening s 206A of the Corporations Act 2001 (Cth) (disqualification from managing corporations); (c) after the date of the bankruptcy, engaging in misleading conduct in respect of an amount exceeding $3,000; (l) failing to attend a meeting of creditors or (m) an interview or examination; and (n) failing to disclose to the trustee the bankrupt’s beneficial interest in any property. Some of these deal with conduct before the bankruptcy – for example (aa) arranging a transfer of property that is void under s 120; and others after, for example, (m) failing to attend an interview or examination. The Inspector-General’s view is that the Act does not allow a trustee to file a notice of objection in a bankruptcy prior to the filing of a statement of affairs by the bankrupt. This is because the commencement of the three-year period (or one year) does not commence until the statement of affairs is lodged and any objection is therefore unnecessary.30 As explained below, the Inspector-General may review a decision by the trustee to lodge an objection, on the Inspector-General’s own initiative, or on application by the bankrupt: s 149K. In conducting a review, the Inspector-General is not able to take into account any conduct of the bankrupt “after the time when the ground concerned first commenced to exist”; that is, it is not enough for a bankrupt to eventually respond to an objection after having delayed in doing so: s 149N(1B). Also, objections on special grounds will be reviewable only on the ground(s) and evidence as made out, unless the Inspector-General is satisfied by the bankrupt that they “had a reasonable excuse for the conduct or failure that constituted the special ground” (s 149N(1A)(c)): Combe v Inspector-General in Bankruptcy [2004] AATA 1324 (AAT); (2005) 4 ABC NS 26 (court); Newcombe v Inspector-General in Bankruptcy [2004] AATA 1320. Severe illness preventing a response in writing to the trustee’s inquiry can be an excuse but a bankrupt who intentionally failed to disclose his gambling liability, because it was a private “gentleman’s” debt did not have a reasonable excuse: Arundell and Inspector-General in Bankruptcy [2006] AATA 88; 3 ABC (NS) 620. 30 See IGPD 11 – Trustees guidelines in issuing an objection to discharge where statement of affairs not yet filed.

[7.140]

7 End of a Bankruptcy and Beyond

307

The broad object of s 149A is to encourage bankrupts to co-operate with their trustees; see s 149B(2). But the regime established by the relevant sections must be applied in a sensible manner so as to avoid operating oppressively, and with some acknowledgment of the vicissitudes of the bankrupt’s life when assessing whether an objection should be lodged: Wharton v Official Receiver in Bankruptcy (2001) 107 FCR 28. However, it is difficult to understand how a bankrupt can be encouraged to co-operate when s 149N(1B) provides that later co-operation is not relevant. Similarly, a bankrupt cannot co-operate to undo conduct that has already occurred, prior to bankruptcy, for example transferring property, upon which certain grounds of objection exist, for example, voidable transactions.31 Nevertheless, a trustee does not have to file an objection unless it would achieve some valid purpose under s 149B(2). Necessarily, the trustee must give a copy of the notice to the bankrupt and also advise that a right of review to the Inspector-General is available: s 149F. An objection filed with the Official Receiver takes effect not on the day it is filed but on the day it is entered on the NPII, which may be some short time later (s 149G); an objection filed on the last day of the three-year period (or last day of the one-year period) may therefore not be effective. See OTPS 5 at [4.13]. Extension of bankruptcy to five or eight years

[7.135] Where an objection is based on any one of the special grounds, the bankrupt will only be entitled to automatic discharge eight years after “the prescribed date”. Where the objection is based on other than a special ground, the bankrupt will be entitled to automatic discharge five years after “the prescribed date”. “The prescribed date” will be, in most cases, the date of the filing of the statement of affairs but if the grounds mentioned in s 149D(1)(a) or (h) are involved, it will be the date on which the bankrupt returns to Australia: s 149A(2). The one year bankruptcy Bill would not alter this.

Withdrawal of objection [7.140] If the purpose of the objection is achieved, the trustee can cease to object, on a particular ground (s 149H), or withdraw an objection at any time: s 149J. If the trustee withdraws an objection, the trustee must give notice to the Official Receiver and the bankrupt: s 149J(1). The effect of a withdrawal (and a cancellation) is that the objection is “taken never to have been made”: s 149A(3)(a). Assuming there is no other objection filed by the

31 See Playford and Inspector-General in Bankruptcy [2018] AATA 19.

308

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.145]

trustee, then the bankrupt is taken to be discharged immediately the objection is withdrawn: s 149A(3)(b). The withdrawal is then effective from the beginning of the day it is entered in the NPII: s 149J(3).32

Review of objection decision Review by Inspector-General and the AAT

[7.145] The bankrupt has 60 days to request the Inspector-General to review the trustee’s decision to lodge an objection to discharge: s 149K(1)(b), (3). The Inspector-General is also entitled to review a decision to object on his or her own initiative (s 149K(1)(a)) and is required to review the decision if requested by the Commonwealth Ombudsman: s 149K(2).33 The Inspector-General must decide within 60 days of the request being lodged lodged whether there are “reasons that appear to the Inspector-General to be sufficient to justify such a review” and if so, must proceed to do so: s 149K(5). If the Inspector-General reviews the decision of the trustee he must cancel the objection if satisfied that (s 149N): • the ground(s) for the objection is not within s 149D(1); • there is insufficient evidence to support the ground relied on by the trustee; • the reasons given for objecting on the specified ground(s) do not justify the filing of the objection; or • a previous objection made on the same ground(s) was cancelled. An application may then be made to the AAT from the Inspector-General’s review of such a decision or refusal to review the decision: s 149Q.34 The parties in such proceedings are the Inspector-General and either the trustee or the bankrupt; joinder of a non-party trustee or bankrupt may be permitted: Pascoe and Inspector-General in Bankruptcy [2006] AATA 252. Where the Inspector-General decides not to review the trustee’s decision, and makes no decision under s 149N, and the AAT then disagrees and sets that decision aside, the Tribunal does not then have the jurisdiction to proceed to conduct a review of the trustee’s objection. The matter must go back to the Inspector-General to decide under s 149K: Neffati and Inspector-General in Bankruptcy [2016] AATA 941.35 32 It is not the end date of the three (or one) year period, that is, the date when discharge would have occurred but for the objection: Re Kotses (1995) 59 FCR 597; [1995] FCA 1608. 33 This might occur if the Ombudsman considers that there has been an administrative error or a lack of natural justice in the objection process. AFSA says it tries to complete any such review within 60 days of receiving the Ombudsman’s request: see IGPS 12 – Statutory reviews of trustees’ decisions under the Bankruptcy Act 1966 by the Inspector-General in Bankruptcy, 3.16-3.18. 34 Such applications can be made by the trustee, the Official Receiver and the bankrupt, as appropriate, but not by a creditor: Waterco Ltd v Inspector-General in Bankruptcy (2000) 32 AAR 109; [2000] AATA 1063. 35 The AAT then upheld the further decision of the Inspector-General that there were still no reasons sufficient to justify a review of the trustee’s decision, under s 139Y: Neffati and Inspector-General in Bankruptcy [2017] AATA 1108.

[7.150]

7 End of a Bankruptcy and Beyond

309

Section 149Q confers on the AAT only those powers that are conferred on the Inspector-General under s 149N. The decision of the Inspector-General is made under s 149K(5)(b) and must be made within the parameters set by s 149N; therefore, so must the decision that the Tribunal makes on review: Phillips and Inspector-General in Bankruptcy [2012] AATA 788; Combe v Inspector-General in Bankruptcy [2005] FCA 1101; (2005) 4 ABC (NS) 26. Cancellation of the objection does not take effect until the end of the period in which the trustee may apply to the AAT for a review of the decision of the Inspector-General, or if such an application is made, the decision of the AAT is given: s 149N(2).36 Review by the court

[7.150] Although the Act provides for a process of review by the InspectorGeneral, and then review by way of application to the AAT, a bankrupt may apply direct to the court to review an objection, under IPSB, s 90-20. That section allows a bankrupt, and others, to seek any orders in relation to the administration of the estate: see Frost v Sheahan (2009) 6 ABC (NS) 786; [2009] FCAFC 20.37 The review by the court is wide in scope. Even in the case of special grounds, where trustees are not required to give reasons for lodging an objection, the court may examine the apparent reasons and may decide there was no need for the objection at all, as not serving a valid purpose. If the trustee’s reasons are found inadequate, then the objection may be set aside. In contrast, the Tribunal has no power generally to review the conduct of the trustee; it reviews the conduct of the Inspector-General. That broader perspective of the court allows it to see if the trustee has properly used the objection to discharge regime. For example, the court can decide if an objection should be withdrawn as no longer serving a proper purpose. In that respect, while there is a focus in the Act on the lodgment of an objection, a trustee has to thereafter assess its continued application. The court in Frost v Sheahan [2005] FCA 1014 said that where the basis for the objection has been attended to by the bankrupt, the trustee must consider withdrawing the objection. In that matter, in later challenges to the objections of the trustee, the bankrupt’s failure to provide full details of his income or expected income, in the context of a pending Family Court proceeding between him and his ex-wife, supported the trustee’s reasons for maintaining the objection: Frost v Sheahan [2009] FCAFC 20; (2009) 6 ABC (NS) 786. If a court finds that the objection is ineffective at law, then the bankrupt is treated as discharged from the bankruptcy at the time of automatic discharge, provided that time has already passed. That is, if the objection is fundamentally defective, the objection is regarded as never having served the purpose of extending the bankruptcy: Re Hall (1994) 14 ACSR 488; [1994] FCA 1319; Prentice v Wood (2002) 119 FCR 296; [2002] FCAFC 48. 36 Therefore, where a trustee filed a second objection after the first was cancelled by the Inspector-General, within the time allowed to apply for review to the AAT, the bankruptcy was not discharged: Mann v Condon [2016] FCA 532. 37 The same applies, for example, in relation to challenges to income contribution assessments, under s 139Y: Peled v Roufeil [2017] FCCA 2342. Both cases were decided under the previous s 178.

310

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.155]

After discharge [7.155] If a trustee ceases to object to the discharge of a bankrupt, the trustee must give to the Official Receiver a notice indicating the particular ground involved and give the bankrupt a copy: s 149H(1). Even though discharged, a former bankrupt is required to give such assistance to the trustee in the realisation and distribution of their property which is vested in the trustee: s 152. The former bankrupt can still be examined under s 81 at a public examination: Official Receiver v Todd (1986) 14 FCR 177.

Effect of discharge on liabilities and property [7.160] Section 153(2) provides that, subject to certain exceptions, a bankrupt is released from all debts provable in bankruptcy. In contrast, discharge does not operate to release the bankrupt estate: Re Kavich (1995) 58 FCR 82. Therefore, if, after the discharge of the bankrupt, additional vested assets become available, the former bankrupt’s discharged debts remain a liability of the estate: Tapp v LawCover Insurance Pty Ltd [2013] FCA 35. However, a bankrupt is not released from, among others, debts incurred by means of fraud,38 a pecuniary penalty order, or an unpaid income contribution liability assessed under s 139ZG(1): s 153(2). Furthermore, unless a court releases the bankrupt specifically they are not released from liability under a family or child maintenance agreement or order: s 153(2)(c), (2A).39 For a debt to be excluded from discharge under s 153(2)(b) on the basis of fraud, the test is whether the bankrupt, in incurring the debt, had acted with some “deliberate dishonesty to the prejudice of another person’s proprietary right”: Civitareale v Secretary, Department of Family and Community Services (1999) 57 ALD 451. In that case, the AAT found that the recipients of social security benefits to which they were not entitled, had not incurred a debt by fraud. There was no “deliberate dishonesty in failing to notify the Department of the (relevant) payments”. The Tribunal was also satisfied that they “did not act recklessly without any regard for whether their answers to the Department in relation to their income were true or false”.40 The right of a secured creditor to deal with its security is not affected by the discharge. That creditor may deal with the property in order to obtain payment of a debt for which the creditor has not proved for, or been fully paid from, the bankruptcy: s 153(3), s 90. 38 If a debt incurred by fraud is then the subject of a civil judgment obtained by the creditor, the fraud merges into the judgment and fraudulent nature of the debt is thereby ended: Power v Kenny [1977] WAR 87. Such a debt would then be discharged by bankruptcy. 39 See further, Hayward v Scott as Trustee of the Debtor Estate of Hayward [2013] FCA 421; (2013) 212 FCR 430. 40 See also Skalkos v Smiles [2006] NSWSC 192; (2006) 4 ABC (NS) 349; Fletcher v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2013] AATA 633.

[7.170]

7 End of a Bankruptcy and Beyond

311

Any property which vested in the trustee during bankruptcy, remains vested in the trustee after discharge. The trustee remains entitled to become the registered owner at any time, even after discharge.41

SETTING ASIDE A SEQUESTRATION ORDER, AS AN ALTERNATIVE TO A COURT ANNULMENT [7.165] Section 37 of the Bankruptcy Act allows the court to rescind, or suspend the operation of, any order made under the Act. However this does not apply to a sequestration order: s 37(2).42 Nevertheless, the courts have general powers under their court rules to set aside any orders made, for example under r 16.05 of the Federal Circuit Court Rules 2016 (Cth), which allows an order to be set aside if it was made in the absence of a party, was obtained by fraud, or if the party in whose favour it was made consents. The courts will use this power to set aside a sequestration order, in particular where soon after the order is made the bankrupt, or the creditor, applies to the court to raise some fundamental error in the bankruptcy process. For example, it may be that the creditor’s debt had in fact been paid just before the bankruptcy hearing and that this was not known by the creditor until after the sequestration order had been obtained; or the petition may not have been served.43 But the court would instead generally require the bankrupt apply for an annulment, under s 153B, if the trustee has proceeded to administer the bankruptcy.

Appeals or new hearings [7.170] Alternatively, a debtor may file an appeal from the making of a sequestration order. Indeed, if a sequestration order is made after a contested hearing, the proper course for the bankrupt is to appeal, not to apply for an annulment: Hudson v Whalan [1998] FCA 189; (1998) 5 ABC (NS) 1. Where the sequestration order is made by a registrar, there is no appeal, rather the matter proceeds under the courts’ statutory powers to review registrars’ decisions. It is conducted as a new hearing – a hearing de novo.44 Among other things, an annulment by the court under s 153B allows the remuneration of the trustee to be protected. But the trustee can suffer being unpaid for that work if the court decides to set aside the sequestration order, rather than annul the bankruptcy; or to allow an appeal. The law has no provision for the remuneration of the trustee in such a case. The court in Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 said that “a trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain” and the Judge saw no basis for visiting those costs on the bankrupt. 41 Gosden v Dixon (1992) 107 ALR 329; Daevys v Official Trustee in Bankruptcy [2011] FCA 398. 42 As to a stay of a sequestration order, see [3.430]. 43 See Austral Brick Co Pty Ltd v Tome Daskalovski [1998] FCA 782. 44 See O’Meara v Hitwise Pty Ltd [2007] FCAFC 114; (2007) 160 FCR 518; 5 ABC (NS) 192. See also Courts’ Bankruptcy Rules, r 2.03.

312

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.175]

Similar issues arise when a sequestration order is set aside on an appeal. In Rangott v Marshall (2004) 139 FCR 14; 2 ABC (NS) 385, a sequestration order was made in August 2002 but was set aside on appeal in March 2003, the trustee having administered the estate in that period. The effect of the appeal decision was that the sequestration order and the consequent appointment of the trustee were set aside; “it is as if the sequestration order had never been made and the respondent had never been a bankrupt”; this is despite s 43(2) of the Bankruptcy Act which provides that a person remains bankrupt until discharge or annulment: De Robillard v Carver [2007] FCAFC 73; (2007) 159 FCR 38; 5 ABC (NS) 92. Hence, if a bankrupt seeks a review of the sequestration order, the trustee may need to limit tasks in the administration of the bankrupt estate pending the court’s decision. The trustee can seek directions from the court, under IPSB, s 90-20, as to whether and to what extent the trustee should refrain from exercising their statutory duties while the bankrupt’s application is pending; any order may be subject to the applicant bankrupt giving an undertaking as to damages, and preparing and filing a statement of affairs: Calia v Cicio [2010] FMCA 385. As we will see at when we examine the comparable circumstance in corporate insolvency, in the termination of a winding up, the courts generally do not raise issues about the right of the liquidator to remuneration to the same extent. See Chapter 17 fn 4.

ANNULMENT OF DECEASED BANKRUPT ESTATES [7.175] The bankruptcy of a deceased person under Pt XI of the Bankruptcy Act can be annulled in a similar way to an ordinary bankruptcy. Thus annulment can occur without court intervention where the trustee of the bankrupt estate is satisfied that all the debts of the estate have been paid in full. The annulment dates from the last payment: s 252A. Annulment can also be granted by the court under s 252B on the ground that the Pt XI order ought not to have been made. In contrast, there can be no order of discharge of a deceased estate from bankruptcy.45 On annulment of a bankrupt deceased estate, any surplus funds, after payment of the trustee’s costs and expenses, are paid to, and any surplus property vests in, the legal personal representative, or such person as the court, on application being made, allows: s 252C. The restriction under s 37(2) of the Act applies to deceased estates; that is, there is no power of a court to rescind or discharge, or suspend the operation of, an order for administration of the deceased estate under Pt XI of the Act. AFSA guidance on the administration of deceased estates is contained in ORPS 5 – Insolvent deceased estates (Part XI of the Bankruptcy Act 1966).

SUBSEQUENT BANKRUPTCIES [7.180] A person may become a bankrupt for a second time either after discharge from the first bankruptcy or during the period when that person remains an undischarged bankrupt. 45 Re Wilkinson (1970) 16 FLR 414.

[7.180]

7 End of a Bankruptcy and Beyond

313

If an undischarged bankrupt incurs further debts, the new creditors are not able to claim in the bankruptcy, as only debts owing at the date of bankruptcy can be claimed. Such a creditor may apply for a sequestration order. Similarly, a debtor is able to present their own petition in respect of debts incurred since the date of their first bankruptcy. Even apart from new debts, some original claims by creditors may not have been provable at the date of the first bankruptcy, for example unliquidated damages claims (s 82(2)), but they have since become liquidated by way of a money judgment being ordered to be paid by the bankrupt. A capital gains tax liability, where the property is sold in the course of the first bankruptcy, may remain as a liability. Other debts might have been provable, but they are not discharged by the bankruptcy, and whatever amount was not recovered from that bankruptcy remains a personal liability of the former bankrupt: s 153. In any of these circumstances, a second or further bankruptcy may result. If this occurs the two bankruptcies are conducted concurrently. While this is not common, some persons are bankrupted more than twice and the principles discussed below apply to bankruptcies subsequent to a second bankruptcy. Section 59(1) provides that all the after-acquired divisible property not applied for the benefit of the creditors in that first bankruptcy, vests in the trustee of the second bankruptcy. However, if after-acquired property was realised by the first trustee without knowledge of the presentation of the petition which led to the second bankruptcy, the proceeds do not vest in the second trustee. But when the first trustee does know of the presentation of a creditor’s petition against the bankrupt, that trustee is required to hold any undistributed after-acquired property until the petition has been dealt with. If a second bankruptcy does in fact occur then the first trustee must deliver that property to the second trustee. All divisible property acquired during the second bankruptcy vests in the second trustee: s 59(1)(b). If, as usually occurs, the trustee of the first bankruptcy is unable to pay all of the provable debts in the first bankruptcy and their remuneration and expenses, that trustee becomes a creditor for that total amount in the second bankruptcy. This right exists even if the bankrupt has been discharged from that bankruptcy: Re Allchurch [1993] FCA 392; (1993) 44 FCR 182. The first trustee’s claim ranks with the ordinary unsecured creditors: s 59(1)(c). Transactions that are voidable in the first bankruptcy may remain voidable in the second: s 59(1)(e). Under ss 59A, each of s 59 and s 58 has effect subject to certain family law property and maintenance orders, made under Pt VIII (Property, spousal maintenance and maintenance agreements) or Pt VIIIAB (Financial matters relating to de facto relationships) of the Family Law Act 1975 (Cth). Under the proposed Bankruptcy Amendment (Enterprise Incentives) Bill 2017, new s 59(1)(f) would provide that where a bankrupt becomes a bankrupt again, the income contribution obligations arising out of the first bankruptcy will cease and the contribution assessment period for the first bankruptcy will come to an end. This amendment ensures consistency with the administration of existing debts that

314

Keay’s Insolvency: Personal and Corporate Law and Practice

[7.185]

have not been met in a bankruptcy where there is a subsequent bankruptcy. New subs 59(7) would ensure that ceasing income contributions to a trustee in an earlier bankruptcy in the event of a second bankruptcy, as referred to in new paragraph 59(1)(f), does not limit the ability of the trustee in the later bankruptcy to exercise the powers that would have been available to the trustee in the earlier bankruptcy with respect to contribution assessment periods.

CONCLUSION [7.185] Bankruptcy law is well established in the legal system and has a long history. At the same time, it is continually under review as indicated by the major amendments to the operation of its various aspects in the last decades, often in response to public perceptions about the obligations that should be imposed on those who are unable to pay their debts, and in response to those who are seen as having apparent wealth and position, save where bankruptcy occurs. While the 1966 Act retains many features of old bankruptcy law – acts of bankruptcy and creditor’s petitions being some – it has also taken on many good processes worthy of broader adoption. The Insolvency Law Reform Act 2016 in fact introduced many of the processes of bankruptcy to corporate insolvency. The minimum three-year-period of bankruptcy also remains under review in 2018, and may be reduced to one year, in common with some other jurisdictions, including England, and more recently, Ireland.46 There have also been calls to end the restriction on overseas travel by bankrupts, as an unnecessary legacy remaining from earlier times.47 Bankruptcy nevertheless will always need to retain its separate identity, given the fundamental differences between the insolvency of an individual and that of a company. It is an area of law that is more closely impacted by shifting public perceptions of what is expected of debtors in relation to their obligations to their creditors. Those perceptions are relevant to the proposed reduction in the period of bankruptcy to one year. The increase in the numbers of bankrupts over the last 20 years has given bankruptcy an extra profile that ensures that it will continue to be refined and developed, even if the numbers are now plateauing or falling. However, its essential elements remain, that a debtor is afforded its protection, but at the same time is held to some account for a set period, and creditors are entitled to share in whatever of the bankrupt’s assets remain. The lack of assets in most bankruptcies leads us into the next two chapters, dealing with non-bankruptcy arrangements designed to provide more flexibility for the debtor and more of a dividend return for creditors.

Bankruptcy Act

Chapter 7 – End of a Bankruptcy and Beyond Part VII – Discharge and Annulment – ss 148 – 154

46 For England, see Insolvency Act 1986 (UK), s 279; Keay and Walton, Insolvency Law – Corporate and Personal, 3rd ed, (Jordan Publishing, 2012) Ch 24. For Ireland, see Bankruptcy (Amendment) Act 2015. 47 C Symes, “Bankrupts and Passports: A Call To Repeal SS 77(1)(A)(II) and 272(1)(C) of the Bankruptcy Act” (2014) 14(3) Queensland University of Technology Law Review 98.

[7.185]

Bankruptcy Regulations AFSA

Courts’ Bankruptcy Rules

7 End of a Bankruptcy and Beyond

Chapter 7 – End of a Bankruptcy and Beyond Part III – Courts – s 37 Part 7 – Discharge and Annulment – regs 7.01 – 7.02 IGPD 11 – Trustees guidelines in issuing an objection to discharge where statement of affairs not yet filed OPTS 4 – The End of a Bankrupt’s Period of Bankruptcy OPTS 5 – Objections to Discharge from Bankruptcy Part 7 – Annulment or Review of Sequestration Order – Sch 1 – Forms

315

PartIII:PersonalInsolvency– Non-bankruptcy Arrangements for Individuals Chapter8:PersonalInsolvencyAgreements........................................................  Chapter9:DebtAgreements............................................................................... 

The Bankruptcy Act provides for a debtor’s compromise with creditors outside formal bankruptcy by way of agreements with creditors under Pt X and Pt IX of the Act. These are explained in the two chapters of this Part. Chapter 9 also refers to pending changes to debt agreements under the proposed Bankruptcy Amendment (Debt Agreement Reform) Bill 2018.

8

Personal Insolvency Agreements [8.05] INTRODUCTION ................................................................................................................ 321 [8.10] OVERVIEW ........................................................................................................................... 322

[8.15] Comparison with Pt 5.3A administrations ..................................................... 323 [8.20] Threshold criteria ................................................................................................ 323 [8.25] Insolvency Law Reform Act 2016 changes ..................................................... 323 [8.25] Terminology .................................................................................................................... 323 [8.30] General personal insolvency provisions apply ......................................................... 323

[8.35] The personal insolvency agreement ................................................................ 324 [8.40] Advantages of Pt X agreements ....................................................................... 325 [8.45] Advantages for a debtor ............................................................................................... 325 [8.50] Advantages for a creditor ............................................................................................. 325

[8.55] Applicable bankruptcy provisions ................................................................... 326 [8.60] Part X and a creditor’s petition ........................................................................ 326 [8.65] Outline of the process ................................................................................................... 327 [8.70] THE S 188 AUTHORITY AND THE CONTROLLING TRUSTEE ............................. 328

[8.70] Commencement with a s 188 authority .......................................................... 328 [8.75] The impact of signing the s 188 authority ................................................................ 328

[8.80] Restriction on giving more than one s 188 authority .................................. 329 [8.85] Powers and duties of the controlling trustee – s 190 ................................... 329 [8.90] Additional duties of the controlling trustee .............................................................. 330

[8.95] Period of control ................................................................................................. 330 [8.100] Reporting to creditors ...................................................................................... 331 [8.100] The s 189A report and declaration ........................................................................... 331 [8.110] The statement under s 189B ....................................................................................... 333

[8.115] The meeting of creditors .................................................................................. 333 [8.120] Meeting rules applying to Pt X agreements: s 75-27 ............................................. 333 [8.125] The timing of the meeting .......................................................................................... 334 [8.130] Expected remuneration of the trustee ...................................................................... 334 [8.135] Notifying creditors ....................................................................................................... 334 [8.145] Who can vote? .............................................................................................................. 335 [8.150] Conduct of the meeting .............................................................................................. 335 [8.155] Joint debtors .................................................................................................................. 336

320

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.160] Special resolution ......................................................................................................... 336 [8.165] One of three special resolutions available: s 206 ................................................... 336 [8.170] Debate at the meeting ................................................................................................. 336 [8.175] Remuneration ................................................................................................................ 337 [8.180] Rights of creditors ........................................................................................................ 338

[8.185] After the meeting .............................................................................................. 338 [8.185] Notification requirements ........................................................................................... 338 [8.190] Limitation on further Pt X agreements .................................................................... 338 [8.195] Failure to implement an agreement ......................................................................... 338

[8.200] Ending the controlling trusteeship ................................................................ 339 [8.205] THE TRUSTEE’S ADMINISTRATION OF A PT X AGREEMENT .......................... 339

[8.210] Impact of family law ........................................................................................ 340 [8.215] VARIATION OF PERSONAL INSOLVENCY AGREEMENTS: S 221A ................... 340 [8.220] ENDING A PT X AGREEMENT .................................................................................... 341

[8.220] Introduction ....................................................................................................... 341 [8.225] Setting aside (s 222) and terminating (s 222C) by the court .................... 341 [8.230] Setting aside if the agreement is unreasonable or not to the creditors’ benefit: s 222(1) .................................................................................................. 341 [8.240] Non-compliance with the requirements: s 222(2) ....................................... 344 [8.245] False and misleading information provided to creditors etc: s 222(5) ... 345 [8.250] Time limits .......................................................................................................... 345 [8.255] Court may terminate a personal insolvency agreement: s 222C ............. 346 [8.260] Standing to bring applications under ss 222 and 222C ............................. 346 [8.265] Common provisions in ss 222 and 222C ...................................................... 346 [8.270] Interests of creditors: ss 222(6) and 222C(2) ............................................................ 347 [8.275] Sequestration order can be applied for .................................................................... 347 [8.280] Ancillary orders, including compensation .............................................................. 348

[8.285] Distinction between setting aside (s 222) and terminating (s 222C) ....... 348 [8.290] Can part of an agreement only be set aside? .............................................. 349 [8.295] Role of the trustee ............................................................................................. 350 [8.300] Three other ways of terminating personal insolvency agreements ......... 350 [8.305] Termination of personal insolvency agreement by the trustee: s 222A ............. 350 [8.310] Termination of personal insolvency agreement by the creditors: s 222B .......... 351 [8.315] Termination of personal insolvency agreement by occurrence of terminating event: s 222D ................................................................................................................. 351 [8.320] Notice requirements: s 224A ...................................................................................... 351

[8.325] Effect of setting aside or termination ............................................................ 352 [8.330] CONCLUSION ................................................................................................................... 352

[8.05]

8 Personal Insolvency Agreements

321

INTRODUCTION [8.05] In some circumstances it can be more beneficial for an insolvent debtor to consider proposing a “personal insolvency agreement” to creditors under Pt X of the Bankruptcy Act, rather than going bankrupt or awaiting what may be the almost inevitable creditor’s petition. A personal insolvency agreement – often abbreviated to PIA, or Pt X – can allow the debtor to come to a formal arrangement to discharge their debts without the more extensive and restrictive consequences of bankruptcy. Debt agreements under Pt IX of the Act, which are discussed in the next chapter, are another more recent non-bankruptcy arrangement but access to these is currently restricted more to those consumer debtors with limited assets and liabilities (around $111,600 each),1 and income (around $83,700). There are no such limitations with Pt X agreements. Debts in the millions of dollars have been discharged by way of a PIA. They tend to be taken up by those in business where the consequences of bankruptcy may be more severe and where the debtor has some external or remaining personal resources to offer creditors. Part X agreements typically have a greater percentage of business related debtors than bankruptcies.2 Arrangements like those under Pt X were introduced into bankruptcy law in the 1966 Act on the recommendation of the Clyne Committee.3 Prior to that, private agreements with creditors were governed by contract law. Such informal agreements obviously remain and continue to be used but they have their drawbacks. They only bind the creditors who agree to them – it only takes one creditor to bankrupt a debtor; creditors often agreed to them without knowing much about the financial affairs of the debtor; and if the arrangement involves an acknowledgement of the debtor’s insolvency it may be an act of bankruptcy and can be relied upon by a creditor to obtain a sequestration order. If the debtor does go bankrupt, those creditors may be subject to preference claims by the trustee. These are the problems with debtors trying to come to some informal arrangement with their creditors. While bankruptcy law and its processes can be technical, the law in relation to Pt X has always been intended to encourage flexible arrangements between debtors and their creditors. However, in attempting to regulate Pt X agreements and prevent abuse of its processes, by way of increased disclosure requirements and more investigatory and recovery powers introduced in 2004, Pt X processes have moved away from the cheaper more flexible regime intended. That may be as expected in that the law allows debtors the benefit of the release of their debts without the consequences and obligations of bankruptcy. Whether as a consequence of that or not, the number of Pt X agreements has fallen to record low levels. They have always been low compared with bankruptcies and Pt IX agreements but in 2016-2017, there were only 244 Pt X agreements compared 1 This threshold figure may be doubled under 2018 proposed law: see Chapter 9. 2 In the September quarter 2017, while only 22.7% of Pt X debtors entered a business-related personal insolvency agreement, compared with 24.6% of bankrupts, this was a fall from 35% in the June quarter 2017. 3 Clyne Report, 1962, [271].

322

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.10]

with over 16,000 bankruptcies and 13,600 debt agreements.4 They fell in number to 37 in the 2018 March quarter, the lowest quarterly level on record. Pt X agreements have not exceeded 300 in many years. Personal insolvency agreements fell to 37 in the March quarter 2018. This is the lowest quarterly level on record, and follows the first year-on-year fall since the March quarter 2016. They do produce a marginally better return than bankruptcies, as should be expected. In the 2016-2017 year, around $10.7m was paid in dividends to unsecured creditors, but at some significant cost,5 with total liabilities discharged exceeding $1.316 billion.6 Just over 40% of agreements returned no dividend to creditors at all, an in the remainder, dividend returns were under 2.5%. In any event, Pt X agreements have remained available and are used by debtors in particular circumstances. Personal insolvency agreements were introduced by the Bankruptcy Legislation Amendment Act 2004 (Cth) as a single type of generic Pt X arrangement which, by agreement between the debtor and creditors, incorporates elements of the three types of arrangement that existed under the old law – deeds of assignment, deeds of arrangement and compositions. The law before 2004, which we will call the “old law”, remains relevant. Many of the terms and concepts were carried over in the 2004 amendments and decisions of the courts under that old law continue to be applied, particularly in relation to assessments of the validity of agreements when they are challenged.7

OVERVIEW [8.10] The debtor and his or her creditors can come to a flexible arrangement under such an agreement that suits the particular circumstances of the debtor – who may for example have a high income but few if any assets, or a substantial asset, but with only a limited income. The debtor must authorise a trustee in bankruptcy to call a meeting of the debtor’s creditors, within 30 business days. All of the debtor’s property then comes under the legal control of the trustee. The trustee then has 20 business days to investigate the debtor’s affairs and come to a recommendation for creditors to consider. Creditors then have 10 business days to consider the proposal before the meeting is held at which a vote on the proposal is taken. A personal insolvency agreement must be accepted at the meeting by a “special resolution”, that is, at least 50% in number and at least 75% in value: IPSB, s 4 AFSA, Selected Statistics on Personal Insolvency in 2016-2017. 5 AFSA Statistics for Registered Trustees 2016-2017. 6 FSA, Selected Annual Personal Insolvency Statistics on Bankruptcies, Debt Agreements and Personal Insolvency Agreements for 2016-2017. 7 In Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116, the trial judge said at [83] that “the substance of the repealed s 239(2) is relevantly the same as the extant ss 222(1)(d) and 222(1)(e)” and there was no reason to depart from the principles established in pre-2004 cases. Note also that compositions and arrangements under s 73 may be challenged under provisions in Pt X: s 76B. Cases on that section can therefore be relevant to Pt X – see Hingston v Westpac Banking Corporation [2012] FCAFC 41; (2012) 200 FCR 493. See [7.60].

[8.30]

8 Personal Insolvency Agreements

323

75-132(2). If accepted, the trustee then administers that agreement and ultimately pays out a dividend to creditors and the agreement terminates. The debtor is then discharged from liability in respect of liabilities specified in the agreement, typically all liabilities, and the debtor may proceed with a “fresh start”. There is no court involvement or approval of the process required. Part X debtors will generally have access to income or funds that enable them to put up a personal agreement to creditors that would not be available if they went bankrupt. They therefore tend to be persons in business or commerce with large liabilities, often through corporate failures, who have an interest in avoiding court hearings and bankruptcy itself and they have some means to achieve this.

Comparison with Pt 5.3A administrations [8.15] The old Pt X arrangements provided a basis for the voluntary administration regime under Pt 5.3A of the Corporations Act 2001 (Cth). Just as an individual comes out of a Pt X agreement with the discharge of their liabilities and the capacity to make a “fresh start”, so too may a company trade through a deed of company arrangement and then continue on as a solvent company with its pre-existing liabilities discharged by the deed. The provisions in Pt 5.3A allowing the court to set aside a deed of company arrangement – ss 445D and 445G – were based on the provisions in the old Pt X of the Bankruptcy Act, with similar wording adopted. The current Pt X provisions are now different from their Pt 5.3A equivalents.

Threshold criteria [8.20]

To initiate the Pt X process a debtor must be “insolvent” (s 187(1), (1A); s 5), even if they “may ultimately cease to be insolvent”. The debtor must also have the requisite connection with Australia, such as being ordinarily resident in Australia or having a business in this country: s 188(1). This is the same connection required for a debtor before a creditor’s petition can be presented against a debtor (s 43(1)(b)) or before a debtor can present a debtor’s petition: s 55(2A).

Insolvency Law Reform Act 2016 changes Terminology

[8.25] The relevant terms introduced by the ILRA are that a regulated debtor is a person whose property is subject to control under Div 2 of Pt X, or a debtor under a personal insolvency agreement, with consequential meanings for a regulated debtor’s estate and trustee of a regulated debtor’s estate. A person has a financial interest in the administration of a Pt X if they are the regulated debtor; a creditor or the trustee: IPSB, s 5-30. The word debtor will mostly be used in this chapter. General personal insolvency provisions apply

[8.30] A purpose of the ILRA was to harmonise the processes, not only between personal and corporate insolvency, but also within personal insolvency itself.

324

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.35]

Hence most of the IPSB and IPRB apply to Pt X administrations, as they do to bankruptcies. These include the rights of creditors to request information, to direct the trustee and to review remuneration. In some instances, particular rules apply; for example, IPSB, s 75-27 Additional rules for meetings under s 188. There are no exclusions in respect of Pt X agreements, as there are, for example, for voluntary administrators, who are, for instance, specifically excluded from having to hold a meeting requested by creditors: IPSB, s 75-15(5). There is no equivalent for controlling trustees: see IPSB, s 75-15. A controlling trustee could, however, rely upon IPRB, s 75-250 and refuse to call a meeting requested by a creditor only five days after the s 188 meeting on the basis that it is unreasonable.

The personal insolvency agreement [8.35] A personal insolvency agreement is a deed that is expressed to be entered into under Pt X and which complies with s 188A(2): s 188A(1). Subsection (2) provides: (2) A personal insolvency agreement must: (a) identify the debtor’s property (whether or not already owned by the debtor when he or she executes the agreement) that is to be available to pay creditors’ claims; and (b) specify how the property is to be dealt with; and (c) identify the debtor’s income (whether or not already derived by the debtor when he or she executes the agreement) that is to be available to pay creditors’ claims; and (d) specify how the income is to be dealt with; and (e) specify the extent (if any) to which the debtor is to be released from his or her provable debts; and (f) specify the conditions (if any) for the agreement to come into operation; and (g) specify the circumstances in which, or the events on which, the agreement terminates; and (h) specify the order in which proceeds of realising the property referred to in paragraph (a) are to be distributed among creditors; and (i) specify the order in which income referred to in paragraph (c) is to be distributed among creditors; and (j) specify whether or not the antecedent transactions provisions of this Act apply to the debtor; and (k) make provision for a person or persons to be trustee or trustees of the agreement; and (l) provide that the debtor will execute such instruments and generally do all such acts and things in relation to his or her property and income as is required by the agreement.

This list of matters does not limit any other provisions that may be included in the agreement: s 188A(3). Creditors are therefore to be given a detailed proposal which explains what property and/or income is included and what remedies, such as those relating to voidable transactions (s 188A(4)), would apply if they accept the debtor’s proposal. The agreement may also provide that the debtor be released from some provable debts but not others: s 188A(2)(e). Joint agreements can be offered by joint debtors: s 187A.

[8.50]

8 Personal Insolvency Agreements

325

Advantages of Pt X agreements [8.40] Generally, there will be advantages for both the debtor and the creditor in coming to an agreement under Pt X. In fact in preparing the proposal to be put to creditors the debtor must ensure that it will appeal to the creditors otherwise they are unlikely to vote in favour of it; even if it also provides the debtor some benefit as well. It is relevant to note that the 208 Pt X agreements in 2014-2015 arose out of 269 proposals made to creditors, indicative of the fact that creditors are not always persuaded by the debtor’s offer. This may be because the financial return is uncertain or because bankruptcy may offer creditors a better return, or because the creditors just do not trust the debtor. The extent of the advantages which will accrue to a debtor and to the creditors will depend on the features of the personal insolvency agreement which are put into effect. (Pt X Data supplied by AFSA on request.) Advantages for a debtor

[8.45] A personal insolvency agreement allows a debtor to avoid the stigma and legal consequences of bankruptcy, and allows the debtor to be released from their debts and responsibilities more quickly.8 There are fewer limitations placed on a Pt X debtor than a bankrupt. A Pt X agreement usually minimises the extent of examination of the debtor’s financial affairs; possibly limits their liability to make income contributions; and may minimise their exposure to criminal prosecution. It also avoids the dissolution of the debtor’s partnership which can occur on the bankruptcy of a partner.9 State stamp duty is not payable on the s 188 authority or the agreement: s 227. Nevertheless, a person subject to a Pt X agreement is unable to be a company director (Corporations Act, s 206B(4)) elsewhere in legislation that seeks to exclude persons from a role or office where financial integrity is expected; for example, in relation to a disabled person’s financial management or in relation to senior parliamentary officers.10 Advantages for a creditor

[8.50] The fact that the debtor’s assets come under the control of the trustee quickly (although only on the debtor’s own initiative), once a valid s 188 authority is signed, serves to minimise the chances of a debtor dissipating their assets; the cost and time of taking sequestration proceedings is avoided; and the creditors will generally receive a distribution more quickly than in bankruptcy. Significantly, funds may be made available to creditors that would not be available in the debtor’s bankruptcy, often from friends or relatives, or the debtor may agree to make non-divisible property available to creditors, such as protected funds. This is 8 Not all debts are discharged, for example, a liability for arrears of maintenance or child support under s 153(2A); see s 231 of the Bankruptcy Act and Hayward v Scott as Trustee of the Debtor Estate of Hayward [2013] FCA 421. 9 See, for example, Partnership Act 1958 (Vic), s 38. 10 National Disability Insurance Scheme Act 2013 (Cth), s 44; Parliamentary Service Act 1999 (Cth), s 52; see also Acts Interpretation Act 1901 (Cth), s 2B.

326

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.55]

usually put to creditors as a reason for allowing the debtor to proceed under Pt X rather than through the stricter bankruptcy process. A debtor in business may be more able to carry on their business if they are only subject to Pt X restrictions, and creditors may benefit from this. And given that the debtor is involved in initiating the process, creditors may find the debtor more co-operative and flexible in persuading them to agree to a beneficial outcome for them. As already noted, the creditors can take some comfort from the fact that they can give the trustee power under the agreement to challenge any voidable transactions. However, while these powers can be made available, they appear to be rarely used.11 The Pt X process involves the controlling trustee investigating the debtor’s financial history and the debtor is required to correctly disclose their financial dealings and affairs, all with a view to persuading creditors to accept the agreement. The debtor’s prior transfer of assets to others is generally inconsistent with that process. If creditors are nevertheless uncertain about the information before them at the meeting, they may take some comfort from the fact that any voidable transactions later detected can still be challenged.

Applicable bankruptcy provisions [8.55] Once an agreement is signed, it is administered with many of the features of a bankruptcy – the assessment of creditors’ claims, the gathering in of funds available under the agreement and the payment of dividends to those creditors. The debtor is then released from all provable debts: s 230. As explained at [8.35], s 231 makes applicable many of the sections available in bankruptcy including all the provisions from ss 82 – 118, in relation to provable debts, set-off, priorities, and so on. Disclaimer of property is available under s 133 and ss 140 – 147 apply in relation to dividends and related matters. Committees of inspection can be convened under IPSB, Div 80. Trustees of personal insolvency agreements remain subject to regulation under the Bankruptcy Act, the Schedule and the Rules including in relation to remuneration and accounting requirements. Even from the time the s 188 authority is signed, many enforcement and control sections available in bankruptcy apply: for example the debtor is subject to the duties under s 77 and the liability for arrest under s 78; and examinations under s 81 and notices under s 77C may be held or issued: s 211.

Part X and a creditor’s petition [8.60] Sometimes a debtor may propose a Pt X agreement after a creditor’s petition for the debtor’s bankruptcy has been presented, as some belated response to the debtor’s financial predicament. In such a case s 189AAA provides that if a s 188 authority is signed by a debtor, then any petition proceedings are stayed until the conclusion of the creditors’ meeting or its adjournment, whichever is the earlier: see Pascoe v Leite [2005] FMCA 334. This serves as a statutory stay, without the need for court intervention: Talacko v Bennett [2017] HCA 15; (2017) 343 ALR 242. 11 Returns from voidable transactions were nil in 2016-2017, compared with $3.3 million from asset sales and $10 million from income contributions.

[8.65]

8 Personal Insolvency Agreements

327

There is no court discretion available to allow a petition to proceed to a hearing before the time stipulated in s 189AAA. The section is expressed to not limit s 206(1). That provision applies in particular circumstances, where a meeting of creditors has passed a special resolution (IPRB, s 75-132) in favour of a personal insolvency agreement, and a creditor’s petition was presented before the passing of that resolution, or after it but before the agreement has been executed.12 In such a case, the court has a discretion to adjourn the hearing of the petition for such a period as it considers necessary to allow the agreement to be executed, “if it appears to the Court that it would be for the advantage of the creditors that the debtor’s affairs be administered under the [agreement]”. In deciding whether to adjourn a creditor’s petition, the court gives weight to the view of the controlling trustee. The debtor has the onus of showing that it would be to the creditors’ advantage for the agreement to proceed but it is not necessarily enough to show that the majority of the creditors are in favour, particularly, as in Lillas & Loel Lawyers Pty Ltd v Smits [2016] FCA 11, there was to be a “miniscule” return. An adjournment was refused; appeal dismissed Smits v Lillas & Loel Lawyers Pty Ltd [2016] FCAFC 143. Outline of the process

[8.65] A typical time sequence leading up to the signing of the agreement is: • a s 188 authority is signed by the debtor and the trustee • the trustee takes control of the debtor’s assets and investigates the debtor’s proposal and prepares a recommendation for the creditors; • · the recommendation must be sent to creditors at least 10 business days before the meeting; • a meeting of must be held not more than 30 business days after the date the s 188 is signed: IPRB, s 75-27(1). The period of control ends by • creditors deciding by special resolution to accept the proposed personal insolvency agreement, which must then be signed within 21 days; or • to end the trustee’s control. Otherwise, the period of control ends if • four months pass; or • the court ends the control under s 208; or • the debtor becomes bankrupt; or the debtor dies: in more detail, see [8.60]. If an agreement is entered into, the agreement is administered according to its particular terms, and over its period of time, provable debts are released, and the agreement is completed: s 222D. A certificate of discharge of the debtor’s obligations under the agreement is issued: s 232. If circumstances require it, the agreement may be varied during that time. 12 The petition can lapse, and be unable to be extended, in some cases: DCT v Johns [2005] FCA 1143; (2005) 144 FCR 112.

328

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.70]

On the other hand, the agreement may be challenged in some way, and set aside or terminated by the court, or by the trustee or by the creditors. See [8.220] and following.

THE S 188 AUTHORITY AND THE CONTROLLING TRUSTEE Commencement with a s 188 authority [8.70] The authority under s 188 of the Act is the significant first step in the Pt X process. The form of authority is AFSA Form 13: s 188(1); reg 10.03. The debtor may authorise a registered trustee in bankruptcy, a solicitor,13 or the Official Trustee, to call the meeting of creditors. Most appointments by far are given to registered trustees in bankruptcy. The debtor is required to be given and acknowledge receipt of the “prescribed information” about Pt X and its consequences before the consent is given (s 188(2AA)), in a similar way to debtor’s petitions: s 55(3A); reg 10.02. The debtor must give the trustee a statement of their affairs and a proposal for dealing with those affairs: s 188(2C). A draft personal insolvency agreement (s 188(2E)) enable creditors to know and understand the debtor’s proposals; it need not be in any set form.14 The statement of affairs must be provided by the debtor and made available for inspection by creditors and others, again to enable an initial assessment of the debtor’s proposal: s 188B(2) – (3). These contain only the preliminary information for creditors. They will mainly rely on the trustee’s investigations into the debtor’s affairs following which the trustee will make a recommendation to creditors in a report under s 189A, discussed shortly at [8.65]. The s 188 authority and the statement of affairs must be given to the Official Receiver within two business days: s 188(5). These then are entered on the NPII for public access. There is a filing fee of $240. The impact of signing the s 188 authority

[8.75] The debtor’s signing of a s 188 authority is legally significant. Once the authority “becomes effective”, the property of the debtor becomes subject to the trustee’s control (s 189(1)) and a meeting of creditors must be convened within 30 business days: s 190. The authority is irrevocable: s 188(3). The trustee’s right to control imposes an immediate restraint on the debtor’s capacity to deal with their property, except with the trustee’s consent: s 189(2)(a). The debtor must give information to the trustee as requested and comply with 13 The ability to authorise a solicitor (lawyer) under s 188 is based historically on the need for Pt X agreements to be available in geographic areas where there may not be a trustee available. Solicitors must have certain educational standards in bankruptcy: see s 188(2A); reg 8.35 and IGPD 8, Solicitor controlling trustees eligibility requirements. The role of a solicitor is limited to calling the meeting; the agreement itself must be administered by a registered trustee. 14 DCT v Johns (2005) 144 FCR 112; [2005] FCA 1143. See also St Leonards Property v Stanley [2005] 4 ABC (NS) 1.

[8.85]

8 Personal Insolvency Agreements

329

directions from the trustee. Breach of these requirements is an offence: s 189(2). It can also lead to a sequestration order being made: s 221(1)(aa). Creditors’ rights are necessarily affected. During the period of control, most creditors’ claims are stayed (s 189AA).15 The “debtor’s property” is defined in s 190(5), in similar terms to bankruptcy except that property acquired after the agreement is signed is not included. The property is immediately charged with the debtor’s unsecured debts and the amount (if any) by which the debtor’s secured debts exceed the value of the secured property: s 189AB. Any charges created by the debtor in favour of other persons (“subsequent chargees”) after the s 188 authority became effective are subject to the s 189AB charge. This means that subsequent chargees have no claim to the property until the existing creditors’ claims are satisfied under the agreement. Moneys in the debtor’s bank account pass to the controlling trustee who must hold those moneys in a new administration account.16 A controlling trustee has a right of indemnity out of the debtor’s property for remuneration and any costs, charges or expenses properly and reasonably incurred: s 189AC. This is secured by a lien on the debtor’s property. The lien ends on the debtor’s bankruptcy but the trustee of a failed agreement has a right of indemnity out of assets which serves to ensure their right to recover their remuneration if bankruptcy follows: Warner v Mayfair Ltd, in the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441. Given the significance of a s 188 authority, it must be completed properly and fully, otherwise it may not be “effective” and hence not “given” for the purposes of s 188(4). The authority in Cervantes Pty Ltd v Moutidis (2004) 212 ALR 619; [2004] FMCA 1023 was held to be invalid where, even though the trustee had signed the authority, no named trustee was nominated in it.

Restriction on giving more than one s 188 authority [8.80] A debtor cannot give an authority within six months of giving an earlier authority, except with leave of the court: s 188(4). That leave may not be necessary if the initial authority is ineffective,17 but leave is required and may be refused if it appears that the debtor is pursuing some collateral purpose outside the Act: Re Watt [1998] FCA 213.

Powers and duties of the controlling trustee – s 190 [8.85] The controlling trustee to whom the s 188 authority is given has the general duties and powers under s 190 of the Act. They are not the agent of the debtor nor subject to the debtor’s control: Re Curry [1992] FCA 619; (1992) 40 FCR 32, 35. 15 An exception is a proceeding under a proceeds of crime law: s 189AA(2); s 5. 16 Interest on those moneys is payable under the Bankruptcy (Estate Charges) Act 1997 (Cth), s 5 and IPSB, s 65.31. 17 Maurice Blackburn Cashman Pty Ltd v Grizonic (2005) 4 ABC (NS) 79; [2005] FMCA 1541.

330

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.90]

The initial duty under s 190(1) is to call the meeting of creditors. Pending that, under s 190(2), the controlling trustee can take immediate control of the debtor’s property and affairs, make inquiries and conduct investigations “as the trustee considers necessary”, carry on the debtor’s business and otherwise deal with the debtor’s property in a way that will be in the interests of creditors. It is therefore a significant exercise of control over the debtor’s affairs and it gives the creditors some assurance that the debtor’s property is secure pending the consideration of any agreement accepted. IPSB, s 90-20 allows the controlling trustee to apply to the court for directions that may be required during this period in respect of any issues that arise: see for example Warner v Mayfair Ltd, in the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441 under the previous directions power. Additional duties of the controlling trustee

[8.90] Section 190A(1) lists a range of further duties of a controlling trustee, similar to the duties of a trustee of a bankruptcy set out in s 19 of the Act. It should also be noted that as a controlling trustee is a “trustee of a regulated debtor’s estate” (IPSB, s 5-20), the duties imposed under the Schedule apply unless otherwise indicated; for example, to respond to creditor’s requests for information: IPSB, Div 70. They are also subject to particular duties under Subdiv D, Div 42 5 of the Standards The s 190A duties include notifying the creditors, taking action to have the debtor discharge their duties, assessing whether the debtor has committed any offences and referring any for prosecution, investigating the debtor’s property and examinable affairs; and acting commercially. The section also requires the controlling trustee to disclose to creditors any material personal conflicts of interests of the trustee and act throughout in an impartial and independent manner. IPRB, s 42-220 of the Standards provides that the controlling trustee “must conduct appropriate investigations of the debtor’s property and income”. It goes on to require the trustee to conduct relevant searches for real estate, company structures and cars, and obtain independent advice about the value of any such assets located. If the debtor was involved in “significant corporate or trust activity”, the controlling trustee must identify the assets that will be subject to the personal insolvency agreement, including making inquiries of relevant parties to establish whether there is any divisible property or antecedent transactions. The controlling trustee must send to the debtor and to all creditors and the Official Receiver, at least 10 business days before the meeting, details of its date, time and place, and copies of the statement of affairs, and the trustees s 189A(1) report and the s 189B(1) statement.18 These must all be tabled at the meeting: see IPRB, s 75-60 and [8.150].

Period of control [8.95] Under s 189(1A), the control exercised under s 190 continues until one of the six events referred to in s 189(1) occurs. These are: 18 IPRB, s 75-27.

[8.100]

8 Personal Insolvency Agreements

331

• the creditors resolve, under s 204(1)(a) at a meeting, that the debtor’s estate no longer be subject to control. This is one of the three resolutions that creditors may decide upon at the meeting of creditors held to consider the debtor’s Pt X proposal. Such a resolution would be rare; • the debtor and the trustee execute a personal insolvency agreement following a special resolution of creditors. This is the second of the three resolutions that creditors may decide upon at the meeting of creditors, under s 204(1)(b), and it is from this resolution that the agreement takes effect and the trustee, no longer the controlling trustee, then administers the agreement.19 • four months elapse since the authority became effective. Thus, unless a meeting has passed a resolution accepting an agreement within four months20 of the date from which the s 188 authority became effective, the controlling trusteeship ends (s 189(1A)(d)); • the court releases the debtor’s property from control, under s 208. The court can order that the controlling trusteeship end earlier if an “interested person” applies for such an order and the court is satisfied that special circumstances justify the order. The power of the court to release property from control must be balanced against the purposes for which a controlling trustee was appointed, in particular to prevent the dissipation of the debtor’s assets and to prevent more losses for creditors: Laurence v Mulroney [1987] FCA 326; (1987) 15 FCR 268. In Reid v Hubbard [2003] FMCA 266; (2003) 1 ABC (NS) 438, the court set aside the appointment of a controlling trustee under s 208 where the debtor’s property had been subject to a court injunction. The court found that the purpose of the appointment of the controlling trustee by the debtor was to circumvent the injunction obtained by the creditor and was an abuse of process. However, the mere fact that Pt X is used by a debtor in order to avoid a sequestration order is not an abuse of process: Maurice Blackburn Cashman Pty Ltd v Grizonic (2005) 4 ABC (NS) 79; [2006] FMCA 126. • the debtor becomes a bankrupt. This may occur following from what is the third option for creditors, to resolve under s 204(1)(c), that the debtor go bankrupt; or • the debtor dies. There is no continuation of a Pt X agreement in such a case. The controlling trustee must notify the Official Receiver within seven days after the trustee becomes aware that the control has ended because of any of these events: s 189(1B). This will then be entered on the NPII.

Reporting to creditors The s 189A report and declaration

[8.100]

The s 189A report of the trustee represents the culmination of the investigations conducted by the trustee throughout the Pt X process. The trustee is required to make a recommendation as to how their interests would be best served, that is, whether to accept or reject the debtor’s proposal. The report to creditors under s 189A must: 19 See AFSA Form 18 - Notice of special resolution. 20 See Acts Interpretation Act 1901 (Cth), s 2G for the calculation of months.

332

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.105]

• summarise and comment on the debtor’s affairs from the information available to the controlling trustee; • state whether the trustee believes that the creditors’ interests would be better served by the debtor’s proposed personal insolvency agreement, or by the debtor’s bankruptcy; and • name each creditor who is identified as a “related entity” (s 5) of the debtor in the debtor’s statement of affairs. The report, and other reports of trustees, are protected by qualified privilege under s 306B, but that does not serve to protect a trustee from a costs order made in respect of a deficient report: Cobbs Hill (Tasmania) Meat Supplies Pty Ltd v El Moustafa [1998] FCA 838; (1998) 83 FCR 403. There must also be a declaration of relationships, that is, the controlling trustee must make a written declaration stating whether the debtor is a related entity of the controlling trustee, or is a related entity of a related entity of the controlling trustee. This declaration must be provided to the Official Receiver and to each of the creditors at the same time as the s 189A(1) report. Trustee’s belief as to the best option

[8.105] In the s 189A(1) report, the controlling trustee is required to express a professional opinion upon which the creditors are entitled to rely. This presupposes that the trustee cannot merely conduct a nominal investigation of the debtor’s affairs even though the time for preparing such a report is limited. The trustee is required to fully apprise the creditors of the debtor’s affairs so that they can make an informed decision at the meeting. A recommendation must be made based on all relevant facts as presented to the creditors, and the trustee’s opinion on the recommendation must be soundly based. The debtor’s income, assets, liabilities, as well as assets disposed of, are all relevant facts. The merits and disadvantages of differing terms in the agreement, and as compared with bankruptcy, should be the subject of comment and assessment by the trustee. Needless to say, the trustee must act impartially and independently in preparing the report21 and is not to be regarded as being there to assist or protect the debtor. In Re Burlock [1993] FCA 424, Olney J said that the trustee’s recommendation under s 189A is vital to the whole decision-making process contemplated by the Act given that creditors are entitled to rely upon it in making their decision. In that case, the trustee’s report concluded: “In the circumstances, Mr Burlock is attempting to provide creditors, a return which although quite small does represent a significant hardship upon him as he will be repaying the loan of $50,000 back to relatives over the next 3 years. Accordingly in the circumstances my recommendation or lack of same would carry no real weight and accordingly I invite creditors to carefully peruse the relevant material to assess the position which they wish to adopt. Certainly I do attach significance to the debtor’s desire to attempt to resolve matters with his creditors to the best of his ability.”

Justice Olney then said at [48]: 21 Re Coates [1993] FCA 14.

[8.120]

8 Personal Insolvency Agreements

333

“There can be no question that the trustee did not state whether or not, in his opinion,22 it would be in the best interests of the debtor’s creditors to deal under Pt X with the debtor’s affairs in the manner indicated in the statement ... In fact the trustee not only specifically avoided stating his opinion but on two occasions he qualified his remarks by the assumption that the statement of affairs was accurate and further drew attention to the fact that he had not had the opportunity to investigate the debtor’s affairs. In these circumstances it is not surprising that a trustee of integrity would be unwilling to express an opinion and Taylor did no more or less than that. However, the statute required him to state his opinion. The creditors were entitled to have it but they did not receive it. In my opinion the trustee’s report was deficient in a most material particular. It cannot be said that the report substantially complied with the statutory requirements in circumstances where perhaps the most crucial part of the report is absent.”

On appeal,23 the Full Court agreed, noting that only “after persistent questioning by creditors at the meeting, the trustee eventually made an oral recommendation that the creditors vote in favour of the motion for the deed”: at 530. This was inadequate. It was “of no value to creditors who had decided not to attend the meeting, or to those who had given proxies to vote in support of the resolution”: at 530. Generally, in reporting to creditors, the Div 42 Standards require the s 189A(1) report to include “the kind of investigations the controlling trustee has carried out and whether any other matters need to be investigated” and “the reasons for the controlling trustee’s opinion about whether creditors’ interests would be better served by accepting the debtor’s proposal for dealing with the debtor’s affairs under Pt X of the Act or by the bankruptcy of the debtor”: s 42-225. The statement under s 189B

[8.110] The controlling trustee must also prepare a written statement containing information about which of the three special resolutions that may reasonably be expected to be passed by the debtor’s creditors under s 204 at the meeting: s 189B. There are Inspector-General Practice Directions for controlling trustees: IGPD 9 – Standards for trustees and controlling trustees, and IGPD 12 – Controlling trustee role and duties.

The meeting of creditors [8.115] The requirements for meetings of creditors are technical and are necessarily aimed at ensuring that all creditors are fully informed of the meeting, and that they have time to consider the issues and attend. As we will see, a creditor can later apply to the court for a declaration that any agreement accepted at the meeting be set aside or terminated. Defects in the meeting processes can provide grounds for such an order. Meeting rules applying to Pt X agreements: s 75-27

[8.120]

A meeting of creditors called under a s 188 authority must be held not more than 30 business days after the relevant consent or approval was given: IPRB, 22 Section 189A at that time required the report to state “whether or not, in the trustee’s opinion, it would be in the best interests of the debtor’s creditors …” (emphasis added). 23 Burlock v Commissioner of Taxation (1994) 49 FCR 522; [1994] FCA 1072.

334

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.125]

s 75-27(1).It may be adjourned (IPRB, s 75-140) but the four months period of control imposed under s 189 imposes a time limit.24 It would, however, be unusual for an unresolved agreement to extend for that period. Along with the notice of meeting itself, these documents must be sent to creditors: • the debtor’s statement of affairs; • the s 189A report and the declaration of relevant relationships; and • the s 189B statement of the trustee about the possible resolutions that may be passed: IPRB, s 75-27(2). Certain of the Div 42 Standards apply specifically to controlling trustees. The following commentary addresses some of the more particular issues that arise at Pt X meetings. The timing of the meeting

[8.125] The important time limit of 30 business days after the s 188 authority has been signed must be kept in mind: IPRB, s 75-27(1). Expected remuneration of the trustee

[8.130]

Creditors must also be informed of the expected amount of the trustee’s remuneration for administering the agreement because what money is offered by the debtor will be subject to reduction by that amount: IPSB, Div60, IPRB. This will be particularly relevant where the amount offered by the debtor is relatively small. Challenges to Pt X agreements will often reveal the true return to creditors after the trustee’s remuneration is taken into account.25 Notifying creditors

[8.135] The controlling trustee must give creditors not less than 10 business days notice: IPRB, s 75-20. Proxy and proof of debt forms should be included: IPRB, s 75-25. As many creditors as are known should be notified, both from information given by the debtor in the statement of affairs, and from any other information obtained. A creditor whose existence is not known, and therefore not notified, may still be bound by any agreement: Re Ogle [1986] FCA 275; (1986) 14 FCR 172. On the other hand, failure to notify a known creditor may result in the agreement being set aside and the trustee being ordered to pay costs: Daimler Chrysler Financial Services Australia Pty Ltd v McKillop [2007] FMCA 1118. Notice of the meeting must also be lodged with AFSA and advertised on AFSA’s website: IPRB, s 75-40. 24 Bunnings Forest Products Pty Ltd v Bullen [1994] FCA 1460; (1994) 53 FCR 438, 449. The time limit can be extended by the court under s 33(1)(c) if more time is required: Thompson v Turnbull [2015] FCCA 1563. 25 See the trial decision in Lillas & Loel Lawyers Pty Ltd v Smits [2016] FCA 11, discussed at [8.60].

[8.150]

8 Personal Insolvency Agreements

335

Inspector-General attendance at meetings

[8.140] In that respect it should be noted that on behalf of the Inspector-General, AFSA’s Regulation and Enforcement team have a policy of attending a sample of Pt X meetings in order to monitor and report on the standard of controlling trustees and trustee meeting practices generally, and to monitor debtors’ Pt X proposals and addressing creditor queries and perceptions. AFSA also examines the s 189A reports and will raise any concerns with the trustee, in particular if related party creditors are involved.26 AFSA has a general right to attend meetings under IPSB, s 75-30. Who can vote?

[8.145] The controlling trustee determines whether anyone can vote at the meeting. IPRB, s 75-100 provides that in deciding whether a creditor is entitled to vote, the controlling trustee must have regard to the merits of the creditor’s claim; and act impartially and independently, without regard to the debtor’s wishes. There is no specific right to appeal a trustee’s decision in relation to who is entitled to vote but any person affected by a decision of a controlling trustee can apply to the court: IPSB, s 90-20.courts are, however, generally reluctant to interfere with the processes of holding a meeting and implementing its outcomes: Forshaw v Thompson (1992) 35 FCR 329. A court will generally only intervene on behalf of a person claiming to have been excluded from voting if, first, that person is, in fact, a creditor; and second, if their vote would have affected the outcome of the meeting proposal. The court is entitled to take into account all the material placed before it, and is not bound to limit itself to the material before the trustee: Re Dingle (1993) 47 FCR 478; [1993] FCA 619; DCT v Clout (2004) 2 ABC (NS) 120; [2004] FMCA 195. Two voting restrictions should be noted. Where a creditor has acquired a debt for an amount less than its value, only the lower amount paid applies for voting purposes (IPRB, s 75-110(4))27 and secured creditors can only vote to the extent they are unsecured (IPRB, s 75-85). Conduct of the meeting

[8.150]

Particular provisions apply to the Pt X meeting process. These include

that: • the debtor must attend the meeting unless prevented by illness or other sufficient cause: IPRB, s 75-27(2B). • the trustee must table the debtor’s statement of affairs; the report and the declaration made by the trustee under s 189A; and the trustee’s s 189B statement: IPRB, s 75-60(2). • the trustee can adjourn the meeting for up to 15 business days if needed, for example, to determine whether a person can vote: IPRB, s 75-140. This power is available irrespective of any resolution of the creditors not to adjourn the 26 See IGPS 11 – Monitoring and inspection of bankruptcy trustees and debt agreement administrators. 27 This restriction does not apply in corporate insolvency.

336

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.155]

meeting: Re Messina [1998] FCA 379. However the period of control under the s 188 authority has a maximum period of four months: s 189(1A)(d). Various other rules common with bankruptcy apply under IPRB, Div 75, for example, rules as to proxies, minutes and the manner of voting. Joint debtors

[8.155] Joint debtors may put forward a joint Pt X proposal. Separate meetings must be held for each debtor and their separate creditors but the meetings may be held concurrently.28 Voting in respect of each proposal should only be open to each relevant creditor.29 But if all creditors are joint creditors, one meeting and one resolution will suffice: Re Brown [1987] FCA 236; (1987) 16 FCR 378.30 Special resolution

[8.160]

A personal insolvency agreement must be passed by a special resolution. A special resolution is passed when, of those voting, 50% in number and 75% in value vote in favour: IPRB, s 75-132. One of three special resolutions available: s 206

[8.165] At the meeting, the creditors are required to pass a special resolution by which they may decide to: • release the debtor’s property from the control of the controlling trustee (if any); or • require the debtor to execute a personal insolvency agreement; or • require the debtor to present his or her own petition within seven days of the resolution: s 206(1). These are comparable with the resolutions that may be passed by creditors of a company under s 439C of Pt 5.3A of the Corporations Act: see Chapter 19. However, only an ordinary resolution is required for a deed of company arrangement to be approved. Debate at the meeting

[8.170] Before the debtor’s proposal is voted upon, it is customary for discussion to occur concerning the debtor’s conduct, financial position, future and whether he or she is likely to meet the requirements of the proposal. IPRB, s 75-65 provides some structure to the process. The trustee is required to address the view given in the s 189B report as to what is in creditors’ best interests, and this will involve a comparison between bankruptcy and what is offered under the agreement. The trustee is to invite discussion and questions. The debtor must answer any questions to the best of their knowledge and ability. 28 Re Forbes (1974) 24 FLR 87. 29 Re Williams (1990) 26 FCR 191; [1990] FCA 309; see also Metropolitan Demolitions Pty Ltd v Gialouris [1998] FCA 936. 30 Particular rules may apply, see IPRB, s 75-170.

[8.175]

8 Personal Insolvency Agreements

337

The meeting of creditors has a wide discretion to decide upon any of the three options under s 204 and to negotiate the particular terms of the agreement proposed. In that regard, the agreement offered by the debtor is not to be seen as a “take it or leave it” proposal; “the meeting of creditors retains an unfettered discretion to resolve in any one of the four ways indicated in s 204(1)”.31 Flexibility is a key feature of the decision-making process. An issue may arise if the final proposal is one so different from that proposed in the initial draft agreement that the meeting should be adjourned. That may be necessary if those who gave special proxies for a certain proposal may need to be consulted on any substantially revised proposal. If the meeting proceeds, and the debtor’s proposal is formally rejected by a meeting, the same or a different proposal is not able to be put to the same or a reconvened meeting after an adjournment – the vote of the creditors effectively means that the meeting for the purposes of formulating an agreement is ended. The creditors’ meeting is then restricted to dealing with motions under s 204(1) which do not relate to the debtor’s proposal. The Full Federal Court in Bunnings Forest Products Pty Ltd v Bullen [1994] FCA 1460 ; (1994) 53 FCR 438, 449 said that to hold otherwise was to allow the subsequent meeting to be the beginning of an “undefined bargaining procedure”32 which could involve prolonged meetings involving adjournments inconsistent with the prompt resolution of the debtor’s affairs contemplated under Pt X. As well, the conduct of “straw polls” or other means whereby a different proposal might be put to the meeting could allow a disgruntled creditor to apply to set aside any agreement approved on the basis that it was not one of the options on which the trustee had initially assessed and recommended. While that is true, that compares with what the legislature intended to be a more flexible procedure under the changes to the law in 2004, providing“debtors with a greater range of options for negotiation if creditors are not prepared to accept the initial proposal”.33 Any special resolution requiring the debtor to execute a personal insolvency agreement must specify provisions to be included in the agreement: s 204(2). Creditors must nominate a trustee of the agreement by resolution: s 204(3). This will invariably be the controlling trustee. A resolution is passed when, of those voting, a majority in number and in value vote in favour: IPRB, s 75-115. Whoever is nominated must have given written consent before the meeting to act as a trustee of an agreement: s 215A(1); AFSA Form 12. As soon as possible after the meeting, the trustee must give a copy of the consent to the Official Receiver: s 215A(1A). Remuneration

[8.175] At [8.130] we explained that the trustee is required to estimate for creditors the expected level and basis of remuneration to be charged. The creditors 31 Policy Nominees Pty Ltd v McDougall [1997] FCA 1067; see also Robson v Ingrilli [1998] FCA 1248. 32 See also Pretorius v Dalton Carpet Tiles Pty Ltd (1984) 1 FCR 273; [1984] FCA 141. 33 “Revised Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 (Cth)”, at [666].

338

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.180]

may approve the trustee’s remuneration at the meeting. Also as we have explained s 189AC gives the controlling trustee a lien over the property of the debtor in respect of trustee’s remuneration. Rights of creditors

[8.180] As explained earlier, most of the IPSB and IPRB apply to Pt X administrations, as they do to bankruptcies. These include the rights of creditors to request information (IPSB, s 70-40), or to direct the trustee (IPSB, s 85-5) and to review remuneration (IPSB, Div 60). The shorter time period of a Pt X agreement may mean these rights are less frequently used than in a bankruptcy. After the meeting Notification requirements

[8.185] Within seven days after a meeting passes a resolution under s 204(1), the controlling trustee must give to the Official Receiver a copy of the resolution and written notice specifying the date of the resolution, the debtor’s full name, address and occupation and, if a resolution accepted an agreement, the name of the trustee nominated: reg 10.06. Limitation on further Pt X agreements

[8.190] Control of a debtor’s estate ultimately ends four months after a s 188 authority becomes effective (s 189(1A)(d)), assuming no agreement is accepted, and no bankruptcy or other event in s 189(1A) intervenes. But s 188(4) states that a debtor cannot give a second authority within a six-month period, without leave of the court. In many cases, because of likely creditor pressure, a debtor may be forced into other options, including bankruptcy, before the six-month period elapses. However the four month period can be extended by the court under s 33. The consent of creditors is relevant and would usually be given if the trustee needed more time to investigate: Williamson v Bond [2013] FCA 828. Failure to implement an agreement

[8.195] If the debtor fails, without sufficient cause, to execute a personal insolvency agreement within 21 days, a court may, on the application of the Inspector-General, a creditor or the controlling trustee, make a sequestration order against the debtor: s 221(1)(b).34 Likewise, if the debtor fails to attend the meeting of creditors (s 221(1)(a)) without sufficient cause, or if a special resolution within s 204 has not been passed within four months from the date that the meeting was called, an application for a sequestration order can be made: s 221(1)(c). The controlling trustee will usually become the trustee in bankruptcy; the advantages of appointing the same person as trustee outweigh any detriment caused by any possible conflict: see Holbrook v Muntz [2010] FMCA 105. 34 In Joiner v Bailey [2004] FCA 1411, the court was ready to say that a deed of assignment was substantially executed within time despite defects in the process.

[8.205]

8 Personal Insolvency Agreements

339

Ending the controlling trusteeship [8.200] In a successful outcome to a Pt X meeting, the time at which the controlling trusteeship ends occurs when the personal insolvency agreement is signed by the debtor and the trustee: s 189(1A)(b). The agreement must be signed by both parties within 21 days of the day on which the special resolution requiring the debtor to execute the agreement was passed: s 216(1). When each party has signed, the agreement commences. Each party’s signature must be witnessed (s 216(2)) otherwise the agreement may be invalid; the witness must not be the controlling trustee.35 THE TRUSTEE’S ADMINISTRATION OF A PT X AGREEMENT [8.205] What is actually involved in the administration of a Pt X agreement, and how long it takes, will depend on its terms. In many agreements, the tasks of the trustee will be similar to those of trustees of bankrupt estates; for example the sale of property, or the gathering in of income contributions. Where a simple instalment agreement is involved, there will be no need for much administration, as often the only action which must be taken is the collection of the instalments to be paid ultimately to creditors. Agreements allowing the recovery of property through voidable transaction provisions will be more complex. As explained earlier, although this right of recovery may be given under an agreement, this is not common. Proofs of debt will have to be lodged by the creditors and dividends are paid to those creditors from the moneys received or realised under the agreement. By virtue of s 211, a number of sections of the Act which apply to the administration of a bankrupt estate are applied to personal insolvency agreements. These are ss 77, 77A, 77C, 77D, 77E, 77F, 78 (other than certain paragraphs of s 78(1)) and 81. There are various modifications to these provisions prescribed by the regulations – see Pt 10 and Sch 6. Many of these provisions now appear in the IPSB. As the trustee is a “trustee of a regulated debtor’s estate” (IPSB, s 5-20), the duties imposed on a trustee in bankruptcy under the Schedule and the Rules apply unless otherwise indicated. For example, the Pt X trustee must attend to the funds handling requirements, the maintenance of records, lodging of returns, and also respond to creditors’ directions and their reasonable requests for information. As in bankruptcy, a debtor who is subject to a personal insolvency agreement is obliged to assist the trustee (s 268(2)), and commits an offence if he or she fails to do so. All creditors are bound by the agreement: s 229(1). Claims of creditors against the debtor in respect of a provable debt cannot be commenced or continued against the debtor (s 229(2)); this includes a creditor’s petition that was pending against the debtor (s 229(2)(a)) – the petition must be dismissed. If the agreement provides for release from provable debts, then the agreement operates to release the debtor from 35 See Burns and Geroff v Lorac Mining Pty Ltd (1985) 4 FCR 301; Re Lawrence (1985) 9 FCR 9; [1985] FCA 343.

340

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.210]

that debt unless the agreement is set aside or terminated: s 230(1). The rights of secured creditors are not affected: ss 229(3) and 230(4). However, as in bankruptcy, some debts are not released by a Pt X agreement, for example, a liability for arrears of maintenance or child support under s 153(2A). Section 231 of the Bankruptcy Act makes applicable to personal insolvency agreements a number of specified provisions favourable to bankrupts, but s 153 is not one of them: Hayward v Scott as Trustee of the Debtor Estate of Hayward [2013] FCA 421. The debtor is entitled to any property remaining after payment in full of the costs, charges and expenses of the administration of the agreement, and all provable debts and interest accrued: s 231A(1). An application may be made to the court to restrain property being returned to the debtor in circumstances where criminal confiscation proceedings are involved: s 231A(2). The debtor is entitled to a certificate from the trustee as to the discharge of their obligations under the agreement: s 232; reg 10.14(4). The “end of the administration” under Pt X is the day three years after the day on which the agreement took effect: IPSB, s 5-5. The trustee must retain books relating to the administration of the agreement for seven years from that day: IPSB, s 70-35.

Impact of family law [8.210] Family law impacts upon Pt X agreements largely in the same way it impacts upon bankruptcies. Part VIII of the Family Law Act (ss 71 – 90) deals with property and maintenance. Section 79(14) – (15) provides that if an application is made under that section for a property order, and a party is subject to a personal insolvency agreement, the trustee may apply to be joined as a party to the family law proceedings and make submissions. The debtor subject to the agreement cannot make a submission to the Family Court about any property that is subject to the agreement.36 Part VIIIAA (ss 90AA – 90AK) contains provisions allowing the Family Court to make property and other orders binding third parties. Persons “affected” by such orders, which include Pt X trustees, may apply to challenge them: s 90SN. The Family Court also has a general right to set aside transfers to defeat any proceedings under the Act; again, a Pt X trustee is an affected party who has the right to apply: s 106B. VARIATION OF PERSONAL INSOLVENCY AGREEMENTS: S 221A [8.215] A personal insolvency agreement may need to be varied because of some change of circumstances that arises during the course of its administration. Section 221A(1) provides that with the debtor’s consent, the trustee may give notice to all the creditors proposing such a variation, giving reasons for the variation and explaining the likely impact it would have on the creditors. The notice must specify 36 However, see Seeming anomaly drops out of the darkness – ability of the Family Court of Australia to adjust property vested in a trustee under a personal insolvency agreement, CCH Law Chat Blog, 17 August 2015, J T Johnson and Dr G O’Shea, as to limitations under the Family Law Act in relation to family law property disputes where a personal insolvency agreement is in place for one party.

[8.230]

8 Personal Insolvency Agreements

341

a date (at least 14 days after the notice is given) from which the variation would take effect; and state that any creditor may, by written notice to the trustee at least two days before that date, object to the variation taking effect without a meeting of the creditors being held: s 221A(4). Under s 221A(5), if no creditor lodges a written notice of objection with the trustee within the two days, then the proposed variation takes effect on the date specified in the notice. The trustee may issue a certificate confirming the variation. The trustee then continues to administer the agreement as varied.

ENDING A PT X AGREEMENT Introduction [8.220]

Usually a personal insolvency agreement will be terminated when the debtor has fulfilled their obligations pursuant to it. Section 222D allows an agreement to be ended on the occurrence of some specified event nominated in the agreement, typically full payment of the sum agreed to by the debtor, which is the end of a successful agreement. However, an agreement may be ended prematurely and in a number of ways: that is by the court setting the agreement aside under s 222 or terminating it under s 222C, or by the agreement being terminated under s 222A by the trustee, or under s 222B by the creditors. In so far as ss 222 and 222C involve or require the intervention of the court, the law has been, and remains, that where the required vote in favour of an agreement has been obtained at a creditors’ meeting, courts are reluctant to interfere with the commercial judgment of the creditors and to set aside the agreement.37 Thus if creditors wish to accept only 5 cents in the dollar for their claims, the court may regard that as a matter for their commercial judgment and decision. However, the courts will intervene where the public interest is not met or breaches of the Act have occurred.

Setting aside (s 222) and terminating (s 222C) by the court [8.225] Section 222 allows a court to set aside a personal insolvency agreement on three broad grounds. Section 222C allows the court to terminate an agreement in specified situations.38 Setting aside if the agreement is unreasonable or not to the creditors’ benefit: s 222(1) [8.230] Section 222(1) provides that the court may make an order setting the agreement aside if the court is satisfied that: (d) the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or 37 Paton v Campbell Capital Ltd (1993) 46 FCR 30; [1993] FCA 526; Stedman v DCT [2000] FCA 336; 44 ATR 88. 38 See Courts’ Bankruptcy Rules, Pt 10.

342

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.230]

(e) for any other reason, the agreement ought to be set aside.

The persons who may apply to the court are the Inspector-General, the trustee or a creditor. Service of the application on the debtor can be dispensed with, for example, if the debtor cannot be located: s 222(12). Section 222(1) is equivalent to the former s 236 that allowed a deed of arrangement to be set aside “for any other reason”, and to s 242 which was a similar provision that applied in respect of compositions. The former s 239 allowed a composition to be set aside on largely the same terms as s 222(1). The law on those provisions may be considered generally in respect of applications under current s 222(1).39 Even if the court is “satisfied” as to the existence of the criteria in paragraphs (d) and (e), it still has a discretion whether to set the agreement aside, based on all the circumstances: New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884. In reality, the facts supporting the criteria within (d) and (e) are often the same as those relevant to the exercise of the court’s discretion. The onus lies on a creditor bringing would be better off by setting aside establish under s 222(1)(d) that the advantageous for the creditors than ABC(NS) 84; [2012] FCA 371.

a s 222 application to show that creditors the agreement; it is not for the debtor to personal insolvency agreement was more bankruptcy: Moran v Robertson (2012) 10

There are various factors and issues taken into account by the courts. Initially, the wide discretion given by s 222 is to be exercised cautiously, having regard to the objectives of Pt X. The court will assess whether the controlling trustee recommended acceptance of the agreement and for what reasons. The fact that the Act allows creditors to make their own decision based on that recommendation is important, and a court is reluctant to substitute its views for the creditors’. In making that decision, creditors can decide in their own interests and are not obliged to act quasi-judicially. But given that the law under Part X allows a court to set aside an agreement despite it being accepted by creditors, the vote of creditors is not ultimately paramount: New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884 at [54]. A negligible benefit provided under an agreement, and a substantial discrepancy between the benefit and the amount of the debts, are factors, although these are not necessarily determinative: Hingston v Westpac Banking Corporation [2012] FCAFC 41 at [93].40 As an example, in IFX Markets Ltd v Rappaport [2009] FMCA 893, the agreement was not set aside even though the payment to creditors was minimal. The court found there was no demonstrable benefit to creditors in setting it aside; there had been significant delay in challenging the agreement and the trustee was not able to be properly remunerated. The extent to which an agreement has already been implemented, perhaps because of delay in challenging it, is relevant against setting it aside. 39 See fn 7. 40 See also Moran v Robertson [2012] FCA 371; Lerinda Pty Ltd v Thornton [2015] FCCA 1436, involving debts of $10m, with a fund of $25,000 offered to creditors, and with assets omitted by the debtor from his statement of affairs.

[8.235]

8 Personal Insolvency Agreements

343

The courts do have regard to the apparent need for further investigations to be pursued, in bankruptcy; an example being if the debtor had transferred her home to her spouse at an undervalue, with no satisfactory explanation given. The court does not have to be satisfied that there are undisclosed assets or sham transactions; an inference or suspicion can be enough. The court may be shown that there was insufficient information available for creditors to make an informed decision. Creditors need enough information to decide that their interests would not be advanced by further investigations, for example by bankruptcy examinations: Ward v Zozi [2012] FMCA 898, (2012) 11 ABC (NS) 40 The existence of active creditors who are determined to pursue their interests, including by way of funding bankruptcy examinations, will be relevant in having an agreement set aside.41 The short period of time allowed a controlling trustee to investigate and report on the debtor’s affairs can be relevant, if the matter is complex, although the trustee can apply for an extension of time if required.

[8.235] The closeness of the vote and related party votes at the meeting are relevant issues, in particular where the vote in favour of the agreement was influenced by related creditors. The court takes into account that it may be in the interests of some such creditors to avoid closer investigations into their dealings with the debtor.42 A related creditor’s agreement not to lodge a proof of debt in the agreement may assist in supporting the agreement, unless there is doubt about the validity of its claim to start with. For example, in Onesteel Trading Pty Ltd v D’Arrigo [2013] FCCA 1019, the court had concerns about a proof of debt for $7m based on an original $1m loan, on which annualised interest of 260% had accrued. That was an issue in Gunns Finance Pty Ltd (R & M Apptd) (in Liq) v Moss [2017] FCCA 1773, where, in setting aside an agreement where related party votes were used, the court said that trustees should be circumspect in relation to debts owed to friendly or related creditors who vote for an agreement but who do not stand to benefit under it. The trustee had also wrongly allowed the large Gunns claim at $1 only, for voting purposes, thus significantly reducing its rights at the meetung. In that respect, the conduct of meeting by the trustee may be called into question. In CBA v Robson [2013] FCA 1430, the trustee admitted the bank’s $8m proof of debt at $1 only, despite the determination of that $8m claim having already been heard in another court. Soon after the Pt X meeting, that court gave judgment for the bank in the full amount of its claim against the debtor. The vast majority of creditors, in value terms, who voted in favour of the minimal payment under the agreement were personally related to the debtor. The agreement was set aside under s 222(1) on the basis that its terms were unreasonable (s 222(1)(d)) and because it was in the public interest to do so (s 222(1)(e); an appeal was dismissed: Shannon v CBA [2014] FCA 108.43 A large creditor’s failure to attend the meeting out of inadvertence can also be relevant, in particular if its vote would have changed the outcome of the meeting. 41 Stedman v DCT [2000] FCA 336. 42 See New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884. 43 See also DCT v Blaikie (2006) 4 ABC (NS) 409; [2006] FCA 1695.

344

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.240]

Under the old law it had been held that provisions in an agreement for the making of payments to secured creditors, or to persons who are not creditors, are permissible.44 These payments may be necessary in order to allow the debtor’s business to continue, from the income of which the debtor proposes to pay the amount agreed. Such payments are not uncommon in relation to a business conducted under a deed of company arrangement under Pt 5.3A of the Corporations Act. In this respect it should be noted that under s 188A(2)(h) – (i) creditors must specify the order in which property and income of the debtor is to be distributed among creditors. While an agreement may be set aside to allow a more thorough examination of the debtor’s affairs through bankruptcy, whether bankruptcy does in fact produce more for creditors is not guaranteed. But in For The Good Times Pty Ltd v Boyle [2009] FMCA 512, where the agreement was set aside and the debtor was made bankrupt, a successful recovery of assets in the bankruptcy was made: Prentice v Boyle [2010] FMCA 681, 8 ABC (NS) 372. The need for a full investigation of the debtor’s affairs as being in the interests of the creditors and the public was evident in DCT v King [2016] FCA 1281. The agreement was approved by only a bare majority, material items about the debtor were falsely omitted from or incorrectly disclosed in the statement of affairs, and unexplained credits to the debtor’s bank account greatly exceeded his declared income. The applicant creditor also offered an indemnity for the bankruptcy trustee to investigate the debtor’s affairs. While a return of between 1 to 4 cents in dollar was possible under the agreement, and a sequestration order might reduce that return to creditors to nil, the agreement was nevertheless set aside. The court noted that the debtor had been able to sustain a lavish lifestyle with significant spending well beyond his disclosed means, with no explanation given. It should also be noted that funding under s 305 of the Bankruptcy Act (see [6.440]) is provided to a Pt X trustee “only in exceptional circumstances, due to the voluntary and commercial nature of personal insolvency agreements, the disclosures required by the debtor, and the preliminary investigations that need to be made by controlling trustees prior to creditors voting on the proposal”.

Non-compliance with the requirements: s 222(2) [8.240] The second broad ground on which the court may set aside a personal insolvency agreement under s 222(2) is based on non-compliance of the process leading to the agreement, or the agreement itself, with the requirements of Pt X. In such cases, in addition to the applicants who can apply as above, the debtor can also apply. The section provides that the court may make an order setting the agreement aside if the court is satisfied that: (e) the agreement was not entered into in accordance with Pt X; or (f) the agreement does not comply with the requirements of Pt X. 44 See Re Clonan (1963) 20 ABC 245, 253-254 and Gee v Schmutter (1971) 123 CLR 503, respectively.

[8.250]

8 Personal Insolvency Agreements

345

For example, the section would be available where there was no special resolution in fact passed at the meeting of creditors: Re Messina [1998] FCA 379; or where a number of creditors whose debts were of substance were not given an opportunity to attend the meeting: Re Kleiss (1968) 15 FLR 281. In QBSA v Ball [2001] FMCA 47 and Marshall v Clarke [2003] FMCA 473 the court found there were no quorums at the meetings, which resulted in the agreements being set aside. As under the previous section, s 222(3) says that the court must not make an order setting aside a personal insolvency agreement on the ground that it does not comply with the requirements of Pt X if the agreement substantially complies. However the need for the avoidance of an agreement to be “in the interests of creditors” was removed in new section 222(3) in order to recognise that the parties’ agreement is paramount.45

False and misleading information provided to creditors etc: s 222(5) [8.245] A third basis for the court setting aside a personal insolvency agreement is on grounds of false or misleading information etc. Applicants for an order on these grounds are the Inspector-General, the trustee or a creditor. The court may make an order setting the agreement aside if the court is satisfied that the debtor has given false or misleading information in answer to a question put at the meeting of creditors, or has omitted a material particular from the statement of affairs, or included an incorrect and material particular in that statement.46 Section 222(5) is equivalent to the former s 222(4) but provides a more detailed series of bases upon which a personal insolvency agreement may be set aside. For s 222(5) to apply, there must be an irregularity of a substantive nature, for example in relation to the omission of a material particular by either the debtor or the controlling trustee.47 Omission of significant personal liabilities to a bank under a guarantee that were of such significance as to alter the trustee’s assessment of his recommendations to creditors were material in National Australia Bank Ltd v Cranney [2011] FMCA 169. It is irrelevant if the debtor innocently gave incorrect information,48 or the controlling trustee – it is simply enough that the creditors were misled: Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116 (and on appeal: [2012] FCAFC 41; (2012) 200 FCR 493). In that case, the debtor genuinely, though mistakenly, believed that he did not need to disclose his overseas assets, in New Zealand.

Time limits [8.250] Under s 222(4) an order under s 222(2) must not be made unless the application is made before all the obligations under the personal insolvency 45 “Revised Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 (Cth)”, [19]. 46 This also includes incorrect and material statements in the declaration of relationships: see s 194A(3) – (5); s 189A(3); s 215A(3) or (4). 47 See also Ward v Zozi [2012] FMCA 898; 11 ABC (NS) 40. 48 Re Cufari (1992) 33 FCR 544; [1992] FCA 95.

346

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.255]

agreement have been discharged. A similar limitation applies under s 222(7) in respect of applications under s 222(5). Such obligations would include payment of the agreed funds to the trustee, the implementation and completion of the proof of debt process and the determination and payment of the dividend.49 In any event, an application under s 222 should be made without appreciable delay or else it may not succeed.50

Court may terminate a personal insolvency agreement: s 222C [8.255] The court may also end a personal insolvency agreement under s 222C, by “terminat[ing]” it. An application for such an order may be made by the trustee, a creditor, the debtor, or if the debtor has died – the person administering the debtor’s estate. The court can order that service of the application on the debtor be dispensed with: s 222C(7). For the court to make such an order, it must be satisfied that the debtor (or the debtor’s deceased estate etc) “has failed to carry out or comply with a term of the agreement”; or “that the agreement cannot be proceeded with without injustice or undue delay” or that, “for any other reason, the agreement ought to be terminated”. Section 222C is broadly equivalent to the old s 236 in respect of deeds of arrangement, and the old s 242 in respect of compositions. Compositions were set aside if a trivial amount was to be paid in comparison to the total debts, as being one “other reason” generally among others, as we have seen.

Standing to bring applications under ss 222 and 222C [8.260] Where an application is made pursuant to s 222(1), (2) or (5), or under s 222C, a court must decide, as a preliminary point, whether the applicant has the necessary standing to bring the application. Usually this will involve considering whether the applicant is a “creditor” or not for the purposes of either section. The court is not confined to matters that were before the trustee: Moran v Robertson [2012] FCA 371. Similarly, applications under these sections can only be made “if a personal insolvency agreement is in force …”, that is, if the agreement has not ended by whatever means, including by way of compliance by the debtor with the agreement.

Common provisions in ss 222 and 222C [8.265]

It was earlier mentioned that ss 222 and 222C both contain common provisions – as to the importance of the “interests of creditors”, as to the power of the court to make a sequestration order following on from the setting aside or 49 Hingston v Westpac Banking Corporation (2012) 200 FCR 493; [2012] FCAFC 41. Whether the application is made before all the obligations under the agreement have been discharged is not a period of “time limited by this Act” under s 33(1)(c) of the Act, hence that provision does not apply: Re Kukler; Ex parte National Australia Bank Ltd v Kukler [1998] FCA 1165; (1998) 87 FCR 352. 50 Re Shepherd [1993] FCA 237; Brott v Grey (2000) 181 ALR 617; [2000] FCA 1727.

[8.275]

8 Personal Insolvency Agreements

347

terminating of an agreement, and as to the power of the court to make ancillary and compensation orders. It is convenient to discuss these provisions together. Interests of creditors: ss 222(6) and 222C(2)

[8.270] Section 222(6) provides that the court must not make an order under s 222(5) – in respect of misleading conduct etc – unless it is satisfied that it would be in the interests of the creditors to do so. Similarly, courts are obliged not to make orders under s 222C(1)(e) (failure to carry out a term of the agreement) or s 222C(1)(g) (for any other reason the agreement should be terminated) terminating the personal insolvency agreement unless the orders are in the interests of creditors: s 222C(2). The courts have regard also to the public interest and, in relevant cases, the interests of the debtor, as well as the direct financial interests of creditors. While the interests of creditors are usually assessed as a composite group, the court may also take into account distinct classes of creditors with divergent interests where that is relevant. But a benefit to a small class of creditors of ending the agreement rather than to creditors overall may not be sufficient to cause an agreement to be set aside: Totterdell v D’Angelo [2004] FMCA 645. On the other hand, a small dividend to creditors may not prevail over the public interest of having the affairs of the debtor investigated in bankruptcy, in particular where there has been non-disclosure and unexplained dealings: DCT v King [2016] FCA 1281. The court’s discretion to set aside or terminate an agreement will often be exercised in the additional context of deciding whether a sequestration order should be made. The balancing of interests that was a feature under the old law in these cases may now need to be reassessed in light of the current law where creditors can, for example, insist on provisions in the personal insolvency agreement allowing for public examinations and challenges to voidable transactions, comparable to those available in bankruptcy (see s 188A(2)(j), s 231), such that the creditors’ interests may be satisfied well enough by not ending the personal insolvency agreement. Sequestration order can be applied for

[8.275] The court has the discretion to make a sequestration order against a debtor when a personal insolvency agreement is set aside (s 222(10))51 or terminated (s 222C(5)). In any application under s 222(1), (2) or (5), the trustee or a creditor can apply for a sequestration order. The application must be accompanied by an affidavit stating the facts relied on to satisfy the relevant prerequisites under s 222(6) for making the order and the facts relied on to establish the relevant grounds under s 222(4).52 Section 222(11) deems the application to be equivalent to the presentation of a creditor’s petition against the debtor, but the provisions of ss 43(1), 44, 47 and 52 and Pt XIA (farmers debts assistance) do not apply in relation to such an application. 51 See Mouglalis v Bendigo and Adelaide Bank Ltd [2017] FCAFC 47 and as discussed at [8.280]. 52 Courts’ Bankruptcy Rules, Pt 10.

348

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.280]

Similarly, an application pursuant to s 222C may include an application for a sequestration order, or the creditor may subsequently apply for such an order: s 222C(5). The making of the order is discretionary. In Nelson v Sutera [2013] FCCA 721, although the court terminated the agreement because of non-compliance with it by the debtors, no sequestration orders were made because the court was satisfied that the debtors had no assets. As under s 222(11), the making of an application by the trustee or a creditor for a sequestration order under s 222C(5) is taken to be equivalent to the presentation of a creditor’s petition against the debtor. It will often follow that if a personal insolvency agreement is set aside or terminated, bankruptcy of the debtor is the proper outcome. This is reinforced by the fact that the setting aside or terminating of a personal insolvency agreement is an act of bankruptcy on which basis a creditor can present a petition (s 40(1)(m)): see George v DCT [2004] FCA 1433. However, the court must have regard to the same sorts of considerations that apply when a court is exercising its discretion under s 52 of the Act, including the potential benefit to the creditors and the potential detriment to the debtor: Macks v Vandenberg [2011] FMCA 325. A relevant factor is that the public interest will invariably require that an insolvent be prevented from further trading and that the rights of creditors be protected: Burlock v Commissioner of Taxation [1994] FCA 1072; (1994) 49 FCR 522, 531. The court need not appoint the existing Pt X trustee, the court in For The Good Times Pty Ltd v Boyle [2009] FMCA 512 deciding that “a new and independent trustee” should be appointed. Ancillary orders, including compensation

[8.280] Section 222(8) allows the court to make ancillary orders as the court thinks fit, including, under s 222(9), an order directing a person to pay another person compensation of such amount as is specified in the order. A similar power exists under s 222C(3) and (4). This was not a power available under the old provisions and is “intended to allow the Court to make any orders necessary to place the parties in the position in which they would have been had they not entered into the agreement”.53 However, it does not give the Court the power to change or vary the date of discharge from bankruptcy as determined by s 149(4) of the Act.54 Distinction between setting aside (s 222) and terminating (s 222C) [8.285] In broad terms, both ss 222 and 222C serve the purpose of allowing a creditor, in particular, to apply to the court to challenge a personal insolvency agreement. 53 “Revised Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 (Cth)”, [94]. 54 See Mouglalis v Bendigo and Adelaide Bank Ltd [2017] FCAFC 47, which questioned a finding to the contrary in Hingston v Westpac where a s 73 annulment was set aside. The Court in Mouglalis held that s 222(8) does not give the Court the power to change the date of discharge, this being at odds with the power of the court under s 222(10).

[8.290]

8 Personal Insolvency Agreements

349

Based on the previous law, there is a relevant distinction between setting aside an agreement under s 222, and terminating an agreement under s 222C. An order under the old s 222(1) allowed a deed to be declared “void” by a court; such an order operated retrospectively to avoid the arrangement from its beginning on the basis that it was never valid. The new provisions contain no power to declare a personal insolvency agreement “void” but the equivalent power is to “set aside” the agreement, under s 222. In contrast, and as under the old law, s 222C allows the court to “terminate” an agreement.55 Applying that to the current provisions, it seems that s 222 applies to matters that occurred or were in existence at the time creditors made their decision, whether those matters were known then or not; for example, if the debtor failed to disclose a material item of property to creditors who made their decision to accept an agreement in ignorance of its existence. In contrast, s 222C applies in respect of situations occurring after the decision of the creditors and during the course of the administration – that is, for example, if the debtor fails to comply with the agreement or there is some undue justice or delay that has subsequently arisen. An example of facts occurring after an agreement was entered into is Hill, in the matter of Fisher & Paykel Australia Pty Ltd v Hill [2001] FCA 800 at [8.235], where a source of income, under which the debtor was to pay under the Pt X arrangement, ceased. The overlap between the various provisions under the old law continues to exist under the current sections. In any application to set aside a Pt X agreement, applicants will often rely on as many sections as appear to apply, and will bring in any extraneous or particular issues involved under the “other reasons” grounds in the various sections.56 As with any application to set aside or terminate an agreement, an application under s 222C should be made without much delay.57 The extent to which an agreement has already been implemented is a factor against setting it aside: Osborne v Gangemi [2011] FCA 1252; (2011) 9 ABC (NS) 257.

Can part of an agreement only be set aside? [8.290] Under the former law, the court had the power to declare void either the whole arrangement, or only one or several provisions, under s 222(2) or (4). Thus an offending clause of a deed could have been excised if that then left the remaining parts of the deed to operate. This power is not available under the existing provisions. The court may set aside or terminate the whole agreement, or allow it to stand.

55 See Musolino v Sidiropoulos [1991] FCA 252; Khera v National Australia Bank Ltd (1997) 71 FCR 133; [1996] FCA 1050. 56 See for example, Roberts v Juniper [2013] FCCA 130. 57 Brott v Grey [2000] FCA 1727.

350

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.295]

Role of the trustee [8.295] A creditor will often be the one that applies to set aside an agreement. For example, the creditor may apply by way of challenging a decision that the trustee made, as chair of the meeting, to deny that creditor their right to vote. In such a case, an agreement may be accepted that the creditor wishes to challenge. A trustee who chairs a meeting in such circumstances may be liable for some of the costs incurred by a creditor seeking to overturn an agreement accepted by the meeting after erroneously exercising his or her power to disallow the creditor voting; or if the trustee fails to notify a known creditor of the meeting: Daimler Chrysler Financial Services Australia Pty Ltd v McKillop [2007] FMCA 1118. In Re Hughes [1996] FCA 1286, the trustee actively defended the creditor’s proceedings, which were successful, and an order for costs was made against the trustee. A similar decision was made in QBSA v Ball [2001] FMCA 47. It appears to be preferable for a trustee, in any challenge to a Pt X agreement, to indicate to the court that he or she will not defend an application and will abide by the court’s decision although it is expected that the trustee will file evidence as to the conduct of the meeting and the reasons for the decisions on creditors’ votes being explained.58 Three other ways of terminating personal insolvency agreements [8.300] Part X provides three methods of terminating a personal insolvency agreement other than by court intervention. These are: • by the trustee (s 222A); • by the creditors (s 222B); or • by the occurrence of some event nominated in the agreement itself: s 222D. Termination of personal insolvency agreement by the trustee: s 222A

[8.305] Section 222A allows the trustee of a personal insolvency agreement to propose to the creditors, in writing, the termination of the agreement if the trustee is satisfied that the debtor is in default. As with s 221A (see [8.190]), the notice must provide reasons for the termination and the likely impact it will have on creditors if it were to take effect; and specify a date (at least 14 days after the notice is given) from which it is proposed that the termination will take effect; and state that any creditor may, by written notice to the trustee at least two days before the specified date, object to the termination taking effect without there being a meeting of creditors. If the debtor is in default; and no creditor lodges a written notice of objection with the trustee within the two days, then the proposed termination takes effect on the date specified in the notice. Section 222A(5) explains that a debtor is “in default” “if, and only if” the debtor has failed to carry out or comply with a term of the personal insolvency agreement. 58 The court in NAB v Cranney [2009] FMCA 169 took into account the trustee’s “special role as an officer of the Court when acting as trustee under Part X” and as a party to the proceedings under which the agreement was challenged.

[8.320]

8 Personal Insolvency Agreements

351

Hence, rather than apply to the court under s 222C, the trustee may put the matter for determination by creditors under s 222A. If a creditor objects to the termination, a meeting of creditors would then need to be held. A decision on termination would then be held under s 222B. A certificate signed by the trustee stating any matter relating to a proposed termination under s 222A is prima facie evidence of the matter. Termination of personal insolvency agreement by the creditors: s 222B

[8.310] Section 222B allows the creditors, by resolution at a meeting called for the purpose, to terminate a personal insolvency agreement if: (a) the debtor is in default; and (b) before the passage of the resolution, the trustee of the agreement tabled at the meeting a written declaration to the effect that the trustee is satisfied that the debtor is in default.

While the declaration by the trustee is a public statement about a serious matter, there is no need for particular formality, although the declaration must be signed: Lofthouse v Stirling [2008] FCA 1936; 173 FCR 574. Such a meeting may follow from an objection lodged by a creditor to a proposed termination under s 222A. A resolution only is required. In a particular circumstance where property of the debtor is covered by a restraining order or a forfeiture order; or a pecuniary penalty order made against the debtor is in force, then the creditors may, by special resolution at a meeting called for the purpose, terminate the personal insolvency agreement. This right to terminate does not apply if the restraining, forfeiture or pecuniary penalty orders were already in place when the personal insolvency agreement was made. In the same terms as s 222A, a debtor is in default if the debtor has failed to carry out or comply with a term of the personal insolvency agreement; or if the debtor has died – the debtor or the person administering the estate of the debtor has failed to carry out or comply with a term of the agreement: s 222B(4). Termination of personal insolvency agreement by occurrence of terminating event: s 222D

[8.315] As explained earlier, under s 222D, a personal insolvency agreement is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate: see also Perovich v Whitton (No 2) [2016] FCAFC 152; (2016) 250 FCR 272. This follows from s 188A(2)(g) which requires a personal insolvency agreement to specify the circumstances in which, or events on the occurrence of which, the agreement terminates. Typically such an event will be defined as occurring when the final payment from the debtor under the personal insolvency agreement is made. Notice requirements: s 224A

[8.320]

Various events trigger requirements imposed on a trustee to file notices with the Official Receiver, under s 224A, generally within two days. These include the termination or variation of an agreement, or an order by the court setting aside

352

Keay’s Insolvency: Personal and Corporate Law and Practice

[8.325]

or terminating an agreement. The trustee must also advise creditors within two business days if an agreement is set aside or terminated. These details are then entered on the NPII.59

Effect of setting aside or termination [8.325] Section 224 serves to validate acts done pursuant to a personal insolvency agreement if the agreement is set aside or terminated. Such payments or transactions cannot be set aside by the trustee of a subsequent agreement or bankruptcy. The full rights of the creditors are restored to them and therefore they may take legal proceedings against the debtor, including the presentation of a bankruptcy petition: Macks v Vandenberg [2011] FMCA 325. However, where a relevant statute of limitations period began to run before the date of entry into the Pt X agreement, and that period later expires, the debt is statute barred; in circumstances where the agreement is terminated, the debtor can plead that limitation in any recovery action by the creditor: Brott v Grey [2000] FCA 1727. The unpaid remuneration of the controlling trustee, and the trustee of an agreement that is set aside or terminated, is a priority debt in any ensuing bankruptcy that occurs. In the case of a personal insolvency agreement, the bankruptcy must have occurred within two months of the ending of the agreement: s 109(1)(b) – (c). See Warner v Mayfair Ltd, in the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441.

CONCLUSION [8.330]

Part X does allow a debtor to be released from all debts in a process that can be quickly and readily organised. The restrictions of bankruptcy, and its usual continuation for the current three years, do not apply. Creditors may well accept the proposal if the debtor’s affairs are explained and they are ready to accept the dividend offered, which may at least be more than would be obtained in bankruptcy. We explained initially that the numbers of Pt X agreements have always remained low in number compared with bankruptcies and debt agreements: see [8.05]. Pt X agreements tend to be used by the “top end” of the personal insolvency market, whose personal financial difficulties can often be remedied or forestalled by an agreement rather than the person suffering the ignominy of bankruptcy. The proportion of business related agreements is generally higher than for bankruptcy. In any event, Pt X remains as a necessary alternative to formal bankruptcy and its acceptance and use by debtors and creditors will remain available for those debtors whose affairs call for the flexible compromise arrangement with creditors that Part X allows. The fact that debt agreements under Pt IX have now become more 59 See AFSA’s Form 19 – Notice of completion, variation, termination or setting aside of a PIA (Part X), composition or scheme of arrangement (Part IV). See also reg 13.03 and Sch 8, items 28B and 28C.

[8.330]

8 Personal Insolvency Agreements

353

accessible to debtors may, however, see a trend towards the even more flexible processes there, even if only for debtors in a particular financial category. It is to that type of agreement we now turn. Chapter 8 – Personal Insolvency Agreements Part X – ss 187 – 232 Bankruptcy Act Part 10 – Personal Insolvency Agreements – Bankruptcy Regulations regs 10.01 – 10.14 AFSA IGPD 8 – Solicitor controlling trustees eligibility requirements IGPD 9 – Standards for trustees and controlling trustees IGPD 12 – Controlling trustees’ roles and duties IGPD 21 – Lodging notice of a section 73 or Part X meeting with the Inspector-General in Bankruptcy for Publication ORPS 4 – Setting up a personal insolvency agreement Part 10 – Personal Insolvency Agreements – Courts’ Bankruptcy Rules rr 10.01 – 10.05

9

Debt Agreements [9.10] INTRODUCTION ................................................................................................................ 356 [9.15] PROPOSING AND PROCESSING A DEBT AGREEMENT ........................................ 357

[9.25] Debtors disqualified from using a debt agreement ...................................... 360 [9.30] Giving of a proposal is an act of bankruptcy ................................................ 361 [9.35] Accepting a proposal for processing: s 185E ................................................. 361 [9.42] Assigned and secured debts ........................................................................................ 362

[9.43] Acceptance by creditors: s 185EC .................................................................... 362 [9.45] Restrictions on creditors after acceptance of proposal for processing: s 185F .................................................................................................................... 362 [9.50] Lapsing of a proposal ........................................................................................ 363 [9.55] CONSEQUENCES OF ACCEPTANCE OF A PROPOSAL .......................................... 363

[9.60] Release from debts .............................................................................................. 363 [9.65] Moratorium on proceedings ............................................................................. 364 [9.70] Distribution of property .................................................................................... 364 [9.75] Variation of a debt agreement .......................................................................... 364 [9.80] ENDING A DEBT AGREEMENT ..................................................................................... 364

[9.85] Ending or termination of the agreement without court involvement ...... 365 [9.85] Ending of a debt agreement: s 185N .......................................................................... 365 [9.90] Termination by accepting a proposal: s 185P ........................................................... 365 [9.95] Termination – designated six-month arrears default: s 185QA ............................. 366 [9.100] Termination by the bankruptcy of the debtor: s 185R .......................................... 366 [9.103] Consequences of termination ..................................................................................... 366

[9.105] Ending an agreement by court order ............................................................ 366 [9.110] Declaring a debt agreement void: ss 185T, 185U ................................................... 366 [9.115] Termination by court orde: s 185Q ........................................................................... 367 [9.116] THE COURTS ..................................................................................................................... 368 [9.118] DEBT AGREEMENT PRACTICE STATEMENTS ........................................................ 368 [9.120] DEBT AGREEMENT ADMINISTRATORS ................................................................... 368

[9.120] Registration of administrators ........................................................................ 368 [9.125] Application for registration as an administrator: s 186B ...................................... 369 [9.130] Registration as an administrator: s 186D ................................................................. 370 [9.135] Cancellation of an individual’s registration as an administrator: s 186K ......... 370 [9.140] Inspector-General may declare a person ineligible to act as an administrator: s 186M ............................................................................................................................ 371

356

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.10]

[9.145] Duties of administrators: Div 3A ................................................................... 371 [9.148] Action required when debtor defaults ..................................................................... 372

[9.150] Powers of the Inspector-General to regulate administrators .................... 373 [9.155] Advertising and promotion ........................................................................................ 373

[9.160] The Personal Insolvency Professionals Association ................................... 374 [9.165] CONCLUSION ................................................................................................................... 374

INTRODUCTION [9.10] Debt agreements under Pt IX of the Bankruptcy Act are a type of personal insolvency, separate from bankruptcy, for those debtors with relatively small debts, low incomes and little property.1 The policy reason for these is that bankruptcy is seen as too strict and serious a regime for those who are usually consumer debtors with few assets and liabilities, who are unable to meet their commitments. The financial affairs of these debtors are better suited to a more informal type of insolvency administration. As with Pt X agreements, it is a decision for the creditors, and the court does not have to be involved, unless there is some challenge to the agreement. A debt agreement is administered by a registered debt agreement administrator (often shown by the acronym RDAA), approved by AFSA. An administrator may be an individual or a company. There are around 34 administrators, mostly companies but with some individuals. Trustees in bankruptcy can administer debt agreements and do not have to be separately registered. Trustees, of course, cannot operate through a company. The debt agreement regime has been successful on the basis of numbers of debt agreements alone, but it also provides a better return to creditors than does bankruptcy. At the same time there is some concern about the co-ordination between debt agreements, PIAs and bankruptcy, the choice of type of administration being regarded as an important “gateway” issue in the area of consumer credit; the commercialisation and marketing of agreements; and the gradual extension of the period of payment arrangements under debt agreements, among other issues.2 Part IX was introduced into the Bankruptcy Act in 1996. The regime was substantially refined in July 2007 by the Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 (Cth), which served to tighten up the process, to improve the success rate of agreements and give creditors more confidence in the system. Regulation of administrators was another aspect of these reforms, including the process whereby the Inspector-General can issue practice guidelines.3 This guidance and other directions are referred to throughout this chapter. 1 For example, the Law Reform Commission in its Report, Insolvency: The Regular Payment of Debts (Report No 6, 1977); a similar procedure recommended by the Harmer Report was called a Debt Payments Plan (para 432). 2 Wyburn, “Debt Agreements under Australian Bankruptcy Law: A Successful Experiment?” (2012) 20 Insolv LJ 158. See also Ramsay and Sim, “The Role and Use of Debt Agreements in Australian Personal Insolvency Law” (2011) 19 Insolv LJ 168. 3 Section 186Q allows the Inspector-General to issue guidelines in relation to various sections of Pt XI concerning administrators.

[9.15]

9 Debt Agreements

357

At the time of publication, further reforms are proposed by way of the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 (in this chapter called the 2018 Bill) which would impose new qualification and registration requirements on administrators, new provisions relating to the content, length, variation, termination and voiding of debt agreements; and introducing new offences and functions and powers of the Inspector General. Aspects of these proposed changes are referred to in this chapter. There were 13,597 debt agreements in 2016-2017, the highest number on record, an increase of 11.9% from the previous financial year. Debt agreements now account for well over a third of all personal insolvencies. In comparison, bankruptcies totalled only 16,320 in 2016-17, a fall of 5.1%. And despite bankruptcies remaining higher in number, over $163 million in dividends were paid to creditors under debt agreements in 2013-2014, compared with around $75 million paid out in bankruptcies. Creditors generally have accepted debt agreement proposals put to them. On the latest figures, of around 12,000 proposals in 2014-2015, around 9,500 – or just under 80% – were accepted, the remainder being either rejected or were not the subject of a vote by any creditor. Apart from minor definitional changes, the significant reforms introduced by the ILRA do not apply to Pt IX debt agreements. The changes comparable to the ILRA reforms in the registration and regulation of bankruptcy trustees are found in the 2018 Bill. One significant change under the ILRA is to include a debtor subject to a debt agreement as an “insolvent under administration” under Corporations Act s 9, along with those who are bankrupt and subject to Pt X agreements. That term is used in Commonwealth, the States and Territories legislation to exclude a person from some activity or role. A significant change proposed under the 2018 Bill is to double the threshold of the value of the debtor’s property, from around $113,000 to $227,000, under s 185C(4)(c). The Explanatory Memorandum4 explains that this is because of the “recent rises in Australian property prices, particularly in capital and major cities” and seeks to “ensure a greater proportion of debtors have access to the debt agreement system”. The 2018 Bill would also limit the period of time for payments under a debt agreement to three years; at present, many agreements extend beyond five years: proposed s 185H.

PROPOSING AND PROCESSING A DEBT AGREEMENT [9.15]

Putting forward a debt agreement, having it approved and then signing up to it is a straightforward process, assuming that the debtor’s information is in order and that the debtor’s financial position comes within the relevant thresholds. The debt agreement process is as follows:

4 “Explanatory Memorandum to the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018”, at [70].

358

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.20]

• A debtor prepares and files a debt agreement proposal with AFSA, with relevant consent and certification by an administrator, and the lodgement fee of $200: s 185C; • AFSA checks the debtor’s eligibility and the content of the agreement and must give the debtor information about alternatives and consequences; • AFSA may then accept the proposal for processing: s 185E; • Restrictions are then imposed on creditors: s 185F; • AFSA notifies the creditors, asking if they wish to accept the agreement: s 185EA; • The creditors may accept the agreement within the “applicable deadline” (s 185), or reject it, in which case the agreement will lapse; • The parties to a debt agreement then become the debtor and the creditors owed provable debts: s 185I; • The debtor is released from his or her provable debts upon the completion of the agreement: s 185NA; • There is a moratorium on creditor proceedings throughout: s 185K; • The administrator pays the claims according to the terms of the agreement: s 185LA; • The debt agreement may be varied if necessary: s 185M; • The debt agreement will end because it has been successfully completed, or because of some failure in the process, or because the debtor has been unable to comply with it.

[9.20] AFSA therefore receives debt agreement proposals, checks the debtor’s eligibility and insolvency, ensures that the debtor is insolvent; that the proposal clearly shows the debtor’s offer to creditors; that conditions in the proposal are able to be met within seven days of acceptance by creditors; and that the debtor has disclosed information to enable creditors to make an informed voting decision. AFSA then conducts the voting process and approves the agreement. The agreement is then administered by a RDAA. A debtor who proposes to enter a debt agreement must be insolvent. The debtor may give to the Official Receiver a written proposal for a debt agreement, plus an explanatory statement, being AFSA’s Debt Agreement Proposal and Explanatory Statement: s 185C(2)(2B). The proposal must identify the debtor’s property to be dealt with under the agreement and how the property will be applied; and must authorise a nominated person (usually the Registered Debt Agreement Administrator) to deal with the identified property in terms of the proposal: s 185C. This explanation is provided to creditors: s 185EA. Before submitting a proposal, a debtor will usually have been to see a debt agreement administrator. They must ultimately certify, among other things, that they have “reasonable grounds for believing” that the debtor will be able to discharge their obligations under the agreement and that the information in the debtor’s statement of affairs and explanatory statement is correct, including the list of creditors and the amounts owed: s 185C(2D). See AFSA Form, Certificate for Debt Agreement Administrator.

[9.20]

9 Debt Agreements

359

To avoid debtors entering agreements that might cause them undue hardship, new paragraph 185C(4)(e) under the 2018 Bill would limit the total payments under an agreement to a percentage figure based on the debtor’s income, to be prescribed: new subs 185C(4B). Also, as earlier explained, payments under a debt agreement would be limited to three years under proposed s 185H. According to the Explanatory Memorandum, this limit would allow the Attorney-General to calibrate the determined percentage to a three year payment schedule. While this percentage would not always capture an excessive payment schedule caused by a shorter timeframe, the Official Receiver could use its powers to refuse the debt agreement proposal on the basis that the agreement would cause the debtor undue hardship. The Explanatory Memorandum says that this power of the Minister under proposed new subs 185C(4B) is a key consumer-protection safeguard, which the Minister cannot delegate. At present Inspector-General Practice Direction IGPD 13 – Debt agreement administrators’ guidelines to certification requirements, sets out in detail the expectations of the Inspector-General in respect of the duty of an administrator under s 185C(2D) to certify, in effect, the viability and worth of the proposed agreement, and also the expected knowledge and experience of the administrator. For example, IGPD 13 says that the administrator will need to be capable of providing debtors with information about the range of options available to them, including, but not limited to, those under the Bankruptcy Act. In certifying a debtor’s ability to comply with a proposed agreement, the administrator must “look behind the budget supplied by the debtor” and independently assess it. In further certifying they have reasonable grounds to believe that the debtor has fully and accurately disclosed their assets and liabilities, administrators may need to examine bank and credit card statements, employment histories and payslips, and tax returns. Credit reporting records or direct contact with creditors may also be needed. The quality of this scrutiny is vital to the integrity of the debt agreement process. Certain mandatory terms must be included in any proposal for a debt agreement: s 185C(2)(d) – (j). They are: • all provable debts must rank equally; • a creditor cannot receive more that 100c in the dollar: s 185C(2)(e). This is based on s 107 which applies to bankruptcies and is designed to address problems that may arise if payments are also made to creditors outside the debt agreement; • the amount of a provable debt is to be ascertained as at the time when the acceptance of the proposal to establish the debt agreement is recorded on the NPII; • the manner in which the entitlement of secured creditors to any distributions must be calculated, essentially to the effect that their entitlement is limited to the unsecured portion of their claim. A debt agreement cannot provide for the transfer of non-monetary property to a creditor, such as shares, or a car: s 185C(2A). This is designed to ensure that creditors are not forced to take property rather than money; and that non-monetary

360

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.25]

transfers are not used to avoid the operation of provisions dealing with remuneration and the payment of the interest and the realisations charge. There cannot be joint debt agreement proposals: s 185C(2E). There may be conditional proposals, as opposed to conditional agreements: s 185C(2F). That is, a proposal may specify a condition that must be satisfied within seven days of the deadline for approval by creditors of the proposal. If a proposal is conditional then, even if creditors have purported to accept the proposal, an agreement will not come into effect if the condition is not met. For example, spouses with joint liabilities may each offer a debt agreement, each proposal saying that it is conditional upon the other’s proposal being accepted by creditors. The proposal may provide for the administrator’s remuneration (s 185C(3)) and it must be expressed as a fixed percentage of the total amounts payable by the debtor under the agreement. The administrator may take as remuneration the specified percentage of each regular payment made by the debtor: s 185C(3A).5 Proposed subs 185C(3B) would provide that a debt agreement proposal must detail the types of expenses the debt agreement administrator can recover. This is meant to ensure that both creditors and debtors have an opportunity to assess the reasonableness of an administrator’s expenses. Administrators have a duty to not reimburse themselves for expenses that are not specified: proposed s 185LA(2). The inclusion of this requirement as a duty would allow the Inspector-General, under paras 186K(3)(b) for an individual, or 186L(3)(b) for a company, to seek a written explanation from an administrator, following an apparent failure to perform their duties, with a view to possibly cancelling their registration. As under Pt X, State stamp duty is not payable on a debt agreement: s 185X.

Debtors disqualified from using a debt agreement [9.25] A debtor is disqualified from giving a proposal if they fall within s 185C(4), that is, if: • at any time during the past 10 years they were bankrupt, were a party to a debt agreement or gave a s 188 authority under Pt X: s 185C(4)(a); • their unsecured debts are greater than the threshold amount: s 185C(4)(b). This indexed amount is over $113,349.60 (at 2018); • the debtor’s divisible property is greater in value than the threshold amount: s 185C(4)(c). This indexed amount is over $113,349.60 (at 2018); or • the debtor’s after-tax income in the year beginning at the time of the proposal is likely to be more than half of the threshold amount: s 185C(4)(d). This indexed amount exceeds $85, 012.2000. The “threshold amount” is defined in s 185C(5) and the formula is similar to that used in determining the “base income threshold amount” in calculating income contributions of bankrupts: s 139K.6 “After tax income” is also defined in s 185C(5). 5 See also IGPD 3 – What constitutes an expense recoverable in a debt agreement by an administrator. 6 The threshold amount means seven times the amount that, at that time, is specified in column 3, item 2, Table B, point 1064 B1 of Pension Rate Calculator A, in the Social Security Act 1991.

[9.40]

9 Debt Agreements

361

It is the amount likely to be the taxable income of the debtor for the year, less the income tax and Medicare levy imposed on the taxable income. A debtor must also give the Official Receiver a statement of their affairs: s 185D; AFSA Form 17.

Giving of a proposal is an act of bankruptcy [9.30] The debtor must be aware that the giving of a debt agreement proposal constitutes an act of bankruptcy: s 40(1)(ha). Consequently, if the proposal is not accepted by the Official Receiver or the creditors reject it, an act of bankruptcy exists on which a creditor’s petition may be presented, within six months.

Accepting a proposal for processing: s 185E [9.35]

Section 185E sets out various preliminary matter about which the Official Receiver must be satisfied before proceeding to process the debt agreement proposal – as to timing and eligibility and information having been given. This is the same information provided to a debtor contemplating bankruptcy (reg 4.11). See [3.25] and [3.80]. The Official Receiver may accept a proposal for processing if it contains the necessary details set out in s 185C(3), the debtor is not disqualified from giving a proposal and the statement of affairs is in order: s 185E(2). The proposal cannot be more than 14 days old from the date of the debtor signing it: s 185E(2AA)). It must be administered by a RDAA or a trustee in bankruptcy, unless the person passes the basic eligibility test in s 186A.

Importantly, the Official Receiver has to make an overall assessment whether the creditors’ interests would be better served by not accepting it, in which case the Official Receiver must not do so: s 185E(3). A debtor may appeal to the Administrative Appeals Tribunal (AAT) if the Official Receiver makes that assessment and refuses to accept the proposal: s 185E(4). See, for example, Hill and Official Receiver [2007] AATA 1420; (2007) 95 ALD 498. Of 12,515 proposals given to the Official Receiver in 2014-2015, only 256 were rejected.

[9.40] If a proposal is accepted for processing, the Official Receiver must, under s 185EA(1), write to each of the known creditors, sending them the details and asking them to indicate whether the proposal should be accepted. This acceptance must be indicated by way of AFSA’s Claim and Vote form. That form be inspected by any creditor: s 185EB. The quantum of creditors’ individual claims is their value as at the time that the acceptance of the debt agreement proposal is registered on the NPII: s 185EC(4). Proposed new subs 185E(2AB) under the 2018 Bill would allow the Official Receiver to reject a proposal that would impose undue hardship to the debtor. Given the significant protections proposed, including the payment to income ratio test, the Explanatory Memorandum says that this discretion of the Official Receiver would be exercised only in exceptional circumstances. A similar discretion applies when the Official Receiver is considering whether a proposal should be varied: proposed s 185M(2).

362

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.42]

Assigned and secured debts

[9.42] If a debt has been assigned to a related creditor, that creditor can only vote for the amount of consideration actually paid for the debt: s 185EC(3). This is the same as in bankruptcy, under IPRB, s 75-110(4), and likewise balances the need to prevent manipulation of voting through the purchase of debts by parties associated with the debtor, while minimising the effect on bona fide arm’s length creditors who may assign debts for other commercial reasons. A secured creditor may only vote for the unsecured portion of their claim: s 185EC(5).

Acceptance by creditors: s 185EC [9.43]

Under s 185EC, a debt agreement is made when the proposal is accepted within the “applicable deadline”: s 185. That acceptance must be from the majority in value of the creditors who reply to the Official Receiver before the deadline saying that the proposal should be accepted: s 185EC(1). Thus, the creditors with the greatest commercial interest will determine the outcome of the proposal approval process. Creditors will generally vote according to their financial interest and the timing of payment, in particular in comparison with bankruptcy. The ATO has stated what considerations it takes into account as a creditor, including the projected returns under bankruptcy and the impact that bankruptcy would have on the debtor. It considers what is an appropriate outcome for the debtor rather than simply preferring an outcome providing the greatest financial return. The ATO may vote against a proposal, preferring bankruptcy, where a debtor’s tax compliance history is poor, or the debtor cannot demonstrate future ability to comply with their tax obligations, or a cost-benefit analysis determines bankruptcy is the more appropriate outcome.7

Once accepted by creditors, the parties to a debt agreement then become the debtor and the creditors to whom the debtor owed provable debts: s 185I. A debt agreement is deemed to be made once accepted and an unconditional agreement is recorded on the NPII: s 185H. This is aligned with the time at which the s 185F freeze ceases to have effect. The NPII should thereby always accurately record whether an agreement has come into effect. The administrator then takes on the task of administering the proposals in the agreement.

Restrictions on creditors after acceptance of proposal for processing: s 185F [9.45] After acceptance of a debt agreement proposal for processing is recorded on the NPII, a moratorium is imposed on creditors’ attempts to recover any frozen debt, including actions by a sheriff or someone acting under a garnishee. This 7 Plowes L, “What the ATO considers when voting on debt agreements” (2015) 13(2) Personal Insolvency Regulator 4, ATO.

[9.60]

9 Debt Agreements

363

moratorium continues until the applicable deadline for the acceptance of the proposal occurs, the proposal lapses or other nominated events occur: s 185F(1)(d) – (i). A “frozen debt” was discussed at [3.35] in the context of Declarations of Intention to Present a Debtor’s Petition. It is defined in s 185(1) as a debt that is both owed by a debtor proposing a debt agreement accepted by the Official Receiver and one that would have been provable in a bankruptcy where the debtor had become a bankrupt on the date when the debt agreement was recorded on the NPII. Debts arising under a maintenance agreement or order are not frozen debts. A creditor still has the right to commence or continue legal proceedings in relation to a frozen debt but may not enforce judgment. Nor is there any stay of action against the debtor under a “proceeds of crime law” (s 5): s 185F.

Lapsing of a proposal [9.50] Apart from the fact that creditors may vote to reject the debtor’s proposal for a debt agreement, the proposal will lapse according to s 185G if one of these two events occur: • the Official Receiver accepts a proposal and writes to the creditors but no replies are received before the deadline; or • the debtor dies after submitting a proposal but before a debt agreement is made.

CONSEQUENCES OF ACCEPTANCE OF A PROPOSAL [9.55]

Acceptance of a proposal constitutes an act of bankruptcy (s 40(1)(hb)) upon which a creditor can base a petition to apply for a sequestration order if the terms of the agreement are not met.

Release from debts [9.60]

Section 185NA provides for the release of the debtor from provable debts (for the purpose of Pt IX) upon the completion of the agreement. The release does not release any person other than the debtor from liability, for example under a guarantee, or under a joint liability: s 185NA(3). Nor does it release any debts that would not be released by bankruptcy. The relevant date for determining which debts are released is the time that the acceptance of the original proposal was recorded on the NPII. The release ceases to operate if the debt agreement is declared void by the court: s 185NA(2). As in bankruptcy, the right of a secured creditor to realise or otherwise deal with its security is protected: s 185XA.8

8 See IGPD 10 – Treatment of secured creditors in a Part IX debt agreement. Note that the vesting provisions in the Personal Property Securities Act 2009 whereby an unperfected security interest may vest in the grantor (debtor) on bankruptcy, thereby making the security void for non-registration, do not apply to Pts IX and X: see PPSA, s 267.

364

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.65]

Moratorium on proceedings [9.65] During the life of a debt agreement and while its details remain on the NPII, a creditor is unable to continue with proceedings for the recovery of its debt, including bankruptcy proceedings, unless the liability involved arises under a maintenance agreement or order or under a proceeds of crime law: s 185K. The creditor can of course lodge a claim in terms of their right to payment under the debt agreement. The sheriff and any potential garnishor cannot take action to enforce or recover money owing in respect of a provable debt: s 185K(3).

Distribution of property [9.70]

The debtor’s property which is subject to a debt agreement will be paid out to creditors in proportion to their provable debts. It is for the administrator to pay these claims according to the terms of the agreement. Those terms are necessarily affected by the mandatory terms listed in s 185C(2) which must be contained in any proposal for a debt agreement. These include that all provable debts in relation to an agreement rank equally; and that a creditor cannot receive more that 100 cents in the dollar. This is based on s 107 which applies to bankruptcies and is designed to address problems that may arise if payments are also made to creditors outside the debt agreement. The amount of a provable debt is to be ascertained as at the time when the acceptance for processing of the original proposal to establish the debt agreement was recorded on the NPII. Thus there is no need for administrators to recalculate the amounts owed to each creditor over the life of the agreement. A secured creditor’s entitlement to a distribution is limited to the unsecured portion of their claim.

Variation of a debt agreement [9.75]

There is some flexibility with debt agreements; like arrangements under Pt X, they can be varied. The procedure to be followed for variation is the same as that specified for acceptance of the original proposal: see ss 185M – 185MD; and AFSA’s Claim and Vote form (s 185MA), and its s 185M(1A) Proposal to Vary a Debt Agreement and Explanatory Statement. As earlier explained [9.40], the 2018 Bill would allow the Official Receiver to refuse the variation if it would impose undue hardship on the debtor: proposed s 185M(2).

ENDING A DEBT AGREEMENT [9.80]

A debt agreement will end either because it has been successfully completed, or because of some failure in the process, or because the debtor has been unable to comply with the payment obligations under the agreement. Thus an agreement will end on discharge of obligations under the agreement under s 185N, unless the agreement has been terminated earlier under ss 185P, 185Q, 185QA or 185R. Without court involvement, the agreement may be terminated as follows: • on termination by a written proposal under s 185P;

[9.90]

9 Debt Agreements

365

• by special resolution of creditors under s 185QA; • by the bankruptcy of the debtor under s 185R. The court may declare that a debt agreement is void (ss 185T, 185U) or it may terminate an agreement: s 185Q. The breach of a debt agreement under ss 185P, 185Q and 185QA is an act of bankruptcy under s 40(1)(hc). Ending a debt agreement may therefore be summarised as: Ending or termination of the agreement without court involvement, by: • Ending of a debt agreement – s 185N • Termination, by: – accepting a termination proposal – s 185P – a
designated
six-month
arrears
default
–
s
185QA – the
bankruptcy
of
the
debtor
–
s
185R • Voiding
or
terminating
an
agreement
by
court
order,
by: – a
court
declaring
a
debt
agreement
void
–
ss
185T,
185U – a
court
ordering
the
termination
of
the
agreement
–
s
185Q.

Ending or termination of the agreement without court involvement Ending of a debt agreement: s 185N

[9.85] The Act envisages that a debt agreement will, ordinarily, end when all obligations under it have been fulfilled, that is, the debtor has made all the required payments: s 185N(1). On such ending, if there is any property which was subject to the agreement but was not required to be distributed to creditors under the agreement, the debtor can retain it: s 185N(2). The debtor is entitled to obtain from the Official Receiver a certificate certifying that the obligations pursuant to the agreement have been discharged – Notice of Completion of Debt Agreement: s 185N(3) – (4). The effect of the end of the agreement is to release the debtor from all provable debts: s 185NA. The administrator has a duty (s 185LG(3)) to notify the Official Receiver of the ending of the agreement within five business days: s 185N(5). However, an agreement may terminate earlier under ss 185P, 185QA and 185R. Termination by accepting a proposal: s 185P

[9.90] Section 185P allows the debtor or a creditor who was bound by a debt agreement, to give the Official Receiver a written proposal to terminate the debt agreement. The proposal must be in the approved form and be accompanied by an explanatory statement: s 185P(1A) – (1C). See AFSA’s Proposal to Terminate a Debt Agreement and Explanatory Statement. That proposal must be processed by the Official Receiver in accord with s 185PA who must then write to the affected creditors asking their views. A decision on the proposal to terminate is determined by replies from a majority of creditors in value: s 185PC: see AFSA’s Claim and Vote form.

366

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.95]

The debt agreement is terminated when the termination proposal is accepted: s 185P(3). Termination – designated six-month arrears default: s 185QA

[9.95] Section 185QA provides that, if an administrator notifies the Official Receiver pursuant to s 185LC of a designated six-month arrears default,9 and the Official Receiver is satisfied that such a default has occurred, the Official Receiver must declare in writing that the agreement is terminated and record the termination on the NPII. Upon the termination being recorded on the NPII the agreement is terminated. Termination by the bankruptcy of the debtor: s 185R

[9.100] An agreement is terminated if the debtor becomes a bankrupt: s 185R. As that section notes, a debtor could become bankrupt if the court gives permission for the debtor to present a debtor’s petition or if the debtor becomes bankrupt as a result of the presentation of a petition against a partnership. Consequences of termination

[9.103] If an agreement is terminated under either s 185P or s 185Q, the debtor commits an act of bankruptcy: s 40(1)(hd). If an agreement is terminated under ss 185P, 185Q, 185QA or 185R then anything which was done in good faith, pursuant to the agreement and by someone without notice of the termination, is valid and cannot be avoided by a trustee in bankruptcy under ss 120 – 122: s 185S.

Ending an agreement by court order [9.105]

The following bases for ending an agreement are similar to the provisions in Pt X by which a court can end a personal insolvency agreement, as explained at [8.05]. Declaring a debt agreement void: ss 185T, 185U

[9.110] A court can order that an agreement or part of it is void on the application of a creditor or the Official Receiver if either, on the one hand, there is doubt on a specified ground that all or part of the agreement was not made according to Pt IX or contravenes the Part; or, alternatively, the statement of affairs of the debtor lodged with the proposal for the agreement was defective in that it omitted a material particular or it was incorrect in a material particular: ss 185T(1) and (2), 185U(1). In the application for the order a creditor may also apply for a sequestration order (s 185T(4)), and a court may make such an order providing that the whole of the agreement is declared void: s 185U(4). A court must not declare that an agreement is void in two situations, namely: • on the ground that it does not comply with Pt IX, where it substantially complies with that Part: s 185U(2); 9 As defined in s 185, read in conjunction with s 185LC; and see AFSA’s Notification of Six Months Arrears Default of Debt Agreement.

[9.115]

9 Debt Agreements

367

• on the ground of the deficiency of the statement of affairs where the court is not convinced that it is in the creditors’ interest that the agreement be declared void: s 185U(3). An application for an order that the agreement is void can only be made before the obligations under the agreement have been completed: s 185T(3). Given the similar wording, case law on the comparable provision in Pt X (s 222) could be relevant in cases heard under s 185T. Orders under s 185U were made in BMW Australia Finance Ltd v Geraerts [2004] FMCA 1028 in circumstances where the debtor had failed to disclose the creditor’s debt in his statement of affairs. The debtor was a real estate agent whose claim that bankruptcy would have a serious impact upon his livelihood did not stop the court from making a sequestration order; see also Turtle Productions Pty Ltd v Hawa [2011] FMCA 460. A debt agreement was declared void in DCT v Trigo-Contillo [2005] FMCA 1856 where the debtor had understated the tax debt owed – it was not an amount of $55,000 as he claimed but over $175,000. This took the agreement outside the then statutory maximum for debt agreements of $74,292 set under s 185C(4)(b) of the Act. An application under s 185T was refused in circumstances where the debtor in effect changed her mind about entering an agreement, but this was only belatedly conveyed to the Official Receiver, too late to have had the agreement cancelled under s 185ED. Section 30 of the Act was also not able to assist: Matter of Vau (aka Vaimomoana Atu, Faasavalu) [2016] FCCA 2038. If an agreement is declared void then anything that was done in good faith pursuant to the agreement by someone who had no notice of the declaration is valid and cannot be later challenged by a trustee in bankruptcy under ss 120 – 122: s 185V. Termination by court orde: s 185Q

[9.115] The court may terminate an agreement on the application of the debtor, a creditor or the Official Receiver: s 185Q(1). The court must be satisfied of one of the following (s 185Q(4)): • the debtor has failed to fulfil one of the terms of the agreement and that it is in the interest of creditors to terminate; • carrying out the terms of the agreement would cause injustice or undue delay to the creditors or the debtor; or • for any other reason there should be termination and that it is in the interest of creditors. If a creditor applies, a sequestration order can also be sought (s 185Q(2)) and the court has power to make such an order: s 185Q(5). The court may then either make a sequestration order under s 185Q, or in some cases, where there is a pending creditor’s petition that has been stayed by the existence of the debt agreement, make an order on that petition. In Fifty-First RH Nominees v Rice [2003] FMCA 213, the court terminated an agreement which had provided for repayment of an amount of $28,000 in 12

368

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.116]

consecutive months by instalments, but no amounts had been paid at all. The court said that, given the constraints on creditors imposed by a debt agreement, it was plainly in their interests that the agreement be set aside so that bankruptcy could proceed. Failure to disclose the full amount of a creditor’s debt was a reason to terminate an agreement in Allied Mills Pty Ltd v Kiriakidis [2006] FMCA 1164.

THE COURTS [9.116] Both the Federal Court and more so, the Federal Circuit Court, hear matters concerning debt agreements. The relevant provision is Part 9 of the Courts’ Bankruptcy Rules which, however, is limited to applications under ss 185Q and 185T. The courts can also be asked to assist with directions. The debtor, a creditor or the Official Receiver are each entitled to apply to the court for an order “directing the Official Receiver or another person how to exercise the Official Receiver’s powers under (Pt IX)”: s 185W. This section appears to be available to have the court intervene in the event of difficulties or disputes on the administration of a particular Pt IX agreement. It is not available to administrators. Case law shows no applications having been made under the section.

DEBT AGREEMENT PRACTICE STATEMENTS [9.118] AFSA issues practice notes and policies on a range of issues in relation to the administration of debt agreements. These are on AFSA’s webpage. They outline how AFSA exercises its powers and performs its functions. Regulatory practice statements provide direction and guidance to regulated entities, outlining AFSA’s expectations on how legislation should be interpreted. Inspector-General Practice Directions in relation to debt agreements and other forms and notices have been referred to throughout this chapter and are listed in the Table at the end of this chapter. DEBT AGREEMENT ADMINISTRATORS Registration of administrators [9.120] Division 8 of Pt IX sets out the process for a person becoming registered as an administrator. At present, someone who administers only a small number of agreements – no more than five at any one time -need not be registered.10 That option is being removed by the 2018 Bill. Section 186A provides for a “basic eligibility test” for an applicant applying to be registered. The criteria are set out in IGPS 9 – Involuntary cancellation of registration of debt agreement administrators and ineligibility process. These include that the person should not have, during the previous 10 years, been an insolvent under administration, or a party (as debtor) to a debt agreement, or 10 Section 185E(2B)(c)(ii).

[9.125]

9 Debt Agreements

369

have been convicted of an offence involving fraud or dishonesty, or have had prior registrations cancelled. Section 186A(3) sets out a similar basic eligibility test for companies. AFSA’s website sets out a list of current practising registered debt agreement administrators, totalling over 30, most of whom operate through companies. It should be noted that a trustee in bankruptcy has authority to administer debt agreements and need not be separately registered: s 185C(2). However, if an applicant for registration as a trustee has limited experience in debt agreements, the committee may decide to impose a condition on their registration to exclude or limit debt agreements.11 Application for registration as an administrator: s 186B

[9.125] The process of applying to be registered as a debt agreement administrator differs from that applying to the registration of trustees. Although certain qualifications and experience are required, the applications can be dealt with “on the papers” and no interview is required, although in practice they are usually conducted. Under the 2018 Bill an interview will be required. An application may be made by an individual or a company.12 The application fee is $2,200. If the application is to renew an existing registration, the application must be made before the expiry of the existing registration. Under s 186C the Inspector-General must approve or refuse to approve a registration application within 60 days of receiving it. Approval will be given where the applicant passes the basic eligibility test, has the ability and knowledge to satisfactorily perform the duties of a RDAA, and has the prescribed accounting or related qualifications: see reg 9.02. Otherwise, the Inspector-General must refuse to approve the application. In deciding whether to approve an application for registration, the Inspector-General must have regard to any relevant guidelines in force under s 186Q: s 186C(6). See [9.118]. An initial registration fee of $1,300 is payable, thereafter the fee is $1,700 every three years. A decision of the Inspector-General to refuse to approve an application for registration is reviewable by the AAT: s 186C(8). For such an instance, see Doherty and Inspector-General in Bankruptcy [2012] AATA 635; upheld in [2013] FCA 1122. Conditions can be imposed on registration and the decision to impose such conditions is also reviewable by the AAT: s 186C(9) – (10).13 Continued registration is of course dependent upon the eligibility criteria being maintained: for example, bankruptcy will serve to terminate a person’s registration: McGrath and InspectorGeneral in Bankruptcy [2011] AATA 27. 11 See Explanatory Memorandum to the Insolvency Law Reform Act 2016, at [2.33]. Conditions on trustees’ registration may be imposed by a committee under IPSB, s 20-20(5). 12 See AFSA Form 24A — Application by an Individual and AFSA Form 24B — Application by a Company. 13 See AFSA Form 25 – Application to Change or Remove Conditions Imposed on the Registration of a RDAA.

370

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.130]

Registration as an administrator: s 186D

[9.130] The consequences of the Inspector-General approving an application for registration are based on the system already in place for registered trustees. The Inspector-General must register the applicant as a RDAA on the NPII and a certificate of registration may be issued to the applicant: s 186D. Proposed s 186HA under the 2018 Bill would require debt agreement administrators to maintain adequate and appropriate professional indemnity and fidelity insurance. This is comparable with the requirement for bankruptcy trustees with the same high penalty – up to 1000 penalty units – for intentional or reckless default. Initial registration lasts for three years, beginning when the person’s details are entered on the NPII. Renewal of registration remains in force for three years beginning immediately after the administrator’s existing renewal expires: s 186E. An on-gong registration fee of $1,700 is payable every three years. Under s 186F, the Inspector-General can impose specified conditions on a person’s registration. These may be imposed as a result of a review of the administrator’s practice by AFSA. This may be as to the need for further training in a particular area in which the administrator’s conduct is deficient, a bar on administering new debt agreements whilst remedial action is being taken to address any deficiencies, or providing regular information to the Inspector-General about the progress of debt agreements.14 In relation to a company, s 186G provides that it must be a condition of registration as a RDAA that each individual who takes overall responsibility for the company’s debt agreement activities is either a RDAA or a registered trustee in respect of whom there is no declaration of ineligibility in force. Section 186H allows the administrator to apply to the Inspector-General for the conditions to be changed or removed, with a right of review to the Administrative Appeals Tribunal: s 186H(6). Section 186J allows a RDAA to request that the Inspector-General accept the surrender of their registration. This may occur, for example, where the administrator wishes to retire or sell their business. The person ceases to be registered as a RDAA only when the Inspector-General accepts the request. A list of RDAA’s, both corporate and individual, is on the AFSA website. Trustees in bankruptcy can also conduct the work of administrators without being separately registered. Cancellation of an individual’s registration as an administrator: s 186K

[9.135] Section 186K sets out when and how an individual’s registration as an administrator can be cancelled. The Inspector-General must cancel the registration if the person no longer passes the basic eligibility test and other similar grounds set out in s 186K(3), including the proposed insurance requirements, and a “fit and 14 See the “Explanatory Memorandum to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007”.

[9.145]

9 Debt Agreements

371

proper” text. The Inspector-General can ask the administrator to give a written explanation of why they should continue to be registered. The process is similar to that applying to registered trustees. Section 186K(7) provides that, in deciding whether or not to cancel an individual’s registration, the Inspector-General may have regard to any guidelines in force under s 186Q.15 Under s 186K(8), a decision to cancel an individual’s registration as a RDAA is reviewable by the AAT. Similar arrangements apply under s 186L in respect of the cancellation of a company’s registration as a RDAA, including AAT review. Inspector-General may declare a person ineligible to act as an administrator: s 186M

[9.140] The Inspector-General can declare that an administrator who is not registered and is not a registered trustee is ineligible to administer debt agreements. This may occur in relation to an administrator who is not required to be registered because he or she is administering not more than five debt agreements. The process to be followed in these cases mirrors that which applies in relation to cancellation of a registered administrator’s registration. A person (being an individual or a company) must return their certificate of registration to the Inspector-General where they have surrendered their registration or their registration is cancelled. Failure to return the certificate is an offence: s 186N. Given the proposed change in the law under the 2018 Bill, this section would be repealed.

Duties of administrators: Div 3A [9.145] Division 3A of Pt IX defines the general duties of administrators (s 185LA); and specific duties in respect of notifying creditors of three-month arrears default by the debtor (s 185LB),16 notifying the Official Receiver of a designated six-month arrears default by the debtor (s 185LC), the banking of debt agreement funds (s 185LD) and the keeping and transfer of records: ss 185LE and 185LF. The division also clarifies that certain other duties are considered to be duties of an administrator in relation to a debt agreement: s 185LG. Sections 185ZCA and 185ZCB provide that a party adversely affected by misconduct or a breach of duty of an administrator can apply to the courts for a remedy. These are closely based on former ss 176 and 179 respectively, see now IPSB, Div 90. Section 185LA provides that the duties of an administrator of a debt agreement include dealing with property in accordance with the agreement and providing information about the administration in response to any reasonable request. Those duties to provide information existed in bankruptcy under former s 19(1)(d): see now IPSB, Div 70, Subdiv D. 15 See Guidelines Relating to the Registration and Cancellation of a Registered Debt Agreement Administrator and Ineligibility of an Unregistered Debt Agreement Administrator. See also IGPS 9 – Involuntary cancellation of registration of administrators and ineligibility process. 16 See IGPD 17 – Debt Agreement Administrators – Guidelines relating to administrator’s duty to notify creditors of 3 month arrears default.

372

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.148]

Action required when debtor defaults

[9.148] There are two levels of action required if the debtor defaults under the debt agreement, usually by not paying required instalments: i) the administrator must notify creditors of the debtor’s “three-month arrears default”: s 185LB. This is a minimum statutory notification requirement and does not prevent administrators from keeping creditors informed more regularly.17 ii) the administrator must notify the Official Receiver of a designated six-month arrears default by the debtor (s 185LC), within 10 business days. Such a default will occur if a debtor has made no payments for a period of six months or has failed to complete the agreement within six months of the time specified in the agreement for its completion. Creditors would also need to be informed. Administrators must give the Inspector-General an annual estate return similar to that required by trustees: s 185LEA. The return is lodged through AER Online: see the example RDAA Annual Estate Return spreadsheet on AFSA’s website; see also Inspector-General Practice Statement 7 IGPS 7 – Annual estate returns (AERs). An administrator must pay all debt agreement funds into a single interest-bearing account: s 185LD. As in bankruptcy, the administrator is personally entitled to any interest on the account but that interest is then payable to the Commonwealth under s 5(1) of the Bankruptcy (Estate Charges) Act 1997 (Cth) at the time the annual estate return is lodged under s 185LEA. The administrator must keep sufficient records as are necessary to give a full and correct account of the administration of each debt agreement: s 185LE. The Inspector-General has the power to access the administrator’s records and compel the administrator to answer an inquiry in relation to an agreement, in order to facilitate the Inspector-General’s regulatory functions, including under s 12 of the Act. Section 185LF imposes a duty (see s 185LG(3)) on an outgoing administrator to provide an incoming administrator with an account of the receipts and payments in each administration. This section is modelled on s 164 which applies to trustees in bankruptcy. As to the conduct of administrators, their duties include any duties that do not relate to a specific agreement: s 185LG(1). This seeks to ensure that “breaches of such duties attract the consequences of breaching the duties of an administrator in relation to a debt agreement, such as possible deregistration and the making of orders pursuant to s 185ZCA”.18 Under s 185LG(2), an administrator is explicitly required to ensure that any s 185C(2D) certificate they sign is correct and that this is also considered to be a duty of an administrator in relation to a debt agreement, notwithstanding that an 17 See the “Explanatory Memorandum to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 (Cth)”. 18 See the Explanatory Memorandum to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 (Cth).

[9.155]

9 Debt Agreements

373

agreement has not yet been entered into and may never be successfully entered into: see Doherty and Inspector-General in Bankruptcy [2012] AATA 635; upheld on appeal [2013] FCA 1122. As earlier explained, the changes made to the registration and regulation of bankruptcy trustees under the ILRA do not affect debt agreement administrators. Administrators must give the Inspector-General an annual estate return similar to that required by trustees: s 185LEA. Failure to do so is an offence. The return is now lodged through AER Online: see the sample RDAA Annual Estate Return spreadsheet on AFSA’s website.

Powers of the Inspector-General to regulate administrators [9.150] In early 2018, there were 37 registered debt agreement administrators, compared with around 210 registered trustees. From July 2011 to June 2016, AFSA received an average of seven applications annually from people and companies wishing to be registered as debt agreement administrators. To assist the Inspector-General, powers are given to regulate debt agreements and administrators.19 Sections 186LA – 186LE assist the Inspector-General to determine whether debt agreement funds have been properly dealt with and, if necessary, to safeguard any funds held at a financial institution pending the outcome of any process to determine whether to declare ineligible or deregister an administrator. Section 186LA provides the Inspector-General with the power to direct a bank or other financial institution at which debt agreement moneys are held to provide relevant information. The Inspector-General must first issue a “show cause” notice to the administrator pursuant to ss 186K or 186ML, or, in the case of a trustee, under IPSB, s 40-40(1)(m). If the information obtained is of concern, the Inspector-General can direct the bank to freeze an account in which debt agreement moneys are held pending investigations into the administrator’s conduct: section 186LB. The freeze may last for up to 42 days but may be extended by court order. The freeze does not prevent deposits into the account or withdrawals with the consent of the Inspector-General. Such consent may be conditional. A refusal by the Inspector-General to give consent is reviewable by the AAT. Section 186LD provides for the judicial enforcement of freezing notices. The court may revoke a freezing notice upon the basis that the Inspector-General lacked authority to issue the notice: s 186LC. None of these provisions appear to have been used by the Inspector-General. Advertising and promotion

[9.155]

However, the Inspector-General does monitor the conduct of administrators and gives warning of inappropriate practices, in particular, in respect of the promotion and marketing of debt agreements to debtors: see Inspector-General Practice Guideline 1 IGPG 1 –Guidelines relating to advertising and 19 See IGPS 11 – Monitoring and inspection of bankruptcy trustees & debt agreement administrators.

374

Keay’s Insolvency: Personal and Corporate Law and Practice

[9.160]

marketing of debt agreements. This is a significant issue given the vulnerability of many consumer debtors in financial difficulties. Concern has been expressed by the Inspector-General at “lead generating firms” who offered to sell to administrators lists of prospective debtors who have been “cold called” by the firms to see whether they are interested in entering a debt agreement or other form of insolvency. AFSA has directed administrators to cease any engagements with such firms, based on IGPG 1.20

The Personal Insolvency Professionals Association [9.160] The Personal Insolvency Professionals Association (PIPA) is the professional body which represents RDAAs. It is comparable to ARITA whose members comprise trustees and liquidators. PIPA offers guidance and assistance to its members to assist with their compliance with the legal and practice requirements, including the guidance issued by AFSA. It seeks to promote best practice of registered RDAAs through its Code of Professional Practice and to educate consumers generally on the benefits and advantages of proposing a debt agreement. See http://www.pipa.net.au. CONCLUSION [9.165] Dividends to creditors through debt agreements have continued to grow in particular in comparison with bankruptcies and Pt X agreements. Various reviews and other research demonstrate the fact that debt agreements can be useful ways of dealing with personal insolvency, both for the debtors and their creditors. The proposed increase in their asset thresholds under the 2018 Bill would make them more available but how that change would interact with the proposed one year period of bankruptcy would need to be monitored and potentially adjusted. At the same time, the higher level of regulation the 2018 Bill would appear to be necessary. As one commentator has said “what was intended as an informal and cheaper way to deal with essentially consumer debtors, has burgeoned into a significant sector of the consumer debt management industry”, needing to be regulated not only by AFSA, but also through thenational consumer protection laws regulated by ASIC.21 Since then, an evaluation of the debt agreement framework has recommended that all debt agreement administrators be required to join an ASIC-approved External Dispute Resolution (EDR) scheme and that they establish clear and consistent dispute resolution processes.22 This raises the potential for the new Australian 20 AFSA’s 15(4) 2017 Personal Insolvency Regulator 4. 21 See Wyburn, “Debt Agreements under Australian Bankruptcy Law: A Successful Experiment?” (2012) 20 Insolv LJ 158. See also Chen, O’Brien and Ramsay, “An Evaluation of Debt Agreements in Australia” (2018) 44(1) Monash University Law Review (forthcoming). 22 See Chen, O’Brien and Ramsay, “An Evaluation of Debt Agreements in Australia” (2018) 44(1) Monash University Law Review (forthcoming).

[9.165]

9 Debt Agreements

375

Financial Complaints Authority23 to be given a role in the regulation of debt agreements and more broadly, debt management firms.

Bankruptcy Act Bankruptcy Regulations AFSA

Courts’ Bankruptcy Rules

Chapter 9 – Debt Agreements Part IX – Debt Agreements – ss 185 – 186Q Part 9 – Debt Agreements – regs 9.01 – 9.02 IGPG 1– Guidelines relating to advertising and marketing of debt agreements IGPD 2 – Collection of realisations and interest charges IGPD 3 – What constitutes an expense recoverable in a debt agreement by an administrator IGPD 10 – Treatment of secured creditors in a Part IX debt agreement IGPD 13 – RDAAs’ guidelines to certification requirements IGPD 15 – RDAAs’ guidelines relating to keeping proper accounts IGPD 16 – Guidelines relating to administrators’ duty to notify the Official Receiver of 6 month arrears default IGPD 17 – Guidelines relating to administrators’ duty to notify creditors of 3 month arrears default IGPD 20 – Guidelines for the payment of monies to the Commonwealth pursuant to section 254 of the Bankruptcy Act 1966 IGPD 22 – Effective practitioner communication IGPS 2 – Regulation of bankruptcy trustees and debt agreement administrators in Australia IGPS 4 – Guidelines and processes for registration of debt agreement administrators IGPS 7 – Annual estate returns (AERs) IGPS 9 – Involuntary cancellation of registration of debt agreement administrators and ineligibility process IGPS 10 – Complaint handling process for complaints against bankruptcy trustees and debt agreement administrators IGPS 11 – Monitoring and inspection of bankruptcy trustees and debt agreement administrators Part 9 – Debt Agreements – rr 9.01 – 9.05

Schedule 1 – Forms

23 Review of the Financial System External Dispute Resolution and Complaints Framework (April 2017), recommendation 10.

PartIV:CorporateInsolvency– Liquidation Chapter10:IntroductiontoLiquidationandItsAdministration.....................  Chapter11:VoluntaryandCompulsoryWindingUp........................................  Chapter12:ProvisionalLiquidation...................................................................... Chapter13:EffectsofWindingUp........................................................................ Chapter14:AssetsAvailabletotheLiquidator.................................................... Chapter15:AdministrationoftheWindingUp................................................. Chapter 16: Criminal Offences and Civil Actions Against Company Directors............................................................................................................... Chapter 17: Termination of the Winding Up: Deregistration and Reinstatement...................................................................................................

     

In Parts II and III, having completed an examination of the insolvency of individuals, we now examine the insolvency of companies. We explain and describe the formal arrangements of liquidation of a company, and then cover the insolvency arrangements that fall outside formal liquidation receiverships, schemes of arrangement and the administrations under Pt 5.3A of the Corporations Act 2001 (Cth). Thus, the same structure is followed as in Parts II and III, liquidation equating with bankruptcy, and Pt X and Pt IX agreements equating with the non-liquidation arrangements just described.

10

Introduction to Liquidation and Its Administration [10.05] INTRODUCTION .............................................................................................................. 381

[10.05] An overview of this chapter ........................................................................... 381 [10.10] Corporate insolvency law ................................................................................ 382 [10.15] The process of winding up – preliminary issues ........................................ 383 [10.20] Solvent winding up ..................................................................................................... 383 [10.25] Other corporations ....................................................................................................... 384 [10.30] ASIC’s power to order winding up .......................................................................... 385

[10.35] Purposes of liquidation .................................................................................... 386 [10.40] Initial comparisons with bankruptcy ............................................................ 387 [10.45] OVERVIEW OF AN INSOLVENT LIQUIDATION ..................................................... 387

[10.50] Why liquidation? .............................................................................................. 389 [10.55] Creditors’ voluntary winding up: Pt 5.5 ...................................................... 390 [10.60] Restrictions on voluntary winding up: ss 490, 440A ................................. 391 [10.65] Compulsory winding up: Pts 5.4 – 5.4B ....................................................... 391 [10.70] Section 461 ..................................................................................................................... 391 [10.75] Section 459A .................................................................................................................. 392 [10.80] Section 459B .................................................................................................................. 392 [10.85] Numbers and trends .................................................................................................... 393

[10.90] Day of commencement and relation-back day ............................................ 393 [10.95] Compulsory winding up ............................................................................................ 394 [10.100] Voluntary winding up ............................................................................................... 394 [10.115] ADMINISTRATION OF LIQUIDATIONS .................................................................. 395

[10.120] Australian Securities and Investments Commission (ASIC) ................... 395 [10.125] Public database, forms etc ........................................................................................ 397 [10.130] Regulatory Guides ..................................................................................................... 397

[10.135] Liquidators ....................................................................................................... 398 [10.140] The process of registration of liquidators .................................................. 398 [10.145] Application to become a liquidator ........................................................................ 398 [10.150] Qualifications and experience etc ........................................................................... 398 [10.155] The committee ............................................................................................................ 399 [10.160] On-going obligations ................................................................................................. 399 [10.165] Other requests ............................................................................................................. 400

380

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.170] Renewal of registration ............................................................................................. 400 [10.175] Register of Liquidators .............................................................................................. 400 [10.180] Insurance ...................................................................................................................... 400 [10.185] Objects .......................................................................................................................... 400

[10.190] The courts ......................................................................................................... 400 [10.195] THE LIQUIDATOR ......................................................................................................... 402

[10.195] Appointment .................................................................................................... 402 [10.200] Statutory restrictions upon appointments .................................................. 402 [10.205] Classifying the liquidator .............................................................................. 403 [10.210] Independence ................................................................................................... 405 [10.215] Liquidators and their lawyers ................................................................................. 407 [10.220] Group companies ....................................................................................................... 408 [10.225] Special purpose liquidators ...................................................................................... 408 [10.230] Declarations of relevant relationships .................................................................... 408

[10.235] Duties of the liquidator ................................................................................. 409 [10.240] Fiduciary duties .......................................................................................................... 409 [10.245] Duties of care and skill ............................................................................................. 410 [10.250] Duty to exercise discretion ....................................................................................... 411 [10.255] Statutory duties .......................................................................................................... 411 [10.260] Specific duties ............................................................................................................. 411

[10.305] Powers of the liquidator ................................................................................ 415 [10.310] Compulsory windings up ......................................................................................... 415

[10.350] Voluntary liquidators ..................................................................................... 421 [10.355] LIQUIDATORS – THEIR REGULATION AND REMOVAL .................................... 422

[10.355] Supervision of the liquidator ........................................................................ 422 [10.360] Termination of registration ....................................................................................... 422 [10.365] Suspending or cancelling registration .................................................................... 422 [10.370] Show-cause notice ...................................................................................................... 423 [10.375] The discipline committee .......................................................................................... 423 [10.380] Exchange of confidential conduct information between ASIC and the industry bodies ........................................................................................................................... 424 [10.385] Register of Liquidators .............................................................................................. 424

[10.390] Resignation and replacement of a liquidator ............................................ 425 [10.395] Creditors’ rights to replace a liquidator: s 90-35 .................................................. 425

[10.400] Court oversight of a liquidator .................................................................... 426 [10.405] The court’s orders in relation to a registered liquidator: s 45-1 ........................ 426 [10.410] Review of the external administration of a company: Div 90 ......................... 427 [10.440] Challenges to liquidator’s decisions ....................................................................... 428 [10.442] Appointment of a reviewing liquidator ................................................................. 429

[10.445] Removal of liquidators .................................................................................. 430

[10.05]

10 Introduction to Liquidation and Its Administration

381

[10.450] Remuneration of the liquidator .................................................................... 431 [10.455] Current issues in liquidator’s remuneration ......................................................... 432 [10.465] Bases of remuneration ............................................................................................... 436 [10.470] Legal practitioners ..................................................................................................... 436 [10.475] CONCLUSION ................................................................................................................. 437

INTRODUCTION An overview of this chapter [10.05] This chapter broadly mirrors Chapter 2, the introduction to bankruptcy. The chapter provides an overview of the structure and context in which the winding up or liquidation of companies operate. The regulator, the liquidator and the creditors are explained, as well as the detail of how liquidators become registered and are regulated, and their significant powers and duties. The need for their independence is particularly emphasised. This overview is necessary in order to then understand the following chapters, which progress through the proceedings leading to a winding up, and the law and procedure in administering a winding up through to its conclusion, being the deregistration of the company. The structure of the new law in corporate insolvency mirrors that in personal insolvency. It is this: • Corporations Act 2001 (Cth) • Corporations Act 2001 Sch 2, being the Insolvency Practice Schedule (Corporations) 2016 • Insolvency Practice Rules (Corporations) 2016 • Corporations Regulations 2001 (Cth). As we explained in Chapter 2, we simplify citations by referring to, for example, s 180 of the Corporations Act; the style IPSC, s 90-20 refers to a provision in Sch 2, Insolvency Practice Schedule (Corporations); and a section in the Insolvency Practice Rules is referred to as IPRC, s 50-30. The new law uses the term “external administration” (IPSC, s 5-15) and “external administrator” (IPSC, s 5-20), although in context we refer to liquidator or (voluntary) administrator. The word “liquidation” is used interchangeably with “winding up”. The objects of new Sch 2 are expressed to be to ensure liquidators have an appropriate level of expertise, behave ethically and maintain insurance. Further objects are to regulate external administrations consistently and to allow creditors greater control of external administrations: IPSC, s 1-1. This chapter examines the processes of liquidation only by way of general introduction, with the detail in following chapters. We explain the roles and duties of those involved in company liquidation – the company members and directors, the creditors, the courts and the lawyers, and the regulator – the Australian Securities and Investments Commission (ASIC). The duties and powers of the liquidator, their initial registration and their regulation by ASIC and the courts, are all explained in detail.

382

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.10]

Although companies are inanimate and have perpetual succession, they can ultimately be “put to death”, so that the company’s existence ceases. The death of a company comes when it is deregistered. Liquidation is the process that prepares a company for deregistration. Liquidation is a legislative creation regulated by the Corporations Act. The parts of that Act which provide for liquidation originate from bankruptcy laws with the necessary adaptations to allow for the corporate form. As we explained in Chapter 1, the first statute that regulated the winding up of companies was the Winding Up Act 1844 (UK) (7 & 8 Vict c111) in England. The provisions of the Corporations Act that deal with liquidation can be traced to this English legislation.

Corporate insolvency law [10.10]

Chapter 5 of the Corporations Act 2001 (Cth) (now referred to as “the Act” or the Corporations Act) prescribes the rules and procedures governing external administrations of companies. The whole of the Act itself is relevant in an insolvency given that the company in external administration is established and governed by its provisions. Schedule 2 of the Corporations Act – IPSC, supported by the Insolvency Practice Rules (Corporations) (IPRC, or Rules), focus solely on external administration. Other significant legislation relevant to external administration is the ASIC Act, the Personal Property Securities Act 2009 (Cth) (PPSA) and the Cross-Border Insolvency Act 2008 (Cth). Section 1364 of the Corporations Act permits the making of regulations. The Corporations Regulations 2001 (Cth) (hereafter referred to as “the regulations”) prescribe the more detailed procedures to be followed in the administration of external administrations. These supplement the Act, the Schedule and the Rules. Prescribed forms for providing information and for lodging with ASIC are found either in the regulations, or on ASIC’s website, being forms approved by ASIC itself: s 350. Throughout this text they are referred to as “Form [number]”. Many of the regulations have been repealed as a consequence of the ILRA – in particular , regs 5.6.01 to 5.6.10 and 5.6.12 to 5.6.36 – and their content transferred to the Schedule or the Rules. Other important laws relate to ASIC fees and its funding, under the Corporations (Fees) Act 2001 and the new ASIC Supervisory Cost Recovery Levy Act 2017. While the vast majority of companies in Australia are registered under the Corporations Act, certain types of companies are registered and administered under particular statutes, which also provide for their external administration. For example, Aboriginal and Torres Strait Islander corporations are registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), and banks, under the Banking Act 1959 (Cth).

[10.20]

10 Introduction to Liquidation and Its Administration

383

The process of winding up – preliminary issues [10.15] We now explain some preliminary issues in corporate insolvency – solvent winding up, ASIC’s power to wind up, the purposes of liquidation, and the nature of the winding up on non-Corporations Act entities. Solvent winding up

[10.20] It should initially be explained that the processes of liquidation do not only apply to insolvent companies. They can be applied by way of the solvent company going through the process of a voluntary liquidation under Pt 5.5 of the Corporations Act. Thus, while the most prevalent reason for liquidation is insolvency (and this chapter focuses on liquidations resulting from insolvency), there are other reasons why companies go into liquidation. Such liquidations are often undertaken as part of a reconstruction of a group of companies in which non-operating subsidiaries, or companies that are surplus to a group’s requirements, can be wound up and the assets distributed to the members. As the company is solvent and the creditors will (it is expected) be paid in full, the liquidation does not need to involve the creditors; it is under the supervision of the members – hence the name of this type of winding up. In other cases the controllers of a company wish to sell its business but the buyer may only want the assets and not the company form. The company’s assets will be transferred and, unless the controllers have a use for the corporate shell, they may wish to deregister it. Often such a corporate shell is sold to someone who wishes to incorporate a company. It is usually less expensive to purchase a dormant company than to incorporate a new company. A member’s meeting will usually require 21 days prior notice (s 249H), although it is 28 days for a public listed company (s 249HA). However, short notice for non-listed companies may be obtained if members with 95% of the votes that may be cast at the meeting agree beforehand (s 249H(2)). Inadequate notice may be rectified by applying for an order under s 1322. As we explain, that shortened period of notice is often used when members meet to put the company into an insolvent creditors voluntary liquidation: see [10.55]. A solvent winding up can also occur in hostile circumstances where there is a dispute and a shareholder considers that the affairs of the company are being conducted contrary to the interests of the members. The shareholder can apply to the court under s 232 of the Act for the court to order the winding up of the company under s 233.1 Importantly, unlike the liquidation of an insolvent company, a solvent winding up of a proprietary company does not need to be administered by a registered liquidator; a company officer, for example, may conduct the winding up: s 532(4). Nevertheless, in cases of hostility or internal dysfunction, the court will usually appoint a liquidator. 1 See further Harris, Company Law: Theories, Principles and Applications (2nd ed, LexisNexis Butterworths, 2015) Ch 13; Boros, Minority Shareholders’ Remedies (Oxford University Press, 1996).

384

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.25]

Other corporations

[10.25] The vast majority of companies in Australia are registered under the Corporations Act. Certain types of companies are registered and administered under particular statutes, which also provide for their external administration. We have explained that Aboriginal and Torres Strait Islander corporations are registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth). That Act has particular provisions that apply in relation to those corporations’ insolvency or other instability. The regulator, the Registrar of Indigenous Corporations, may, for example, appoint a special administrator to an Aboriginal corporation under s 490.1 in circumstances including that the corporation has been trading at a loss for at least six months in the last 12, or where it is in the interests of the corporation’s creditors, or in the public interest: s 487.5. A prior “show cause” process applies.2 “circumstances that are vital to the continued viability of the corporation”. The Registrar or the special administrator may apply for an order that the corporation be wound up: s 526.15. A winding up order terminates the special administration: s 505.1. The winding up is then carried out under the provisions of Ch 5 of the Corporations Act: s 526.35. Given their economic significance, and their prudential style of regulation, banks and insurers have their own insolvency provisions. Life insurance companies are regulated by the Life Insurance Act 1995 (Cth) which contains provisions for both winding up and judicial management in the event of insolvency; a comparable regime exists under the Insurance Act 1973 (Cth).3 Similarly, banks (and other authorised deposit-taking institutions (ADIs)) are separately regulated under the Banking Act 1959 (Cth) by the Australian Prudential Regulation Authority (APRA). Given the economic significance of banks, APRA has strong powers to direct and “pre-position” a bank in any restructuring of its operations, to appoint a statutory manager and ultimately to apply to the Federal Court for its winding up. Particular powers are given to the liquidator, including in relation to payments to depositors under the financial claims scheme. The winding up is then largely administered in accordance with the Corporations Act: Banking Act 1959 (Cth), s 14F.4 The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (Cth) has increased and harmonised APRA’s powers across banks, insurers and life insurers, in relation to APRA directions powers and its authority to apply to the court for the external administration of these regulated entities. The national economic significance of banks and insurers also means that they are excluded from the operation of the Cross-Border Insolvency Act 2008 (Cth), so that foreign liquidators are unable to seek orders against them, and local policy holders and depositors have particular ring-fencing protection. 2 See Onus v Registrar of Aboriginal and Torres Strait Islander Corporations [2017] FCA 1498. 3 Relevant provisions were previously contained in Ch 5 of the Corporations Act. For a decision under that regime, see Magney v Greatlands General Insurance Co Ltd (1998) 28 ACSR 249 where the then Insurance and Superannuation Commissioner failed in an application to wind up an insurer. 4 See Mason and Murray, “Australia” in Haentjens & Wessels (eds), Research Handbook on Crisis Management in the Banking Sector, (Edward Elgar Publishing, 2015) Ch 20.

[10.30]

10 Introduction to Liquidation and Its Administration

385

There are also State-based insolvency regimes, largely in the not-for-profit sector, such as co-operatives and associations: see for example, the Associations Incorporation Act 2009 (NSW); the Cooperatives Act 1997 (Qld). There is being introduced a national co-operatives law to replace the separate co-operatives legislation of the States and Territories. For example, the Co-operatives (Adoption of National Law) Act 2012 (NSW) applies the Co-operatives National Law, which is contained as an appendix to that Act. The Law has extensive external administration provisions but otherwise largely adopts the Corporations Act: Co-operatives (Adoption of National Law) Act 2012 (NSW), Appendix, s 444. A person does not necessarily have to be a registered liquidator for the purposes of the Act.5 These State based arrangements are an aspect of Australia’s constitutional system. They compare with national Commonwealth laws based either on direct Commonwealth constitutional power, or on referral of powers from the States, the Corporations Act and the PPSA being examples. In more recent times, managed investment schemes (MIS) have operated that enable individual investors to pool their moneys to secure an interest in a scheme operating a particular commercial enterprise. Chapter 5C of the Corporations Act – Managed Investments Schemes – governs their registration and operation. A “responsible entity”, registered by ASIC, operates the scheme: Corporations Act, s 601FB. Schemes have offered a wide variety of investment arrangements that include cash management and property trusts as well as agricultural schemes in horticulture, aquaculture and commercial horse breeding. As an indication of the nature and size of such schemes, Great Southern, before its liquidation in 2009, was Australia’s leading forestry and agricultural fund manager, raising $1.8 billion in recent years and managing around 43,000 investors through 45 managed investment schemes.6 Apart from Great Southern, a number of agricultural schemes have failed in recent times, prompting law reform and parliamentary inquiries into the reasons for the failure and the adequacy of the insolvency laws.7 Reforms are proposed to replace these by way of creating a corporate collective investment vehicle regime.8 This book does not deal with these particular types of entities or their insolvency except in passing.9 ASIC’s power to order winding up

[10.30] It is a particular and relatively new feature of corporate insolvency that ASIC has the power to order the winding up of companies, under Pt 5.4C of the 5 For the progress of adopting the National Co-operatives Law in other States and Territories, see National Co-operatives Law Updates, NSW Fair Trading. 6 For a review of the problems of managed investment schemes see “Forestry Managed Investment Schemes”, Senate Economic References Committee Report, February 2016. 7 See CAMAC, Managed Investment Schemes Report (July 2017). 8 See Treasury’s exposure draft of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2017, released on 21 August 2017. 9 See further D’Angelo, Commercial Trusts (LexisNexis, 2014); Maiden (ed), Insolvent Investments (LexisNexis, 2015).

386

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.35]

Corporations Act, without needing a court order. It is not uncommon for insolvent companies to languish as “zombie companies” without active members or directors because no party wishes to spend funds to apply for a winding up order. This is partly a product of Australia’s lack of a government liquidator which might otherwise perform this role. Apart from other problems this causes, employees cannot claim their unpaid entitlements under the Fair Entitlements Guarantee Act 2012 (Cth) (the FEG Act) until their employer company is in liquidation. There is also the public benefit of having a liquidator who can pursue investigations and possibly take action for voidable transactions and insolvent trading, or phoenix company misconduct. The lack of funds available in these types of companies result in such action being uncommon, at least without government funding. ASIC has a panel of liquidators to take these appointments at a set fee rate. ASIC’s RG 242 otherwise explains how it exercises this power. However, the restrictions and delay in ASIC’s processes under RG 242 have been the subject of adverse comment and the potential for this regime to deal with any significant number of abandoned companies has not yet been realised.10

Purposes of liquidation [10.35] The purposes of the liquidation of insolvent companies essentially mirror the purposes of bankruptcy and are a subset of the broader purpose of insolvency described in Chapter 1. First, liquidation provides a collective procedure that allows for an equitable and fair distribution of the assets of the debtor company amongst its creditors. This is consistent with personal insolvency and requires no further explanation at this stage. Secondly, liquidation aims to provide for the winding up of a company that is insolvent. In such circumstances, it is considered necessary for the good of the community to put an end to the company’s trading, and further creditor losses, and wind up its affairs in an orderly way. Thirdly, liquidation is designed to allow for an investigation of the company’s affairs, with particular emphasis on the circumstances that precipitated the winding up. This consistent with personal insolvency save that the investigations and recoveries can be the more substantial and complex. The limited liability company itself has been a major vehicle for economic progress, allowing the management of risk and the collective efforts of individuals to be harnessed to a joint and more significant economic force. Given the risk involved, the failure of companies is inevitable and the need for their orderly disposition is necessary. Given the privilege of limited liability, there needs to be some investigation of their failure in order to determine if their corporate form has been abused, to the disadvantage of creditors. Insolvent trading, the continued incurring 10 Anderson, The Protection of Employee Entitlements in Insolvency: An Australian Perspective (Melbourne University Press, 2014). It may be more useful for ASIC to appoint a liquidator where employees are unable to claim under the Fair Entitlements Guarantee scheme to claim unpaid statutory entitlements until the company is placed into liquidation.

[10.45]

10 Introduction to Liquidation and Its Administration

387

of debts to creditors for services supplied or goods delivered when the company has no capacity to pay them, is one such abuse. Other purposes of external administration include the “fresh start” that is provided to business operators, by way of directors and members putting aside a failed company and starting a new venture, hopefully more successfully. The voluntary administration process under Pt 5.3A of the Corporations Act can allow the existing company and its business to be revived and continue, even if under new control. That concept exists but has a different focus and relevance in personal insolvency. An important economic purpose of corporate insolvency is to ensure assets of a failing business are put to better use with the least transaction costs, either by way of restructuring the entity or releasing its assets with the least loss of value and purpose. An insolvency regime supports lending and entrepreneurial business conduct. As in bankruptcy, there are also strong rule of law purposes involved, whereby the otherwise unrestrained actions of creditors and others might cause social and business friction, and be counterproductive to a more financial constructive outcome. The sense of justice provided to creditors, that their losses are not ignored by the law, is also important.

Initial comparisons with bankruptcy [10.40] As already explained, many of the liquidation provisions of the Corporations Act are similar to those contained in the Bankruptcy Act and many of the procedures that have developed in bankruptcy have been imported wholly or substantially into liquidation law. Some adaptations have been made because of the nature of a company. Each has their own particular issues. Bankruptcy law deals with the bankrupt’s discharge, protected property, family law transactions and income contributions; liquidations tend to involve the usual aspects of business – the sale of plant and equipment, PPSA and tax issues, the claims of employees and the prior commercial dealings and conduct of the directors of the company. As to the core features of the laws of personal and corporate insolvency, there has been an increasing divergence between the two set of laws, partly due to their administration by separate Commonwealth departments, and their ministers – Treasury and Attorney-General’s. The ILRA has sought to change that, with the introduction of common processes. Nevertheless, there remain unnecessary differences, often because of the inherent differences of the two regulators, ASIC and AFSA, whose separate regulatory roles in insolvency have been maintained.11

OVERVIEW OF AN INSOLVENT LIQUIDATION [10.45]

If a company is insolvent it may be wound up in one of two ways:

11 See the Productivity Commission’s Annual Review of Regulatory Burdens on Business: Business and Consumer Services, Research Report, 12 October 2010, at [4.5]; see also the Senate Economics Committee’s The Regulation, Registration and Remuneration of Insolvency Practitioners in Australia: The Case for a New Framework (September 2010) recommendation 2 at [11.2]; Keay, “The Unity of Insolvency Legislation: Time for a Re-think?” (1999) 7 Insolv LJ 4.

388

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.45]

• either a creditor will force a liquidation of the company through a court order (known as compulsory liquidation, or winding up); or • the members of the company will resolve to wind up their company under the scrutiny of the creditors (known as a creditors’ voluntary winding up). If a creditor initiates an application for a compulsory winding up, it usually relies upon the ground that the company is insolvent through its failure to comply with a statutory demand for payment (s 459E), although, as with bankruptcy, the creditor may prove insolvency in a number of other ways. There is no real equivalent to the act of bankruptcy that applies in personal insolvency under s 40 of the Bankruptcy Act, which is relevant to the date of commencement of the bankruptcy and which predates the date of the actual bankruptcy. If a creditors’ voluntary winding up is initiated, the court is not involved and it may never be involved in the liquidation at any stage. Even in a court-appointed liquidation, the court may not be further involved after the winding up order is made. In either case, access to the courts may be needed if directions are sought, or the liquidator brings or is required to defend, proceedings. This is comparable to debtors’ petitions and creditors’ petitions in bankruptcy. While an individual can act without reference to others, a company necessarily can only act after certain legal processes – for example, a formal meeting of members – takes place. One legal difference is that the court appoints the liquidator, under s 472 of the Corporations Act; in contrast, a trustee is appointed by operation of the law when a sequestration order is made by the court: s 156A(3) Bankruptcy Act. There is, however, no government liquidator role, as there is in bankruptcy with the Official Trustee in Bankruptcy. Whichever procedure is initiated, a liquidator will be appointed to administer the winding up of the affairs of the company. Unlike a trustee, there is no vesting of the property in the liquidator; the company continues to own the property12 and the liquidator becomes the company’s agent. Apart from such differences, the task of a liquidator is comparable to that of a trustee in bankruptcy. The liquidator possesses wide powers of investigation and inquiry into the dealings of the company, and powers to recover and gather in and secure the company’s property. The liquidator is then required to realise that property and distribute any proceeds amongst the creditors, according to the provisions of the Corporations Act. Any proceeds of the company’s realised property are distributed rateably and equally amongst all creditors who succeed in proving that they are owed money by the company in respect of a legally recoverable debt. As in bankruptcy, such debts are known as provable debts. Creditors who have proved their debt are paid dividends from the realised property. Once the liquidator has completed the winding up of the company’s affairs it is deregistered, and this, in effect, represents the death of the company – the company 12 Commissioner of Taxation v Linter Textiles Pty Ltd [2005] HCA 20; (2005) 220 CLR 592.

[10.50]

10 Introduction to Liquidation and Its Administration

389

“ceases to exist”: s 601AD(1). This is in contrast to other insolvency administrations, such as receivership and voluntary administration, where the hope will often be that the outcome of these will be that the company will be able to “get back on its feet” and trade successfully. In contrast to bankruptcy, corporate insolvency retains a separate regime for court-ordered winding up and for voluntary winding up, even though, in terms of what is required to be done, the liquidations are identical. Thus, once a company goes into liquidation voluntarily, certain divisions and sections of the Corporations Act do or do not apply in comparison with a compulsory liquidation.13 Nevertheless, they exist and the separate regimes must be explained.

Why liquidation? [10.50] Where a company is wound up because of insolvency, the process is initiated because the company has no realistic chance of resolving its financial malaise. In most cases, voluntary administration under Pt 5.3A or a scheme of arrangement under Pt 5.1 is unworkable (or in respect of the latter, too expensive) because of the severity of the company’s financial difficulties. In such cases, the general unsecured creditors will acknowledge that they will not receive the full amount of their debts but know that the company will be wound up equitably by an independent person – the liquidator. The creditors should have some comfort in the knowledge that the liquidator will examine the affairs of the company carefully, including the reasons for the company’s failure, and that the whole process will be (or at least should be) carried out in an orderly fashion. Nevertheless, the reality will often be that unsecured creditors have little if any of their debts repaid by the liquidation process. Liquidation is therefore an essential aspect of corporate insolvency law. It has been and continues to be the most common form of insolvency administration, even if at times in the past the number of Pt 5.3A voluntary administrations have exceeded the number of liquidations. In the 2016-2017 financial year there were 2,432 companies placed into a court-ordered winding up compared with 3,803 companies placed into a creditors’ voluntary liquidation. In contrast, if we look at the statistics from 10 years ago in the 2006-2007 financial year we see similar court winding up numbers (2,291) but we see much fewer creditors’ voluntary liquidations (1,509).14 Creditors’ voluntary liquidations are the most common form of corporate insolvency appointment and are comparable to the high proportion of debtors’ petitions in bankruptcy, compared with court sequestration orders. The 2015 Productivity Commission Report, Business Set-up, Transfer and Closure, gives some useful statistics on the nature of liquidations. Chapter 13 of the Report notes, based on administrative data provided by ASIC (but not otherwise publicly 13 The court in Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373, described it as “an academic point” in discussing the reasons for it given in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209. 14 ASIC statistics on the number of companies entering external administration (Series 2) are available from the ASIC website: http://www.asic.gov.au.

390

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.55]

available), that over two thirds of companies that entered external administration during 2005-2015 entered liquidation and that a liquidator only was appointed, that is, there was no overlapping administration or receivership. The next most common path to deregistration was voluntary administration followed by liquidation (12% of matters). The Report also notes that the median time from commencement of liquidation to deregistration of the company was 520 days. Where liquidation follows or precedes receivership or voluntary administration the median duration (from appointment to deregistration) can be more than 700 days (up to more than 1200 days for three or more appointments). The liquidation process involves, at a minimum, some extensive work by a liquidator and is therefore expensive, and in many cases the returns to creditors will be minimal or nil, with practitioners themselves often unpaid for their work done. The Productivity Commission Report recommended that a new simplified small liquidation regime be introduced into the Corporations Act, available for companies with liabilities under a certain amount and with a more limited role for a liquidator than under a full liquidation. Creditors would have the capacity to require the company to convert to a full liquidation. The government has not accepted those recommendations but some of its proposed “anti-phoenixing” laws, announced in principle in September 2017, do contain some fresh ideas for small liquidations.15

Creditors’ voluntary winding up: Pt 5.5 [10.55] Although called a creditors’ voluntary winding up, this can only be initiated by a resolution of the members. The use of the word “creditors” refers to the fact that if the members do decide to wind up, then the creditors have some control over the liquidation process, although it is the liquidator who administers the winding up. It is in effect no different from the process of a debtor initiating their own bankruptcy on a debtor’s petition. The three week notice required for a meeting of members (see s 249H) can be shortened (s 249H(2)) to allow the directors to proceed to a creditors voluntary liquidation in order to avoid personal liability for a director penalty notice served on them by the Tax Commissioner.16 The directors who receive the notice generally have 21 days to either pay the amount specified or appoint a liquidator or voluntary administrator. Since a change in the law in 2007 simplifying the process of appointing a voluntary liquidator, such an appointment has been the preferred method of responding to a director penalty notice rather than a voluntary administration. Only a registered liquidator can conduct a creditors voluntary liquidation. Throughout the liquidation process, the creditors17 can seek information from the liquidator (IPSC, Div 75), determine the liquidator’s remuneration (IPSC, Div 60), establish a committee of inspection to assist and oversee the liquidator: (IPSC, 15 Treasury, Reforms to address illegal phoenix activity (28 September 2017). 16 Issued under Div 269 of Sch 1 of the Taxation Administration Act 1953 (Cth) and discussed at [16.150]. 17 For the meaning of “creditors”, see National Australia Bank Ltd v Market Holdings Pty Ltd [2000] NSWSC 1009; (2000) 50 NSWLR 465.

[10.70]

10 Introduction to Liquidation and Its Administration

391

Div 80) and vote to remove the liquidator at any time: IPSC, s 90-35. Where there is a large number of creditors, a committee of creditors may be set up, being a small group authorised to meet and decide on matters throughout the liquidation process. The members themselves are, essentially, excluded from being involved in the supervision of the winding up.

Restrictions on voluntary winding up: ss 490, 440A [10.60] If an application has already been filed with the court for the winding up of the company on the basis that it is insolvent (see [10.55]), the company cannot resolve to wind up voluntarily unless the leave of the court is obtained. This provision is mirrored in bankruptcy law and is similarly designed to stop a company from frustrating the actions of creditors to wind up the company compulsorily, either by design or ignorance of the fact that a court application has been made.18 While the directors should be aware of such proceedings through the service on them of the application to wind up, there will be a period of time between the filing of the application and its service when it is conceivable that the company will not be aware of the application. As a consequence, it is wise for the company to search at ASIC to ascertain whether an application has been filed before its directors initiate a voluntary winding up.19

Compulsory winding up: Pts 5.4 – 5.4B [10.65] This type of winding up requires an order for winding up being made by the court, on application by a creditor or other party. The court may make such orders under: • s 461, on general non-insolvency grounds listed in that section; • s 459A, on insolvency grounds, by applicants listed in s 459P; • s 459B, on grounds in ss 234, 462 and 464. Section 461

[10.70] Applications under s 461 are made on grounds other than insolvency – the internal affairs of the company are being conducted oppressively, or an ASIC investigation has concluded it should be wound up, or the company is in effect defunct. A significant and often used ground under s 461 is that it is “just and equitable”” that the company be wound up. Section 461 applications are usually initiated by a creditor or ASIC, as permitted by s 462. Other persons permitted to apply, by that section, are the company itself, the members (known as “contributories” in liquidation law), the liquidator and APRA. 18 Because there are different powers of a court appointed liquidator (see [10.350]), creditors may be prejudiced if a creditors voluntary liquidator is appointed. The lack of this distinction in bankruptcy results in a different approach being taken when a debtor presents a petition while a creditor’s petition is pending: see [3.125]. 19 Notices of applications to wind up a company are published on the ASIC Published notices website: http://www.insolvencynotices.asic.gov.au.

392

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.75]

Section 459A

[10.75] Separately, s 459A provides that a creditor may apply for a winding up order on the ground that the debtor company is insolvent, that is, it is unable to pay all its debts as and when they become due and payable. Given that in most cases a compulsory liquidation will be initiated by a creditor of the company – usually one that has been frustrated in attempts to recover the money owed – we focus on creditors’ applications. However, a number of other parties can also apply – the company itself, a liquidator, and, by leave of the court only, a director or contributory, or ASIC: s 459P. This mode of winding up is initiated by court order. While it is called a compulsory winding up, in many cases the company does not contest or defend the winding up. Nevertheless, the processes of a compulsory winding up are more formal and costly than voluntary liquidation, involving service of court process on the company and a formal court hearing. It is comparable to the petitioning for a sequestration order in bankruptcy. If a court decides to order the winding up of a company, it will appoint a liquidator to conduct the winding up. The liquidator will have, at the request of the creditor, filed a consent to act in the event that the winding up order is made. Establishing insolvency is often difficult for a liquidator to prove, more so for a creditor who has no access to the debtor company’s records. Therefore, s 459C provides that in any one of six situations a company will be presumed to be insolvent. These will be discussed later. However, the presumption most commonly relied on by creditors is that the company has failed to pay a claim which has been made in a statutory demand notice served pursuant to s 459E; that failure to pay leads to a presumption that the company is insolvent. Section 459B

[10.80]

A court may also order the winding up of a company in insolvency if it is found, in an application for the liquidation of the company under various other sections, that the company is insolvent: s 459B. These sections are s 232 (oppressive conduct within the company), s 462 (on grounds in s 461, above) or s 464 (arising from an ASIC investigation). Just as the making of a sequestration order is ultimately discretionary, so too a court retains an absolute discretion as to whether it will make a winding up order (Crema Pty Ltd v Land Mark Property Developments Pty Ltd [2006] VSC 338; (2006) 24 ACLC 889) or whether it might allow the company some time in which to demonstrate its solvency (Garreffa Holdings Pty Ltd v Damen Pty Ltd [1998] WASC 147) although it may decide not to do so if the company is hopelessly insolvent: Re Huon Foam Pty Ltd [2000] TASSC 99. It remains to be seen whether, if directors have invoked the “safe harbour” regime under s 588GA of the Corporations Act, this would provide a reason for a court to adjourn a winding up application.

[10.90]

10 Introduction to Liquidation and Its Administration

393

Numbers and trends

[10.85] No more than 10,000 companies enter external administration in Australia each year, a small proportion given the two million companies registered. The percentage of companies entering external administration relative to new incorporations generally remains below 4%. Most external administrations are of small to medium businesses. Figures produced by the Productivity Commission20 in 2015 showed that in 2013-2014, companies employing fewer than five staff (including non-employing companies) accounted for 92% of company exits, and companies employing fewer than 20 staff accounted for 98%. As well, failures represent only a small fraction of all companies registered. ASIC reports indicate that, in 2013-2014, 81% of the 9459 initial external administrators’ reports related to companies with fewer than 20 employees; that 43% of failed companies had estimated liabilities of $250,000 or less, and 76% had estimated liabilities of less than $1 million. And 41% were assetless at the time of insolvency, and a total of nearly 80% had less than $50 000 in assets. By industry, business and personal services (26%), construction (23%), accommodation and food services (9%), and retail trade (9%) industries together made up more than half of all companies entering insolvency in 2013-2014. In contrast, relatively large industries (which are typically characterised by large businesses) such as mining, health care and education accounted for approximately 1% of insolvencies each. Corporate insolvencies have been falling. In the September quarter 2017, there was a decrease of 5.1% in companies entering external administration (2,087), which itself was 9.2% lower than the 2016 September quarter. As to the types of appointment, court liquidation appointments are falling, with director voluntary liquidations generally static.

Day of commencement and relation-back day [10.90] It is useful at this point to explain when a liquidation “commences”, both in respect of an insolvent creditors’ voluntary winding up and a compulsory winding up. This is important for the purpose of determining the time when the liquidator takes control of the company’s affairs, and from what point in time the liquidator can go back in time to challenge voidable transactions or seek to impose liabilities on others. In Chapter 2, the introductory chapter on bankruptcy we explained similar concepts and time periods – that is the date of commencement of the bankruptcy and how it can relate back to a point in time much earlier than the actual date of bankruptcy.

20 Business Set-up, Transfer and Closure (7 December 2015).

394

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.95]

However, it is important to note that although corporate insolvency law has a “relation-back day” (defined in s 91), it is quite different in concept from the same term in bankruptcy. The provisions are contained in Pt 5.6, Div 1A of the Corporations Act.21 Compulsory winding up

[10.95] Thus, in compulsory winding up, if a winding up order is made by the court and there was no prior insolvency administration, the day on which the order is made is the “commencement of the winding up”: Corporations Act, s 513A(e). Importantly, the day on which the application to wind up was filed with the court is known as the “relation-back day”: s 91. The importance of that day is that it is the point in time which is used to measure the periods prior to winding up within which transactions must have been entered into if they are to be classified as subject to challenge by the liquidator. As an example, a preference paid by a company may be recovered from a creditor if it was a transaction entered into during the six months ending on the relation-back day or during the period between the relation-back day and the date when the winding up began: s 588FE(2). This is shown in the following simple time line where the preference is within time to be recovered. Although the preference payment falls within the total period of nine months from the date of the winding up order it is within six months of the relation-back day:

Section 513A deals with other scenarios where a winding up order is made by the court, which result in varied dates of commencement of the winding up, depending on the circumstances, for example, if the company was previously in provisional liquidation or voluntary administration or under a deed of company arrangement. The relation-back day in those cases is “the day on which the winding up is taken because of Div 1A of Pt 5.6 to have begun”; otherwise, it is the date the application for winding up was filed: s 91. Reference needs to be made to the “section 513C day”, which, in relation to the administration of a company is the day the administration began, or, if there was a prior liquidation, the day when the winding up is taken to have begun. Voluntary winding up

[10.100] There are then six situations in which a voluntary winding up is taken to have commenced, listed in s 513B of the Corporations Act. There are also the respective relation-back days: s 91. These include circumstances of a prior voluntary administration, a deed of company arrangement, and a resolution of 21 For a discussion of the history of these provisions and of the concept of relation back, see CBA Corporate Services (NSW) Pty Ltd v Walker [2013] FCAFC 74; (2013) 212 FCR 444.

[10.120]

10 Introduction to Liquidation and Its Administration

395

creditors that the deed be terminated and the company wound up. In these cases reference is also made to the s 513C day. Again, the common situation is that the commencement day and relation-back date is the date of the resolution to wind up. Typically therefore, unless there is some prior insolvency arrangement, the commencement date of the liquidation and the relation-back day occur on the day the company resolves to wind up in a voluntary liquidation or on the day the court so orders in a compulsory liquidation. A liquidator has to assess in each particular administration the relevant relation-back and commencement dates. Many of these will be considered in more detail when we examine Pt 5.3A administrations in Chapter 19. Further aspects of the date of commencement and the relation-back day are discussed throughout the remaining chapters concerning liquidation. 22 Beyond the necessary differences between the procedures leading to a compulsory winding up and voluntary winding up, there are few practical differences between the two types of administration. However, the Corporations Act has different provisions applying to each type, often with the same purpose. There are also some common provisions – s 513 provides that unless the contrary is stated, the provisions contained in Pt 5.6 apply equally to companies being wound up in insolvency by the court or voluntarily. The Corporations Act has separate Parts dealing with winding up in insolvency (Pt 5.4B) and winding up on grounds other than insolvency: Pt 5.4A. The different modes of winding up are considered in greater detail in later chapters.

ADMINISTRATION OF LIQUIDATIONS [10.115]

There are a number of parties with significant powers and roles in the administration of the liquidation of companies. These parties include ASIC, and its role in registering and regulating liquidators, and the courts and legal practitioners. Liquidators and their powers and responsibilities are dealt with in detail.

Australian Securities and Investments Commission (ASIC) [10.120] ASIC was initially the Australian Securities Commission (ASC), established pursuant to s 7 of the Australian Securities Commission Act 1989 (Cth) (now the Australian Securities and Investments Commission Act 2001 (Cth), the ASIC Act). It was formed to take over from the National Companies and Securities Commission (NCSC) as the regulatory authority administering the corporations legislation. The ASC operated from 1 January 1991 establishing regional offices in the capital cities of Australia. These offices had previously been the Corporate Affairs Commissions of each State. The ASC became ASIC as a result of the passage of the Company Law Review Act 1998 (Cth). ASIC’s powers, while based upon those previously exercised by the NCSC, are wider and more substantive. 22 The prior gap in the law identified in Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd (in liq) [2008] NSWSC 452 where a voluntary administration is commenced after an application for winding up has been filed; and where a winding up occurs after the termination of a DOCA, has been remedied by the ILRA. These issues are explained at [19.395] and [20.270].

396

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.120]

ASIC is responsible to the Treasurer for the Commonwealth. In the context of insolvency, it is broadly comparable to AFSA (which comes under the AttorneyGeneral’s portfolio), though with a much wider focus. More broadly, its comparable regulators are APRA and the ACCC. The position, role and powers of ASIC in relation to winding up are covered in other chapters. ASIC administers the Corporations Act and has power to intervene, under s 1330, in any proceedings under the Act. It has the power to apply to the court to wind up an insolvent company, and in fact, as we have seen, order that a company be wound up; and it can also sue a director for insolvent trading. It also has a significant role in maintaining records of companies, including as to their administration in insolvency. ASIC also has investigative powers under the ASIC Act. Some of its particular powers and roles in relation to winding up are: • to apply for the winding up of a company pursuant to s 464 of the Corporations Act (also see ss 462(2)(e), or 459P); • to order the winding up of a company under Pt 5.4C of the Corporations Act; • to receive reports from liquidators concerning the company being wound up and its affairs (ss 476, 533) and to investigate the matters referred to in those reports (ASIC Act, s 15); • to apply to the court for a warrant to search for and seize property or books of a company in liquidation or provisional liquidation (Corporations Act, s 530C(1), (2)); • to register and regulate liquidators, with powers in support, for example to have their accounts audited and demand information and documents from them; • to initiate proceedings for breach of the Corporations Act (s 1315(1)(a)), and to apply for the imposition of civil penalties; • to accept written undertakings from a person to comply with the law and to pay compensation: ASIC Act, s 93AA; and • to deregister companies: ss 601AB, 601AC. ASIC has the power to give a liquidator a notice seeking specified information and books in order to assist ASIC in its regulatory role: ASIC Act, s 30B. The notice may require production of any external administration files of the liquidator and also the liquidator’s policies and procedures in relation to how those files are handled. Section 13 of the ASIC Act sets out when ASIC’s investigative powers under Pt 3 are triggered. Those circumstances include investigation of a suspected contravention of the corporations legislation, including in relation to the management or affairs of a company or involving fraud or dishonesty. ASIC may investigate liquidators’ conduct under s 13(3) and make applications for disciplinary purposes either to a committee under IPSC, Div 40 or to the court: IPSC, s 45-1. In recent years ASIC has used enforceable undertakings given by those being pursued by ASIC, as a means of resolving its enforcement aims. These may be for the person to pay compensation, or to not engage in further conduct, or may comprise a variety of other elements. Liquidators may resolve a misconduct claim

[10.130]

10 Introduction to Liquidation and Its Administration

397

by giving undertakings to undergo training, or to improve their compliance systems, or pay compensation or have their files peer reviewed for a period: see RG 100 – Enforceable Undertakings. There is no comparable power available to the Inspector-General in Bankruptcy. In the regulation of liquidators, ASIC is required to work co-operatively with the Inspector-General in Bankruptcy in relation to practitioners who are also liquidators; and, one would think, generally: IPSC, s 10-5. ASIC is also required to give information in its annual reports about its insolvency related activities, both under Chapter 5, and Schedule 2: s ASIC Act, s 136(1)(ca). The costs of ASIC’s regulation of liquidators is funded by the liquidators and their administrations under the new ASIC Supervisory Cost Recovery Levy Act 2017. This approach contrasts with bankruptcy, and the realisations charge on assets realised, under the Bankruptcy (Estate Charges) Act 1997 (Cth): see [2.110]. Section 138 of the ASIC Act requires ASIC to publish details annually of its regulatory costs, and their allocation, across all sectors, including external administration. Public database, forms etc

[10.125] ASIC also has the important role of providing the database of information on the status of companies registered under the Corporations Act. From an insolvency viewpoint, that shows whether a company is the subject of a winding up application, or is already in external administration. This database comprises information and records that liquidators and others are obliged by the Act to “lodge” (as defined in Corporations Act, s 9). Hence, an application for winding up and a winding up order (s 470(1)) must be lodged with ASIC; as must reports from liquidators concerning the company being wound up and its affairs: ss 476, 533. ASIC is also responsible for the approval of prescribed forms (Corporations Act, s 350; IPSC, s 100-6), with other forms being as prescribed in the regulations, each to be lodged within a set time.23 Equally important for corporate insolvency law is the ASIC Published Notices Website (PNW) on which is recorded various insolvency events such as winding up applications and notices of creditors’ meetings. Regulatory Guides

[10.130] ASIC issues a large number of regulatory guides – “RGs” – with a proportion focused on corporate insolvency administrations. These are comparable to the various guidance documents issued by the Inspector-General in Bankruptcy. While ASIC acknowledges that RGs do not necessarily state the law, they are a useful guidance for liquidators and others in relation to their responsibilities under the law. Compliance with an RG will generally offer protection for a liquidator or other party. At the same time, the courts will reject or criticise the content of an RG if it is considered to be incorrect.24 23 Late lodgement fees are imposed under the Corporations (Fees) Regulations 2001 (Cth), Sch 1. 24 See, for example, In the matter of Bevillesta [2011] NSWSC 417.

398

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.135]

Liquidators [10.135] Liquidators are necessarily central to any winding up. Their significant powers and responsibilities will be explained shortly. Unlike personal insolvency, all liquidators (600-700 in Australia) are private individuals; there is no government liquidator, for instance, as there is in the form of the Official Trustee. They are usually accountants by training. They have authority under the Corporations Act to administer external administrations, although in some cases this authority this may be limited to receiverships. Liquidators are sometimes also registered as trustees in bankruptcy.

The process of registration of liquidators [10.140] The ILRA introduced the long-standing process for the registration of bankruptcy trustees into corporate insolvency law. An outline of the process in corporate insolvency is given but readers are referred to more detail about the process in Chapter 2. Application to become a liquidator

[10.145] Any person with the required experience and qualifications can apply to ASIC to be registered as a liquidator and thereby be authorised under the law to administer corporate external administrations.Liquidation is the dominant focus of the insolvency profession and, in fact, many of the larger insolvency firms have no focus on bankruptcy at all. As with trustees in bankruptcy, liquidators are usually professional accountants, and as such they are bound by the Code of Ethics for Professional Accountants,25 and, depending on their professional body membership, by the ARITA Code or APES 330 – Insolvency Services. On a person applying for registration, a committee is convened comprising an ASIC representative, a nominee of the Minister and a registered liquidator of at least fiveyears’ experience chosen by ARITA (IPSC, s 20-10). The committee interviews the applicant and decides whether they should be registered: IPSC, s 20-20. In some cases, the applicant can be required to sit an exam. See ASIC’s Liquidator Registration Checklist. Qualifications and experience etc

[10.150] IPRC, s 20-1 sets out the qualifications, experience, knowledge and abilities that a person must have. Practically, applicants are accountants of considerable experience in liquidation and insolvency practice. They must be able to demonstrate the completion of set academic requirements in accounting and commercial law; at least “4000 hours of relevant employment” in the administration of corporate insolvencies, and demonstrated capacity to perform the duties of a liquidator. Their experience should show an exposure to the processes of bankruptcy. 25 APES 110; Accounting Professional & Ethical Standards Board Limited (“APESB”).

[10.160]

10 Introduction to Liquidation and Its Administration

399

An interview process has applied in bankruptcy for some years and was introduced into the liquidator registration process by the ILRA because it allows a better assessment of an applicant’s “ability” to perform as a liquidator, whereby the prior paper application process did not. The law allows a person to be registered as a liquidator, even if they do not satisfy these requirements, if it is thought that they are, in fact, suitable. This gives a committee some latitude to allow persons of experience to be registered. Certain criteria, including convictions of an offence for fraud or dishonesty, or having been a bankrupt, disqualify a person from being a liquidator: IPSC, s 20-20(4). The committee may decide that registration should be made subject to certain conditions, for example that the liquidator only take appointments jointly for the first year: IIPSC, s 20-20(6). The liquidator can then or later request a variation or removal of any conditions: IPSC, ss 20-40 to 20-65. The new liquidator must undertake at least 40 hours of continuing professional education (CPE) each year : IPSC, s 20-35; IPRC, s 20-5. The committee must give its reasons for decision to the applicant and to ASIC, including details of any conditions imposed: IPSC, s 20-25. ASIC must then register the applicant, subject to being satisfied that prior insurance is in place, and the application fee has been paid. That is, there is no separate discretion of ASIC to reject a committee’s decision. The liquidator’s name and details are entered on the Register of Liquidators. The registration lasts for three years and must then be renewed. The committee

[10.155] The committee processes are set out in IPRC, Div 50. A committee must accord natural justice but is not strictly bound by rules of evidence. The persons on the committee must not have any conflict of interest nor material personal interest in the applicant or their firm. On-going obligations

[10.160] Liquidators must lodge an annual liquidator return (Form 908) by the end of each “liquidator return year”, being the 12-month anniversary of the date of their initial registration. Among other things, the liquidator must confirm they have maintained adequate insurance: IPSC, s 30-1. A liquidator must notify ASIC if certain events occur, such as their bankruptcy or their conviction of a serious offence: IPSC, s 35-1. See RL30 Notice of significant events involving a liquidator. Other events must be notified, including, if information in a return is found to be incorrect (RL31 Notice of inaccuracy in a return), or they cease to practise, or change their address: IPSC, s 35-5.

400

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.165]

Other requests

[10.165] IPSC, ss 40-25, 40-30 and 40-70 contemplate a liquidator asking ASIC to suspend their registration for a period, or cancel it, or to lift or shorten a suspension: IPSC, s 40-70. See RL08 Request to cancel or suspend registration as a liquidator. Renewal of registration

[10.170] The three yearly renewal process of a liquidator is conducted by ASIC “on the papers”: IPSC, ss 20-20, 20-75. At that point, a check is made by ASIC of the maintenance of insurance by the liquidator and compliance with CPE requirements. ASIC then renews the registration by entering details on the Register, for another three years: IPSC, s 20-75(2). Register of Liquidators

[10.175] The details of all registered liquidators are contained in this Register. Once a person is registered without restriction he or she is able to perform all functions of a registered liquidator under the Act. The Register also records “disciplinary action” (IPRC, s 5-5) against liquidators.26 Insurance

[10.180] There are particular professional indemnity and fidelity insurance requirements imposed on liquidators: IPSC, Div 25, s 25-1. Objects

[10.185] The law provides that the objects of these provisions include an assurance that liquidators will behave ethically, and have an appropriate level of expertise: IPSC, s 1-1. It is apparent that these requirements and processes are largely aligned with personal insolvency, as explained in Chapter 2. Much of the law that has come from personal insolvency will also be applicable to these new corporate insolvency processes.

The courts [10.190]

Part 9.6A of the Corporations Act sets out the civil jurisdiction of the various courts. The Federal Court of Australia and the State and Territory Supreme Courts have full jurisdiction in corporate law and insolvency, as does the Family Court: s 1337C, applied, for example, where a winding up of a family company is required. These are ‘big C’ Courts compared with other courts which have more jurisdiction under the Act – see s 58AA. Matters may be transferred between courts and the routes of appeal are set out in s 1337F.

26 See also Corporations Act, s 1274 as to what liquidator discipline documents lodged with ASIC may be publicly inspected.

[10.190]

10 Introduction to Liquidation and Its Administration

401

The relevant rules are the uniform Federal Court (Corporations) Rules 2000 (Cth) and the harmonised State and Territory rules. We refer to these rules collectively as the Courts’ Corporations Rules. The Family Court of Australia also has a role in corporate insolvency under the Family Law Act 1975 (Cth), as does the Administrative Appeals Tribunal. Chapter 25 of the Family Law Rules 2004 (Cth) applies to a case started in, or transferred to, a Family Court under the Corporations Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth). The AAT hears applications to review decisions of ASIC: Corporations Act, s 1317B, subject to excluded ASIC decisions listed in s 1317C. The Federal Circuit Court has no jurisdiction in corporate insolvency: Alfaro v Crown Commercial Cleaning Pty Ltd [2012] FMCA 478. Under s 10 of the Cross-Border Insolvency Act 2008, the Federal Court and the State and Territory Supreme Courts are the courts specified in Art 4 of the Model Law as courts competent to perform the functions referred to in the Model Law relating to recognition of foreign proceedings and co-operation with foreign courts. We earlier examined the role of these courts in the making of winding up orders under ss 459A and 461 of the Corporations Act. In many cases, the court is then no longer involved in the administration of the liquidation. However, the court has a major role to play once the winding up of the company occurs, in both voluntary and compulsory liquidations. Of course, most of the involvement of courts is in a judicial role as opposed to the role of other entities that involve administration and regulation. For example, courts may: • order the appointment of a provisional liquidator (s 472(2)); • give directions to liquidators in their administration of the winding up (IPSC, s 90-15); • order the stay or termination of a winding up during its term (s 482); • appoint a liquidator to review an external administration of an appointed liquidator (IPSC, s 90-23(6)); • give leave to a person disqualified as a liquidator to so act (s 532(2)); • change, in effect, the priority structure laid down for the repayment of creditors by liquidators (s 564); • give leave to assign a right to sue under IPSC, s 100-5; and • hear applications from aggrieved persons concerning the acts, omissions or decisions of liquidators and make appropriate orders or give appropriate directions: IPSC, s 90-15. As in personal insolvency, court registrars exercise delegated judicial powers in relation to the winding up of companies and related orders, the assessment of remuneration and other tasks found in the uniform set of court rules adopted by the Federal Court and each Supreme Court. Associate Justices of some of the Supreme Courts also exercise powers in corporate insolvency.

402

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.195]

This table sets out the general position, noting the presence of the High Court as the ultimate court of appeal. CORPORATE INSOLVENCY Corporate insolvency Federal Court Yes State and Territory Supreme Courts Yes Family Court Federal Circuit Court Local and County Courts AAT Registration and Discipline Committees

COURTS AND TRIBUNALS Appeals

Full Federal Court State and Territory Courts of Appeal Full Family Court n/a State and Territory Supreme Courts

Yes No Yes, but limited Yes, Federal Court but limited Yes, AAT but limited

Cross Border Insolvency Yes Yes No n/a No No n/a

THE LIQUIDATOR Appointment [10.195] The process by which a person may become registered as a liquidator is explained at [10.145]. In voluntary liquidations, the liquidator is appointed by either the members or creditors after consenting to so act. In compulsory liquidations the court appoints the liquidator. A liquidator is nominated by the person applying for the winding up order, to which the liquidator must also have given a consent to act.27 This regime is therefore reliant upon liquidators agreeing to take an appointment as liquidator. If there are no funds in the company, or no possibility of recovery of funds, the liquidator may require an indemnity or funding from whomever seeks their consent. This contrasts with personal insolvency, where the Official Trustee is in effect, the trustee of last resort for assetless bankruptcies.

Statutory restrictions upon appointments [10.200] Before consenting, a liquidator must ensure they are not prevented from taking the appointment under restrictions imposed by s 532 of the Act. That section provides that a liquidator also must not, without leave of the court, seek to be appointed or act as liquidator if he or she has various connections with the company, including that of a debtor or creditor of the company for more than $5,000, or an auditor, or an officer or employee of the company: s 532(2). The court’s power to grant leave extends not only to allow the seeking of appointment but also 27 In DCT v Statewide Contracting Qld Pty Ltd (No 2) [2015] FCA 690, although a joint appointment was proposed, one of the liquidators had not in fact consented; orders were made rendering the appointment a sole appointment.

[10.205]

10 Introduction to Liquidation and Its Administration

403

to allow the ongoing exercise of the office of liquidator; for example, the court may grant leave to act to a liquidator already acting who is, by subsequent events, brought within one of the categories that attract the prohibition: Re McGrath; HIH Insurance Ltd [2010] NSWSC 404; (2010) 78 ACSR 405. In Queensland Nickel Pty Ltd (in liq) (No 2) [2017] QSC 89, prior to their appointment as administrators, the liquidators had obtained promises to pay by two related companies of Queensland Nickel. This made them creditors of those companies in an amount exceeding $5000. Leave to be appointed liquidators was granted. The purpose of this is to give additional protection to the necessary perception of independence required of liquidators. Certain disqualifying relationships or roles (see s 532(1)(c)) do not disqualify a person being appointed as liquidator to a creditors’ (or members’) voluntary liquidation if the creditors so resolve. These include if the liquidator is an officer or employee of the company, or a mortgagee of the company, or is the company auditor: s 532(5) Apart from the restrictions of s 532, liquidators must not seek appointment if they are not independent or reasonably seen as not being independent. Independence of liquidators is a significant issue and can apply at the time the liquidator seeks to be appointed, or after, when their appointment may be challenged: see [10.445]. In that respect, 532 does not provide an exhaustive list of the persons who should not be appointed as a liquidator in particular circumstances: Re Pinklillies Pty Ltd; Northwest Motel Group Pty Ltd v Huxtable [2011] FCA 1543. A person who is an insolvent under administration, which includes being subject to a Pt IX or Pt X agreement under the Bankruptcy Act, cannot be a liquidator: IPSC, Div 40. Nor must a person consent, nor act, as liquidator of a company being wound up by order of the court if that person is not entitled to do so under any conditions imposed on them: s 532(8). In cross-border insolvency matters, s 11 of the Cross-Border Insolvency Act 2008 provides that the Model Law is taken to refer to a registered liquidator as being generally able to take an appointment where relevant.

Classifying the liquidator [10.205]

The office of liquidator does not fit any precise legal category or classification, being a hybrid composite with elements of fiduciary, liquidator, agent, officer of the corporation and officer of the court. Liquidators differ from the normal agent, however, in that they themselves control the actions of their principal, ie the company. Those duties as agent of the company are subject to the liquidator’s overriding statutory duties under the law.28 Official liquidators were said to be representatives of the court: CAC v Harvey [1980] VR 669 and any interference with their tasks could constitute a contempt of court. Their history dates from the courts themselves, as their present role was originally part of the functions of a court official: Re Biposo (1995) 13 ACLC 1,271. In exercising some of their powers, such as determining proofs of debt, liquidators continue to 28 See further, Sydlow Pty Ltd v TG Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234 at [23].

404

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.205]

retain a quasi-judicial role; they are in effect taking over the court’s role of determining a creditor’s claim and they may take oaths from creditors or others for that purpose. They nevertheless remain, like trustees, subject to the control and direction of the court: see IPSC, Div 90. They must discharge their duties fairly and in accordance with the law and their own professional judgment, which the courts will respect. These duties can include the conduct of significant investigations, legal proceedings and examinations. For these reasons, the courts seek to ensure that the powers given to a liquidator are used impartially and for a proper purpose; the corollary being that the court will not permit a liquidator to be sued by a creditor or have an inquiry made under the law unless it is satisfied that the concern is based on a prima facie case: Re Siromath Pty Ltd (No 3) (1991) 9 ACLC 1,587, or if the litigation is vexatious Re Magic Aust Pty Ltd (1992) 10 ACLC 929; Re Biposo (1995) 13 ACLC 1,271.29 The courts also act to protect the integrity of the winding up process to ensure there is no wrongful interference with it: Sydlow Pty Ltd v TG Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234, 241. With the removal of the category of official liquidator, this long-standing connection with the courts may be lessened.30 The strictness of the regulation of liquidators introduced by the ILRA may also have reduced the alignment of the position of liquidator with the courts. Beyond the courts, the liquidator owes responsibilities to a wide range of interests in a liquidation – the creditors, the members and the company itself, the regulators and the wider community. A feature of the liquidator’s position is that he or she has no client, as in a typical professional relationship, but a number of stakeholders, mainly the creditors, for whom, largely, the liquidator is acting.31 The liquidator does not act at their direction, but in their interests, and their control of the process is limited. This unique position confers strong powers on the liquidator over the creditors and other stakeholders involved in the liquidation. Those powers and obligations to the disparate interested parties impose on the liquidator a high standard of fiduciary responsibility and independence of action. The position of the liquidator vis-à-vis creditors and other parties was emphasised by the court in ASIC v Edge [2007] VSC 170; (2007) 211 FLR 137. The court described the “conferral of wide and extensive powers” on the liquidator under s 477 of the Corporations Act and in relation to the right to obtain information and be assisted by the company’s officers. The court continued at [44]: “The extensive powers vested exclusively in the liquidator entail a corresponding vulnerability in the creditors, members and the public. The liquidator is a fiduciary on whom high standards of honesty, impartiality and probity are imposed both by the Act and the general law.” 29

Raised as an issue in Frigger v Kitay (No 2) [2017] WASCA 139.

30 The duties imposed on liquidators are no different between a court-appointed and a voluntary liquidator: Hughes v Receivers and Managers of Westgem Investments Pty Ltd (No 3) [2012] WASC 360 at [18]. 31 See the ARITA Code, Part 6 – “Independence”.

[10.210]

10 Introduction to Liquidation and Its Administration

405

However, on matters of commercial judgment in carrying out their duties, the courts accord weight to the decisions of liquidators.32 Indeed, the court will not become involved, by way of giving directions, on matters of commercial judgment. A liquidator is not expected to act with the knowledge or experience of a lawyer on difficult issues, but rather to act with common sense and professional and business judgment: ASIC v Edge at [637]. Nevertheless, they should know when to seek professional advice.

Independence [10.210] It follows from the fiduciary and other responsibilities of liquidators that they must be independent and impartial in the way they conduct administrations, and they also must be seen to be independent, that is, they must not have any perceived lack of impartiality or independence.33 This is also the case with trustees although given its nature, corporate insolvency raises questions of independence more frequently and with greater complexity. Given the wide range of competing interests in an insolvency, and the fact that the liquidator is determining and distributing moneys to competing claimants, a liquidator has to carefully assess his or her independence and perceived independence on taking an appointment and throughout the administration. An appearance of conflict can be as important as the reality of one, even when there is no question of the liquidator’s good faith: Re Club Superstores Australia Pty Ltd (1993) 10 ACSR 730; ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204. In such cases, a liquidator may decide to seek directions from the court to justify their independence: Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486. The test for apprehended bias of liquidators is of a similar nature to that used for judicial officers, namely, whether “a fair-minded lay observer might reasonably apprehend that the [liquidator] might not bring an impartial mind” to the matters that the liquidator must determine: ASIC v Franklin at [59] citing Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337. In Franklin, the court went on to state that the test must be applied with the statutory context in mind. It was noted that liquidators do not perform the same role as judges, in particular given that liquidators are in business and must actively cultivate professional relationships. In that case it was held that the referral relationship between the liquidators and a private equity adviser could give rise to a perception of bias where the adviser was involved in selecting the liquidators, had previously worked with the liquidators’ firm and it would be expected that future work would be given to their firm. The private equity adviser had been involved in a number of asset sale transactions with the companies in liquidation and the liquidators would be required to

32 Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434, 440; Wood v Targett (1997) 23 ACSR 291. 33 Re National Safety Council of Australia (Victoria Division) [1990] VR 29; ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204.

406

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.210]

investigate those transactions. But otherwise, the mere fact of a referral relationship between a liquidator and a referrer will not necessarily give rise to an apprehension of bias.34 It follows that a liquidator will be open to removal by the court on grounds of a lack of independence, either actual or perceived. An actual lack of independence is regarded seriously, if, for example, the liquidator seeks to prefer or assist a person such as a director, by not investigating certain alleged misconduct of that director. Even without any actual bias shown, personal relationships of the liquidator with directors or other parties can result in a lack of independence: Commonwealth v Irving (1996) 65 FCR 291.35 Disclosure to and consent from creditors to a liquidator who is not independent taking an appointment does not “cure” the breach of duty;36 although in matters in which the court is asked to review an issue of independence, the views of creditors are important. In Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486, the court took note of the fact that no creditor raised any issue about the liquidators’ independence. The courts will replace a conflicted liquidator even where this will increase the costs of the liquidation in having a new person take over; at the same time, the cost of replacement can be a factor against replacement depending on the extent of the conflict. Many of the issues to do with independence arise out of relationships that the liquidator has had with the company or its directors or creditors prior to the appointment. However, it is not every prior association that will lead to a lack of independence. Indeed some prior contact is inevitable and necessary, for example, in relation to a creditors’ voluntary liquidation, where the directors must seek out a registered liquidator to consent to being appointed. In Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 12 ACLC 701, Santow J said (at 704-705): “the correct balance is struck by permitting the liquidator to act as such even if there be a prior involvement with the company in liquidation, provided that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited.”

Any absolute requirement that the liquidator has had no prior involvement has been “slightly eroded” in other respects, such as by: (a) the practice to permit a company which has consulted an insolvency accountant about its future and has been advised to go into liquidation to nominate that accountant as liquidator; 34 See ARITA Code (3rd ed), at [6.6]. 35 See also ASIC v Edge [2007] VSC 170; (2007) 211 FLR 137. 36 See the “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)” which says that disclosure of a relationship to creditors “will in no way ‘cure’ any conflict of interest or conflict of duties that may arise out of that relationship, even if creditors approve the appointment after the declaration is made”. However the Memorandum also refers to “relationships where a conflict might be perceived to exist in the absence of full disclosure”: at [4.73]-[4.75].

[10.215]

10 Introduction to Liquidation and Its Administration

407

(b) the practice to permit a voluntary liquidator to be appointed who has given financial advice to the directors: National Australia Bank Ltd v Market Holdings Pty Ltd [2001] NSWSC 253; (2001) 19 ACLC 710, 733; Bovis Lend Lease v Wily [2003] NSWSC 467; (2003) 45 ACSR 612.

Thus in Re Club Superstores Australia Pty Ltd (1993) 11 ACLC 751 it was accepted as common practice for a potential liquidator to attend a pre-appointment conference with a creditor or the company’s directors, which did not contravene the duties of independence and impartiality. The fair-minded observer has knowledge of the reality of this process of how practitioners are selected and appointed.37 However, the potential liquidator needed to be careful not to “cross the line” by giving personal advice to the persons in attendance.38 In Re Healy; Falaren Pty Ltd v ASIC [2012] FCA 368, the court would not appoint a liquidator to a company that was to have its registration reinstated because he had advised one of the directors on a possible insolvent trading claim against the director. In Re Korda, Ten Network Holdings Ltd (Administrators Apptd) (Recs and Mgrs Apptd) [2017] FCA 914, where the conduct of pre-appointment business reviews by a firm whose partners then became administrators was not held to compromise independence where the pre-appointment engagement was narrow in its scope and did not involve advice to the company or the directors. The court appointed a registered liquidator to act as a special investigator to report to creditors on the potential for pre-appointment work by the administrators to be set aside as a voidable transaction.39 A liquidator’s role as investigating accountant will often prevent their later appointment, despite the benefit of the knowledge of the company gained from that process (Wood v Targett [1997] FCA 232; (1997) 23 ACSR 291); and in particular where there is a possible claim arising out of the adequacy of the investigating report. But it is generally permissible for a liquidator to come to a funding arrangement with a particular creditor for payment of the liquidator’s costs and expenses. In most cases, even though there may be no lack of independence, despite some prior relationship, it will be necessary for the liquidator to disclose such a relationship to creditors in the declaration of indemnities required under the Corporations Act: see, for example, s 436DA. Liquidators and their lawyers

[10.215] Liquidators, and their lawyers, have to have regard to joint conflicts, for example where a liquidator uses the law firm that also advises a major creditor or the petitioning creditor, or the creditor funding the liquidator’s proceedings. Of 37 See Ziziphus Pty Ltd v Pluton Resources Ltd (rec & man apptd) (in liq) [2017] WASCA 193, discussed at Insolvency practitioner independence – a “fair-minded” or “uncharitably-minded” assessment, at http://www.murrayslegal.com.au. 38 See ARITA Code, at [6.8]. 39 For a discussion of the Ten Network case see, Harris, “Unpacking the Ten Network Administration” (2017) 28 JBFLP 343.

408

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.220]

itself this raises no issue and, in fact, may be beneficial if the law firm brings its knowledge of the company through its work done for the creditor. There will be an issue if the debt of the creditor is likely to be contested by the liquidator: Re Kala Capital Pty Ltd [2012] NSWSC 1073 at [29]; Accord Pacific Holdings Pty Ltd v Gleeson [2011] NSWSC 1021 at [30]. Separately, lawyers have their own obligations to ensure their independence.40 Group companies

[10.220] An appointment of one liquidator to a group of companies in external administration can be a sensible arrangement, even though there is the potential for conflicts of interests between the companies to arise. The courts take a practical and commercial approach to the question with a view to advancing the efficiency of the liquidation of the group and taking advantage of costs efficiencies: ASIC v Westpoint [2006] FCA 135; (2006) 56 ACSR 646; Re Chilia Properties Pty Ltd (1997) 73 FCR 171. However, the courts will expect that the appointee be “alive to the possibility” that conflicts may arise in which event it is expected that the appointee will approach the court for directions: Willow Court Retirement Village Pty Ltd v ASIC [2007] NSWSC 76. Special purpose liquidators

[10.225] If an issue of independence arises, the court may decide to appoint a “special purpose liquidator” to address a particular issue in which the conflict arises, for example where there are disputed transactions between companies in the insolvent group: Re McGrath [2006] NSWSC 385.41 The need for such special purpose appointments can arise in the liquidation of one company, for example where a separate liquidator is needed to investigate issues in which the primary liquidator was involved: Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407; (2008) 26 ACLC 497. Generally, a factor in making such an appointment is that it would not be in the interests of creditors and contributories for the existing liquidator to resign from office; hence the expense and loss of expertise involved in the resignation of that liquidator in a partially completed administration is avoided: Onefone Australia Pty Ltd v One.Tel Ltd [2003] NSWSC 1228; (2003) 48 ACSR 562. Special purpose liquidators were appointed in GDK Projects Pty Ltd v Umberto Pty Ltd (in liq) [2018] FCA 541 because a significant creditor was only willing to fund their nominated person as liquidator to conduct certain investigations. This is a common feature of such appointments. The orders were made under IPSC, s 90-15. Declarations of relevant relationships

[10.230] The importance of independence was a reason for the legislature to require disclosure of relevant relationships by liquidators and administrators, being relationships that did not result in a lack of independence but about which the creditors should nevertheless be informed. These are to be disclosed through 40 Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, r 11. 41 See further Re Spedley Securities Ltd (1991) 4 ACSR 555.

[10.240]

10 Introduction to Liquidation and Its Administration

409

“declarations of relevant relationships” as defined in s 60 of the Corporations Act. This was to address some community concerns about practitioner independence. The declarations allow creditors to make a more informed decision about whether to retain or replace the administrator. While a lack of independence may not arise at law, the existence of such a relationship may cause creditors to decide to replace the administrator. A key theme of those reforms was to “provide creditors with better information and more power to manage external administration processes”.42 ARITA’s pro-forma declaration of independence, relevant relationships and indemnities (called a DIRRI) addresses these statutory obligations. The circumstances of the Network Ten appointment43 led to some close analysis of the declarations made by the administrators.

Duties of the liquidator [10.235] We have seen that the liquidator owes fiduciary duties to the company, its creditors and members. Besides these duties, liquidators owe other, more specific, duties. The duties of a liquidator are contained in the Corporations Act and in the case law. Generally, these duties are common for liquidators in both compulsory and voluntary windings up. Some of the more specific duties in the Corporations Act differ, depending on the type of liquidation involved. Fiduciary duties

[10.240] The fact that the liquidator is a fiduciary has a number of implications. The liquidator must comply with certain obligations.44 • To act honestly: This includes the obligation to exercise the powers conferred bona fide and for the purposes for which such powers were conferred.45 This equitable obligation is supplemented by s 181 of the Corporations Act which imposes the obligation of acting in good faith in the best interests of the corporation and for a proper purpose on officers, which includes liquidators. • To avoid a conflict of interest: A fiduciary is not to permit their personal interests to conflict with the interests of those to whom a duty is owed. This obligation applies in a number of ways. First, a liquidator cannot profit from their position, either directly or indirectly, except by way of remuneration for work done: IPSC, s 60-20; Commissioner for Corporate Affairs v Harvey [1980] VR 669. This is supplemented by s 182 of the Corporations Act in that an officer is not to make improper use of their position to gain an advantage. Secondly, a liquidator is not at liberty to make contracts with the company. A liquidator who becomes aware of a potential conflict should apply to the court for leave to resign: Commissioner for Corporate Affairs v Harvey. 42 “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, [4.72]. 43 Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914. 44 See further, Nosworthy and Symes, “The Liquidator: A Hybrid of Agent, Fiduciary and Officer” (2016) 31 AJCL 65. 45 Re Burnells Pty Ltd [1979] Qd R 440; Ah Toy v Registrar of Companies (1986) 10 FCR 356.

410

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.245]

• To act impartially: A liquidator must not favour anyone and must not act as the agent of any group: Bovis Lend Lease v Wily [2003] NSWSC 467; (2003) 45 ACSR 612. However, the liquidator does not owe fiduciary duties to individual creditors, who cannot, for example, sue the liquidator for compensation arising from breach of those duties. The liquidator’s fiduciary obligation as an officer of the company is owed to the company itself, to act properly and with due care and diligence, and the company (or another party through a derivative action) may seek to enforce that duty: see Macks v Viscariello [2017] SASCFC 172. Nor is every task of a liquidator subject to their fiduciary duties. In Macks, it was held that compliance with statutory reporting obligations did not give rise to fiduciary duties because those duties are proscriptive and not prescriptive in Australia (following Breen v Williams [1996] HCA 57; (1996) 186 CLR 71). Duties of care and skill

[10.245] Liquidators, who are appointed and remunerated to exercise professional duties, must meet high standards of skill and competence in the performance of those duties. But conduct that is found to be a mere error of judgment does not contravene the statutory standard required under Corporations Acts 181(1): Macks v Viscariello [2017] SASCFC 172. In that case, the court found that the liquidator, by not accepting an offer to settle long running claim, failed to exercise the degree of skill and diligence required. A liquidator is duty-bound to complete the administration of the affairs of the company within a reasonable time and without protracting the liquidation where there is no reason to do so. Liquidators may be in breach of duty if they do not seek the advice of professionals in areas in which they are not qualified, for example, a solicitor in respect of a legal issue or a valuer regarding the value of property. In City & Suburban v Smith [1998] FCA 822, (1998) 28 ACSR 328 the liquidator had incorrectly determined a complex legal issue of whether the company was the employer of various employees, resulting in termination payments being made. The court said that “[t]he basic failing on this issue on the part of the liquidator was his failure to obtain appropriate legal advice prior to making the termination payments”: at 335-336. A liquidator is also required to act with a reasonable degree of care and skill: Gray v Bridgestone Aust Ltd (1986) 4 ACLC 330. They can be liable at common law for failure to reach that standard in performing their duties – the duty is analogous to the common law duty owed by directors: Sydlow Pty Ltd v TG Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234. Furthermore, as officers of the company, liquidators can be liable under s 180 of the Corporations Act, which requires liquidators (and other officers) to exercise their powers and discharge their duties with a reasonable degree of care and diligence. In Asden Developments Pty Ltd v Dinoris (No 3) [2016] FCA 788; (2016) 114 ACSR 347,46 it was held that a failure of a liquidator to contact the company’s sole director to query the reason for substantial funds being 46 Upheld on appeal, Asden Developments Pty Ltd (in liq) v Dinoris [2017] FCAFC 117.

[10.260]

10 Introduction to Liquidation and Its Administration

411

withdrawn shortly before the commencement of the liquidation was breach of the duty of care. It was not sufficient for the liquidator to merely rely on financial records. Liquidators can owe a duty of care to third parties, such as guarantors of the company’s debt: Perpetual Nominees Ltd v McGoldrick [2017] VSC 78; (2017) 120 ACSR 32 (citing the 9th edition of this text). In that case, it was held that a liquidator’s exercise of the power of sale was not, in all of the circumstances, conduct in breach of the duty of care owed to guarantors. Comparable standards are imposed on trustees in bankruptcy. Duty to exercise discretion

[10.250] Liquidators are required to use their own discretion in administering the affairs of the company. This is recognised in s 477(6) of the Act. While liquidators are entitled to seek advice and appoint agents, they are not permitted to delegate the exercise of their professional judgment and discretion.47 Statutory duties

[10.255] As already indicated, a liquidator as an officer of the company for the purposes of ss 180 – 183 of the Corporations Act, owes certain specific statutory duties supplementing the duties just discussed. Sections 180 – 182 have already been mentioned. Section 183 requires the liquidator not to make improper use of inside information to gain an advantage. Specific duties Duty to ascertain and take possession of and, if necessary, recover assets

[10.260] In many ways the duty to ascertain and take possession of and, if necessary, recover assets is the liquidator’s principal duty. Section 478(1) of the Corporations Act requires a liquidator to do everything to collect the property of the company. Immediately a winding up order is made, a liquidator is empowered by s 474(1) to take into their custody all of the property to which the company is, or appears to be, entitled. A liquidator should do this as soon as possible. Sections 483(1) and 500(3) entitle the liquidator to apply to the court to obtain an order that people deliver up company property or books. The liquidator may need to initiate litigation in order to recover company property that has, for example, been property disposed of under an uncommercial transaction: s 588FB. Given the potential costs and time of litigation, the liquidator needs to take careful consideration of the prospect of success and likely recovery: Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99. However, as that decision explained, the availability of litigation funding now raises important issues concerning the duty of liquidators to collect assets by taking recovery proceedings. For lawyers’ and clients’ responsibilities to the court. For other issues, and actions that a liquidator may commence, see Chapter 14. 47 ASIC v Edge [2007] VSC 170; (2007) 211 FLR 137; Commissioner for Corporate Affairs v Harvey [1980] VR 669; Ah Toy v Registrar of Companies (1986) 10 FCR 356.

412

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.265]

Duty to preserve and realise assets

[10.265] Preserving assets entails a liquidator taking an inventory of the assets, insuring them, wisely investing funds and defending any legal actions initiated against the company for recovery of assets or claims for damages. In some cases it may be necessary for the liquidator to carry on the company’s business for a short time in order to protect its goodwill and to enable it to be sold as a going concern for a better price than simply selling its assets. Power for this purpose exists under s 477(1)(a). After obtaining possession of assets, the liquidator has the duty to deal with them as far as is necessary for the beneficial winding up of the company. The powers of the liquidator to realise assets is considered at [15.230]. Naturally, realisation is a necessary precursor to a distribution of any dividends to the creditors. Duty to lodge notice of appointment and to register for GST

[10.270] Within 14 days of being appointed, the liquidator must lodge notice of their appointment with ASIC (Corporations Act, s 537; Form 505) and with the Commissioner of Taxation: Taxation Administration Act 1953 (Cth), Sch 1, s 260-45. State legislation has similar notification obligations in respect of the relevant revenue commissioner: see, for example, s 99 of each of the Payroll Tax Act 2007 (NSW) and Payroll Tax Act 2007 (Vic). In addition, a liquidator is obliged to become registered within 21 days as the representative of the company for the purposes of the goods and services tax (GST). If the liquidator carries on the business of the company, he or she will be personally liable for GST on taxable supplies and services from the date of appointment until the liquidator’s release: A New Tax System (Goods and Services Tax) Act 1999 (Cth), Div 58 – Representatives of incapacitated entities. The liquidator may also be obliged to complete tax returns for the company, including pre-appointment returns: see http://www.ato.gov.au. Duty to keep records and accounts

[10.275] The liquidator must promptly pay all company money into a single administration account for each administration within five business days of receipt (IPSC, s 65-10) and ensure the other funds handling requirements in IPSC, Div 65 are met. A single account may be opened for a pooled group. Court directions can be sought about the payment, deposit or custody of moneys: IPSC, s 65-45. The liquidator must also keep proper books containing entries or minutes of proceedings at meetings and of such other matters that are required to give a complete and correct record of the administration. These must be available for inspection at the liquidator’s office: IPSC, s 70-10. The creditors or contributories may wish to inspect these books as a way of enabling them to monitor the progress of the winding up, although this would be unusual. Creditors will generally be informed by reports and at meetings. Section 70-35 of the IPSC specifies the duties of the liquidator in maintaining the books of the company kept before winding up, and, ultimately, when those records may be destroyed: see [17.65].

[10.280]

10 Introduction to Liquidation and Its Administration

413

During the course of the winding up the liquidator must, every year, lodge with ASIC an annual administration return within three months after the end of the administration return year: IPSC, s 70-5; ASIC Form 5602. Duty to report and investigate

[10.280] The liquidator is required to report to creditors within 20 business days of their appointment in the case of a court appointed liquidator, and within 10 business days in the case of a voluntary liquidator: IPSC, s 70-30. This report must advise of the appointment and the rights of the creditors in the liquidation – to give directions, to request information, to replace the liquidator, etc. The report as to affairs of the officers of the company (the RATA) must be submitted to the liquidator within 10 business days of the winding up order being made: s 475(4); ASIC Form 507. If the company will not pay unsecured creditors more than 50 cents in the dollar, or a company officer may have breached the law, s 533 requires a liquidator (in any type of winding up) to file a report with ASIC. ASIC will then investigate and pursue those offences, in its discretion. This is similar to the offence reporting to AFSA required of trustees in bankruptcy under s 19(1)(i) of the Bankruptcy Act. Subject to funds being available, and the commercial decisions of the liquidator, the conduct of investigations into the company and its operations is one of the major functions of a liquidator. This is done for two reasons. First, to ascertain whether all the assets available to creditors have been located, and if not, how they can be recovered. Secondly, to ascertain whether, in the public interest, breaches of the law may have been committed. Investigations to a level necessary to be able to report to ASIC under s 533 are required, whatever the level of funding available. The investigations will vary depending on the company’s history and operations. The liquidator will examine books, accounts and financial records, interview company officers and employees, and conduct searches of public records and titles. The liquidator is often in an invidious position, coming to a company knowing little or nothing about it; its books and accounts have often been poorly maintained (if at all) and on occasions the persons who might be able to assist the liquidator – the officers of the company – are uncooperative or have departed. If funding is available, it may be necessary for a liquidator to have relevant persons examined in court under ss 596A or 596B. Usually, the targets of such examinations are officers or former officers of the company. This examination is discussed more fully at [15.125] – [15.200]. The investigative and reporting role of the liquidator can be expansive, depending on the nature of the company’s business and its impact, and it can engender significant political and media interest, apart from the interest of creditors.48 Major 48 Although, in relation to the One.Tel collapse, the court considered that it was not the liquidator’s function to ensure that the particular winding up was accurately reported by the media, at least in so far as claiming remuneration was concerned: Onefone Australia Pty Ltd v One.Tel Ltd [2010] NSWSC 1120; (2010) 80 ACSR 11 at [41].

414

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.285]

corporate collapses may prompt government intervention. External funding may be provided, or in some cases, a special purpose liquidator may be appointed and funded. The court in ASIC v Midland Hwy Pty Ltd [2015] FCA 1360, said that major corporate losses required full investigation and, if appropriate, the institution of recovery proceedings. These were “appropriately done by a liquidator, rather than ASIC”. A liquidator has the necessary role and focus to carry out the investigations. If necessary, ASIC may finance that task but “it is not ASIC’s role or obligation to undertake the detailed investigation required and even if it were, a liquidator is best placed to do this”. Duty to settle list of contributories

[10.285] If members or past members of the company are liable to contribute on a winding up – “contributory”, s 9 – the liquidator will make “calls” on those contributories or adjust their rights among themselves: ss 478, 506(1). Duty to ascertain liabilities

[10.290] The liquidator must try to ascertain all the creditors of the company. This involves obtaining information from the directors and making inquiries, and contacting and inviting creditors to lodge proofs of debt and then examining their claims. Some claims may be rejected, others admitted; with others the liquidator may seek further evidence. Duties in relation to an assetless company: s 545

[10.295] If a company has no assets from which the liquidator may draw remuneration for work done, the duties of the liquidator are limited. Section 545(1) says that a liquidator is not liable to incur any expense unless there is sufficient money available; but a lack of funds does not absolve a liquidator from lodging reports or other documents with ASIC, such as a report under s 533. The outcome of s 545 is that liquidators are not expected to do work in an administration by way of expending their own funds; but statutory requirements of completing and lodging reports with ASIC must nevertheless be completed.49 As the court in Jenkins v Jonkay Pty Ltd [2007] FCA 858 explained: “apart from lodging certain documents, a liquidator is not required to do anything if he cannot recover his expenses. It means the liquidator commits no wrong in failing to carry out any duties.”

In reality a liquidator will make what inquiries are reasonably necessary to determine the assets and liabilities, and seek responses from the directors; but will not pursue detailed inquiries that may involve examinations or investigations or legal action. The liquidator is the focal point for the company’s insolvent administration and is therefore expected by the community to undertake some level of investigation and provide advice as to why the company failed and who 49 Even though s 545 does not appear to apply to a liquidator’s time costs, as distinct from expenses payable to third parties, it is arguable that the principle it reflects should “inform an understanding of the liquidator’s role”: Re ACN 151 726 224 Pty Ltd (in liq) [2016] NSWSC 1801 at [57].

[10.310]

10 Introduction to Liquidation and Its Administration

415

may be accountable for potential breaches of the law. This does mean that a liquidator may need to perform work required by law without being remunerated, or without being reimbursed for expenses incurred, such as search fees paid to ASIC.50 In cases where liquidators have sought directions on whether funds should be expended, the court has generally supported the liquidator. Thus the requirement to attend to reports does not require liquidators to expend their own funds to take possession of, transport and store large volumes of company records: Clasquin SA v AAR International Pty Ltd (1989) 7 ACLC 284. Nor can a liquidator be criticised for not taking legal advice on an issue if there are no funds to do so: Jenkins v Jonkay Pty Ltd [2007] FCA 858.51 The rule in Ex parte James

[10.300] This rule has been explained in the context of bankruptcy (at [2.250]) as the rule of fair dealing expected of a trustee in bankruptcy and of a liquidator, that can be used to resist a trustee’s claim, even if that means overriding the trustee’s strict legal rights. The three elements required are that the claimant must have caused some form of enrichment of the company; they must not be able to prove in the winding up; and an honest person would acknowledge that it was not fair that the enrichment should not be the subject of relief. That relief is given only to the extent necessary to nullify the enrichment and this might not restore the claimant to the status quo. The position of the general creditors is not relevant; the concern is solely whether it is clearly unfair for the company to retain the enrichment at the plaintiff’s expense.52

Powers of the liquidator [10.305] The powers of the liquidator will be considered in more detail in Chapter 15. Compulsory windings up Section 477

[10.310] The main source of the liquidator’s powers is contained in s 477(1) and (2) – carrying on the company’s business, taking legal proceedings, compromising claims, selling property and so on. The subsections give the liquidator the power effectively to do all things necessary for winding up the affairs of the company and distributing its property in the proper exercise of the liquidator’s own discretion: s 477(6). This section is equivalent to the list of the trustee’s powers under s 134 of the Bankruptcy Act. 50 See Phillips, “An Analysis of Official Liquidations in Australia” (ARITA Terry Taylor Scholarship, February 2013) which shows the extent of unfunded work in official liquidations. 51 See ASIC’s RG 16 – External Administrators – Reporting and Lodging, at [16.19]-[16.22], for its views as to the operation of s 545. 52 Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676; (2007) 64 ACSR 31; ASIC v Karl Suleman Enterprises Pty Ltd [2003] NSWSC 400; (2003) 45 ACSR 401.

416

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.315]

Restriction on right to compromise a debt: s 477(2A)

[10.315] There are limitations on some powers referred to in s 477(1). A liquidator is not entitled to compromise a debt owed to the company where the debt owed is greater than $100,000 (reg 5.4.02) without first obtaining the consent of the creditors, committee of inspection or the court: s 477(2A).53 This imposes some oversight on the liquidator so that the company does not forgo large sums which might otherwise be available for creditors: State Bank of NSW v Turner Corp Ltd (1994) 14 ACSR 480, 483. However, the courts accept that the liquidator is usually in the best position to determine whether a compromise is in the best interests of creditors.54 There is no similar restriction imposed on a trustee in bankruptcy. If there is a conflict between the liquidator and some of the creditors as to the benefit of a compromise, the creditors must establish “some lack of good faith, error in law or principle or some real or substantial ground” for doubting the liquidator’s proposal and there is an onus on the creditors to show this. If the compromise involves the settlement of existing litigation, the court would expect evidence in the form of advice of counsel dealing with the litigation, its issues and possible outcomes and considering the proposal in the light of these matters.55 Leave is only required in respect of the compromise of a “debt”. This does not include a preference payment (Re Luxtrend Pty Ltd [1997] 2 Qd R 86), a claim for breach of fiduciary duty and misleading and deceptive conduct (Farrow Finance Co Ltd v ANZ Executors and Trustees Co Ltd [1998] 1 VR 50), a claim for damages for breach of contract (Cvitanovic v Marsdens Law Group [2012] NSWSC 205) or a breach of trust under the principles of Barnes v Addy (Re Tietyens Investments Pty Ltd [1999] FCA 206; (1999) 17 ACLC 697). Restriction on entering long-term funding agreements: s 477(2B)

[10.320] Further, a liquidator is unable to enter into an agreement on behalf of the company where the term of the agreement may end or obligations of a party to the agreement may be discharged by performance more than three months after the agreement has been effected, even if the term may end or the obligations may be discharged within those three months, without the approval of the creditors, the committee of inspection or the court: s 477(2B). An exception to this is provided to an agreement where the costs and expenses of the company under the agreement are to be paid out of money paid to the liquidator by ASIC on behalf of the Commonwealth for those costs and expenses: s 477(2C). This relates to funding provided by ASIC under the AA Fund or other such assistance. The courts have often been required to exercise their discretion under s 477(2B) in approving a liquidator entering into a litigation funding agreement either with a major creditor, or with a commercial litigation funder. A major creditor such as the 53 The focus of this provision is the interests of the creditors. See generally, Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No 6) [2007] FCA 1030; (2007) 160 FCR 423; Handberg v MIG Property Services Pty Ltd [2012] VSC 551; (2012) 92 ACSR 38. 54 Re Spedley Securities Ltd (1992) 9 ACSR 83. 55 Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207, 230; State Bank of NSW v Turner Corp Ltd (1994) 14 ACSR 480, 483; Re Spedley Securities Ltd (1992) 9 ACSR 83, 85.

[10.320]

10 Introduction to Liquidation and Its Administration

417

Australian Taxation Office may agree to fund, often to a capped amount and on various conditions.56 More often, funding or indemnities from creditors for the proposed litigation have not been able to be secured and a commercial funder will be used. The agreement will usually involve the funder agreeing, in exchange for either a percentage of any damages obtained in litigation or for assignment to it of the cause of action (with the liquidator being entitled to a portion of any judgment obtained), to pay all of the costs of the litigation and any adverse costs order awarded against the liquidator. A series of principles applicable to an application under s 477(2B) are summarised in Hughes, in the matter of Sales Express Pty Ltd (in Liq) [2016] FCA 423 at [20]. These include: • the role of the court is to grant or refuse approval. It is not to develop an alternative proposal. • while the power of the liquidator to do “things as are necessary” has a broad meaning, the court must be satisfied that there is a good and solid reason for concluding that the winding up would be enhanced by the funding agreement, compared with the ordinary deployment of surplus funds. The enhancement must be demonstrated by some informed and independent assessment of the separate and selfish interests of the funding company. • the court will not generally review a liquidator’s commercial judgment or second guess its decision. • the court will scrutinise a liquidator’s decision closely where there appears to be a lack of good faith, an error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator’s conduct. In considering whether the court’s power under s 477(2B) should be exercised, matters that are commonly relevant include the manner in which the funding or indemnity will be provided; the extent to which the liquidator has considered other funding options; the interests of creditors and the extent to which the liquidator has consulted them; the liquidator’s general prospects of success in the litigation; any possible oppression in bringing the proceedings; the nature and complexity of the cause of action; any particular premium or benefit promised including whether it is proportionate to the risk undertaken by the funder; whether the liquidator is subject to any control over the conduct of the litigation, other than the usual obligation to keep the funder informed, and whether there is a mechanism for resolving any dispute between the funder and the liquidator. The risks involved in the claim are also important, including the amount of costs likely to be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the costs of the defendant in the event that the action is not successful, or to contribute towards any order for security for costs: see [10.225].57 Approval may be given for companies of a corporate group to enter into an agreement, supported by the court’s exercise of the general power under 56 As to ATO funding, see Arnold, “Use of Contingent Fee Arrangements in Insolvencies” (2010) 22(4) A Insol J 30. 57 Also see a similar list in Re 77738930144 Pty Ltd (in liq) [2017] NSWSC 452 at [54].

418

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.325]

s 477(2)(m) for each of the companies to enter into and perform the proposed agreement: Woodings, in the matter of the Bell Group Limited [2016] FCA 369. Costs agreements with lawyers for their conduct of the proposed litigation extending beyond three months must also be approved. The retention of the same lawyers as the creditor funding the liquidator may also be the subject of court approval: Re 77738930144 Pty Ltd (in liq) (formerly Commercial Indemnity Pty Ltd) [2017] NSWSC 452. Section 477(2)(c) does not authorise the liquidator to sell assets held by the company in trust as they are not “property of the company”. The liquidator may, however, sell the rights that the company has against the assets, that is, an equitable charge over the assets to cover the trustee’s right of indemnity. The equitable charge can support a court application to appoint a receiver with a power of sale: Re Stansfield DIY Wealth Pty Ltd [2014] NSWSC 1484; (2014) 103 ACSR 401; Re Mecfab Holdings Pty Ltd [2015] NSWSC 46. The terms of the funding agreement are usually disclosed to the court although confidentiality orders are often made: Goyal, in the matter of Tiaro Coal Limited (In Liq) [2017] FCA 1252. Section 477(2B) also applies to an entry into a deed of settlement by the liquidator that may extend over the three month period. Approval under both subsections may be required: Downey v Stewart [2014] FCA 792; Boné v Smith [2015] FCA 870. Approval can be granted nunc pro tunc, that is, approval given after the arrangement had been entered into by the liquidator (Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167; Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375), usually in circumstances of oversight in approval being obtained. Liquidators should properly seek prior approval. The court cannot extend time under s 477(2B) but it can excuse any late application under s 1322(4)(a), after first approving the agreement by reference to the criteria in s 477(2B): Re Read [2007] FCA 1985; (2007) 164 FCR 237. Costs and litigation

[10.325] While dealing with this point, it is to be emphasised that often liquidators have a cause of action available but have no funds to support the prosecution of the litigation. They must be careful if they issue proceedings in view of the potential for costs orders to be made against them.58 There is a general rule that in a proceeding by or against a liquidator the real party to the action is the company and the company’s assets are responsible for the costs. If the liquidator is the plaintiff he or she will be ordered to pay the costs of the successful defendant but has an indemnity for those costs from the assets of the company. “If this were not the rule a liquidator would be in an impossible position. He would only bring an action if it were bound to succeed. He might not resist claims brought against the 58 Clutha Ltd v Millar (No 5) [2002] NSWSC 833; (2002) 43 ACSR 295.

[10.335]

10 Introduction to Liquidation and Its Administration

419

company unless they were clearly hopeless. There is also the risk that good people would be deterred from taking on the responsibility of acting as a liquidator.”59

There are exceptions to the rule that the company’s assets should bear the costs. If the liquidator acts unreasonably, recklessly or negligently and their conduct leads to the unnecessary incurring of costs, the court can order that those costs be paid by the liquidator, in effect personally, with no right of indemnity from the company’s assets: Hypec Electronics Pty Ltd v Mead [2004] NSWSC 731; (2004) 61 NSWLR 169; Jenkins v Jonkay Pty Ltd [2007] FCA 858. Apart from issues of negligence, the reality is that liquidators will not pursue the action in most cases without support to cover the costs of litigation, and liquidators are not obliged to do so, even if the action is a good one, unless there are funds available to meet expenses: Magarditch v ANZ Banking Group Ltd (1999) 17 ACLC 1275; Corporations Act, s 545(1). Engagement of agents

[10.330] Section 477(2)(k) of the Corporations Act provides that a liquidator may “appoint an agent to do any business that the liquidator is unable to do, or that it is unreasonable to expect the liquidator to do, in person”. Hence, a liquidator will usually employ agents to assist as may be necessary, for example, auctioneers or valuers. In selecting, appointing and supervising such agents, the liquidator must exercise a reasonable degree of care, skill and competence including as to the reasonableness of fees charged. This includes legal fees: Re Stockford Ltd [2004] FCA 1682; (2004) 140 FCR 424. It is also accepted that the liquidator will employ other staff such as accountants, managers and clerks to carry out the range of matters associated with a liquidation.60 Section 477(1)(b) allows a liquidator to appoint a solicitor to assist and advise. Nevertheless, beyond these types of engagements, the authority to delegate is “quite circumscribed”: ASIC v Edge [2007] VSC 170; (2007) 211 FLR 137; Ah Toy v Registrar of Companies (1986) 10 FCR 356. All such other things as are necessary

[10.335] The liquidator’s office is entirely statutory and derives solely from the Corporations Act: Re Dallhold Investments Pty Ltd (1994) 53 FCR 339; Cummeragunga Pty Ltd v ATSIC [2004] FCA 1098; (2004) 139 FCR 73. Nevertheless, s 477(2)(m) of the Act is a broad catch-all provision, giving a liquidator power to do “anything expedient with reference to, or conducive to, the beneficial pursuit towards completion of the winding up of affairs and distribution of property” Re McGrath; HIH Insurance Ltd [2010] NSWSC 404; (2010) 78 ACSR 405; Re Bairnsdale Food Products Ltd (1948) VLR 264. The word is not synonymous with “essential” or “indispensable” and is therefore not confined to matters without which winding-up and distribution cannot occur. But the existence of the power must be distinguished from the propriety of its exercise, meaning that the outcome or consequences of the action proposed must also be considered. The power was held not to support the liquidator entering a litigation funding agreement without a 59 Jenkins v Jonkay Pty Ltd [2007] FCA 858 at [9]. 60 Re The Trustees, Executors and Agency Company Ltd (1985) 3 ACLC 475.

420

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.340]

return to the creditors, that is, purely for the sake of a return which might be generated by the funding itself.61 It must necessarily be read in the context of the other powers conferred by s 477(2) so that it is not given a meaning which renders the other powers otiose. Those other powers in s 477 will usually be wide enough for the range of issues that arise in a liquidation in any event. Approval has been given for companies of a corporate group to enter into an agreement, supported by s 477(2)(m), each of the companies entering into and performing the proposed agreement: Woodings, in the matter of the Bell Group Limited [2016] FCA 369; and for a liquidator’s exercise of the power of sale of property initially purchased under the company’s right of first refusal as lessee. That purchase was justified as an incident of the subsequent sale with reliance on former provision equivalent of s 477(2)(m): Re Bairnsdale Food Products Ltd. While it is a broad power, not all of the powers formerly exercisable by particular officers of a company are transferred to the liquidator but in a loose way this is sufficiently descriptive of what in reality occurs: Butterell v Docker Smith Pty Ltd (1999) 41 NSWLR 129. Other powers

[10.340] Liquidators, as well as trustees, have significant powers to search for and seize company books: s 530B; apply to the court for a search warrant: s 530C and to conduct public examinations. These powers are discussed in detail in Chapter 15. There are certain powers which reside in the court which, through r 7.10 of the Courts’ Corporations Rules, are in effect delegated to the liquidator: Corporations Act, s 488(1). These include the holding and conducting of meetings of creditors, adjusting of the rights of contributories, and fixing of the time within which debts and claims must be proved. However, a liquidator may only distribute a surplus to members with the court’s special leave and on affidavit evidence being provided by the liquidator: s 488(2); Courts’ Corporations Rules, r 7.9, Court Form 15. The requirement that “special leave” be obtained simply means that a specific application for leave must be made primarily to ensure that there is in fact a surplus to be distributed: Visnic v Sywak [2012] NSWSC 1284. The liquidator may at the same time seek approval of their remuneration: Re GPJ Investments Pty Ltd [2016] NSWSC 1173. Section 488 also applies to distributions of surplus funds to unit holders where the company in liquidation is a trustee of a trust: Re Wise Guys International Pty Ltd (in liq) [2015] NSWSC 1245. In exercising their powers under s 477, liquidators are subject to the control of the court to which any creditor or contributory, or ASIC, may apply: IPSC, Div 90. As with a trustee in bankruptcy, a liquidator is to “have regard to” any directions of the creditors or contributories given by resolution (IPSC, s 85-5), but is not obliged to comply with them. This equates with the position in bankruptcy, under IPSB, Div 90. 61 Fortress Credit Corp (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85; (2015) 105 ACSR 581. See also In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556.

[10.350]

10 Introduction to Liquidation and Its Administration

421

Directions

[10.345] A liquidator may apply under IPSC, Div 90 to the court for directions and the court may “make such orders as it thinks fit”: IPSC, s 90-15(1). The prior law envisaged that a particular matter would be of a concrete character and the liquidator should place before the court a statement of facts that identifies that matter in a particular factual context. The court would therefore not consider hypothetical or general questions: HIH v Building Insurers’ Guarantee Corporation [2004] NSWSC 910; (2004) 51 ACSR 21. The discretion under IPSC, s 90-15 might properly be exercised according to the same principles as under the former directions provisions: In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481. However, the power of the court under IPSC, s 90-15 is wider and includes making “an order determining any question arising in the external administration of a company” s 90-15(3)(a)), which accommodates the determination of substantive rights. In such a case, the affected parties would need to be put on notice: In the matter of Hawden Property Group. Under the law concerning the former directions provisions, while the courts would not make orders binding upon or affecting the rights of third parties to the liquidation,62 they could convert an application for directions into proceedings for the determination of substantive rights and make a declaratory order concerning those substantive rights; this was on the proviso that those affected would suffer no injustice as a result.63 Protecting the interests of creditors is an important purpose of liquidators seeking advice: Handberg v MIG Property Services Pty Ltd [2012] VSC 551; (2012) 92 ACSR 38. An order for directions can also protect the liquidator from allegations that he or she has acted improperly or unreasonably or has caused actionable loss: Coats v Southern Cross Airlines Holdings Ltd [2000] 1 Qd R 84.

Voluntary liquidators [10.350] A voluntary liquidator is authorised to exercise all of the powers conferred by the Corporations Act on a court liquidator (s 506(1)(b)). Section 477(2A) and (2B) specifically apply to the liquidator just as they apply to a court liquidator: s 506(1A). The voluntary liquidator has the power, given to a court liquidator under s 478, to take custody of company property and to settle a list of contributories. Section 506(1)(c) – (e) grants the voluntary liquidator additional powers, including to fix the time within which debts and claims must be proved. It should be noted again that this distinction in powers between court appointed and voluntary liquidators does not exist in bankruptcy. The ILRA made only some inroads into removing what is an unnecessary separation.

62 Re GB Nathan & Co Pty Ltd (1991) 24 NSWLR 674, 679-680; Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18. 63 Meadow Springs v Balanced Securities [2007] FCA 1443; (2007) 25 ACLC 1433; Re GB Nathan & Co Pty Ltd (1991) 24 NSWLR 674.

422

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.355]

LIQUIDATORS – THEIR REGULATION AND REMOVAL Supervision of the liquidator [10.355] As explained earlier, the liquidator has wide powers granted under the Corporations Act, virtually as a delegate of the court or the delegate of ASIC to ensure that fair play occurs as far as the competing interests in a liquidation are concerned: Re Biposo Pty Ltd (1995) 120 FLR 399. The court is careful how its delegates exercise these powers and will take precautions to make sure that those powers are used impartially and for a proper purpose. While the creditors and contributories can exercise some supervisory role, the substantial supervision of liquidators comes from ASIC and the court. These provisions now substantially mirror those for trustees in bankruptcy: see Chapter 2. Termination of registration

[10.360] Division 40 of Sch 2 sets out the process by which ASIC may take disciplinary and other action against a liquidator, including by way of terminating a liquidator’s registration for grounds such as misconduct, or commission of some serious offence. ASIC may direct a registered liquidator to comply with a requirement to lodge a document or to give any information to ASIC: IPSC, s 40-5. If the liquidator fails to comply, ASIC can direct that the liquidator accept no further insolvency appointments (IPSC, s 40-15(1)) or ASIC can seek an order from the court directing the liquidator to comply (IPSC, s 45-1). Similar processes apply if ASIC reasonably suspects that information provided by a liquidator under the Act is incomplete or inaccurate. ASIC can also direct the liquidator to advise relevant people about the incorrect information. There are other grounds on which ASIC can issue a direction not to accept further appointments, for example, if the liquidator fails to comply with a direction to convene a meeting: IPSC, s 40-15(1)(e). None of this means that the liquidator cannot challenge the directions of ASIC on legal grounds. Suspending or cancelling registration

[10.365] The registration of a liquidator is automatically cancelled if the liquidator becomes an insolvent under administration (Corporations Act, s 9). In some circumstances, ASIC can suspend or cancel the liquidator’s registration. For example, if their registration as trustee is cancelled, or the liquidator is convicted of an offence involving fraud or dishonesty: IPSC, ss 40-25, 40-30. ASIC must give notice to the liquidator within 10 business days, giving reasons for the suspension or cancellation: IPSC, s 40-35. In such cases, ASIC may appoint another liquidator or liquidators to handle the external administrations: IPSC, s 40-111.

[10.375]

10 Introduction to Liquidation and Its Administration

423

ASIC’s decision about the suspension or cancellation of the registration of a liquidator is reviewable by the Administrative Appeals Tribunal (see IPSC, Div 96). At this point is should be noted that “penalty privilege” has been abrogated in respect of liquidators, although, as we explained, not for bankruptcy trustees.64 A liquidator cannot refuse or fail to respond to a disciplinary process before the court on the basis that this may lead to a penalty in the nature of a suspension or disqualification: see s 1349(3)(la). Show-cause notice

[10.370] Under IPSC, s 40-40, ASIC may request a written explanation from a liquidator as to why they should continue to be registered if ASIC believes that the liquidator no longer has the relevant ability; has been convicted of an offence of fraud or dishonesty; or has failed to properly discharge her or his duties.65 That process is usually activated following some complaint about the liquidator’s conduct or competence, or following a review of the liquidator’s files by ASIC. This is referred to as a “show-cause” notice. If there is no reasonable explanation from the liquidator, a discipline committee must be convened under IPSC, s 40-45 to which ASIC can refer the liquidator’s conduct for a decision as to whether the liquidator should continue to be registered. There is no obligation on ASIC to give the liquidator, or the committee, reasons for its dissatisfaction with the liquidator’s response. The discipline committee

[10.375] As in bankruptcy, the committee sits informally but must abide by principles of natural justice.66 Although it is not bound by the rules of evidence it must have regard to them. The members of the committee must be independent of the liquidator and his or her firm and been seen to be so. It is important that the person on the committee from ASIC not have been involved in investigating the liquidator’s conduct. The liquidator chosen by ARITA must also meet independence standards and be a person with the knowledge and experience necessary to carry out their functions on the committee. Apart from knowledge of corporate insolvency, this includes knowledge of the requirements of natural justice, objective decision-making and the penalties. The liquidator should be given the right to have representation. Natural justice requires that the liquidator be clearly advised of the case against them. This is despite the fact that under IPSC, s 40-55(3), the committee can have regard to a wide range of issues, including any information provided by ASIC, any explanation or information given by the liquidator, and any other matter that the committee considers relevant. 64 Corporations Act, s 1349; see Rich v ASIC [2004] HCA 42; (2004) 220 CLR 129. See also Migration Agents Registration Authority v Frugtniet [2018] FCAFC 5 as to the scope of the privilege. 65 This extends to the liquidator’s compliance with their duties “in a foreign country”, for example, when acting under the authority of the Cross-Border Insolvency Act in pursuing assets overseas: see M Murray, “Cross-border Regulation of Insolvency Practitioners” [2018] 19(3) INSLB 55. 66 Castle, “Corporate Disciplinary Committees and Natural Justice” (2017) 18 (3 & 4) INSLB 73.

424

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.380]

The committee then must make a decision as to what penalty to apply. It has the option to cancel the registration, or allow the registration to continue subject to specified conditions: IPSC, s 40-55. Any such decision is reviewable to the AAT. Exchange of confidential conduct information between ASIC and the “industry bodies”

[10.380] An “industry body” can give ASIC a written notice of possible grounds for disciplinary action against a liquidator: IPSC, s 40-100. This process is the same that applies in personal insolvency and involves the same industry bodies – ARITA, CAANZ, CPA and others67 – who determine on reasonable suspicion that there are grounds for ASIC to take some action against a liquidator. While not formally termed whistleblowing, it has the same broad purpose. ASIC must consider this information and let the industry body know whether any action is taken. That action could involve ASIC itself looking into the matter of concern and taking action against the liquidator using its powers. The industry body, and any person referring information or using it, is protected from any liability if they act in good faith and if their suspicion of the liquidator’s misconduct is based on reasonable grounds: IPSC, s 40-105.68 ASIC also has authority to give out confidential information about a liquidator’s conduct in three circumstances under the ASIC Act: • to ARITA and the other industry bodies, each being a “prescribed professional disciplinary body”, to enable or assist them to perform one of their functions: ASIC Act, s 127(4)(d)(i); ASIC Regulations, reg 8AA(1); • to give confidential information to a “prescribed body”, being ARITA, reg 8AA(2), in relation to it performing a disciplinary function in relation to one of its members;69 and • to give confidential information to a disciplinary committee convened under IPSC, s 40-40. Register of Liquidators

[10.385] Some disciplinary processes and outcomes are to be recorded on the Register of Trustees: IPSC, s 15-1(5). These include particulars of any disciplinary action (defined in s 5-5) but exclude the giving of a show-cause notice by ASIC under s 40-40: s 15-1(2)(f). Nevertheless, while certain relevant documents are protected from public access under s 1274, a notice of significant events being one (IPSC, s 35-1), other documents lodged with ASIC under Div 40 may be open to inspection under that section. 67 For the equivalent arrangements in bankruptcy, see [2.112]. 68 See ASIC RL 355 – Notice by an industry body of possible grounds for disciplinary action. 69 ARITA’s disciplinary process is found in its Constitution and Regulations.

[10.395]

10 Introduction to Liquidation and Its Administration

425

Resignation and replacement of a liquidator [10.390] A court appointed liquidator may resign from a particular administration: s 473. The vacancy can then be filled by either ASIC or the court; in the case of an ASIC appointment, the liquidator is taken to have been appointed by the court: s 473A. In the case of a resignation of a voluntary liquidator, the vacancy can also be filled by the creditors, as well as by ASIC or by the court: s 499(3). Although suspension or cancellation of registration will often be as a result of adverse action by ASIC, a liquidator may request ASIC to suspend or cancel their registration: IPSC, s 40-25(1)(f); s 40-30(1)(f). This may be because of retirement or due to taking long leave from the role. As explained earlier, if a liquidator’s registration is suspended or cancelled, ASIC must fill the consequent vacancy: IPSC, s 40-111. Also, the Courts’ Corporations Rules note that the court may appoint a new liquidator on its own initiative, during any proceedings, or on application made under IPSC, s 90-20; see IPSC, s 90-15(2). Creditors’ rights to replace a liquidator: s 90-35

[10.395] Liquidators, both voluntary and court appointed, may also be replaced at any time by resolution of the creditors: IPSC, s 90-35. Reasons can include creditor dissatisfaction with the liquidator, or convenience (a conflict of interest may have arisen). At least five business days’ notice of the meeting must be given to the creditors. The law allows the former liquidator who has been removed to apply to the court to be reappointed. If they do so, they must record all their costs incurred in relation to the application in a way that separates those costs from their costs incurred in relation to other matters. The court may order that the former liquidator be reappointed if it is satisfied that the removal was an improper use of the powers of one or more creditors. The court may make such other orders in relation to the application as it thinks fit, including orders in relation to the costs of the application and the remuneration of the former liquidator. The law imposes no obligation on a replaced former liquidator to apply for reappointment, even if there appears to be improper conduct. The proper course in that case may be for the liquidator to refer the matter to ASIC. The incoming liquidator must give a declaration of independence in terms of IPRC, s 75-265. The same structure of ASIC and court and creditor oversight of a liquidator applies as in bankruptcy.

426

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.400]

Court oversight of a liquidator [10.400] Schedule 2 gives the court powers to make any orders in particular liquidator, a particular administration, or to inquire into administration. These are contained in IPSC, Div 45, in respect of liquidator; or in IPSC, Div 90, in respect of the conduct of administration by a liquidator.

relation to a a particular a particular an external

Examining these together, an application to the court may be made: (a) under s 45-1 for an order in relation to a particular registered liquidator; or (b) under s 90-10 for an inquiry to be conducted into the external administration of a particular company; or (c) under s 90-20 for an order in relation to the external administration of a company. In addition, under s 90-5, the court may inquire into the external administration of a company on its own initiative, during proceedings before the court. Also, under s 90-15, in giving directions to the liquidator, the court has a range of disciplinary powers it can exercise. Such applications are normally made to the court that made the winding up order although this is not strictly necessary. The court’s orders in relation to a registered liquidator: s 45-1

[10.405] IPSC, s 45-1 allows the court, “on its own initiative during proceedings before the court”, to make any orders it thinks fit in relation to a liquidator. It may also act on application made by the liquidator, or ASIC. A circumstance where the court might act on its own initiative would be where, in the course of a proceeding, evidence of issues about the liquidator’s conduct not central to the matter might be disclosed, for example, a false affidavit or apparent collusion with a creditor. IPSC, s 45-1 would allow the court to require the liquidator to respond to that concern. In exercising its powers, the court may take into account: (a) whether the liquidator has faithfully performed, or is faithfully performing, their duties; and (b) whether an action or failure to act by the liquidator is in compliance with the Act and the Insolvency Practice Rules; and (c) whether an action or failure to act by the liquidator is in compliance with an order of the court; and (d) whether any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and (e) the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group. Invariably, the court would direct the matter to be referred to ASIC for consideration. ASIC can itself also apply for orders under s 45-1, and so can the liquidator.

[10.425]

10 Introduction to Liquidation and Its Administration

427

Former s 536 was broadly interpreted as applying to disciplinary issues involving liquidators but was not limited to this and despite the factors listed in paragraphs (a) to (e) of the section, that may be the case with s 45-1. The fact that the liquidator may apply under the section supports this. IPSC, s 45-5 allows the court to make orders about costs, including that the liquidator pay costs personally. Review of the external administration of a company: Div 90

[10.410] Unlike IPSC, Div 45, which focuses on the person who is the liquidator, comparable provisions in IPSC, Div 90 focus on the administration of the winding up itself. However, the two Divisions have the potential for overlap. All of the supervisory provisions in Div 90 are expressed so as not to limit other powers the court might otherwise have: for example, s 90-10(6). The Court’s own inquiry in relation to an external administration: s 90-5

[10.415] Section 90-5 is comparable to s 45-1, allowing the court to act on its own initiative during proceedings to inquire into the external administration itself. The court may require the external administrator to give information, provide a report or produce a document to the Court in relation to the administration. Application to the Court for an inquiry: s 90-10

[10.420] Separately, the liquidator may make an application for an inquiry, as well as a company officer, a creditor on behalf of a committee, or ASIC: IPSC, s 90-10. Applications to the Court for orders: s 90-15

[10.425] The power of the court to give directions under s 90-15 is discussed at [10.345], including the power to make “an order determining any question arising in the external administration of a company” (s 90-15(3)(a)), which accommodates the determination of substantive rights. The court also has a range of disciplinary powers it can exercise under s 90-15, an odd juxtaposition with the power to assist a liquidator with directions. These include removing and replacing the external administrator, orders as to costs, orders in relation to any loss that the company has sustained because of a breach of duty by the external administrator, and orders in relation to remuneration, including repayment to the company: s 90-15(3). Under s 90-15(4), the court can take into account whether the liquidator has faithfully performed their duties, whether their action or failure to act was in compliance with the law, or an order of the court, and whether any person has suffered, or is likely to suffer, loss or damage because of this. As with IPSC, s 45-1, the court may take into account the seriousness of the consequences of the liquidator’s conduct and the effect it has “on public confidence in registered liquidators as a group”: s 90-15(4)(e).

428

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.430]

Section 90-20

[10.430] IPSC, s 90-20 allows the external administrator, a creditor, including one representing a committee of inspection, a director, and ASIC to apply for a court order under s 90-15.70 Court inquiries

[10.435] Many of the cases under former s 536 will remain relevant and are referred to in the 9th edition of this book. Former s 536 permitted the court, on the application of ASIC or a creditor to pursue an inquiry into a liquidator’s conduct of an external administration. An application under s 536 involved a two-step process. First, whether there were sufficient grounds in support of an application to hold an inquiry; second, if so, whether an inquiry should be undertaken and on what grounds. The court is generally reluctant to undertake an inquiry, unless there are substantial grounds for believing that the liquidator erred in the administration. Indeed, if an inquiry is unlikely to reveal misconduct, it should not be undertaken. Courts take the view that they should not unduly interfere with the liquidator’s day-to-day administration. There must be at least a prima facie case to investigate in the public interest, and not for the pursuit of some private claim. There may also be alternative remedies available: Burns Philp Investments Pty Ltd v Dickens (1993) 11 ACLC 272, 273. As discussed at [10.360], ASIC itself has alternative means of pursuing liquidator misconduct under IPSC, Div 40. Alternatively, it may choose to apply for orders under s 90-10 based on the seriousness of the misconduct and the need for any compensation or monetary orders. For example, in ASIC v Ariff [2009] NSWSC 829, the court acted on ASIC’s application under former s 536 to prohibit the former liquidator from ever again being a liquidator and ordered compensation of nearly $5 million to be paid to certain creditors. Challenges to liquidator’s decisions

[10.440] A fundamental aspect of any insolvency regime is to allow creditors and others to challenge the decisions of a liquidator. Section 90-15 allows an application to be made by any person with a financial interest in the administration, a creditor authorised by the committee of inspection, ASIC, or an officer of the company. The court may also make an order on its own initiative. This in effect replaces the appeal rights under former s 1321 and the case law on that section will remain relevant. In that respect, the courts have been particularly reluctant to interfere when a question of business sense or commercial prudence is involved, unless it is also unreasonable.71 Liquidators are encouraged by the courts to take legal advice 70 Compare IPRB, s 90-80 which imposes a 60 day time limit for a s 90-15 application concerning the trustee’s conduct, other than on AFSA. See [2.345]. 71 Re Equity Funds of Australia (1976) 2 ACLR 238; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434.

[10.442]

10 Introduction to Liquidation and Its Administration

429

before acting. A liquidator who exercises their powers in good faith, after having taken proper advice, is generally protected from challenge.72 Courts will act if the liquidator has acted because of a want of good faith or because of some erroneous approach in law or in principle.73 Appointment of a reviewing liquidator

[10.442] A process of challenge or review of liquidator conduct applies by way of the appointment of a “reviewing liquidator”. That person is an independent registered liquidator who is asked to review and report on any matter of concern about the conduct or the remuneration of the particular liquidator subject to the review. That report then allows consideration of what action, if any, needs to be taken. The court may appoint a reviewing liquidator under IPSC, s 90-23(6) on an application made by ASIC or by a person with a financial interest in the external administration: IPSC, s 90-23(7), (8).74 ASIC also has the power to appoint a reviewing liquidator itself (IPSC, s 90-23(1)) either on its own initiative on an application by an officer of the company or by a person with the necessary financial interest. The court order appointing a reviewing liquidator must set out the matters in relation to the external administration of the company which the liquidator is appointed to review and how the costs of carrying on the review will be determined: IPSC, s 90-23(5), (9). Those matters cannot relate to the minimum remuneration payable to a liquidator under IPSC, s 60-5(2): see s 90-23(10). The creditors can also appoint a reviewing liquidator, by a resolution passed at a meeting of creditors (IPSC, s 90-24(2)) but this is limited to the remuneration of the liquidator and the expenses incurred: s 90-24(1); and a remuneration determination (under IPSC, Div 60) must first have been made: s 90-24(7). Individual creditors may also appoint a reviewing liquidator under s 90-24(4) if the liquidator agrees to the appointment (s 90-24(5)). The same arrangements apply for a review of remuneration and expenses in a members voluntary liquidation, with the company, or one or more members, being able to resolve to appoint a reviewing liquidator: s 90-24(2). A reviewing liquidator cannot review remuneration for work done beyond six months prior to the review, nor costs and expenses incurred more thaiughgyln 12 months prior: IPSC, s 90-7. The costs of a reviewing liquidator appointed by the court or by ASIC are treated as expenses of the liquidation, while they are to be paid by the creditors or members if appointed under s 90-24: s 90-27. The report of the reviewing liquidator is to be 72 Re Burnells Pty Ltd (1979) 4 ACLR 213; Ah Toy v Registrar of Companies (1986) 10 FCR 356. 73 Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434. 74 The Courts’ Corporations Rules, r 7.11 requires the application to be accompanied by the written declaration made by the proposed reviewing liquidator under IPRC, s 90-18.

430

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.445]

provided to the external administrator, the committee of inspection (if any is appointed) and to ASIC and must be tabled at the next meeting of creditors (if one is held): IPRCs 90-24(2).75 The court has broad powers to make orders in relation to a review conducted by a reviewing liquidator: s 90-28. The reviewing liquidator has extensive powers under IPRC, s 90-22. The reviewing liquidator mechanism is contrasted with bankruptcy law, where it is the Inspector-General in Bankruptcy who has the authority to review a trustee’s remuneration: IPSB, see [2.210].

Removal of liquidators [10.445] An order for removal of a liquidator based on misconduct would only be made on clear and unequivocal evidence. The courts have removed a liquidator whose independence or position as a fiduciary was compromised,76 or who had acted improperly and was unfit for office,77 or if it was in the best interests of the liquidation, subject to issues of fairness to the liquidator. A lack of independence can be a reason for removal of a liquidator and sometimes, a sanction. Issues of the liquidator’s independence may not have been reasonably foreseen at the time the appointment was taken. If the conflict is significant, the liquidator may seek to resign, or seek directions from the court. In clear cases, the court may have no option but to remove the liquidator although the appointment of a special purpose liquidator is, as we have discussed, another option: see . If a liquidator becomes too familiar with a major creditor during the administration of the winding up such that the liquidator’s independence is drawn into question, a court may remove the liquidator: Re Biposo Pty Ltd (1995) 120 FLR 399. Prohibitions under s 532(2) may arise through subsequent events, which may bring a challenge to the appointment or cause the liquidator to seek court leave to continue: , Gollant, in the matter of ACN 065 229 831 Pty Ltd [2017] FCA 1158; Re McGrath; HIH Insurance Ltd [2010] NSWSC 404; (2010) 78 ACSR 405. Similar questions of independence and impartiality also arise, and are similarly treated, where an application is made for leave under s 448C for a liquidator to be appointed administrator: see [19.135]. In circumstances where the court found that administrators had not properly supervised the administration, and then appointed themselves liquidators, the court removed them, one reason being that further investigations needed to be carried out and it was inappropriate for the administrators to investigate themselves: Malhotra v Tiwari [2007] VSCA 101; (2007) 25 ACLC 917. If the creditors have lost confidence in the liquidator that may be grounds for removal: Singtel 75 For reviewing liquidators appointed by ASIC, the report is not to be provided to the committee of inspection without ASIC approval; and for court appointed reviewing liquidators, the court may order how the information is to be provided: IPRCs 90-24. 76 ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204 (apprehension of bias). 77 ASIC v Ariff [2009] NSWSC 829, where the orders were made by consent.

[10.450]

10 Introduction to Liquidation and Its Administration

431

Optus Pty Ltd v Weston [2012] NSWSC 674; (2012) 90 ACSR 225 at [162]. In such a case, the creditors may vote to remove the liquidator under IPSC, s 90-35. Those seeking the removal of a liquidator are required to establish at least a prima facie case that removal is for the general advantage of those interested in the winding up; the onus of proof will not be easily discharged where the liquidator has already become acquainted with the business and affairs of the company.78 Courts will be cautious in situations where it appears that a person may be trying to avoid the consequences of some wrongdoing by attacking the liquidator and seeking their removal.79 A relevant factor in determining whether a liquidator should be removed is the costs that would be incurred if another liquidator had to complete the liquidation, wasting the work already performed: Re Biposo Pty Ltd (1995) 120 FLR 399, 403. A court is less likely to discharge a liquidator towards the end of a winding up. Court applications for removal may now be less common given that creditors have another avenue, being under IPSC, s 90-35, to resolve to remove and replace a liquidator. It would only be used if a creditor or group were unable to get the numbers under that power that they might apply to the court.

Remuneration of the liquidator [10.450] The law concerning the general entitlement of a liquidator to remuneration for work performed is broadly governed by the principles applying to trustees stated in the bankruptcy case of Adsett v Berlouis (1992) 37 FCR 201, which was discussed in the bankruptcy context: see [2.275]. This entitlement to remuneration is express in IPSC, s 60-5 in that a liquidator can claim remuneration for “necessary work properly performed” in the administration.80 A liquidator has a fiduciary responsibility to creditors in the conduct of the administration and the way in which that necessary work is performed. A liquidator’s remuneration is necessarily given a high priority in the order of distribution of the company’s assets under , s 556(1) of the Act. Assuming that there are funds available, a liquidator is entitled to remuneration as is determined by the committee of inspection, the creditors or the court: IPSC, s 60-5. Before going to the committee of inspection, or the creditors, the liquidator must prepare a report setting out such matters as will enable the committee, or the creditors, to make an informed assessment as to whether the proposed remuneration is reasonable; and a summary description of the major tasks performed, or likely to be performed, by the liquidator; and the costs associated with each of those major tasks: IPSC, s 70-35. A copy of the report must be given to each member of the committee, or each creditor, at the same time as the initial report to creditors under IPSC, s 70-30. 78 See SingTel Optus Pty Ltd v Weston [2012] NSWSC 674; (2012) 90 ACSR 225; Re St Gregory’s Armenian School Inc [2012] NSWSC 1215; (2012) 92 ACSR 588. 79 Re Biposo Pty Ltd (1995) 120 FLR 399, 403. Also, see Domino Hire Pty Ltd v Pioneer Park Pty Ltd (2000) 18 ACLC 13, 21. 80 See also Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96; Conlan v Adams [2008] WASCA 61; (2008) 65 ACSR 521; Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459.

432

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.455]

The same requirements apply in a voluntary winding up, subject to the different timing requirements: IPSC, s 70-30(3). IPSC, s 60-10 provides that a remuneration determination may be made by the creditors,81 or, if there is a committee of inspection, and the creditors have not approved the remuneration, by that committee, or, ultimately, by the court. Remuneration of a liquidator does not include disbursements.82 Nevertheless a liquidator has responsibilities to ensure disbursements are reasonable and necessary; for example, in respect of legal fees, as to the services provided and the rate charged: Re Stockford Ltd [2004] FCA 1682; (2004) 140 FCR 424. In liquidations where there are difficulties in obtaining a quorum of creditors to approve remuneration, and there may only be limited funds from which it may be drawn, the liquidator may claim up to $5,000 in remuneration without holding a meeting: IPSC, s 60-15. There is no need for the liquidator to attempt to call a meeting. The court has the power to review any agreement or resolution made concerning the remuneration of the liquidator: IPSC, s 60-11.83 It may do this on the application of a creditor, ASIC or a company officer. The court may affirm vary or set aside and replace the remuneration determination: IPSC, s 60-11(4). In reviewing the liquidator’s remuneration, the court must have regard to whether the remuneration is reasonable taking into account any or all of matters listed in IPSC, s 60-12. These matters include the extent to which the work performed was reasonably necessary, the period of time involved, the quality of the work, its complexity, the value of any property involved, whether any receivers were involved, the nature and value of the creditors, and the time taken. These apply in bankruptcy and are set out in full at [2.195]. The court’s general powers extend beyond these outcomes. For example, a court has made an order providing for the remuneration of a liquidator notwithstanding that the order of appointment was invalid because of a lack of jurisdiction.84 Current issues in liquidator’s remuneration

[10.455] As in bankruptcy, remuneration should generally be proportionate to the size of, or the benefit accruing to, the liquidation. That general principle cannot always be achieved because every company will bring its own individual mix of issues. It must be noted that the reasonable cost of the liquidation does not neatly correlate to the size of the company or the value of its assets. A company with 81 A liquidator cannot use their casting vote in favour of their own remuneration: IPRC, s 75-115. Under the previous law, see Williams v CD Protective Services Pty Ltd (No 3) [2010] QSC 224; Re Huxtable; P Hindle & Co (WA) Pty Ltd [2013] FCA 1105; cf Krejci as liquidator of Eaton Electrical Services [2006] NSWSC 782; (2006) 58 ACSR 403. 82 Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96, 100; Onefone Australia Pty Ltd v One.Tel Ltd [2010] NSWSC 1120; (2010) 80 ACSR 11. 83 Courts’ Corporations Rules, r 9.2A, Form 16A. 84 Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (No 2) (1986) 5 NSWLR 227.

[10.455]

10 Introduction to Liquidation and Its Administration

433

relatively low assets can give rise to complex practical and legal issues that may be costly to finalise. Similarly, a company with a large and valuable asset base may be relatively straightforward to wind up. Even where the work undertaken is complex, claiming remuneration and expenses that exhaust all or most of the fund for creditors may be inconsistent with the concept of proportionality in setting remuneration: Re On Q Group Ltd [2014] NSWSC 1428; (2014) 104 ACSR 470. In some cases, courts have rejected liquidator claims for remuneration on the basis that the claims are out of proportion to the work undertaken and the value provided to the estate: see for example, Re AAA Financial Intelligence Ltd (No 2) [2014] NSWSC 1270; Re Independent Contractor Services (Aust) Pty Ltd [2016] NSWSC 106. However, the balance of authority clearly states that proportionality is based on the value and importance of the work provided, not merely economic returns to creditors. This is made clear by the relevant factors that the court must have regard to when making or reviewing a remuneration determination under IPSC, s 60-12. The overarching principle is whether, in all the circumstances, the remuneration is reasonable based on the necessary work undertaken, and this cannot be determined simply by applying a universal percentage of assets realised, whether for all liquidations or for liquidators of a particular category (such as liquidations involving low asset levels): Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459 at [52] (Sakr Nominees). There may be cases where necessary work will exhaust most, or even all, of the funds available to creditors and this is not, taken in isolation, manifestly unreasonable or inappropriate. It all depends on the work that is reasonably necessary for that particular liquidation: see Re Idylic Solutions Pty Ltd [2016] NSWSC 1292; Re Atwell & Co Pty Ltd (in liq) [2017] VSC 683. In Templeton v ASIC [2015] FCAFC 137 the Full Federal Court said (at [34]): “Another way to look at proportionality can be to conclude from a lack of proportionality between the cost of the work done relative to the value of the services provided that there has been overcharging or excessive remuneration claimed.”

In that case (a receivership), the Court explained the relationship between proportionality and reasonableness as follows (at [30]-[31]): “the question of proportionality is an anterior question to consider in order to determine whether time was reasonably spent. If the relevant work plan underpinning the actual time spent and the allocation of personnel at the requisite level of seniority was disproportionate to the nature, importance and complexity of the task and the benefit to be achieved from the task, then it might be said that the time spent on the task was not time reasonably spent… Generally, an amalgam of the factors in s 425(8)(d), (e), (g) and (h) [equivalent to s 473(8)(d)-(h)] have as their unifying theme the concept of proportionality.” [emphasis in original]

The NSW Court of Appeal that the court’s exercise of powers to fix remuneration involves “applying a legal norm of reasonableness”: Sakr Nominees at [49], [55]. Evidence as to the percentage that remuneration constitutes of the realisations may nonetheless provide a useful measure of testing the reasonableness of the remuneration claim: Re Idylic Solutions Pty Ltd [2016] NSWSC 1292 at [50] (approved in Sakr Nominees at [56]).

434

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.460]

In the context of a commercial claim brought by a liquidator – for example, in challenging a voidable transaction – the concept of proportionality can be of more relevance, and it is an issue that the liquidator should bear in mind in deciding whether to bring proceedings. As the court noted in Sakr Nominees at [58]: “there are commonly cases where work is undertaken in an unsuccessful attempt to recover assets whether at the request of creditors or otherwise. Provided it was reasonable to carry out the work and the amount charged for it was reasonable, there is no reason a liquidator should not recover remuneration for undertaking the work.”

The courts recognise that liquidators have other tasks beyond seeking a return to creditors of their money. These include investigations and reporting offences to ASIC, attending to statutory recording and lodging of accounts, and pursuing compliance by company officers with the legal obligations. Thus “not all necessary work results in a return to creditors, but that does not mean that remuneration for it is not reasonable or justified even at the price of a more limited return to creditors”: Warner, Re GTL Tradeup Pty Ltd [2015] FCA 323; (2015) 104 ACSR 633 at [71]. Remuneration for time spent in investigating suspect transactions may well be necessary, even if in the end there is insufficient evidence to proceed. Benefits to creditors are, therefore, not only to be measured in commercial terms, but include having the affairs of an insolvent company properly investigated and administered – Pegulan Floor Coverings Pty Ltd v Carter [1997] SASC 6299; (1997) 24 ACSR 651, 659. Outcomes that produce enough returns only for the liquidators’ remuneration and the costs of a litigation funder can be valid; liquidators would less readily accept appointments, and litigation funders would less readily fund proceedings, if the law were otherwise: Re Cardinal Group Pty Ltd (in liq) [2015] NSWSC 1761. In addition, a liquidator may bring proceedings to enforce the insolvency laws, for example, by suing directors for insolvent trading, potentially, although not desirably, without any dividend return: Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99.

[10.460] The fact that most liquidators (and other insolvency practitioners) typically charge fees based on time-billing has been the subject of criticism in some cases. The decision of Re Carton Ltd (1923) 39 TLR 194; [1923] ALL ER Rep 622 is frequently cited for its criticism of time billing as a method of calculating liquidator’s remuneration. In that case, the court stated: “The court as a general rule only fixes remuneration on a time basis if there is no other method which would operate to give the liquidator a fair remuneration. Experience has shown that the time occupied by a liquidator and his clerks affords a most unreliable test by which to measure the remuneration. Even the best accountant may spend hours over unproductive work, let alone his more or less efficient staff of clerks. Moreover, it is quite impossible to check charges based on such a system and to gauge the value of odd hours said to have been spent on the affairs of the company. The court has long since come to the conclusion that the proper method to adopt, whenever it is practicable, is to assess the remuneration according to the results attained.”

This has been applied in a number of cases where proportionality has been a significant consideration: see, for example, Re AAA Financial Intelligence Ltd (No 2) [2014] NSWSC 1270; Re Independent Contractor Services (Aust) Pty Ltd [2016] NSWSC 106. However, it should be noted that the decision in Re Carton was (as described by the court) one involving facts that were “somewhat out of the ordinary”. The

[10.460]

10 Introduction to Liquidation and Its Administration

435

case involved a voluntary liquidator who allegedly destroyed the company’s records so as to prevent a proper account of his work being undertaken. The court reviewed the remuneration after a shareholder of the company sought to remove the liquidator for misconduct, with the court appointing a liquidator to investigate and subsequently removed the liquidator. The remuneration claimed by the original liquidator had been approved by the committee of inspection based on a percentage basis from both realisations and distributions, but the law in England at that time did not allow for the COI to approve remuneration as approval needed to be given by a resolution of the creditors. In the authors’ view, this case is not a sound foundation to reject all time billing as manifestly unreasonable or disproportionate. Indeed, while many cases note the criticism of time billing in Re Carton, there is appellate authority that makes it clear that time billing is not in itself a reason for the court to reject a liquidator’s remuneration: Conlan v Adams [2008] WASCA 61 at [39].85 In Sakr Nominees, the court noted (at [59]-[60]) that there “is force” in traditional criticisms of time based charging, and stated that it may not always be appropriate, but held that the question is not whether time billing can be used (and clearly it is open under the statute to charge on a time-costed basis), but whether the remuneration is reasonable in the circumstances. It should be noted that the wording of the statutory provisions considered in these cases stated that remuneration could be calculated “by percentage or otherwise” (see former s 473(3)), but the current wording in IPSC, Div 60 no longer refers to a percentage. Rather it stated that a remuneration determination may specify the amount of remuneration or specify a method for working out an amount of remuneration (IPSC, s 60-10(3)) and expressly allows for calculation based wholly or partly on a time-cost basis (IPSC, s 60-10(4)). However, in the authors’ view, nothing turns on this different wording and the relevant factors that are to be considered by the court (as discussed in Sakr Nominees) are the virtually the same under both the pre-ILRA and the current law (IPSC, s 60-12).86 Liquidators normally have a lien over the funds and assets under their control, not only for the costs and expenses of obtaining the property or funds but also for general remuneration. Where a liquidator has preserved or realised property subject to security the liquidator’s remuneration and expenses incurred in such work and action may rank in priority to the rights of the secured creditor to the property: Re Universal Distributing Co Ltd (1933) 48 CLR 171; Stewart v Atco Controls Pty Ltd [2014] HCA 15; (2014) 252 CLR 307. A liquidator entitled to such a claim has an equitable lien over the funds. The claim is in the nature of “salvage”; it ensures that those who have the benefit of the liquidator’s administration bear the burden: Shirlaw v Taylor (1991) 31 FCR 222, 230-231.87 85 See also Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280 at 285. 86 One difference is the addition of IPSC, s 60-12(l) which allows for the contents of a report by an reviewing liquidator appointed under IPSC, Div 90 to be included. This is a new role that was not explicitly provided under the former provisions, although the court had power to appoint a special purpose liquidator or investigator to report on particular matters. 87 See Tiverios, “Raiders of the Secured Asset: The Doctrinal Rationalisation for the Liquidator’s Lien or Charge over a Secured Asset post-Stewart v Atco” (2015) 23 Insolv LJ 101.

436

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.465]

Care must be taken in relation to trustee companies. Liquidators appointed over such companies must ensure that remuneration and expense claims that draw from the trust assets are referable only to the work of the company as trustee: Re GB Nathan & Co Pty Ltd (1991) 24 NSWLR 674; Re French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361; Re AAA Financial Intelligence Ltd [2014] NSWSC 1004. It should be noted that the court has an equitable jurisdiction to allow for remuneration for trustees (for work properly undertaken as trustee) and this jurisdiction can be exercised in favour of a liquidator who acts over a company that acts as trustee for work that relates to the company’s role as trustee: Re MF Global Limited (in liq) (No 2) [2012] NSWSC 1426.88 Many companies that act as trustee only act as trustee and hence the costs and expenses of the liquidation are properly recognised by the court. These and related issues are discussed in Chapter 15.. Despite the fact that a liquidator is entitled to claim remuneration, and at a high priority, the reality is that remuneration can only be drawn from company assets. In many company liquidations, there are insufficient funds available for remuneration to be drawn, in full or at all.89 Bases of remuneration

[10.465] There is no fixed scale of remuneration. The law now states that an external administrator of a company is entitled to receive remuneration for necessary work properly performed according to a “remuneration determination”: IPSC, s 60-10. Remuneration determinations may be made by resolution of the creditors, or by the committee of inspection or by the court. IPSC, s 60-12 sets out the various matters to which the court must have regard. No bases of calculation are required, except that if time costing is used, there must be a cap applied, that is, an upper limit. That cap may be increased by a further remuneration determination. The consent of a liquidator to act in any administration must be in accordance with Form 8 to the Courts’ Corporations Rules, rr 5.5(2), 6.1(2). Federal Court Form 8 requires disclosure of the hourly rates of the liquidator and their staff. Legal practitioners

[10.470] As in bankruptcy, lawyers have no formal role under the Corporations Act in that legal capacity, although liquidators themselves may well be legally qualified. Most lawyers are licensed and regulated as Australian legal practitioners (“lawyers”) under the Legal Profession Uniform Law (NSW) and the Legal Profession Uniform Law (Victoria), operative in those States. They act for liquidators, creditors and others in court proceedings and in giving advice. Unlike controlling trustees under s 188 of the Bankruptcy Act, lawyers have no comparable role under Pt 5.3A. They do have responsibilities under the Civil 88

See also Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32.

89 For a detailed analysis of liquidators’ remuneration, see R Quick and E Harris, Quick on Costs (Thomson Reuters, subscription service).

[10.475]

10 Introduction to Liquidation and Its Administration

437

Dispute Resolution Act 2011 (Cth) and equivalent State laws in relation to the need for pre-litigation advice given to liquidators, creditors, directors and others as clients. Legislation establishing the various courts also impose obligations on lawyers, and their clients, in the conduct of proceedings. For example, s 37M of the Federal Court of Australia Act 1976 (Cth) sets out the overriding purpose of its civil practice and procedure, including “the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute”. The lawyer for a liquidator must, in the conduct of proceedings, assist the liquidator to comply not only with that duty but the general duty of a liquidator in the context of the pursuit of litigation, “to act with the skill and care appropriate to his office, to weigh the costs involved against the amounts at stake, to take appropriate legal advice, to form a careful professional judgment, and not to waste the entity’s assets in dubious litigation …”: Re St Gregory’s Armenian School (in liq) [2012] NSWSC 1215 at [38]. The court can ask the lawyer to give their liquidator client the likely duration of the proceeding, and costs, including any adverse costs. The court can order the lawyer pays costs because of a failure to comply with these obligations: see Yeo (as liquidator), in the matter of Lyco Innovations Pty Ltd (in liq) v Onesteel Trading Pty Ltd [2013] FCA 568. Lawyers also have ethical responsibilities under the Legal Profession Uniform Laws in relation to conflicts of interest, for example, in acting for both a creditor and the liquidator. Other ethical obligations may extend to not advising debtor clients on ways to defeat creditors or ignore their duties as directors.90 Government lawyers acting for the Official Trustee or government creditors have model litigant obligations.91 Liquidators are “commercial or government clients” under s 170 of the Uniform Laws meaning that full costs disclosure is not required under Pt 4.3 of the Uniform Laws. This appears to be because liquidators can and should properly negotiate on fees. Lawyers’ fees are payable by the liquidator as a disbursement, not remuneration, and are not subject to creditor approval.

CONCLUSION [10.475] Having given a general description of the processes of liquidation, the following chapters will review the issues in more detail, particularly looking at the processes of voluntary and compulsory winding up, provisional liquidation, the recovery of assets and so on.

90 For members of ARITA, see the ARITA Code, at [5.5]. 91 For example, see Legal Services Directions 2017 made by the Attorney-General pursuant to s 55ZF of the Judiciary Act 1903 (Cth).

438

Keay’s Insolvency: Personal and Corporate Law and Practice

[10.475]

Chapter 10 – Introduction to Liquidation and its Administration Pts 5.4 – 5.6 Corporations Act IPSC, IPRC Pts 5.4 – 5.6 Corporations Regulations RG 16 – External administrators – Reporting and lodging ASIC RG 258 – Registered Liquidators: Registration, disciplinary actions and insurance requirements Courts’ CorporaDiv 7 – Liquidators rr 9.4, 9.4A, 11A.01 tions Rules

11

Voluntary and Compulsory Winding Up [11.05] VOLUNTARY WINDING UP ......................................................................................... 440

[11.10] Members’ voluntary winding up ................................................................... 440 [11.15] The declaration of solvency ........................................................................................ 441 [11.20] After the resolution ...................................................................................................... 442 [11.23] The liquidator ............................................................................................................... 442

[11.25] Creditors’ voluntary winding up ................................................................... 442 [11.30] (a) No declaration of solvency ................................................................................... 442 [11.35] Defects in the process .................................................................................................. 443 [11.40] (b) Liquidator believes company is insolvent ......................................................... 443 [11.45] (b) Voluntary administrator becomes a creditors’ voluntary liquidator ............ 444 [11.50] (d) Appointment by ASIC ........................................................................................... 444 [11.55] COMPULSORY WINDING UP ....................................................................................... 445

[11.60] Creditor is the usual applicant, under s 459P ............................................. 445 [11.65] Presumptions of insolvency ............................................................................ 446 [11.70] Application must be made within three months ........................................ 446 [11.75] Statutory demands – the most common way to prove insolvency ......... 447 [11.80] Comparisons with bankruptcy notices ..................................................................... 447 [11.85] Form of a demand ....................................................................................................... 447 [11.90] The creditor’s debt ....................................................................................................... 448 [11.95] Demand not based on a judgment debt to be verified by affidavit ................... 449 [11.100] Service .......................................................................................................................... 450 [11.105] Compliance with the demand .................................................................................. 452 [11.110] Date of failure to comply with the demand .......................................................... 453 [11.115] Processes whereby a debtor company can apply to challenge a demand ...... 453 [11.120] Application to the court – s 459G ........................................................................... 453 [11.125] The Graywinter principle ......................................................................................... 454 [11.130] The 21 days is a definite time limit – David Grant & Co v Westpac ............... 454 [11.135] Challenging the demand after 21 days .................................................................. 455 [11.140] Extension of the 21 days may be granted ............................................................. 455 [11.145] Grounds for setting aside demands: ss 459H and 459J ...................................... 456 [11.150] Section 459H(1)(a): genuine dispute about the debt ............................................ 456 [11.170] Demands used for debt recovery ............................................................................ 459

440

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.05]

[11.175] Section 459H(1)(b): offsetting claims ....................................................................... 460 [11.180] Section 459J(1)(a): defect in the demand (leading to) substantial injustice or some other reason ...................................................................................................... 462

[11.195] Consequences of demand being set aside .................................................. 465 [11.200] Unsatisfied execution ..................................................................................... 465 [11.205] WINDING UP PROCEDURES ...................................................................................... 466

[11.210] Applicants for winding up ............................................................................ 466 [11.215] Explanations of the various categories ................................................................... 466

[11.220] Applying for winding up .............................................................................. 469 [11.225] Application must be determined within six months, or as extended .............. 469 [11.235] Consent of liquidator ................................................................................................. 471 [11.240] Publication ................................................................................................................... 471

[11.245] Opposition to the winding up – s 465C ..................................................... 471 [11.250] Injunction to prevent winding up ................................................................ 471 [11.255] The hearing ...................................................................................................... 472 [11.260] Adjournment ............................................................................................................... 473 [11.265] Court’s discretion ....................................................................................................... 474 [11.305] Section 459S ................................................................................................................. 479 [11.310] Substituting creditor: s 465B ..................................................................................... 480

[11.315] The order .......................................................................................................... 481 [11.320] After the order ................................................................................................. 482

VOLUNTARY WINDING UP [11.05] The nature of this mode of winding up has already been discussed in Chapter 10. It needs to be repeated that a member’s voluntary winding up is only available if the company is solvent, and that if a creditor’s voluntary winding up is initiated, it will be in the circumstances of the company’s insolvency. Members’ voluntary winding up [11.10] In this form of voluntary winding up, the creditors have no involvement because they will be repaid in full. The purpose of the winding up is invariably to distribute the assets to the members, in accordance with the constitution, and close the company down to its ultimate deregistration. A winding up is initiated by special resolution of the company: Corporations Act, ss 491, 9. A special resolution requires the support of 75% of the members who attend and vote after 21 days’ written notice has been given: s 249H(1). A shorter period of notice is permitted provided that members with at least 95% of the votes that can be voted at the meeting agree to the shorter notice in advance: s 249H(2). The requirement to agree to short notice in advance only requires that consent be given before the meeting begins: Re Aprais Pty Ltd [2003] QSC 329; [2004] 1 Qd R 450. That case involved a shareholder meeting to consider a voluntary winding up where there was no evidence that the major shareholder had consented to the short

[11.15]

11 Voluntary and Compulsory Winding Up

441

notice, although its consent was subsequently given. The court granted relief from the consequences of this defect in process under s 1322.1 The declaration of solvency

[11.15] Before the meeting is convened to consider the proposal to wind up the company, a majority of the directors of the company are required to make a written declaration (ASIC Form 520) to the effect that they have made an inquiry into the company’s affairs and at a meeting of directors they have formed the opinion that the company will be able to pay its debts in full within 12 months of the commencement of the winding up: s 494(1). This declaration, known as the declaration of solvency, must have attached to it a statement of affairs of the company. The statement must show the property of the company and the total amount expected to be realised from that property, the company’s liabilities and the estimated expenses of the winding up. It must be made up to the latest practicable date before the making of the declaration: s 494(2). The declaration of solvency is ineffectual unless (s 494(3)): • it is made at a directors’ meeting; • it is lodged with ASIC prior to the issue of notices calling the meeting of the company’s members to consider the proposal to wind up; and • the resolution to wind up is passed within five weeks of the making of the declaration. It is an offence for a director to make a declaration without having reasonable grounds for the opinion as to solvency: s 494(4). A director has the burden of proving the reasonableness of that opinion. If the company’s debts are not paid for or provided for within the period stated in the declaration, it is presumed that the director did not have reasonable grounds: s 494(5).2 If the directors fail to give the declaration of solvency, then the members may still appoint a voluntary liquidator, but the liquidation will be a creditors’ voluntary liquidation. There is no requirement to convene a creditors’ meeting: s 497. An ordinary resolution is required, being a simple majority of the members who participate by voting in person or by proxy. The remuneration determination for a members’ voluntary liquidator may be approved by members under IPSC, s 60-10(2). In proceeding to wind up the company, if the liquidator, at any time, forms the opinion that the company will not be able to pay its debts in full within the period stated in the declaration of solvency, the liquidator must do one of the following as soon as practicable (s 496(1)): • apply to the court under s 459P for the company to be wound up in insolvency; • appoint an administrator of the company under Pt 5.3A; or • convene a meeting of the company’s creditors. If the last action is taken then the liquidator must lay before the meeting a statement of the assets and liabilities of the company. The notice convening the 1 See also Re Grundy Organisation Pty Ltd [2010] NSWSC 1432. 2 It should be noted that this definition of solvency differs from that in s 95(1).

442

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.20]

meeting must draw the attention of the creditors to their right to appoint some other person as liquidator instead of the liquidator appointed by the company. The meeting then proceeds as if it were a creditors’ voluntary winding up. Within seven days after the meeting, whoever is appointed must lodge a Form 521 notice with ASIC; IPRC, s 75-15. After the resolution

[11.20] Under the last option above, if a special resolution is passed at a members’ meeting providing for the winding up of the company, the company must lodge with ASIC a notice setting out the text of the resolution within seven days and notice of the resolution must be published on the ASIC Public Notices website: s 491(2)(b); ASIC Forms 205, 505. Once the special resolution has been passed, the liquidator will commence the tasks necessary in order to wind up the company’s affairs. The liquidator must provide an initial information report to creditors under IPRC, s 75-30, which includes notice of their rights under the IPSC and IPRC, as well as the initial remuneration notice under IPRC, s 75-35, if remuneration is claimed. The liquidator

[11.23] In a members’ voluntary winding up of a proprietary company, the liquidator need not be a registered liquidator, and they may in fact be an officer or employee of the company, or the company accountant or lawyer: s 532(4); hence, the usual issues of independence are not relevant. Although this type of winding up requires expertise, it does not involve the wide range of powers and duties of a registered liquidator of an insolvent company. Creditors’ voluntary winding up [11.25] In this form of winding up, the company will be insolvent, and despite its title, it cannot be initiated by the creditors. It occurs when the members resolve, by special resolution, that the company be wound up. This form of winding up may only occur in one of four ways: (a) through directors determining that their company is insolvent and that it should be wound up and then convening a members’ meeting to pass a special resolution appointing a liquidator. No creditors meeting is required, although the creditors later have the right to request that the liquidator convene a creditors’ meeting and resolve to replace the liquidator; or (b) as described above, through a members’ voluntary winding up being initiated for what is thought to be a solvent company (where there is a declaration of solvency by the directors) and the liquidator then forms the opinion that the company is in fact insolvent; or (c) where a company transitions from voluntary administration into a creditors’ voluntary liquidation; or (d) where ASIC appoints a liquidator under Pt 5.4C (s 489EA). (a) No declaration of solvency

[11.30]

If the directors are unable to complete a declaration of solvency, the company has no option but to proceed with a creditors’ voluntary winding up.

[11.40]

11 Voluntary and Compulsory Winding Up

443

Once the directors have determined that the company is unable to pay its debts, the directors should ensure that the company does not incur any further debts, because they could be in breach of the insolvent trading provisions of the Corporations Act. Once the liquidator is appointed by the members, a copy of the special resolution must be lodged with ASIC within seven days (s 491(2)(a)) and notice of the resolution must be published on the ASIC Public Notices website: s 491(2)(b); ASIC Forms 205, 505. The liquidator will also need to provide an initial information report to creditors under IPRC, s 75-30, which includes notice of their rights under the IPSC and IPRC, as well as the initial remuneration notice under IPRC, s 75-35. The liquidator will then begin the task of administering the company. These tasks are discussed in later sections. Suffice to say, the actions of a liquidator in a creditors’ voluntary winding up are identical, in most situations, with those of a liquidator in a compulsory winding up. Defects in the process

[11.35] Defects in the process of convening or holding a meeting may cause the court to set aside the winding up resolution. Procedural irregularities may be overlooked (see s 1322) but a deliberate failure to give notice to a person entitled to notice of a meeting may be considered to be more than a procedural irregularity: Re PW Saddington & Sons Pty Ltd (1990) 19 NSWLR 674, 675.3 The court in Mamouney v Soliman (1992) 9 ACSR 63, 72 said, “the more significant the resolutions passed at the meeting, and the greater the procedural defects, the more ready the court will be to say that they have caused or may cause substantial injustice”. A failure to advertise the meeting will only be fatal if it causes substantial injustice: Re John Plunkett Consolidated Pty Ltd (1978) 3 ACLR 279, 285. The court also has the power to set aside the resolution or to order that the meeting be reconvened with either separate classes or by disregarding particular votes where the result of the meeting was determined by related party creditors (such as a parent company owed money through an intra-group loan): IPSC, s 75-41 (b) Liquidator believes company is insolvent

[11.40] As mentioned earlier, if a liquidator forms the opinion, during the course of a members’ voluntary winding up, that the company will not be able to pay or provide for payment of its debts within the period stated in the declaration of solvency, the liquidator must take one of the courses of action prescribed by s 496(1). One such course of action is to convene a meeting of the creditors: s 496(1)(c). If the liquidator does this he or she should provide the meeting with a statement of the assets and liabilities of the company: s 496(4). The notice convening the meeting should advise the creditors that they are at liberty to appoint a new liquidator: s 496(4), (5). From the time of the creditors’ meeting, the liquidation is converted from a members’ voluntary winding up to a creditors’ voluntary winding up: s 496(8). 3 The question of whether a deliberate failure to comply is within s 1322 is subject to divergent lines of authority: see further Nenna v ASIC [2011] FCA 1193; (2011) 198 FCR 32; Re The Bell Group Ltd (in liq) [2015] WASC 88 (as to non-compliance with s 548).

444

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.45]

Necessarily, if the original liquidator was not a registered liquidator, a registered liquidator must take over the winding up. Within seven days after the meeting has been held, the liquidator must lodge with ASIC a Form 522 notice stating that the meeting has been held. This requirement falls on a new liquidator if one is appointed by the meeting: s 496(7). (b) Voluntary administrator becomes a creditors’ voluntary liquidator

[11.45] A company may transition from Pt 5.3A voluntary administration into a creditors’ voluntary liquidation by the creditors voting to put the company into liquidation at the second creditors’ meeting: ss 439C(c), 446A. A company can also move from voluntary administration to a creditors’ voluntary liquidation where the:4 • company fails to execute a deed of company arrangement within time; • creditors vote to terminate a deed of company arrangement; • deed of company arrangement provides for its termination and the commencement of voluntary liquidation; or • court terminates a deed of company arrangement. These will be explained further in Chapters 19 and 20. (d) Appointment by ASIC

[11.50] In certain circumstances ASIC may appoint a liquidator, in which case the liquidation proceeds as a creditors’ voluntary liquidation: s 489EA. This is used to deal with so-called “zombie companies” that are not trading and have failed to comply with their reporting obligations. Section 489EA of the Corporations Act allows ASIC to order the winding up of a company in circumstances where: (1) the company has failed to lodge certain documents and ASIC has reason to believe that the company is not carrying on business and a winding up order is in the public interest (s 489EA(1)); (2) the company’s annual review fee is at least 12 months overdue (s 489EA(2)); (3) the company’s registration has been reinstated in the last six months and ASIC has reason to believe that the order is in the public interest (s 489EA(3)); or (4) ASIC has reason to believe that the company is not carrying on business and ASIC serves a notice on the company and its directors and there is no objection to the order (s 489EA(4)). ASIC must publish a notice of its intention to order the winding up: s 489EA(6). ASIC cannot order a winding up where there is already an application before the court to wind up the company. The effect of ASIC’s winding up order is that the company is deemed to have passed a special resolution that the company be wound up voluntarily: s 489EB. ASIC itself appoints the liquidator, who must consent to the appointment (s 4 See Corporations Act, ss 446A, 446AA. See further [19.420], [20.295].

[11.60]

11 Voluntary and Compulsory Winding Up

445

489EC), and ASIC sets the remuneration. ASIC has a panel of liquidators to take these appointments at a set fee rate. ASIC’s RG 242 otherwise explains how it exercises this power.

COMPULSORY WINDING UP [11.55] As we have discussed, compulsory liquidation is a procedure enabling a person to apply to the court for an order that a company be wound up. Although this is referred to as a compulsory process, in many cases the company may consent to or not oppose the court’s order that it be wound up. Section 459A provides that on an application under s 459P, the court may order that an insolvent company be wound up in insolvency. Section 459P then lists the persons who may apply for a company to be wound up. Section 461 lists the various other grounds upon which a court may order a winding up. Section 462(2) then lists a broad range of persons who can apply for such orders. These include the company, a creditor, ASIC and APRA. While a creditor can apply under s 459A, in some cases it may rely on the “just and equitable” ground for seeking to wind up the company: s 461(1)(k). This ground is used in circumstances where there is a lack of probity in the conduct of the company’s affairs, leading to a justifiable lack of confidence in the administration of the company. This may be shown where directors cause the company to enter into highly irregular and potentially dishonest transactions or where the history of the company indicates a failure to abide by its obligations and by commercial morality in the conduct of its business, for example, where the company has improperly divested itself of assets in breach of directors’ obligations.5 In DCT v Casualife Furniture International Pty Ltd [2004] VSC 157; (2004) 9 VR 549, the company had in fact paid out the debt upon which the Deputy Commissioner of Taxation relied to wind up the company. Nevertheless the court found that the Deputy Commissioner was entitled to apply on the just and equitable ground based on concerns about the company’s poor tax history and the company’s controllers’ disdain for the obligation to pay tax.6

Creditor is the usual applicant, under s 459P [11.60]

Section 459P of the Corporations Act confers standing on creditors to apply to the court for a winding up order and this is the most frequent situation in which a company is wound up. The creditor must be owed a valid debt that is capable of legal enforcement even if the time for payment has not yet arisen. The debt must also be unpaid at the time of lodging the application for the winding up: Re Aquaqueen International Pty Ltd [2014] NSWSC 527; Re William Hockley Ltd [1962] 1 WLR 555. It often occurs that the debtor will seek to avoid a winding up by paying the creditors’ applicant prior to the winding up hearing, in which case another creditor may take their place as a substituted applicant. The categories of applicants with standing to apply for a winding up order are discussed further at [11.220] and [11.225].

5 See Macquarie University v Macquarie University Union Ltd (No 2) [2007] FCA 844, particularly at [40]. 6 See also ASIC v Gognos Holdings Ltd [2017] QSC 207.

446

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.65]

Presumptions of insolvency [11.65] There are presumptions of insolvency that can be relied upon by creditors that allow those creditors to avoid having to provide actual proof that their debtor company is insolvent. That would in most cases be an impossible task, simply because of their lack of knowledge of the internal operations of the company. Section 459C provides that a company is presumed to be insolvent if, during or after the three months ending on the day on which an application was made for the winding up of the company, any one of the following six situations occurs: • the company failed to comply with a s 459E statutory demand; this is the most common ground; • an execution process issued on a judgment in favour of a creditor was returned wholly or partly unsatisfied; • a receiver was appointed in respect of property of the company pursuant to a circulating security interest; • an order was made for the appointment of a receiver for the purpose of enforcing a security interest; • a person entered into possession or assumed control of property to enforce a security interest; or • a person was appointed to enter into possession or assume control of property of a company. The first two grounds are comparable with acts of bankruptcy: see Bankruptcy Act, s 40. See [3.175].

Application must be made within three months [11.70] Importantly, any application for winding up the company must be filed with the court within three months of the last date for compliance with the demand, or other presumed insolvency event listed above: s 459C(2). If there are multiple events recognised under s 459C which span both during and after the 3-month time period, events that occur after the filing of the application and outside the 3-month time period may still be given consideration by the court and are not to be disregarded simply because they occur after the winding up application is made: Equititrust Ltd v Willaire Pty Ltd [2012] QSC 206; Re Plutus Payroll Pty Ltd [2017] NSWSC 1360. In a case involving the filing of an application for winding up before the 21 day period had expired, through a miscalculation, the court held that the creditor could still rely upon the presumption of insolvency as long as the demand remained unsatisfied at the time of the hearing: Re DG Haulage Pty Ltd [2017] VSC 780. Of course, if the sole ground to support the insolvency presumption was the failure to comply with the demand then the presumption could not arise until a failure to comply had actually occurred: see s 459Q.7 It should be noted that the equivalent 7 Woodgate v Garard Pty Ltd [2010] NSWSC 508; (2010) 78 ACSR 468. Woodgate v Garard was not followed on this point in Equititrust Ltd v Willaire Pty Ltd [2012] QSC 206; Re Plutus Payroll Pty Ltd [2017] NSWSC 1360.

[11.85]

11 Voluntary and Compulsory Winding Up

447

period in bankruptcy is that a petition must be filed within six months of the date of the commission of the act of bankruptcy: see [3.170]. These presumptions, in general, apply to applications under ss 232, 459P, 462 or 464. If any of the above presumptions can be invoked, the company is regarded as insolvent unless the company proves to the contrary: s 459C(3).

Statutory demands – the most common way to prove insolvency [11.75] The first ground available for proving insolvency is that of noncompliance with a statutory demand. It is the ground most used by creditors, because of its relative simplicity and convenience, and a substantial body of law has grown up in relation to demands. Similarly, in bankruptcy law, as we have seen, most acts of bankruptcy arise through a debtor failing to comply with a bankruptcy notice. A regime for dealing with statutory demands, including dealing with challenges to their validity, is provided in Pt 5.4 Divs 2 and 3 of the Corporations Act. Comparisons with bankruptcy notices

[11.80] The demand resembles a bankruptcy notice, in substance, and in a way it achieves the same purpose. Service of a demand sets in motion proceedings for a company’s compulsory winding up; hence the procedure prescribed for demands must be strictly adhered to. Thus, it has been said that because creditors can gain the benefit of presumed insolvency by way of the demand process, creditors should ensure that demands are expressed in clear, correct and unambiguous terms: Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226. In that decision, Lockhart J said: “A creditor who issues a statutory demand under the Corporations Law gains the benefit of the presumption of insolvency if the notice is not complied with: and the additional benefit that the company may not oppose the application to wind it up on a ground relating to a defect in the statutory demand, without the leave of the court, because of the provisions of s 459S of the Corporations Law. It is not asking too much that creditors who issue statutory demands under the Corporations Law should ensure that the demands are expressed in clear, correct and unambiguous terms. If the creditors wish to have the benefit of the presumption of insolvency, the least they can do is to tell the debtor companies in clear terms what amounts are due, whether they include interest or not, and, if so, the amount.”

Similar comments have been made about bankruptcy notices: see [3.295]. While a bankruptcy notice is a “proceeding” under the Bankruptcy Act (Re Wheeler & Reynolds; Ex parte Kerr v Crowe [1988] FCA 381; (1988) 20 FCR 185; see Chapter 3), a winding up demand does not constitute a legal proceeding; it is merely a means of providing presumptive evidence of insolvency: Bartex Fabrics Pty Ltd v Phillips Fox (1994) 12 ACLC 462. There are a number of important legal issues about demands. Form of a demand

[11.85]

Under s 459E(2) of the Corporations Act the demand must satisfy the following requirements:

448

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.90]

• it must specify the debt claimed and if it relates to two or more debts the demand must specify the total of the amounts. The creditor must at least indicate the nature of the debt relied upon, for example, goods supplied and delivered.8 But there are no mechanical rules as to whether the demand sufficiently specifies the debt – it is a question of fact in each case. Failure to specify the nature of the debt is a defect in the demand, but it may not cause substantial injustice such that the demand is invalid (see s 459J(1)(a)). A failure to specify the amount of the debt, so that the debtor must try to work out how much to pay, will justify setting aside the demand;9 • the demand must require the company to pay the debt or secure or compound for that amount to the creditor’s satisfaction within 21 days of the demand being served on the company. The words, “to the creditor’s satisfaction”, do not mean that the creditor is the sole judge of “satisfaction”. The words posit an objective test – it is for the court to decide whether a creditor acted reasonably if it rejects a debtor’s proposal;10 • the demand must be in writing; • it must be in the prescribed form (Form 509H in Sch 2 to the Corporations Regulations); and • it must be signed by or on behalf of the creditor.11 While a demand is to be in accord with the prescribed form, strict compliance is not necessary provided there is substantial compliance. The definition of statutory demand in s 9 of the Act includes anything that purports to be a statutory demand.12 Of course the document purporting to be a statutory demand may be so unclear, or may depart so far from the required form, that the document cannot properly be characterised as a statutory demand.13 Only deficiencies of a gross and exceptional character would deny a document the status of a statutory demand.14 The creditor’s debt

[11.90] Valid demands can only be issued by creditors who have a debt due and payable15 (Corporations Act, s 459E(1)(a)) and which are immediately recoverable16 8 Jarena Pty Ltd v Sholl Nicholson Pty Ltd (1996) 14 ACLC 531. 9 Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226 (demand stated principal debt “plus interest” from a specified day – it was held that the debtor should not be required to calculate the total amount of interest in order to comply with the demand). 10 Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1309. 11 Where one creditor is bankrupt, s 62 of the Bankruptcy Act (as to the rights of a non-bankrupt co-contractor with the bankrupt), and the general law of who must sign a statutory demand, allows one creditor to sign the demand. If the company pays the debt to that creditor, that creditor holds half the amount on trust for the trustee in bankruptcy: Re Kevin McNamara & Son Pty Ltd [2014] VSC 337. 12 See further, Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd (1994) 51 FCR 446; Quitstar Pty Ltd v Cooline Pacific Pty Ltd [2002] NSWCA 329; Re Lake Johnston Pty Ltd [2013] FCA 915. 13 Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226, 238. 14 Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd [2006] VSC 338; (2006) 58 ACSR 631. See also Slap Corp Pty Ltd v Civil, Infrastructure & Logistics Pty Ltd (2017) 50 VR 542; [2017] VSC 168 (which refused to follow Re International Materials & Technologies Pty Ltd [2013] NSWSC 787). 15 See Rothwells Ltd v Nommack (No 100) Pty Ltd [1990] 2 Qd R 85.

[11.95]

11 Voluntary and Compulsory Winding Up

449

by enforcement action.17 Consequently the debt cannot be contingent or prospective, or unliquidated.18 A quantum meruit may be relied upon to support a statutory demand, however, provided that the parties have agreed to the process of valuing the work done.19 The debt or debts claimed in the demand must total at least “the statutory minimum” (s 459E(1)), presently set at $2,000: s 9. A demand that claims significant amounts not due may be set aside: see [11.170]. A multiple number of creditors are not allowed to serve a single demand on one company – it is a defect which would cause a substantial injustice. However, separate demands can be issued for each separate debt owed by the company, subject to the number of demands and other circumstances not being oppressive: Cooloola Dairys Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12. A creditor is not entitled to serve a demand at the same time as taking proceedings against the debtor company’s directors in relation to the same alleged debt; that is an abuse of process and a reason for the setting aside of the demand: Perlake Pty Ltd v Finance and Mortgage Corp (NSW) Pty Ltd (1997) 15 ACLC 76.20 Even a creditor’s contemporaneous reliance on two different recovery means can give rise to “some other reason” to set the demand aside: Re Zarzar Pty Ltd [2017] NSWSC 93. Demand not based on a judgment debt to be verified by affidavit

[11.95] Importantly, and unlike a bankruptcy notice, a demand need not be based on a money judgment. In cases where there is no judgment,21 the demand must be accompanied by an affidavit which verifies that the debt is due and payable: s 459(3)(a). Even where there is a judgment, if the amount claimed in the demand is different from the judgment amount, an affidavit explaining this is required: Anderson Formrite Pty Ltd v CASC Hire Pty Ltd [2005] FCA 1424; (2005) 147 FCR 379. The affidavit must be made by a creditor or someone with the creditor’s authority. That person must have direct knowledge of the relevant indebtedness.22

16 Willaire Pty Ltd v Equitrust Ltd [2010] QCA 350; (2010) 81 ACSR 200. 17 Re Elgar Heights Pty Ltd (No 1) [1985] VR 657 (solicitor’s bill of costs not in proper form and therefore not due and payable); Remuneration Data Base Pty Ltd v Pauline Goodyer Real Estate Pty Ltd [2007] NSWSC 59 (where a legislative requirement of service of a notice of claim prior to a statutory demand not met, the demand was set aside). See also Marshall, “Is ‘Due and Payable’ A Magic Phrase?” (2007) 15 Insolv LJ 115. 18 See the discussion in Vimblue Pty Ltd v Toweel [2009] NSWSC 494 which compares liquidated and unliquidated sums. 19 Edwards v ASIC [2009] NSWCA 424; (2009) 76 ACSR 369. 20 See also Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236. 21 As to the meaning of the term “judgment debt” see: Body Corporate Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSC 435. 22 See B&M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1995) 15 ACSR 433, where the affidavit was made only by an independent contractor of the creditor.

450

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.100]

Form 7 requires the creditor to depose that they “believe that there is no genuine dispute about the existence or amount of the (debt)”. If that statement is not made and verified, the demand will be invalid: Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262. In that case the Court (at [33]-[34]) emphasised that the “quality of the debt as undisputed is central to the proper working of Part 5.4”, given the presumption of insolvency that follows from non-payment. A creditor seeking the benefit of the statutory presumption of insolvency through service of a statutory demand: has a responsibility to ensure that, so far as it is aware, the debt relied on is owing, due, payable and undisputed – or, more accurately, a responsibility not to rely on the debt unless it genuinely believes it to be of that kind. And the company served with the demand has a right, secured to it by s 459E(3)(b) and the provision of the rules requiring adherence to Form 7, to be assured that the demanding creditor recognises that responsibility and has conscientiously formed a belief that the responsibility has been discharged. The statement by the deponent of the s 459E(3) affidavit of belief of absence of genuine dispute therefore provides a significant measure of assurance that the objectives of Part 5.4 are being observed by the creditor. Absence of the statement means that that measure of assurance is lacking and puts the recipient company into a position of uncertainty from which the legislation intends that it should be protected.

We explain challenges to demands on the basis that there is in fact a genuine dispute about the debt at [11.170]. The demand must comply with the rules laid down for demands (s 459E(3)), otherwise that may constitute “some other reason” why the demand should be set aside, which is discussed below. The demand must correctly state the debtor company’s name and its registered office. The demand can say that payment be made to the creditor’s solicitors.23 If the name of the creditor is incorrect the court will consider whether the demand correctly identifies the party who claims to be entitled to be paid: Re Macro Constructions Pty Ltd [1994] 2 Qd R 31. The courts have generally not allowed minor errors to frustrate the purpose of the statutory demand regime. The grounds for setting aside statutory demands (including minor and major defects) are discussed below. Service

[11.100]

Unless the company is already in insolvency, Corporations Act, s 109X requires that the demand must be served on the company by leaving it at, or posting it to, its registered office; or delivering a copy of the document personally to a director of the company who resides in Australia or in an external Territory (s 109X(1)). The date of service of a demand can be critical given that a company has 21 days after service to file any application to set it aside. When a demand is served by 23 Re Leac Engineering Pty Ltd [1991] FCA 937; (1991) 10 ACLC 74.

[11.100]

11 Voluntary and Compulsory Winding Up

451

post, the date of service is to be determined by s 29 of the Acts Interpretation Act.24 The result is that, in the absence of proof to the contrary, which may be proof of the date of actual receipt, service is deemed to have been effected at the time at which the letter would be delivered in the ordinary course of post.25 This assumes that there is adequate evidence of proof of a properly addressed envelope and of actual postage.26 Section 28A of the Acts Interpretation Act 1901 (Cth) regulates personal service; service by fax or email is not adequate unless it can be proved the documents came to the person’s attention before the relevant period for service expired: Austar Finance Group v Campbell [2007] NSWSC 1493; (2007) 25 ACLC 1834.27 Section 109X of the Corporations Act is facultative and not exclusive or mandatory, and any means of service which brings a document to the actual attention of a company will be valid.28 Hence, even though the procedures provided for in s 109X were not followed, evidence of the company’s receipt of and dealings with the document required to be served can suffice, for example, by way of the company acknowledging receipt: Pearlburst Pty Ltd v Summers Resort Group Pty Ltd [2007] NSWSC 1126. A letter returned to sender with the note “RTS left address” was not proof that the letter had failed to reach the registered address and was valid service in Re Intercorp Estate Pty Ltd [2016] NSWSC 1953. In Perpetual Nominees v Masri Apartments [2004] NSWSC 500; (2004) 22 ACLC 971, the company’s registered office had changed and it claimed not to have received the demand. The NSW Supreme Court found that service had been effective because the requirement of s 109X(1), that the demand was posted to the company’s registered office at that time, had been met: s 29(1) of the Acts Interpretation Act. However, if the creditor had known of the change of registered office and sought to gain advantage by posting the statutory demand to the old address, “fair notice” would not have been given to the company and in such a case the court would prevent the creditor from relying on literal compliance with the statutory provisions for service: Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15; (1999) 17 ACLC 467. Section 29(1) allows a company to prove that a demand properly addressed to its registered office was not delivered in the ordinary course of post; but mere proof of non-receipt of a document is not 24 As in force on 1 November 2000, that being the version made applicable by s 5C of the Corporations Act. 25 For a detailed review of the authorities, see Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012), [3.38]-[3.45]. 26 Dwyer v Canon Australia Pty Ltd [2007] SASC 100 at [6]. 27 Email can present particular problems. In Austar Finance Group v Campbell [2007] NSWSC 1493; (2007) 25 ACLC 1834, an email copy of the statutory demand was not received by the debtor during the required 21-day period as the email was not read until outside the period – until it was read, the email sat on the server of the debtor’s internet service provider (rather than on the debtor’s computer). But a facsimile of the demand is served within the 21 days if it is shown to have been sent in that period: Renegade Rigging Pty Ltd v Hanlon Nominees Pty Ltd [2010] VSC 385; Greenmint Pty Ltd v O’Keefe [2015] VSC 326. In PCM Nominees (WA) Pty Ltd v ACN 063 291 430 Pty Ltd [2017] FCA 848, service via email was defective where it omitted the court’s seal and proceeding number and return date. 28 Howship Holdings Pty Ltd v Leslie (1996) 41 NSWLR 542.

452

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.105]

sufficient to prove non-delivery: Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87; DCT v Trio Site Services Pty Ltd [2007] FCA 776. The rules of service of documents under the Corporations Act are unnecessarily complex, in particular in the area of insolvency where time limits are critical. In light of this, the rules are usefully summarised by Palmer J, in relation to documents generally under the Corporations Act, but applicable to statutory demands:29 • if a document required to be served on a company by the Corporations Act, the document is validly served and once service in a prescribed mode is proved, a proceeding cannot be challenged on the basis that the document did not actually come to the attention of the company; • where service is effected by leaving the document at the company’s registered office in accordance with s 109X(1)(a), it makes no difference whether the document is left within or outside normal business hours or within or outside the hours at which that office is kept open, and the date of service is the date of leaving the document, not when it comes to someone’s attention; • the prescribed modes (that is, the statutory provisions as to service) are not exclusive of other modes of service. If some other mode of service is used – what may be described as the “effective informal service rule” – whether it is good service depends upon whether the serving party can prove to the Court’s satisfaction that the document actually came to the attention of an officer of the company who was either expressly or implicitly authorised by the company to deal directly and responsively with the document, or documents of that nature (“a responsible officer”); • there is no special exception to the effective informal service rule in the case of service by email or facsimile – the question remains whether that mode of service actually brought the document to the attention of a responsible officer; • where a document, not served in a prescribed mode, comes to the actual attention of the sole director of a company it will be presumed, unless a strong case to the contrary is shown, that the director is the responsible officer and that service is good; • a party invoking the effective informal service rule bears the onus of proving the time at which the document came to the actual attention of a responsible officer of the company and, in view of the serious consequences which may attend, the Court will not lightly draw inferences or make assumptions as to the time of service. One of the functions of the procedure is to give the debtor the opportunity of either satisfying the debt or of being presumed insolvent. Consequently, it is fundamental that the creditor who makes the demand must be able to give a valid discharge of the debt to the company: Re Steel Wing Co [1921] 1 Ch 349, 356-357. Compliance with the demand

[11.105]

On being served with a demand, the debtor company may pay the debt demanded, or secure or compound the debt to the creditor’s reasonable satisfaction.

29 Woodgate v Garard Pty Ltd [2010] NSWSC 508; (2010) 239 FLR 339 at [44] (citations omitted). These points were applied in Australian Solar Electrics Pty Ltd v IPD Group Ltd [2012] FCA 786.

[11.120]

11 Voluntary and Compulsory Winding Up

453

If it fails to do so, or fails to have time for compliance extended, its insolvency is presumed under s 459C of the Corporations Act. The creditor may use that presumed insolvency on which to base a winding up application to the court. Date of failure to comply with the demand

[11.110]

The company is taken to have failed to comply with the demand at the end of the 21 days after service: s 459F(1). The time for compliance may be longer if the company seeks to set aside the demand under s 459G. The court may extend the time for compliance when hearing an application pursuant to s 459G: s 459F(2)(a)(i). If an application is made under s 459G and the court makes no order extending the time then the time for compliance ends seven days after the application is finally determined: s 459F(2)(a)(ii). The court may not extend time after it has expired: Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2008] HCA 9; (2008) 232 CLR 314. Processes whereby a debtor company can apply to challenge a demand

[11.115] The real problems for statutory demands have come where a company seeks to challenge the demand and have it set aside on the basis of some defect in the demand or its process of issue.30 Part 5.4 Div 3 of the Corporations Act seeks to provide “a complete code for the resolution of disputes involving statutory demands, and to do so on the basis of the commercial justice of the matter, rather than on the basis of technical deficiencies”: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, [688]. The law purports to provide a means of dealing with disputes in such a way that an alleged defect does not cause proceedings, which are preliminary to the commencement of liquidation, to be prolonged by requiring debtor companies to raise genuine disputes prior to the point when winding up proceedings are commenced: [689]. The process is similar, both in purpose and procedure, to the provisions of the Bankruptcy Act that deal with the setting aside of bankruptcy notices. The two sections which provide the grounds for setting aside demands are ss 459H and 459J of the Corporations Act. These will be discussed below. We first examine the application that may be filed by a debtor company under s 459G based on these grounds. Application to the court – s 459G

[11.120]

If a company, which is the recipient of a demand, wishes to resist the demand it may apply to the court for an order setting aside the demand: s 459G(1).31 The application must be made within 21 days of the service of the demand on the company: s 459G(2). The application must be accompanied by a supporting affidavit, and copies of both the application and the affidavit must be served on the person who served the demand, that is, the creditor: s 459G(3). Service may be determined in several ways, which were discussed at [11.100].

30 See further Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012) Chs 4-7. 31 Courts’ Corporations Rules, r 5.2.

454

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.125]

An application can generally be made to set aside multiple statutory demands though it will depend on whether there is a common underlying factual basis to them. For example, two demands may be served by the same creditor; or there may be statutory demands served by different defendants.32 An order dismissing a s 459G application is interlocutory in nature and not final, so leave to appeal is needed: MNWA Pty Ltd v Deputy Commissioner of Taxation (2016) 117 ACSR 446; [2016] FCAFC 154. The Graywinter principle

[11.125]

The decision in Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452, 459 states what is required of an affidavit in support of an application to set aside a demand.33 “In a s 459H(1)(a) case the affidavit must in my view disclose facts showing there is a genuine dispute between the parties. A mere assertion that there is a genuine dispute is not enough. Nor is a bare claim that the debt is disputed sufficient. It follows from the fact that the affidavit need not go into evidence, which is the customary function of an affidavit, that it may read like a pleading. … The affidavit must, as a minimum, contain a statement of the material facts on which the applicant intends to rely to show a genuine dispute – it might read more like a pleading than a story. That accords with what I consider to be the minimum requirement.”

It will be sufficient if the grounds of challenge can be drawn by inference from the affidavit.34 However, the Graywinter principle also provides that an affidavit that is insufficient cannot be added to at a later date, after the expiry of the 21 days.35 An applicant may, however, file further affidavits to support the original grounds for setting the demand aside. That is: “The court can act on supplementary affidavits filed outside the 21 day period that expand on the grounds raised in an affidavit filed within the 21 days, but the court cannot act on new grounds raised by an affidavit filed outside the 21 day period”: Jian Xing Knitting Factory v SCASA Pty Ltd [2004] SASC 152 at [18]. As Black J explained in Re Rockwall Homes Pty Ltd [2017] NSWSC 223 at [33]: “The balance of authority establishes that the Graywinter principle raises a fact-specific inquiry as to whether the affidavit in support of an application to set aside a creditor’s statutory demand in fact supports that application, and the initial affidavit will sufficiently raise a relevant ground of dispute if that ground is raised by a necessary or reasonably available inference, including from documents exhibited to that affidavit.”

The 21 days is a definite time limit – David Grant & Co v Westpac

[11.130]

If the debtor company fails to file and serve its application and affidavit within 21 days of being served with the demand, s 1322 of the Corporations Act,

32 See the discussion in Greenhills Securities Pty Ltd v Loire Consultants Pty Ltd [2015] NSWSC 13. 33 For a critique of how the law has developed in this area, see Infratel Networks Pty Ltd v Gundry’s Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27. 34 Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd (2007) 61 ACSR 321, 326; Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343; (2011) 87 ACSR 1. 35 See also Imagebuild Group Pty Ltd v Fokust Pty Ltd [2017] VSCA 131.

[11.140]

11 Voluntary and Compulsory Winding Up

455

cannot be used to extend the time for filing because the time limit is fully prescribed in s 459G(2): David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265. If a company fails to apply in time, there is the safety net under s 459S in that if a company fails to comply with s 459G it may seek the leave of the court at any winding up hearing to, in effect, oppose the demand. However, the court may not grant leave unless it is satisfied that the ground is material to proving that the company is solvent: s 459S(2). See [11.305]. A company, or the creditor, may appeal from a judge’s decision concerning the validity of the demand: see [11.205]. Challenging the demand after 21 days

[11.135] Section 459S of the Corporations Act, refers to “a ground … that the company could have … relied on [in an application to set aside the statutory demand]”. It presupposes that the company was in a position, at any time during the 21-day period specified by s 459S(2), to raise the relevant grounds in an application to set aside the demand. In Perpetual Nominees v Masri Apartments [2004] NSWSC 551; (2004) 22 ACLC 975, Austin J found that demands, though properly served by posting, were not received until after service of the originating processes, well after the end of the 21-day period beginning at the time of service. That arose out of a change of registered offices occurring at that time. At the winding up hearing, Austin J found that the company could rely upon alleged defects in the demand even though the requirements of s 459S were otherwise not met. Austin J noted that a similar view had been taken in Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181, where Barrett J said that s 459S refers to a ground “that was actually available to be asserted according to the facts and circumstances existing at the time when it was open to the company to resort to the s 459G procedure”.36 Austin J said that in such cases (Perpetual Nominees v Masri Apartments (No 2) [2004] NSWSC 551; (2004) 22 ACLC 975, 979): “fairness requires that the company be permitted to raise those issues at the only hearing available to it, namely the final hearing of the application for winding up, even though to that extent one reverts to the old practice which the Harmer reforms were intended to reverse.”37

Extension of the 21 days may be granted As with bankruptcy notices,38 provided an application for an extension of time to comply with a demand is brought before the expiry of the time set for

[11.140]

36 See also Re Tomic Industries Pty Ltd [2012] NSWSC 1478. 37 An extension of that concession was identified in Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2006] NSWSC 100, as to the defendant company in a winding up application becoming aware after the s 459G challenge period had ended of new matters “previously not only unknown but also unascertainable”. 38 Bankruptcy Act, s 41(6A), (6C).

456

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.145]

compliance, that period can be further extended, notwithstanding the fact that the s 459G application has been determined: s 459F(2).39 Grounds for setting aside demands: ss 459H and 459J

[11.145]

The application to the court to set aside a demand must be based on grounds which are found in ss 459H and 459J which specify the grounds as bases for the court deciding to set aside a demand: • if there is a genuine dispute about the existence of the debt (s 459H(1)(a)); • if the company has an offsetting claim (as defined, s 459H(1)(b)); • if there is a defect in the demand and substantial injustice will be caused if the demand is not set aside (s 459J(1)(a)); • if there is some other reason why the demand should be set aside: s 459J(1)(b). These four grounds will be discussed. Section 459H(1)(a): genuine dispute about the debt

[11.150]

Section 459H(1)(a) of the Corporations Act allows a demand to be set aside on the basis that there is a genuine dispute about the existence of the debt. This issue may arise because a demand need not be based on a court judgment, where any issue of dispute might otherwise have been resolved. That being the case, courts will be concerned to ensure that creditors, who have the benefit of the demand process without first obtaining judgment, should not use that process as a debt collecting mechanism so as to coerce a party to pay a sum that is in dispute.40 If the dispute has substance and is genuine, the company cannot be said to have failed to pay the sum demanded within the meaning of the deemed insolvency provisions of the Corporations Act. As we explained earlier at [11.95], the courts insist upon an affidavit from the creditor, in issuing a demand, that there is no genuine dispute about the debt. It is open to a creditor to issue a demand for what is claimed to be a disputed debt in order to test whether or not the dispute is in fact genuine: Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867.41 Ultimately, such issues go to the costs awarded if there is found to be a genuine dispute. The meaning of “genuine dispute”

[11.155]

The nature of the court’s role in determining a genuine dispute was considered in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290: “it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.”

39 Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012), [3.73]-[3.78]. 40 Moutere Pty Ltd v DCT [2000] NSWSC 379; (2000) 34 ACSR 533. 41 Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452.

[11.155]

11 Voluntary and Compulsory Winding Up

457

There have been a large number of cases that have considered the meaning of a “genuine dispute” and the issue can be a difficult one.42 Its meaning in any particular set of circumstances is a question of fact: Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSCA 176 at [5]. The test that is often referred to is that given in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 by the Queensland Supreme Court (at 605) that: “There is little doubt that Division 3 … prescribes a formula that requires the Court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the Court will examine the merits or settle the dispute. The specified limits of the court’s examination are the ascertainment of whether there is a ’genuine dispute’ or whether there is a ’genuine claim’. It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than the other. The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).”

The test has been variously described by other courts, that the court should be satisfied that there is a serious question to be tried (Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451, 467), or as on an application for an interlocutory injunction (Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, 787; Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452); that the dispute is not plainly vexatious or frivolous (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, 39); and that the task is no more onerous than that confronting a party seeking to meet an application for summary judgment: Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347, 354. In Ligon 158 Pty Ltd v Huber [2016] NSWCA 330; (2016) 117 ACSR 495 at [10], Barrett JA explained: “the court must decide whether the grounds of dispute delineated by the affidavit are grounds which, when viewed in the whole of the circumstances emerging from the evidence, indicate a plausible defence propounded in good faith and not one merely constructed in response to the pressure represented by the statutory demand”. Or, as has been described in other cases, that the defence is not just a “recent invention” prompted by the service of the demand: Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300. Given that statutory demands may be based on any number of circumstances whereby a payment of a sum due may be claimed by a creditor, the courts are reluctant to seek to determine matters that of their nature involve, for example, interpretation of complex contractual terms and evidence of claimed breach (Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300) or compliance with a shareholder agreement (Re Litigation Insurance Pty Ltd [2017] NSWSC 334). Where there are such 42 See further Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012) Ch 5. See also the summary by the Full Federal Court in First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd [2013] FCAFC 108 at [21].

458

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.160]

matters of rational controversy and cogency of evidence, the court should exercise some restraint in finding there is no genuine dispute. The Court in Litigation Insurance Pty Ltd explained this in saying that “the court dealing with a s 459G application is not compelled to determine questions of construction of documents ... s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning [and] the cases in which it will be appropriate for the court to entertain a construction argument on a s 459G application are likely to be few in number”. If the debt is found to be genuinely in dispute to the extent that the amount of the debt not in dispute falls to less than the statutory minimum of $2,000 (ss 459E and 9), then the demand will be invalid. Thus the determining factor is whether there is a valid demand for a debt of at least $2,000. Appeals

[11.160]

Even if the judgment the subject of the demand is on appeal, this does not give rise to a “genuine dispute”; even pending an appeal, there can be no genuine dispute as to the existence of the judgment debt because the fact of the debt is res judicata between the parties (Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235), although it may be possible to adjourn the hearing until the appeal has been heard: Woodhead Firth Lee Pty Ltd v Archer Pty Ltd (1995) 13 ACLC 883. As Barrett J said in Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 at [11]: “(u)nless and until the judgment is set aside, it is the source of a payment obligation that cannot be called into question.” A distinction needs to be drawn between a stay on the execution of a judgment and a stay on the operation of a judgment. The former does not affect the judgment order constituting a debt but only the enforcement of that order, whereas the latter stays the legal effect of the judgment which means there is (during the stay period) no debt to found the statutory demand. The ability to appeal against a tax debt does not give rise to a genuine dispute as the debt is established by statute and has legal effect: DCT v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473. Where there is a judgment or order which precludes a contention that there is a genuine dispute, but there is on foot a bona fide appeal from that judgment or order, the court may, under Corporations Act, s 459M, as a condition of setting aside the demand, order that the plaintiff company pay the money into court: Midas Management Pty Ltd v Equator Communications Pty Ltd [2007] NSWSC 759; (2007) 25 ACLC 1038. In considering what effect the appeal may have on the demand the Court in Re Saracen Holdings Pty Ltd [2013] NSWSC 1083 at [7] noted: “(r)elevant considerations include whether reasonable and arguable grounds for the application to set aside the judgment or the appeal have been shown; whether a stay is available, and if so, has been sought or refused; and whether there has been an offer to pay into court the amount of the demand pending the outcome of the application or appeal.”

[11.170]

11 Voluntary and Compulsory Winding Up

459

If the debtor company is successful, it may claim costs

[11.165]

If the company succeeds in having the demand set aside by the court because there is a genuine dispute then the company ought, on ordinary principles, recover its costs from the creditor pursuant to s 459N: Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607.43 Costs may be ordered on a solicitor client or indemnity basis if it is shown that the demand process had been used when the creditor was never in doubt about the existence of a genuine dispute and the debtor plaintiff ought never have been put in a position where it was obliged to bring the proceedings: Professional Advantage Pty Ltd v Australian Broadcasting Commission [2007] NSWSC 607; CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 at [18]-[22]. The creditor may also be liable to pay damages for abuse of process.44 However, just because there is a bona fide dispute on substantial grounds does not, necessarily, mean that there has been an abuse of process: Re Bond Corporation Holdings Ltd [1990] 1 WAR 465. Such an abuse would be found if the company brings proceedings to set aside a demand in circumstances where there is no genuine argument that the demand should be set aside, but is merely a ploy by the company to obtain a statutory extension of the time in which to comply with the demand: Vista Commercial Construction Pty Ltd v DCT (1997) 15 ACLC 1668, 1673. As we have seen, if the dispute is merely concerned with the amount of the debt rather than the existence of the debt, the demand may remain valid if it is admitted or determined that the debtor company owes more than the statutory minimum. Demands used for debt recovery

[11.170]

Apart from whether there is a genuine dispute between the debtor and the creditor, case law indicates that demands should not be used as a fast-track alternative to taking action in the courts for recovery of alleged debts. It is said that winding up proceedings are to be used for the winding up of companies for the benefit of all creditors (Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 14 ACLC 1234) and the liquidation process is not to be used for the simple pursuit of debts45 where normal court processes are to be used: CVC Investments Pty Ltd v PT Aviation (1989) 18 NSWLR 295; Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216.

In other cases a more realistic approach has been taken – that use of the statutory demand and winding up processes to recover a debt is a proper purpose.46 As a New Zealand court said, “[t]he purpose of a statutory demand is to obtain payment for a debt, with the secondary purpose to provide a basis on which the debtor’s inability to pay its debts as they fall due may be proved in liquidation 43 See also, Dynamics Co Pty Ltd v G and M Nicholas Pty Ltd [2012] NSWSC 206. 44 QIW Retailers Ltd v Felview Pty Ltd [1989] 2 Qd R 245. 45 For example, see Re Lympne Investments Pty Ltd [1972] 1 WLR 523, 527; Re Bond Corporation Holdings Ltd [1990] 1 WAR 465; 8 ACLC 153, 156; South East Water v Kitoria Pty Ltd (1996) 14 ACLC 1328. 46 Khoury v Rosemist Holdings Pty Ltd (1999) 17 ACLC 1013, 1023; Liverpool Cement Renderers Pty Ltd v Landmarks Constructions Pty Ltd (1996) 19 ACSR 411, 417-419.

460

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.175]

proceedings”.47 The reality is that statutory demands are often served on companies by creditors who have no intention of filing winding up proceedings, as a strategy to persuade a company to pay a debt (often where all else has failed) by instilling apprehension (the creditor hopes) in the company that the creditor may succeed in having it wound up. The debtor company does not know, in most cases, whether the creditor is intent on seeing the matter through to a winding up order. The fact that a demand, unlike a bankruptcy notice, is issued by the creditor itself and need not be based on a money judgment, promotes its ready use. In any event, non-payment of a debt that is due may be an indicator of insolvency and the debtor company must take that into account. That debt recovery strategy may extend to the creditor then filing a winding up application with the court. Although, as with bankruptcy, such an application is brought for the benefit of all creditors, the reality is if that creditor is paid, its own purposes will have been served. If no other creditor seeks leave to be substituted and take over the winding up application, the court will readily dismiss the proceedings. In the end, the courts do not readily infer impropriety of a creditor’s purpose from knowledge that a debt was disputed: Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; Reschke Pty Ltd v Digiorgio Family Wines Pty Ltd [2017] SASC 187. Nevertheless, courts still do take issue with the pursuit of debts through insolvency processes.48 Section 459H(1)(b): offsetting claims

[11.175] Section 459H(1)(b) of the Corporations Act allows a demand to be set aside on the basis of an offsetting claim by the debtor. As with any genuine dispute about the debt, this may reduce the amount of the debt to less than the statutory minimum of $2,000. The date for assessing the amount of the offsetting claim is the date of the hearing to have the demand set aside: Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132; (2014) 46 WAR 483. Section 459H explains how it is determined whether the debtor company in fact owes the statutory minimum. That will be an issue when the company states in its application, pursuant to s 459G that it genuinely disputes the existence or amount of the debt to which the demand relates. If the debtor company admits that it owes more than the statutory minimum of $2,000, the court may order that the demand be varied and it may declare that the demand had effect when served (s 459H(4)); this is so even if the debtor disputes the actual amount of the debt claimed in the demand. On the other hand, if the amount that is admitted to be owed to the creditor is less than the statutory minimum then the demand will be set aside. 47 Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2008] NZCA 450 (CA) at [24]. See also Haley Construction Limited v Evolving Projects Limited [2015] NZHC 2490; Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 165 FLR 72 at [29], that the statutory demand procedure “is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding up of insolvent companies unable to pay their just debts”. 48 The authorities are reviewed in Fitness First Australia Pty Ltd v Dubow [2011] NSWSC 531; (2011) 84 ACSR 296.

[11.175]

11 Voluntary and Compulsory Winding Up

461

If an original demand was grossly inflated by the inclusion of matters which are clearly genuinely in dispute, the court can decline to vary it under s 459H(4).49 An offsetting claim is defined in s 459H(5) and means a genuine counter-claim, set-off or cross-demand which the company has against, necessarily, the creditor who issued the demand.50 The claim must be made in good faith, meaning that it is arguable on the basis of facts that are asserted “with sufficient particularity to enable the Court to determine that the claim is not fanciful”: Macleay Nominees v Belle Property East Pty Ltd [2001] NSWSC 743. While an offsetting claim does not have to be for a liquidated amount (Classic Ceramic Importers (1994) 13 ACSR 263), “only a claim which is capable of being quantified as an amount of money can qualify as an ‘offsetting claim’”: Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd (1995) 17 ACSR 128, 135. An offsetting claim is not confined to a debt which is presently due and payable. For example, in the case of costs that are yet to be taxed, the amount claimed may constitute an offsetting claim. In such a case the demand may be set aside but on conditions that the costs be taxed or assessed: Fleur De Lys Pty Ltd v Jarrett [2005] NSWSC 1357; (2005) 51 ACSR 238. The supporting affidavit must contain “sufficient material indicating the nature of the offsetting claim and the way in which it is calculated to enable the statutory exercise under the Corporations Act 2001 (Cth), s 459H(2) to be carried out by the Court”: Re Infratel Networks Pty Ltd [2012] NSWSC 943; (2012) 91 ACSR 170. See further Body Corporate Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSC 435. In such cases, the question for the court is “whether there is a genuine counter-claim, set-off or cross-demand against the Defendant and if so, in what amount. In particular, how should it be quantified; at a nominal $1 or at a large figure and if the latter, how is the quantification to be arrived at?”51 As with the question whether there is a genuine dispute under para (a) of s 459H(1), in deciding whether there is an offsetting claim under para (b), it is not the court’s task to seek to resolve the competing claims of the parties: Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456, 462. However, there is some difference in approach between the two issues in the two paragraphs of s 459H(1). In determining whether there is a genuine dispute about a debt under s 459H(1)(a), the court asks, as we have seen, whether it is bona fide, real and not spurious or misconceived. In contrast, the question of whether there is an offsetting claim under s 459H(1)(b) involves a different and heavier test. It should raise “a serious question to be tried” (Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 47 FCR 451, 467) even if the bar that the plaintiff must clear is not a high one: Britten-Norman Pty 49 First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939, 951; Equus Corporation Pty Ltd v Perpetual Trustees WA Ltd [1997] FCA 468; (1997) 80 FCR 296. 50 See Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012) Ch 6. 51 Edge Technology Pty Ltd v Lite-on Technology Corp [2000] NSWSC 471; (2000) 18 ACLC 576.

462

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.180]

Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344. The plaintiff company must do more than simply assert a claim and some basis for it without more.52 That places a heavier onus on the party seeking to maintain its statutory demand, than if it merely had to establish the reciprocal of a genuine dispute against the offsetting claim: Edge Technology Pty Ltd v Lite-On Technology Corp (2000) 18 ACLC 576. Section 459J(1)(a): “defect in the demand (leading to) substantial injustice” or “some other reason”

[11.180]

Section 459J of the Corporations Act provides:

459J Setting aside demand on other grounds: (1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. (2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

Initially it should be explained that the two paragraphs of s 459J(1) serve distinct purposes. Thus the requirement that substantial injustice will be caused unless the demand is set aside relates only to the exercise of the discretion pursuant to s 459J(1)(a) of the Act: Chippendale Printing Co Pty Ltd v DCT (1995) 55 FCR 562, 577. The “other reason” required by s 459J(1)(b) of the Act must be a reason other than a defect in the demand: Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452, 458-459. That is, a defective demand is only to be set aside if a substantial injustice would otherwise be caused; but if there is any other defect, including a defect in relation to the demand rather than in the demand itself, the demand may be set aside only if the court is satisfied that there is some reason for doing so going beyond that mere defect. Is there substantial injustice?: s 459J(1)(a)

[11.185]

The question whether there is substantial injustice does often arise because of some defect in the demand itself. The presence of a defect will not cause a demand to be set aside unless it would lead to a substantial injustice: s 459J(1)(a). “Defect” is defined in s 9 as including an irregularity, misstatement of an amount or total, a misdescription of either a debt or other matter on the one hand or a person or entity on the other. The primary ground upon which it may be established that a defect will give rise to injustice will be where the defect makes it difficult for the debtor to comply with the demand. As Assaf notes in his treatise on the law of statutory demands “a statutory demand that is likely to mislead, confuse or fail to properly inform the debtor of the substantive requirements of s 459E will likely

52 Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, 39. The authorities were reviewed by the Full Bench of the South Australian Supreme Court in Ozone Manufacturing Pty Ltd v DCT [2006] SASC 91; (2006) 94 SASR 269.

[11.190]

11 Voluntary and Compulsory Winding Up

463

cause substantial injustice within the meaning of s 459J(1)(a)”.53 For example, in Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226 the failure to specify the amount of interest in the demand by leaving it to the debtor to calculate was a defect that caused substantial injustice. In Wildtown Holdings Pty Ltd v Rural Traders Co Ltd [2002] WASCA 196, the court found that an error of some $31,000 in a total of some $131,000 was not a minor misstatement. The court had “little sympathy for a creditor whose accounting records are such that it cannot calculate the amount of indebtedness to a high degree of accuracy. I appreciate that a creditor is not obliged to provide an analysis of the debt. However, if a creditor chooses to do so in a way which demonstrates the inadequacy of the information, he cannot be heard to complain about the consequences.” But there must be shown an injustice for the company; a demand is not to be set aside simply as a way of punishing the creditor for being lax in not complying with the form: Hornet Aviation Pty Ltd v Ansett International Air Freight [1994] FCA 1533; (1995) 13 ACLC 613. Examples of situations where the court has refused to find that a defect gives rise to substantial injustice include: • failing to provide an address for service in the jurisdiction (Daewoo Australia v Suncorp Metway [2000] NSWSC 35; (2000) 48 NSWLR 692); • misdescription of statutory provisions (eg, referring to the Corporations Law rather than Corporations Act) (Quitstar Pty Ltd v Cooline Pacific Pty Ltd [2003] NSWCA 359; (2003) 48 ACSR 222); • where there is a minor deficiency in compliance with statutory requirements or court rules: Dolvelle Pty Ltd v Australian Macfarms Pty Ltd (1998) 43 NSWLR 717. On the other hand, including debts that are not yet due in the statutory demand has been found to be a defect that results in substantial injustice: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746. However, where there is a genuine dispute about the debt the court may vary the demand under s 459H rather than set it aside under s 459J(1)(a): Primestyle Pty Ltd v Fluhler [2017] WASC 296. Failing to provide sufficient notice of the assignment of a debt can be a defect in the demand that presents a substantial injustice: Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139; (2005) 56 ACSR 223. Where joint creditors do not all sign the demand, that can be a defect that causes substantial injustice: Re Access Elevators Australia Pty Ltd [2016] NSWSC 739. “Some other reason”: s 459J(1)(b)

[11.190]

Section 459J(1)(b) of the Corporations Act states that a court may order a demand to be set aside if satisfied that there is some other reason for the setting aside of the demand. The scope of s 459J(1)(b) as a remedial provision has been examined in several cases. For example, in Hoare Bros Pty Ltd v DCT (1996) 62 FCR 302, the Full Federal

53 Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012), [7.19].

464

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.190]

Court took the view that subpara (b) gave the court a discretion, in a case which did not involve a defect in the demand, to set aside the demand if some appropriate reason was shown. That discretion could be exercised in favour of the debtor without showing that substantial injustice would otherwise be caused. The court referred to the “Explanatory Memorandum for the Corporate Law Reform Bill 1992 (Cth)”, which introduced the new provisions concerning statutory demands, noting its explanation at [687] that s 459J(1)(b) would enable the court to take into account matters such as improper or invalid service and mistakes or misstatements in the statutory demand, in circumstances where this would significantly prejudice any party. The court noted another example54 where a creditor unreasonably refuses the company’s offer to meet the debt. In Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3; 157 ACTR 22, the creditor had agreed to withdraw the statutory demand but later reneged on its agreement and it was set aside. Issuing a statutory demand while also undertaking debt recovery proceedings may provide some other reason to set aside the demand: Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236. The need for the affidavit verifying the demand to be accurate given the responsibilities attaching to the officer swearing it was noted earlier. In Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11, the demand was set aside under s 459J(1)(b) where the affidavit verifying it had failed to comply with the rules in “at least five … respects”. The scope of s 459J(1)(b) has to be assessed within the strict statutory regime of Pt 5.4 Divs 2 and 3 and the purposes of the legislation. A demand has therefore been set aside because it was made for a purpose other than that contemplated by the Corporations Act: Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290. The section also needs to be assessed, where relevant, in light of any statutory regime supporting the underlying debt itself, such as the tax laws.55 “Some other reason” can be found in the way the demand was served. If a creditor serves a demand using a prescribed mode of service, but knows that, at the time of service or before the 21 days expire, the demand has not actually come to the attention of the company, and knows that the company would dispute the demand if made aware of it, but refrains from bringing the demand to the actual notice of a responsible officer of the company, the court may set aside the demand under s 459J(1)(b). The reason is not for want of good service but for want of fair notice being given to the debtor: Woodgate v Garard Pty Ltd [2010] NSWSC 508; (2010) 78 ACSR 468. Solvency alone is not a sufficient “other reason” for setting aside the demand: Chippendale Printing Co Pty Ltd v DCT (1995) 55 FCR 562. This is because, amongst other things, the Corporations Act shows an intention that the issue of solvency is to be the subject of a final determination in the winding up proceedings, whereas the 54 General Insolvency Inquiry, DP 32 (1987) at [114]. 55 DCT v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; Meehan v Glazier Holdings Pty Ltd (2005) 53 ACSR 229.

[11.200]

11 Voluntary and Compulsory Winding Up

465

statutory demand procedure is of a preliminary nature.56 As we will see, the court has the discretion at the winding up hearing to allow the company to rely upon the fact that the debt is disputed: s 459S. So, if a company fails to apply to set aside a demand within time and wants to argue that it is solvent (and s 459S applies) it cannot do so until the hearing of the winding up application. Merely applying to set aside the judgment debt is not, without more, “some other reason” that requires the demand to be set aside: Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235. See also Body Corporate Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSC 435. A genuine dispute about the debt can constitute some other reason: MNWA Pty Ltd v DCT [2016] FCAFC 154; (2016) 117 ACSR 446. Section 459J(1)(b) is obviously broad in effect. But in Hoare Bros Pty Ltd v DCT (1996) 62 FCR 302 the court said it was “unwise to attempt to mark out the limits of the jurisdiction conferred by s 459J(1)(b)”. And while legal concepts such as unconscionability, abuse of process and substantial injustice are used, the real question is whether there is good reason to deny effect to a statutory demand as creating a ground for the winding up of the debtor company: Neutral Bay Pty Ltd v Deputy Commissioner of Taxation [2007] QCA 312; 25 ACLC 1341. Section 459J(1)(b) is not concerned with trifles: Plate Impressions Pty Ltd v JRL Consortium Group Pty Ltd [2016] QSC 274.

Consequences of demand being set aside [11.195]

If an order is made by the court under s 459H or s 459J of the Corporations Act setting aside the demand, then the demand is of no effect while the order is in force: s 459K. In making an order pursuant to s 459H or s 459J the court may attach conditions (s 459M, such as payment of the money into court) and the court may, if it sets aside the demand, order the creditor who served the demand to pay the company’s costs: s 459N.

Unsatisfied execution [11.200]

It remains to explain one other common way of securing a presumption of insolvency. A company will be deemed to be insolvent if execution or other processes issued on a judgment, decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part: s 459C(2)(b). This is the equivalent of the act of bankruptcy under s 40(1)(d)(ii) of the Bankruptcy Act: see [3.185].

In certain circumstances, a court has the right to go behind the judgment on which the execution proceedings were based. As we have seen in bankruptcy law, courts are reluctant to go behind judgments, but may do so where there has been fraud, collusion or a substantial miscarriage of justice.57 The grounds for going behind a judgment are not, however, limited to situations of fraud, collusion or substantial miscarriages of justice: Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28. 56 See also O’Gorman, “Sidestepping the Statutory Demand: Is Solvency a Solution?” (2002) 10 Insolv LJ 239. As we have seen, the same applies in respect of bankruptcy notices: see [3.325]. 57 Corney v Brien (1951) 84 CLR 343; Wren v Mahony (1972) 126 CLR 212. See Chapter 3.

466

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.205]

WINDING UP PROCEDURES [11.205]

The procedure involved in securing a winding up order is regulated by the Corporations Act itself and by Div 5 of the Courts’ Corporations Rules.58

We now examine applications to wind up a company pursuant to s 459P. Where such an application is made a court may order a winding up under s 459A.

Applicants for winding up [11.210]

Section 459P(1) of the Corporations Act states that the following may apply for the winding up of a company in insolvency: (a) the company; (b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);59 (c) a contributory (defined in s 9 and generally means a past or present member); (d) a director; (e) a liquidator or provisional liquidator of the company; (f) ASIC; (g) a prescribed agency. Under Corporations Regulations, reg 5.4.01, the only agency prescribed is the Australian Prudential Regulation Authority (APRA) which regulates insurers, superannuation funds, banks and the like. In the case of some such entities, there is specific legislation that gives APRA the right to apply for their winding up.

Some of these require leave of the court, under s 459P(2) – contingent60 or prospective creditors; a contributory;61 a director;62 and ASIC. The court may grant leave if it is “satisfied that there is a prima facie case that the company is insolvent, but not otherwise”: s 459B(3). Leave may be given nunc pro tunc, that is, after the application has been brought: Masri Apartments v Perpetual Nominees [2004] NSWCA 471; (2004) 52 ACSR 136. Explanations of the various categories

[11.215]

The term “creditor” in relation to an application for winding up includes every person who has a right to prove in a winding up: National Australia Bank Ltd v Market Holdings Pty Ltd [2000] NSWSC 1009; (2000) 50 NSWLR 465, although it should be noted that persons with claims for unliquidated damages

58 See further Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012). 59 Thus a secured creditor is not confined to relying upon its security, or is not required to surrender its security before being entitled to apply, as is the case in bankruptcy, under s 44 of the Bankruptcy Act: Re Gem Sapphires (Aust) Pty Ltd (1983) 8 ACLR 225; Masri Apartments Pty Ltd v Perpetual Nominees Ltd [2004] NSWCA 471; (2004) 52 ACSR 136. 60 For example, see Alati v Wei Sheung [2000] NSWSC 601; (2000) 34 ACSR 489. 61 For an example, see Re Daintree Rain Forest Resort Pty Ltd (1999) 17 ACLC 585. 62 For example, see Wong v Australia Machinery Equipment Sales Pty Ltd [2000] NSWSC 623; (2000) 34 ACSR 669.

[11.215]

11 Voluntary and Compulsory Winding Up

467

may submit a proof of debt but do not have standing to apply for a winding up.63 As Santow J said in Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311, 322-323: “There is no compelling logic in making the class of those who can prove in a liquidation identical with those who can trigger it. There is a procedure in the winding up itself for proof of debts and claims. This allows for the testing and ultimate quantification of, for example, an unliquidated claim. This is absent at the initial point where application for winding up is first made. … Put shortly, insolvent companies, even if generally insolvent, are not to be put to the equivalent of citizens’ arrest; particularly when the ’citizen’ most likely to do this has yet to satisfy the requirements for standing. Otherwise the threat of winding up can so easily be used as a source of unfair pressure to achieve that end, or other unfair commercial advantage. The Australian Securities Commission and other ’prescribed agencies’ can adequately represent the citizens’ interest in taking such companies off the register, along with genuine creditors pursuing their own interests.”

As noted above, in Corporations Act, s 459P (and also s 462(2)(b) for winding up applications on grounds other than insolvency) contingent and prospective creditors are included. A contingent creditor is someone to whom the company owes an existing obligation out of which a liability on the part of the company concerned to pay a sum of money may arise in a future event, but the occurrence of the future event may or may not happen: Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455. The classic example of a contingent liability is a contract of guarantee where the guarantor promises to pay the principal debtor’s loan obligation but that obligation to pay will only fall due if and when the principal debtor defaults on their loan. Although a contingent liability involves some doubt about whether there will be any amount owing at all, there must be an existing legal obligation and the obligation must be able to be valued or estimated. A prospective or future creditor is one who is owed a sum of money that is not immediately payable: Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455. Section 459A states that the court may order the winding up of a company that is insolvent when an application under s 459P has been filed. A court, in determining whether a company is or is not insolvent, can take into account its contingent and prospective liabilities: s 459D. As we have seen, the wording of s 95A contemplates that in any event. A creditor that is fully or partly secured is entitled to apply for a winding up; there is no obligation on the creditor to realise the security before it commences winding up proceedings: Re Alexander’s Securities (No 2) [1983] 2 Qd R 597. A creditor may include an assignee of a debt: DCT v Lanstel Pty Ltd [1996] NSWSC 572; (1997) 15 ACLC 25.64 63 Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311; cf Re Gasbourne Pty Ltd [1984] VR 801. 64 See also Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2008] NSWSC 3; (2008) 26 ACLC 74.

468

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.215]

As to the various other categories of applicants in s 459P(1), a contributory may wish to apply because they will be liable to contribute if the company is insolvent. The contributory might be concerned that if the company continues to trade and is wound up later they will be liable for more than would be the case if the company were wound up sooner. The same may apply to a director, who might be concerned about liability for insolvent trading. A liquidator of a voluntary winding up may wish to apply because they may take the view that if the liquidation were a court liquidation they may be able to wind up the affairs more successfully. This may be because relevant provisions applicable only in compulsory winding up would become available, for example s 588FJ which allows a liquidator to challenge a circulating security interest over a company’s assets created within six months of the relation-back day (Carter v New Tel Ltd [2003] NSWSC 128; (2003) 44 ACSR 661) or because insolvent trading proceedings against directors’ are contemplated and the directors and officers’ insurance policy provides indemnity only if a claim is brought against the directors by the company “at the instigation of a liquidator formally appointed by a court”: Re Dean-Willcocks [2004] NSWSC 1209. However, given that there is little practical difference between the administration of a voluntary and a compulsory winding up, a court will generally not permit a creditor to wind up a company that is already in voluntary winding up: DCT v Tull Reinforcing Pty Ltd [2006] FCA 810; (2006) 153 FCR 394. The Full Federal Court has noted, however, that the discretion to order a winding up under s 459A is not to be limited by imposing a requirement that the applicant must demonstrate “some good reason”: CBA Corporate Services (NSW) Pty Ltd v Walker and Moloney, in the matter of ZYX Learning Centres Ltd [2013] FCAFC 74 at [42]. As to the restrictions imposed on certain creditors by s 459P(2), the reasons for these were explained in Masri Apartments Pty Ltd v Perpetual Nominees Ltd [2004] NSWCA 471; (2004) 23 ACLC 165, 172: “Liquidation is a serious, indeed fatal step, in the life of a company. It is not a means of debt collection. Rather, in the case of insolvency, it is a means whereby creditors and potential creditors are protected from the continued trading by a company that is unable to pay its debts as they become due. The legislature could not have meant to allow that step to be taken by a party whose debt was not presently due as in the case of a prospective creditor, or which may not become due in the case of a contingent creditor, unless there was good reason to do so. That ’good reason’ is where the company is insolvent. … There are a number of reasons why the section limits the grant of leave, not the least of which is that otherwise, a prospective or contingent creditor could use the section as a means of pressure or harassment. The same might be said of a contributory or a director. By requiring that these parties obtain leave, the legislature ensures a system whereby the purpose for which the section was enacted, that is, that insolvent companies not trade, is appropriately applied.”

Undoubtedly, by far the most winding up applications will come from creditors and it is this type of applicant on which emphasis will be placed in the ensuing discussion.

[11.225]

11 Voluntary and Compulsory Winding Up

469

It remains to be said that there is no inherent jurisdiction of the court to make a winding up order even though no application has been made by a person within the specified categories of eligible applicants: Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; (2016) 316 FLR 318; Re IR Services (Qld) Pty Ltd [2017] NSWSC 1823.

Applying for winding up [11.220]

Winding up proceedings are initiated by an application – an originating process, Court Form 2 – and state the orders sought and the grounds upon which the application relies, supported by an affidavit.65 The date of filing the application at the court registry is important because this date fixes the relation-back day back from which voidable transaction claims by the liquidator can be claimed (under Corporations Act, Pt 5.7B Div 2), if there is a subsequent winding up order made. The application must be served on the company within 14 days of the date the application is made and no later than five days before the date fixed for hearing: s 465A(b); Courts’ Corporations Rules, r 2.7(1). Under s 109X(1) of the Corporations Act, service can be effected by leaving the application at the company’s registered office, sending it to that office by post, or delivering a copy of the document personally to a director of the company who resides in Australia or in an external Territory. If the application relies on the non-compliance by the company in respect of a statutory demand under s 459E, as most creditors’ applications do, the application must (s 459Q): • set out the particulars of both the service of the demand and of the non-compliance; • have attached to it a copy of the demand and a copy of any order varying the demand; and • be accompanied by an affidavit verifying that the debt is due and payable and the demand complies with the rules unless the demand was founded on a judgment debt. Application must be determined within six months, or as extended

[11.225]

An application must be determined by the court within six months of being made: s 459R(1). This time period may be extended by a court if it is satisfied that special circumstances justify it and the order is made within the six months or any extension of time previously ordered: s 459R(2). In Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2002] NSWSC 851; (2002) 194 ALR 138 Hamilton J said (at [9]): “What the Court must bear in mind in exercising its discretion is not simply the interests of the parties, but the public interest in what is established as the policy of this portion of the Act of ensuring that winding up proceedings are speedily disposed of. There are various good reasons for this policy and I do not purport to be exhaustive. They include winding up applications not being dealt with on material which is stale. They include situations where a company may be trading or engaging in transactions whilst it is insolvent, which should not be protracted. And they include companies, which are not

65 Courts’ Corporations Rules, r 5.4.

470

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.230]

insolvent, not having the commercial cloud caused by the existence of winding up proceedings hanging over their heads for a long time. This is particularly so when, under the policy of the Act, the circumstances in which applications may be made to set aside notices of demand are stringently controlled.”

This six-month period contrasts with the initial one year (that can be extended up to two) period allowed under the Bankruptcy Act for a creditor’s petition to be heard: see [3.350]. Slip rule

[11.230]

If the six months set under s 459R pass without an order for extension having been made, usually by oversight a retrospective order may be obtained from the court under the “slip rule”. This is a rule of court that allows a court to remedy clerical or accidental omissions in orders made by the court. It was applied in DDB Needham Sydney Pty Ltd v Elyard Corp Pty Ltd (1995) 61 FCR 385 where the company’s solicitor inadvertently did not ask for an extension of the winding up application beyond the six months prescribed in s 459R and the court did not itself raise the issue. Although the case law raises some issues of uncertainty about the extent of the slip rule in these cases,66 it is applied in the context of the comparable 12 month life of a creditor’s petition in bankruptcy, at [3.350].

The exercise of the power to extend time is discretionary. Relevant factors include whether the slip was accidental, how quickly an application was made to rectify it, whether the court itself was involved in the oversight and whether the application for winding up itself was of legal substance. It is also important to distinguish between the exercise of the discretion to correct an error so as to reflect the intention of the court and the existence of a statutory discretion which the earlier court omitted to exercise; the latter should not be the subject of exercise of the slip rule: Amorin Constructions Pty Ltd v Kamtech Electrical Services Pty Ltd [2008] NSWSC 285; (2008) 73 NSWLR 627. Nevertheless there has been a broadening of the ability of the courts to remedy such slips if it serves to protect the integrity of the administration of justice, even if the orders would fall outside the slip rule or are expressed in other terms: Newmont Yandal Operations Pty Ltd v J Aron Corporation [2007] NSWCA 195; (2007) 70 NSWLR 411; Soil and Contracting Pty Ltd v Boban Pty Ltd [2014] WASC 402. It should be noted that s 459R does not apply to applications to wind up on grounds other than insolvency such as the “just and equitable” ground under s 461.

66 See the comments in Amorin Constructions Pty Ltd v Kamtech Electrical Services Pty Ltd [2008] NSWSC 285; (2008) 73 NSWLR 627.

[11.250]

11 Voluntary and Compulsory Winding Up

471

Consent of liquidator

[11.235]

The applicant should obtain a signed “consent to act” of a registered liquidator before the hearing (s 532(9)) and file the consent (Court Form 8) with the court.67 That requires the liquidator to state that they are not aware of any conflict of interest or duty that would make it improper for them to act as liquidator of the company. Publication

[11.240]

In order to allow other persons the opportunity of supporting or opposing the application, notice of the application must be publicised, in accordance with Form 9, but only after at least three days after the originating process is served on the company (the “publication rule”, see [11.250] and at least seven days before the date fixed for hearing of the application: see Courts’ Corporations Rules, r 5.6. Proof of publication of the notice is required: r 2.12. Publication is made on the Public Notices website: Corporations Regulations, reg 5.6.75.68

Notice of the application should be lodged with ASIC: Corporations Act, s 465A(a), ASIC Form 519.

Opposition to the winding up – s 465C [11.245]

If a person wishes to attend at the hearing of the application to support or oppose it there must be filed at the court a notice of intention to appear, which must contain any grounds of opposition and must be accompanied by an affidavit: Courts’ Corporations Rules, r 2.9(2). The notice and affidavit must be served on the applicant. These Rules merely supplement Corporations Act, s 465C which provides that a person may not appear and oppose an application without first filing a notice setting out the grounds of opposition, verified by an affidavit, unless leave of the court is obtained. The court will grant leave where there is no prejudice to the applicant: Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459.

The company through its directors will be the one defending the winding up application. If a company is in receivership, the receiver has power under s 420(2)(u), on behalf of the company, to defend an application for winding up. Before the receiver exercises such power, the directors are entitled to defend the application: Deangrove Pty Ltd v Commonwealth Bank of Australia [2001] FCA 173; (2001) 108 FCR 77.

Injunction to prevent winding up [11.250]

The three days delay on publication of the winding up application is meant to allow time for the company to seek an injunction order from the court to prevent the filing and advertising of the winding up application, and thereby save it from adverse publicity and damage to its trading reputation. The winding up

67 Courts’ Corporations Rules, r 5.5, Form 8. See the ARITA Code for its recommended “Declaration of Independence Relevant Relationships and Indemnities”, the DIRRI, which supports the Consent to Act, although calls for a broader declaration of independence. 68 See http://www.insolvencynotices.asic.gov.au.

472

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.255]

proceedings may be an abuse of process and the courts have inherent jurisdiction to prevent such abuse.69 A winding up application advanced on the basis of a disputed debt is regarded as an abuse of process where some more suitable means of determining the dispute is available and not pursued: Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374. Before the court can agree to grant an injunction it must be satisfied that there is a serious question to be tried: Felkro Nominees Pty Ltd v DCT (1996) 21 ACSR 391. The court will also consider where the balance of convenience lies, that is, is it more convenient to allow the winding up application to proceed or not (ie depending upon the damage that the mere application itself may cause the company): Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd (1989) 1 ACSR 118. If it is clear that the company is insolvent, it is unlikely that the requisite degree of damage would be established.70 There is no abuse of process if the disputed debt was the subject of a statutory demand and either an application under s 459G of the Corporations Act to have the demand set aside because of the existence of the dispute was unsuccessful or no such application was made within the period allowed by that section: Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374. The court may well take the view that the company should have opposed the demand according to the procedure outlined in s 459G.

The hearing [11.255]

The hearing of the winding up application is usually conducted before a registrar, exercising the delegated authority of the court. A number of orders may be made at the hearing. The court may: • grant a winding up order (s 459A); • dismiss the application even if a ground has been proved on which a winding up order may be made (s 467(1)(a)); • adjourn the hearing conditionally or unconditionally (s 467(1)(b)); or • make an interim or other order: s 467(1)(c). Importantly, s 467A provides that an application will not be dismissed just because there is a defect or irregularity in relation to the application. Furthermore, an application that relies on the non-compliance with the terms of a statutory demand will not be dismissed merely because there was a defect in the demand: s 459J(2). A failure to advertise the winding up proceedings may be excused under s 467A,

69 Williams v Spautz (1992) 174 CLR 509; Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287; David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265; House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527. The last case indicated that the effect of Pt 5.4 of the Corporations Act is effectively to limit the exercise of the court’s general jurisdiction to stay proceedings where there is an abuse of power (at 529). 70 Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1992) 11 ACSR 1, 6; DCT v Peter Sleiman Investments Pty Ltd [2016] NSWSC 1657.

[11.260]

11 Voluntary and Compulsory Winding Up

473

although the court may also adjourn the matter to allow advertising to proceed: Kozlowski v JSBG Developments Pty Ltd [2010] NSWSC 1022; Re DJG Securities Pty Ltd [2013] NSWSC 588. Frequently, companies do not file any notice of intention to appear and do not attend at the hearing. If this occurs, the applicant’s lawyer will take the registrar through the documents filed and seek the winding up order. Such uncontested applications are usually disposed of on affidavit evidence. The registrar will raise any concerns about the documents and the circumstances surrounding the application. Cases where orders are made in the company’s absence may sometimes occur because the company intended to defend the matter, or had in fact paid the debt, but through some error, did not have representation on the day. If the company then wishes to challenge the winding up order, it must explain why the matter passed undefended and must also show its solvency. These issues are considered in more detail in examining termination of a winding up in Chapter 17. On the hearing of an application, the court has broad powers to make directions as to the manner in which the hearing is to be conducted: s 467(3). On the application of the company, the applicant or anyone who has given notice of their intention to appear at the hearing, the court may direct that notices be given or steps taken before or after the hearing; dispense with required steps; direct that oral evidence be taken on the application; direct a speedy hearing; permit the application to be amended or withdrawn; and otherwise give such directions as it sees fit. Adjournment

[11.260]

The court may order an adjournment, but it is reluctant to allow lengthy adjournments, in particular, as s 459R of the Corporations Act requires applications to be determined within six months. While the court has the power to extend this time it must be satisfied of the existence of special circumstances before doing so: s 459R(2)(a). Short adjournments are often permitted to enable formal defects to be attended to, to allow further affidavits to be filed, and to permit time for negotiations between the creditor and the company. Factors that a court is to take into account in deciding on an application for an adjournment are the period of time sought and the purpose of the adjournment: Waste Recycling and Processing Services of NSW v Local Government Recycling Co-Operative Ltd [1999] NSWSC 507; (1999) 32 ACSR 194. Adjournments of winding up applications are often sought when a company goes into Pt 5.3A administration. Section 440A(2) requires the court to grant an adjournment if it considers that it is in the interests of the company’s creditors for the company to continue under administration rather than be immediately wound up. This is discussed further in Chapter 19. Where a company diligently pursues an appeal against the judgment debt on which the winding up application is based, and the appeal is in good faith and

474

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.265]

founded on arguable grounds, the application to wind up should generally be adjourned to await the outcome of the appeal.71 Court’s discretion

[11.265] It is clear from s 459A of the Corporations Act that, even if the company is insolvent the court retains an overriding discretion not to make a winding up order even where the applicant can clearly rely on one of the statutory presumptions of insolvency. However, while the courts possess a wide discretion, a creditor who has unquestionably established the insolvency of the company is entitled, almost as a matter of right, to an order.72 In submitting that a court should exercise its discretion not to order a winding up, it is not sufficient to demonstrate that the applicant creditor had ulterior motives for the application, for example, ill-will.73 However, if the company could establish that the real object was not to obtain a winding up order, but some other restraint upon the company, then a court might reject the application on the basis that it is an abuse of process. The court’s right to refuse a winding up order is limited to some well-defined principles. One potential new basis upon which to adjourn a matter is if the company puts on evidence that it is seeking to resolve its difficulties according to the safe harbour process outlined in s 588GA discussed in Chapter 21. Disputed debt

[11.270]

Historically, the major reason for a court exercising its discretion and refusing to make a winding up order has been where there is a bona fide dispute based on some substantial ground concerning the debt which is the subject of the proceedings.74 The rationale for giving this opportunity is that a creditor should not be permitted to invoke winding up proceedings to compel the payment of a disputed debt by a solvent company.75 In such circumstances a court would dismiss the application and may award costs against the applicant. But in seeking leave, the company is required to establish a prima facie case that there is a matter which deserves to be tried: Derby Motorplus Pty Ltd v Swan Building Society (1990) 2 ACSR 239, 241. Given the rights of a company to challenge a demand as being based on a disputed debt, under s 459H, there is less likelihood of a company being allowed to argue this ground at a hearing of the application to wind up. However, if the defendant company failed to oppose the demand then a court may, in its discretion, grant

71 Woodhead Firth Lee Pty Ltd v Archer Pty Ltd (1995) 13 ACLC 883; cf Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd (No 3) [2010] WASC 93. 72 Re Derrygarrif Investments Pty Ltd (1982) 6 ACLR 751; DCT v Guy Holdings Pty Ltd (1994) 12 ACLC 966; Re Elgar Heights (1985) 9 ACLR 846; Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376. 73 IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417; Re Kolback Group Ltd (1991) 4 ACSR 165. 74 Re K L Tractors Ltd [1954] VLR 505, 512; Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290. 75 Re Imperial Hydropathic Hotel Co (1882) 49 LT 147, 150; Mann v Goldstein [1968] 1 WLR 1091.

[11.275]

11 Voluntary and Compulsory Winding Up

475

leave to the company to prove its solvency on the basis that the debt claimed by the applicant is disputed. Courts are reluctant to grant such leave, except in special circumstances. The purpose of s 459H is to try and ensure disputes over debts are resolved at the statutory demand stage rather than waiting until the case gets to a hearing. In fact, even if the debt is disputed, the presumption of insolvency applies, and the court is entitled to wind up a company in that circumstance: ASIC v Lanepoint Enterprises Pty Ltd [2011] HCA 18; (2011) 244 CLR 1. There has been a question where a disputed debt has been established of whether or not a winding up order should be made if the company is nevertheless found to be insolvent, that is, without reliance on the presumption of insolvency produced by non-compliance with a statutory demand. The accepted view is that the question of insolvency is distinct from the applicant’s standing, and that where a genuine dispute is manifested the creditor is no longer a creditor for the purposes of s 462 of the Corporations Act, and therefore cannot bring the proceedings. The opposing view states that once the company has been found to be insolvent, the court should exercise its discretion and make the order, because, inter alia, companies that are insolvent should not be permitted to continue to trade. In the view of the NSW Supreme Court in Tokich Holdings Pty Ltd v Sheraton Constructions [2004] NSWSC 527; (2004) 22 ACLC 955,76 the “preponderance of authority is that a company may not be wound up on the application of a person claiming to be a creditor whose debt is disputed unless that dispute is resolved. Otherwise the applicant will not establish its standing to apply for the company’s winding up”: at 968. “However desirable it might be for the Court to wind up a company which is insolvent and whose continued trading might adversely affect the public with whom it deals, the Court has no power to order its winding up if the applicant for winding up has no standing to bring the application. To refuse a winding up order where a company is insolvent on the application of a person without standing is not to favour the company over the public interest. … It is rather to recognise the jurisdictional limits upon the power to order the winding up of a company”: at 970.

Abuse of process

[11.275]

We have discussed abuse of process in the context of the issue and service of a winding up demand. We examine here abuse of process by the applicant in bringing the winding up proceedings, where the court may dismiss the application and award costs against the applicant.77 An abuse of process may occur when:78 • the proceedings to wind up are bound to fail because they are defective;79 76 See also, Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216 and cases there cited. 77 Ballieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 3597. 78 A review of the authorities is provided in Lanepoint Enterprises Pty Ltd v ASIC [2010] FCAFC 49; (2010) 78 ACSR 487. The successful appeal to the High Court of Australia does not affect this point. 79 L & D Audio Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536.

476

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.280]

• the real object of the applicant is to attain an object other than the securing of a winding up order. The usual example is where the process is used as a debt-collecting procedure, for example to present a winding up application against a solvent company as a means of pressuring it to pay a disputed debt or where the creditor’s knowledge of the company is such that it knew that the company could rebut the presumption of insolvency: Paperlinx Ltd v Skidmore [2004] NSWSC 1624; (2004) 51 ACSR 614. In that case the company served with the demand had a book value and operating profit exceeding $100 million. The court found that regardless of whether the plaintiff had discharged the judgment debt, the application to wind up was bound to fail. There may be abuse where the winding up process is used in order to conduct a “fishing expedition”80 or in order to thwart family law proceedings of a wife being brought against the husband director: Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204; • issues will arise in the proceedings of a kind inappropriate for determination in such proceedings – for example, a substantial contest in relation to the existence of a debt relied on by the applicant;81 or • the creditor who is applying for the winding up order is making a claim against the company in parallel proceedings for a sum which founds the winding up application. In such a case it is for the creditor to satisfy the court that a good reason for the other action exists.82 Broadly and consistent with the views explained at [11.300] about standing as a creditor, a creditor with a disputed debt that applies to wind up the company is acting in abuse of process. However, an attempt to cause the company to cease business and have a liquidator appointed, or to cease proceedings, is not necessarily an abuse of process: Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd (2007) 213 FLR 450; [2007] NSWSC 966. In IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 49 ALJR 176, 182 Gibbs J said that seeking a winding up order was simply one of the remedies open to a creditor of a company which cannot pay its debts: “…if it be surmised that [the creditor] was pleased at the prospect that the appellant might have to cease business, that is immaterial, for it is not the law that only a creditor who feels goodwill towards his debtor is entitled to a winding-up order.”

Tender of payment

[11.280]

If the debtor company tenders payment of the applicant’s debt after filing of the application but before the hearing, and the tender is refused, those facts may be relevant to the exercise of the court’s discretion to decline to order a winding up. Tender and refusal of payment, even refusal without justification, does not eliminate the debt, even though the availability of bank cheques for payment

80 Re Kolback Group Ltd (1991) 4 ACSR 165. 81 L & D Audio Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536; Forsayth NL v Juno Securities Ltd (1991) 4 ACSR 281. 82 Portfolio Projects Pty Ltd v Oakes Building Co Pty Ltd (1987) 5 ACLC 911, 913; Mala Pty Ltd v Johnston (1994) 13 ACLC 100, 102.

[11.290]

11 Voluntary and Compulsory Winding Up

477

may be the equivalent in practical terms of payment: Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2008] NSWSC 3; (2008) 26 ACLC 74. Similar law applies in bankruptcy. Opposition to the order by creditors

[11.285]

If the applicant is an unsecured creditor, the right to have a winding up belongs to the class of unsecured creditors, so all are entitled to be consulted.83 This is in line with the general principle that winding up is a collective process designed to benefit the general body of creditors. The general policy of the law is to treat the creditors themselves as being in the best position to decide what is in their interests. Therefore, if a majority in value of the unsecured creditors oppose a winding up order the court can exercise its discretion and refrain from making an order.84 It is necessary for a court to balance the right of the applicant creditor, who has an unpaid and undisputed debt, to a winding up order,85 as against the fact that the majority in value of creditors may wish the company to continue. The court may say that the applicant is entitled to an order but the court, in exercising its discretion (which is overriding),86 refrains from making the order because of the attitude of the majority of creditors and the fact that the creditors can demonstrate good reasons for their attitude. Section 547

[11.290]

Section 90-21 of the IPSC recognises the collective nature of winding up for it grants the court a discretion to have regard to the wishes of the creditors in relation to all matters affecting an external administration (which includes liquidation). Therefore, the courts have a legislatively endowed right to consider the views of the creditors. Importantly, the wishes of the majority in value are to be given more weight than the wishes of the majority in number.87 A winding up order will invariably be made on the application of the major creditor even though a large number of smaller creditors do not support a winding up: Re Huon Foam Pty Ltd [2000] TASSC 99. The wishes of the unsecured creditors should be given more weight than those of the secured creditors.88 Furthermore, while the views of creditors with vested interests in the company, such as the directors of the company and creditors who are associated with the company, will not be disregarded, they will carry far less weight when it comes down to working out majorities, and may well be discounted.89

83 Re Crigglestone Coal Co [1906] 2 Ch 327. 84 Re P & J Macrae Ltd [1961] 1 WLR 229; Laucke Flour Mills (Stockwell) Pty Ltd v Fresjac Pty Ltd (1992) 8 ACSR 59. 85 Re Crigglestone Coal Co [1906] 2 Ch 327; Re P & J Macrae Ltd [1961] 1 WLR 229. 86 Re Chapel House Colliery Co (1883) 24 Ch D 259; Re Concrete Pipes & Cement Products Ltd [1926] VLR 34. 87 Re Shopware Trading & Engineering Pty Ltd [1977-1978] CLC 40-327. 88 Re Crigglestone Coal Co [1906] 2 Ch 327; NSW Rugby League Ltd v United Telecasters Ltd (1991) 4 ACSR 510. 89 See McPherson’s Law of Company Liquidation (Thomson Reuters, Westlaw AU), [3.1440].

478

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.295]

No benefit: s 467(2)

[11.295]

It is debatable whether the court has the right to refrain from making a winding up order on an application where it is clear that the making of an order would not be of any benefit to the creditor who is the applicant. Old cases had held that an applicant creditor was not entitled to an order when it was impossible that it would obtain any dividend.90 Section 467(2) now provides that a winding up order should not be refused on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of that property, or that the company has no property.91 Already subject to a winding up order, or application

[11.300]

If a company is subject to a winding up order, for example already made by a court in another State, another order cannot be made against the company.92 Although this should not occur given that a winding up order is recorded at ASIC and a creditor should be aware of the liquidation of the company, some short delay in the liquidation being recorded on ASIC’s database may occur. If a subsequent winding up order is nevertheless obtained, it should be terminated and the applicant may not be awarded its costs.93

Also, as we have seen, if a company is the subject of a winding up application, or a winding up order has been made, the company cannot resolve to wind up voluntarily except with leave of the court: s 490. If leave of the court is sought under s 490(a), the onus is on the applicant who must establish that this is preferable to a compulsory winding up, and that special circumstances exist.94 The court must consider whether the creditors have taken into account the respective advantages of a compulsory, as opposed to a voluntary, winding up95 although, in reality, there are few differences. There may be issues involving an insurance policy that will respond to claims for insolvent trading by directors only if the liquidator is appointed by the court, or where a charge or disposition of property may only be challenged if the court has ordered the winding up.96

90 For example, Re Crigglestone Coal Co [1906] 2 Ch 327; Re Chapel House Colliery Co (1883) 24 Ch D 259; Re Concrete Pipes & Cement Products Ltd [1926] VLR 34. 91 See Rees, Chapel House and Crigglestone Exhumed (1992) 10 C&SLJ 305. 92 Commonwealth of Australia v Emanuel Projects Pty Ltd (1996) 14 ACLC 1351; Dewina Trading Sdn Bhd v Ion International Pty Ltd (1996) 14 ACLC 1603. 93 Dewina Trading Sdn Bhd v Ion International Pty Ltd (1997) 15 ACLC 21. See also, Newsnet v Raine & Horne [2001] NSWSC 310; (2001) 19 ACLC 843 where the costs of a second winding up order could not be claimed. 94 Progress Printers and Distributors Pty Ltd & Production & Graphic Communications Pty Ltd [1996] FCA 1688; (1996) 21 ACSR 241, 243. 95 DCT v Concrete Contractors (NSW) Pty Ltd [2008] FCA 1339 and authorities there cited. 96 Re Australian Resources Ltd (2004) 52 ACSR 452; Carter v New Tel Ltd [2003] NSWSC 128; (2003) 44 ACSR 661.

[11.305]

11 Voluntary and Compulsory Winding Up

479

Leave may be given retrospectively, nunc pro tunc.97 The power to grant leave is to be used sparingly, and only where the court is satisfied that the assent of the creditors or at least the principal creditors is given.98 There are two other restrictions on the ability of a company to proceed to a voluntary winding up. These are: • where the court has already ordered that the company be wound up in insolvency (s 490(b)). It is obvious that a company cannot voluntarily go into insolvency if it is already subject to a winding up; and • where the company is subject to voluntary administration (s 440A(1)). In this case a company may only wind up voluntarily in accordance with s 446A or s 446AA. The latter instance is discussed further in Chapter 19. Section 459S

[11.305]

This section provides that if a winding up application is based on the failure of the company to comply with a statutory demand, then the company’s ability to oppose the application on certain grounds will require the court’s leave. The company will require the court’s leave to raise a ground of opposition, either: • that the company relied on for the purposes of an application to set aside the demand; or • that the company could have relied on, but refrained from relying on, when the application to set aside was heard (or a ground that could have been relied on even though no application to set aside was filed). For example, where the debt owed to the creditor is genuinely disputed the court may grant leave under s 459S of the Corporations Act to raise the issue against the winding up application, provided that the disputed debt is material to proving the company’s solvency.99

There are three preliminary matters relevant to whether leave should be granted under s 459S: • a preliminary consideration of the defendant’s basis for disputing the debt the subject of the demand; • an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party’s conduct at that time; and • an investigation of whether the dispute about the debt is material to proving that the company is solvent: Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 889; (1999) 47 NSWLR 382. See also Re Vangory Holdings Pty Ltd [2015] NSWSC 546. As to the last issue, a court is not permitted to grant leave unless satisfied that the ground is material to proving the solvency of the company. This means that the 97 DCT v VFS Employment Services Pty Ltd [2016] FCA 1054. 98 Progress Printers and Distributors Pty Ltd & Production & Graphic Communications Pty Ltd [1996] FCA 1688; (1996) 21 ACSR 241, 243. 99 ASIC v Lanepoint Enterprises Pty Ltd [2011] HCA 18; (2011) 244 CLR 1 at [27].

480

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.310]

debt must, on the company’s case, make the difference between a finding of solvency and a finding of insolvency; it is not enough that, depending on what other findings are made, the debt may be relevant to the question of solvency: Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661. Clearly leave is not granted automatically, and cases have held that the power to grant leave under the section “is to be used cautiously and even sparingly given the overall policy of Part 5.4 of the Act”: Re Yuan Tong Investments Pty Ltd [2017] NSWSC 910 at [11]. Ordinarily a company is expected to put before the court its case when resisting the demand and if it does not then the court expects some explanation for this failure: Kekatos v Holmark Construction Company Pty Ltd (1995) 13 ACLC 1581. Inattention by the company’s lawyers in serving the application to challenge a demand in time may suffice: SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421. Whether there is a serious question to be tried is directed to the court identifying, without determining, whether the defendant has a seriously arguable case that the debt is the subject of a genuine dispute: Re Vangory Holdings Pty Ltd [2015] NSWSC 546; DAG International Pty Ltd v DAG International Group Pty Ltd [2005] NSWSC 1036; Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466. It should also be noted that the debtor must have practically been able to challenge the demand. As we saw earlier, that was not the case in Perpetual Nominees Ltd v Masri Apartments [2004] NSWSC 551; (2004) 49 ACSR 719 because the debtor did not receive the demand because of a change of postal address. Contrast however, Hadley v Bethq Pty Ltd [2016] FCA 1263. Substituting creditor: s 465B

[11.310]

Frequently, after the filing of the application and before the hearing, the debtor company will pay the applicant the debt which is owed, and the applicant will consent to a dismissal of the application when it comes on for hearing. Other creditors of the company may seek permission from the court to apply to be substituted as the applicant for winding up.100 The court has the power under s 465B of the Corporations Act to order the substitution in an application made pursuant to ss 459P, 462 and 464. The court may make the order because the application is not being prosecuted with sufficient diligence or for some other reason. Similar rules apply in bankruptcy: see [3.370]. After substitution the application proceeds as if the person who is substituted was the original applicant: s 465B(4). Often applications to substitute will come where the applicant for the winding up has been paid out by the company and seeks to withdraw. In deciding whether to exercise the discretion given by s 465B, the court must balance two competing policies. First, insolvent companies should not be allowed to continue to trade to the detriment of existing and future creditors, but should be wound up as expeditiously as possible. Secondly, a court should not allow winding up to be used as a debt collecting mechanism or as an instrument of oppression by a creditor whose debt is subject to genuine dispute: South Eastern Water Ltd v Kitoria 100 Courts’ Corporations Rules, r 5.10; Form 10.

[11.315]

11 Voluntary and Compulsory Winding Up

481

Pty Ltd (1996) 21 ACSR 465. Thus the court may not substitute another creditor if that creditor’s alleged debt is in dispute,101 even if the court may not be satisfied of the solvency of the company: Tilley Air Conditioning Pty Ltd v Austruc Constructions Ltd [2009] NSWSC 757.

The order [11.315]

If the court orders the winding up of the debtor company, it will appoint a registered liquidator to be the liquidator of the company (s 472) who is nominated by the creditor by way of filing a consent of the liquidator to act.102 There is some discretion reserved to the court to appoint another liquidator, for example if the court considers there is a conflict of interest in relation to the nominated liquidator. The three guiding principles are that the liquidator should be independent, that liquidators should not be chosen by the company itself, and that, if there are competing nominations for liquidator, the court will choose on the basis of cost, for example in relation to the geographic location of the liquidator: Workers Compensation Nominal Insurer v Denny Earthmoving & Bulk Haulage Pty Ltd [2008] NSWSC 1167. It should also be noted that the appointment of the liquidator by the court is a separate order to the order that the company be wound up: Re National Safety Council of Australia (Victoria Division) [1990] VR 29. The order (if any) that is made as to costs depends on the circumstances. The court has a discretion concerning the order it will make. The costs of the applicant for the winding up order are the applicant’s own expense: s 466(1). However, where a winding up order is made, it is customary for the court to allow the applicant to have its taxed costs which are to be paid out of the assets of the company: see s 466(2). Section 556(1)(b) prescribes that the taxed costs will have a high priority when the liquidator pays creditors. Where the company has no property or does not have sufficient property and, in the opinion of ASIC, some fraud has been committed on the company, the taxed costs may be reimbursed by ASIC to an amount not exceeding $1,000: s 466(3). See ASIC’s RG 93 – Reimbursing liquidation costs. The courts generally allow for short form bills of costs, claiming a set amount with further amounts for adjournments. For example, Federal Court Rules 2011, Item 13, Sch 3 provides that costs of $3,776 can be claimed by a plaintiff on the making of a winding up order or on the dismissal of such an application. Additional costs are allowable for any adjournment in which costs have been reserved by the court. It should be noted that the application may be dismissed even though the necessary grounds for winding up have been proven. That merely expresses the residual discretion available to the court to decline an order: TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410. If the application is dismissed, the court will often order the applicant to pay the costs of the company and parties opposing the order. If the application is withdrawn by the applicant, because the company has paid the debt owing, there is 101 Re C2C Investments Pty Ltd [2012] NSWSC 1443; Tokich Holdings Pty Ltd v Sheraton Constructions (2004) 22 ACLC 955. 102 Courts’ Corporations Rules, r 5.11; Form 11.

482

Keay’s Insolvency: Personal and Corporate Law and Practice

[11.320]

often no order as to costs. The applicant will have sought its costs from the debtor company as part of the agreement to withdraw the application. The court can dismiss an application with or without an order as to costs: s 467(1)(a). If the application for winding up is dismissed because the company has entered Pt 5.3A administration, any costs order made is after the date of commencement of the winding up which, in this situation, is the date of the appointment of the administrator, and is therefore not a provable claim in any subsequent liquidation: McDonald v DCT [2005] NSWSC 2; (2005) 23 ACLC 324. This is remedied by s 556(1)(ba) which gives statutory priority to those costs. See Chapter 15. As we have seen, if a winding up order is made, the day on which it is made is generally the commencement of the winding up: s 513A(e). Importantly, the day on which the application to wind up was filed, generally becomes the “relation-back day”. This day may be important when the liquidator comes to the point of examining what property can be recovered for the benefit of the creditors. This is discussed in detail later in Chapter 14.

After the order [11.320]

Once the winding up order has been made, the applicant will obtain a sealed copy of the winding up order from the court. Within two business days after the making of the order, the applicant must lodge with ASIC notice of the order and the name and address of the liquidator (s 470(1)(b)); this is done through ASIC Form 519. The applicant will be required to serve a court-sealed copy of the notice of appointment on the liquidator and the company, in addition to publicising the appointment.103 Further, the applicant must lodge an office copy of the winding up order with ASIC (s 470(2)(a)), ASIC Form 519; serve a copy on the company (s 470(2)(b)); and deliver a copy to the liquidator with a statement that the order has been served on the company: s 470(2)(c). In practice, the liquidator will have been informed by the applicant of the appointment shortly after the order has been made – this enables the liquidator to take urgent action (if necessary) and prepare for the winding up process. After the order for winding up, the liquidator is authorised to get in the company’s property: s 474. As we will see, the property does not vest in the liquidator; the liquidator is the agent of the company. It is then the role of the liquidator to administer the property and affairs of the company for the benefit of the creditors.

103 Despite the availability of ASIC’s Public Notices Website, newspaper publication of the winding up order is still required: Courts’ Corporations Rules, r 5.11; Form 11. The court can order that this rule be dispensed with when the winding up order is made.

[11.320]

11 Voluntary and Compulsory Winding Up

483

Chaper 11 – Voluntary and Compulsory Winding Up Part 5.4 – Winding Up in Insolvency – ss 459A-459T Part 5.4A – Winding Up by the Court on Other Grounds – ss 461-464 Part 5.4B – Winding Up in Insolvency or By the Court – ss 465-489E Corporations Regulations Part 5.5 – Voluntary Winding Up – regs 5.5.01-5.5.02 Part 5.6 – Winding Up Generally – regs 5.6.01-5.6.75 ASIC RG 93 – Reimbursing liquidation costs Courts’ Corporations Rules Divs 2, 5, 6, 7, 9, 10, 14, 15A ILRA Minimal change. Corporations Act

12

Provisional Liquidation [12.05] INTRODUCTION .............................................................................................................. 485 [12.10] WHO CAN APPLY? .......................................................................................................... 486

[12.10] A creditor ............................................................................................................ 486 [12.15] A member ........................................................................................................... 487 [12.20] The company ..................................................................................................... 487 [12.25] Undertaking as to damages may be required ............................................. 488 [12.30] GROUNDS FOR APPOINTMENT ................................................................................. 488

[12.35] Instances where appointments have been made ........................................ 489 [12.40] EFFECT OF AN APPOINTMENT .................................................................................. 490

[12.45] Company officers can no longer exercise their powers, and they assume obligations .......................................................................................................... 490 [12.50] Proceedings against the company are stayed .............................................. 490 [12.55] THE PROVISIONAL LIQUIDATOR .............................................................................. 491

[12.60] Powers under the Corporations Act .............................................................. 491 [12.65] Discretion in exercising powers ..................................................................... 492 [12.70] Duties and responsibilities .............................................................................. 493 [12.75] Remuneration .................................................................................................... 493 [12.80] INTERACTIONS WITH OTHER ARRANGEMENTS ................................................ 494

[12.85] Provisional liquidation and Pt 5.3A administration ................................... 494 [12.90] Provisional liquidation and receivership ...................................................... 494 [12.95] Provisional liquidation preceding a scheme ................................................ 495 [12.100] END OF THE APPOINTMENT .................................................................................... 495 [12.105] CONCLUSION ................................................................................................................. 496

INTRODUCTION [12.05]

After the filing of an application for winding up and while it is pending, the creditor may find that the assets and affairs of the company are in jeopardy and are being dealt with to avoid the consequences of liquidation. This would have the consequence that the creditors and/or members would be disadvantaged if the company were eventually wound up: see VR Dye & Co v Peninsula Hotels Pty Ltd [1999] 3 VR 201. The usual concern is that the assets are being transferred or taken by the directors, and that there is a need to urgently remove them from their position of authority to deal with the assets.

486

Keay’s Insolvency: Personal and Corporate Law and Practice

[12.10]

The court therefore has the power, pursuant to the Corporations Act, s 472(2), to appoint a provisional liquidator of a company at any time after the filing of a winding up application and before the making of a winding up order. Such an appointment gives interim control of the company to a liquidator; it is interim because the control is given only until the final determination of the winding up application. While not the only reason for applying for an order, concern about dissipation of assets most frequently precipitates an application: see Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201, 204. The solvency of the company is also an important consideration: “While insolvency is not in itself a necessary or sufficient condition nor an inevitable consequence of the appointment of a provisional liquidator, apparent or probable insolvency frequently accompanies the problems typically invoking provisional liquidation and may significantly favour the exercise of the discretion conferred by s 472(2) of the Act.”1

The company’s financial position will be examined in its entirety: Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625. While provisional liquidation is a significant and useful remedy in particular circumstances, it is in fact rarely used. There were only 56 such orders made in 2016-2017, out of nearly 3,000 court-appointed liquidations.2 Provisional liquidation compares with the application by a creditor for an order for interim control of a debtor’s property under s 50 of the Bankruptcy Act, (see [3.445]), so as to preserve that property pending a sequestration order being made. Where ASIC is conducting an investigation of a company it is possible to obtain both orders appointing provisional liquidators and asset preservation orders under s 1323 of the Corporations Act: ASIC v Oceanic Asset Management Pty Ltd [2015] FCA 966 (asset preservation orders made, including the appointment of a trustee over the estates of the deceased directors).

WHO CAN APPLY? A creditor [12.10] In most cases, a creditor will be the applicant for an order; initially the creditor will need to establish its standing as such. Generally, it will be the creditor who has sought the winding up of the company and who is concerned that the directors are disposing of the company’s assets in order to avoid the consequences of liquidation. An example is where the directors have given guarantees to creditors in respect of the company’s liability and they seek to satisfy, as far as possible, the claims to those creditors in preference to the claims of other creditors. Another example is where the directors continue to misuse funds for their own benefit or in conducting reckless business ventures through the company. 1 ASIC v Tax Returns Australia Dot Com Pty Ltd [2010] FCA 715 at [77]. 2 ASIC insolvency statistics, series 2 released September 2017. Relative numbers of provisional liquidations have also fallen, from 102 in 1999-2000, out of 1,412 court appointed liquidations.

[12.20]

12 Provisional Liquidation

487

A member [12.15] Members may also seek the appointment of a provisional liquidator, for example where they are concerned that the directors are acting improperly or recklessly and consequently are wasting assets. This occurred in Re JN Taylor Holdings Ltd (1991) 9 ACLC 1 in which a group of preference shareholders alleged that the directors had acted in their own interests and in breach of their duties. Members may seek such an order in tandem with a winding up pursuant to ss 232, 233 or 461(1)(k) of the Corporations Act. The former sections allow applications to the court for relief where, inter alia, the affairs of the company are being conducted oppressively. Section 461(1)(k) allows an application for a winding up order on the basis that it is just and equitable that the company be wound up. The interests of the members of the company are of particular relevance where both the application for winding up and for the appointment of a provisional liquidator are made pursuant to a resolution of the directors rather than of the members: Re T & L Trading (Aust) Pty Ltd (1986) 10 ACLR 388, 389; Re United Medical Protection Ltd [2002] NSWSC 413; (2002) 41 ACSR 623.

The company [12.20]

The company will usually only apply where it has sought its own winding up. This may arise in circumstances where a voluntary liquidation is not possible because of a deadlock in the company. A company application was more common in the past when voluntary liquidation could not be initiated as swiftly as necessary, before the more expeditious processes introduced to the creditors’ voluntary liquidation regime in 2007: see [11.25]. Also, it has never been a valid response of a director, served with a tax penalty notice, to simply put the company into provisional liquidation; only liquidation of the company will provide a relevant response to such a notice. See [16.150]. In Olive v Litchfield Trading Co Pty Ltd [2015] NTSC 2, the court ordered a provisional winding up where there was a serious dispute between the company’s two directors and one of the directors sought a winding up order on the basis of concerns about potential insolvency. While there would be some additional costs flowing from the appointment, the creditors were not otherwise disadvantaged. Indeed the court considered that their positions might be better protected because they could deal with the provisional liquidators, rather than separately with each of the directors.

488

Keay’s Insolvency: Personal and Corporate Law and Practice

[12.25]

Undertaking as to damages may be required [12.25] Given the potentially serious consequences for the company involved in being ordered into provisional liquidation, the court may require a creditor applying for the appointment of a provisional liquidator to give an undertaking as to damages.3 GROUNDS FOR APPOINTMENT [12.30] The court has a wide and complete discretion whether or not to appoint a provisional liquidator: Re McLennan Holdings Pty Ltd (1983) 1 ACLC 786, 789. Commercial affairs are infinitely complex and various, and the courts have said it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or facts. Certainly there must be good grounds for the appointment and it must be sought for bona fide purposes.4 It is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures are able to preserve the status quo.5 For example, the mere need to preserve the financial records of the company can be provided for by an order under the court’s rules for interim custody rather than by the appointment of a provisional liquidator.6 The court should consider the degree of urgency, the need established by the applicant creditor, the public interest7 and the balance of convenience. Before such an order can be made there must be before the court a valid application to wind up the company which itself discloses a good basis for a winding up order;8 a provisional liquidator is not usually appointed unless it is likely that a winding up order will be made.9 The application for the appointment of a provisional liquidator is usually lodged contemporaneously with, or soon after, the filing of the application to wind up.10 A provisional liquidator will not be

3 Courts’ Corporations Rules, r 6.1(4). See Re Property Corporate Services Pty Ltd [2004] FCA 175; (2004) 48 ACSR 508, 518; Roumanus v Orchard Holdings [2007] NSWSC 1480. In comparable circumstances in bankruptcy, Bankruptcy Regulations 1996 (Cth), reg 4.08 allows a debtor to apply to the court for damages: see [3.445]. 4 The principles were summarised in ASC v Solomon (1996) 19 ACSR 73. 5 Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103; Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625. 6 Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (No 4) (1984) 2 ACLC 682. 7 See generally Zempilas v JN Taylor Holdings Ltd (1990) 3 ACSR 516; Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625; ASC v Solomon (1996) 19 ACSR 73, 80; Re United Medical Protection Ltd [2003] NSWSC 1031; (2004) 22 ACLC 56. 8 Mere disagreement between the applicant and the company’s management is not of itself sufficient: Nikolaidis v Camden Retail Pty Ltd [2010] NSWSC 977 (company approaching insolvency but no risk to the assets). 9 ASC v Solomon (1996) 19 ACSR 73. If the winding up application itself is dismissed the provisional liquidation may also be terminated: see Grace v Grace (No 5) [2013] NSWSC 601. 10 See Div 6 of the Courts’ Corporations Rules.

[12.35]

12 Provisional Liquidation

489

appointed merely because the company is insolvent11 although insolvency will be relevant. But unless an applicant can demonstrate that there is a need for an interim control of the company pending the winding up of the company, no appointment will be made. Where an application is made on an ex parte basis, there should be cogent evidence as justification, such that “the very fact of notice itself is likely to be such as to defeat the purpose of appointing a provisional liquidator”: DCT v A & S Services Australia Pty Ltd [2017] FCA 437 at [4].

Instances where appointments have been made [12.35] Provisional liquidators have been appointed in the following types of circumstances: • where, in the public interest, there is a need for an examination of the state of the accounts of a company;12 • where the company is paralysed without a board of directors, and its sole shareholder has applied for a winding up due to the company’s insolvency;13 • where company funds may be at risk;14 • where the company had been involved in unethical and irresponsible business conduct;15 • for the purpose of ascertaining whether the company could pursue both its directors and the recipients of a purported dividend that had been paid contrary to the Corporations Act to companies controlled by certain directors;16 • for the purpose of assessing a medical indemnity insurer’s capacity to respond to a combination of developments, including declining capital reserves, a demand for increased capital being made by the regulator, foreshadowed changes to accounting standards, and a contraction of the medical insurance market;17 • where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company’s affairs would be properly conducted with due regard for the interests of shareholders.18 11 Re McLennan Holdings Pty Ltd (1983) 1 ACLC 786; Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (No 4) (1984) 2 ACLC 682. 12 Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493; ASC v Solomon (1996) 19 ACSR 73; ASIC v Uglii Corporation Ltd [2016] FCA 1099 (illegal corporate fundraising and failures to lodge accounts); Re Plutus Payroll Australia Pty Ltd [2017] NSWSC 1041 (a history of phoenix activity using nominee directors). 13 Telfer v Astarra Securities Pty Ltd [2010] NSWSC 682. 14 ASC v Solomon (1996) 19 ACSR 73, 80. 15 Omarjee v Lincoln Hunt Australia Pty Ltd (1986) 4 ACLC 205. 16 Yellowrock Pty Ltd v Eastgate Properties Pty Ltd [2004] QSC 214. 17 Re United Medical Protection Ltd [2004] NSWSC 1031; (2002) 41 ACSR 623. 18 In effect paralysis of the company can occur because of disputes between shareholders or directors; or a conflict of interest that a director has between his or her own personal interest and the company’s interest which may lead to the affairs of the company being put in jeopardy: Re McLennan Holdings Pty Ltd (1983) 1 ACLC 786; Re Club Mediterranean Pty Ltd (1975) 11 SASR 481; ASC v Solomon (1996) 19 ACSR 73, 80, citations omitted. See also ASIC v Activesuper Pty Ltd (No 2) [2013] FCA 234; (2013) 93 ACSR 189; Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Co Pty Ltd (No 7) [2012] WASC 502; (2012) 92 ACSR 281.

490

Keay’s Insolvency: Personal and Corporate Law and Practice

[12.40]

EFFECT OF AN APPOINTMENT [12.40] The effect of an order for provisional liquidation can be extensive and is a major reason why courts do not make orders lightly. An appointment will paralyse the operations of the company, and while a company can trade on, the appointment will usually damage its business. The recently enacted protection against ipso facto termination clauses does not apply to provisional liquidation.19 Company officers can no longer exercise their powers, and they assume obligations [12.45]

The company continues to exist, but the liquidator assumes control of the company. At common law the directors retained residual powers but this is no longer the case given the terms of s 198G of the Corporations Act. That section provides that officers, which term includes directors, are unable to perform or exercise a function or a power as an officer of the company where an external administrator (which includes provisions liquidator) is appointed unless that officer is acting with the written approval of the provisional liquidator or where the action is allowed under the Act despite the external administration. Necessarily the provisional liquidator, and also an administrator of the company appointed after the provisional liquidator, are given authority as officers of the company. At the same time, officers immediately assume obligations to the provisional liquidator. Section 475(1) requires the directors and the secretary to prepare and give to the provisional liquidator a report as to the affairs (RATA – ASIC Form 507) of the company. The liquidator can also give notice that such a report is required within 10 business days of service of the notice: s 475(2) – (5).

Proceedings against the company are stayed [12.50] On the appointment of a provisional liquidator, there is a stay of proceedings so that no action or other civil proceeding may be begun or continued against the company without the leave of the court: s 471B. While the same general principles will apply in considering such applications for leave as for a company in liquidation, the more limited role of the provisional liquidator can mean that leave to proceed will more readily be granted. For example, the primary role of the provisional liquidator is in preserving the status quo pending the hearing of the winding up application, and not in assessing creditors’ claims. The maintenance of a creditor’s proceedings by way of leave being granted may be the only basis upon which its claim may be brought: Ibbco Trading Pty Ltd v HIH Casualty and General Insurance Ltd [2001] NSWSC 346.

19 Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth), commencing by 1 July 2018.

[12.60]

12 Provisional Liquidation

491

THE PROVISIONAL LIQUIDATOR [12.55] The appointee must be a registered liquidator (s 472(2)) who may become the liquidator of the company if a winding up order is made. But the appointment of a provisional liquidator is not regarded as the beginning of a winding up;20 of course, a winding up order may never be made. The requirements for a provisional liquidator to be independent of the company may not be fully applied if there is urgency and a need for prompt familiarity with the company assets and affairs (Re Central Queensland Earthmoving Pty Ltd (1984) 2 ACLC 481) although the appointment may be revisited at the time of making the winding up order. Hence the appointment of the provisional liquidator as liquidator is not a foregone conclusion. In Re Giant Resources Ltd [1991] 1 Qd R 107, the court declined to appoint the provisional liquidator as liquidator because there was a need for investigation by the liquidator of companies associated with the provisional liquidator’s firm. In Cox v T-D Joint Venture Pty Ltd [2010] WASC 116, the court appointed liquidators from a larger firm than that of the provisional liquidator when it became apparent that the company was involved in interstate and international litigation. Apart from that, the grounds which apply to the disqualification of a liquidator from acting in any given administration, for example in relation to prior financial connections with the company, apply to provisional liquidators: s 532(1A). A provisional liquidator is an “external administrator” under IPSC, s 5-20. This means that the provisions in IPSC and IPRC, Pt 3 (which relate to the conduct of external administrations) will apply to, for instance, funds handling, requests for information by creditors and powers of the court. In some cases, there will be carve outs for provisional liquidators, such as in remuneration determinations under Div 60, where there are specific provisions (IPSC, s 60-16). Furthermore, the requirements for a liquidator to convene creditor meetings under IPSC, s 75-15 (where required by the creditors) or IPSC, s 80-27 (where required by a committee of inspection in a pooled group) do not apply to provisional liquidators: IPSC, s 75-15(5)(a). The power of the court to appoint a reviewing liquidator under IPSC, s 90-23 also does not apply to a provisional liquidator: IPSC, s 90-22. Nor is there any power of the creditors to remove a provisional liquidator: IPSC, s 90-30.

Powers under the Corporations Act [12.60] A provisional liquidator’s powers are derived from the Corporations Act (including the Insolvency Practice Schedule), the Corporations Regulations 2001 (Cth), the Courts’ Corporations Rules, the order of appointment and any supplementary orders made. On the making of the order to appoint a provisional liquidator, the management of the company is effectively under the control of the appointee. A provisionally appointed liquidator has the power to carry on the company’s business (s 472(4)(a)) and other provisions in s 472 confer on provisional liquidators 20 Fleet Motor & General Insurance Co (Aust) Pty Ltd v Tickle [1984] 1 NSWLR 210; Re Scobie [1995] FCA 1456; (1995) 59 FCR 177

492

Keay’s Insolvency: Personal and Corporate Law and Practice

[12.65]

most of the powers which are given to liquidators pursuant to s 477. On occasions the provisional liquidator is given all of the powers of a liquidator.21 The court order may require the provisional liquidator to identify the assets of the company and its likely solvency within a short period of time, as well as any apparent misconduct by company officers; or may limit the provisional liquidator’s powers to taking custody of the assets and carrying on the business in order to maintain the status quo until the winding up application has been determined.22 Courts have frequently emphasised this provisional role and that any powers conferred must be exercised in light of this purpose.23 Therefore, while a provisional liquidator is given a specific power to carry on the company’s business (s 472(4)(a)), this should only be done in order to preserve the status quo pending the winding up hearing. The power of sale of the company’s assets under s 477(2)(c) is not given to a provisional liquidator. The provisional status of the role is reinforced by the fact that the powers to carry on the business, and other powers in s 472(4), are subject to the control of the court and a creditor, a contributory or ASIC. Each of these may apply to the court requesting it to rule on the use or proposed use of such powers: IPSC, ss 90-15, 90-20. The court’s order may require the provisional liquidator to report back to the court within a short period or may require the liquidator to undertake specific tasks. In Olive v Litchfield Trading Co Pty Ltd [2015] NTSC 2, referred to at [12.35], the provisional liquidators were ordered to provide a report to the court concerning the management and trading status of the company, and their opinion as to whether the company or its assets were capable of being sold as a going concern and whether a final winding up order should be made.

Discretion in exercising powers [12.65] Despite the provisional nature of the appointment, and the safeguards and limitations imposed, provisional liquidators must exercise their discretion on many matters, and often in a short timeframe. In some cases, the ultimate interests of the creditors and members may be such that the assets should be sold quickly, rather than simply being preserved, assuming that this power is granted by the court order.24 There may also be circumstances in which there is need to sell the actual business of the company, for example in Re Bayswood Pty Ltd (1981) 6 ACLR 107 where the company had little funds and the lease of its premises had expired. It is clear, therefore, that a provisional liquidator may, if the commercial circumstances dictate, depart from the traditional role of simply protecting and preserving. However, a prudent liquidator would probably seek court directions 21 These may include powers arising under the company’s constitution with respect to special contracts: Re United Medical Protection Ltd (No 4) [2002] NSWSC 516; (2002) 42 ACSR 218 at [85]. 22 See for example, DCT v Eskdale South Cattle Company Pty Ltd [2013] FCA 740. 23 Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (No 4) (1984) 2 ACLC 682, 683; ASC v Solomon (1996) 19 ACSR 73, 80. See also Telfer v Astarra Securities Pty Ltd [2010] NSWSC 682, where Barrett J compares provisional liquidation with a winding up. 24 Re Codisco Pty Ltd [1974] CLC 40-126, 27,906; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434.

[12.75]

12 Provisional Liquidation

493

where there is no legal obligation to sell, but where it is considered that it is the correct course of action: Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434. Whether any sale is commercially prudent is primarily a matter for the judgment of the provisional liquidator. Unless bad faith is established, the decision of a liquidator will be regarded as proper, except where the court is satisfied that the liquidator acted in a way in which no reasonable liquidator should have acted: Northbourne, above. If a provisional liquidator has any doubt as to whether a certain power is available, an application may be made to the court to grant the power: Re Rothwells Ltd [1990] 2 Qd R 181. Division 6 of the Courts’ Corporations Rules deals with some of the practical matters relating to the appointment and administration of provisional liquidators.

Duties and responsibilities [12.70] The same principles which generally regulate liquidators apply to provisional liquidators, for example, in relation to their need to be independent: Aloridge Pty Ltd v Christianos [1994] FCA 972, (1994) 12 ACLC 256, 259-260. However, as we have seen, the independence requirements for the appointment of a provisional liquidator may not be fully applied if there is urgency involved and a need for the appointee to have familiarity with the company’s assets and affairs: see [12.55]. A provisional liquidator necessarily owes fiduciary duties to the company, and is the company’s controlling agent and an officer of the court, and is the one responsible for the administration of the company during the period of provisional liquidation. A provisional liquidator must lodge a return with ASIC in relation to the administration. While an annual return may need to be lodged and notice given to the court (IPSC, s 70-5(6)), the appointment will usually end with that period, in which case an end of administration return is lodged which the court may require to be filed: IPSC, s 70-6(5).

Remuneration [12.75] A provisional liquidator is entitled to such remuneration, by way of percentage or otherwise, as is determined by the court, or if the court does not make a determination then as approved by the committee of inspection or the creditors (if there is no committee of inspection): IPSC, s 60-16(1). Rule 9.3 of the Courts’ Corporations Rules states the courts’ evidence and other requirements for remuneration to be determined. Professional guidelines also apply.25 The law gives some protection to the remuneration of a provisional liquidator. A portion of a provisional liquidator’s remuneration and expenses which relate to the caring for, preserving or realising of assets which are subject to security are entitled to rank in priority to the rights of a secured creditor in relation to those assets: Re 25 See Court Form 16. See also the remuneration guidelines of the ARITA Code of Professional Practice; and APES 330, Insolvency Services.

494

Keay’s Insolvency: Personal and Corporate Law and Practice

[12.80]

Universal Distributing Co Ltd (1933) 48 CLR 171. The provisional liquidator also has an equitable lien over the assets under administration to secure payment of their remuneration and expenses: Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (No 2) (1986) 5 NSWLR 227. The lien remains available even if the provisional liquidator is not appointed as the liquidator; the subsequent liquidator appointed must respect the lien: Shirlaw v Taylor (1991) 31 FCR 222. To the extent that the equitable lien is not sufficient to satisfy the remuneration and expenses, the provisional liquidator is entitled to priority in the winding up in accordance with s 556(1)(a). Given that a provisional liquidator’s powers are limited, remuneration for work done outside the scope of the work that is authorised cannot be claimed: Re Reiter Brothers Exploratory Drilling Pty Ltd [1994] TASSC 42; (1994) 12 ACLC 430, 434. But remuneration can be awarded for work necessarily done by the appointee, subsequent to the termination of the appointment, in complying with the law: at 441.

INTERACTIONS WITH OTHER ARRANGEMENTS [12.80] Provisional liquidation may be an alternative to another insolvency administration, such as a voluntary administration, or it may potentially conflict with another administration, such as a receivership. Provisional liquidation and Pt 5.3A administration [12.85] The appointment of a provisional liquidator may be an appropriate measure where interim administration is needed and where urgent decisions may need to be made. Whilst it traditionally had that purpose, in many cases the appointment of an administrator under Pt 5.3A of the Corporations Act is more suitable than a provisional liquidator; apart from other considerations, the court does not have to be involved in an administration and the overall cost should be less. Part 5.3A may also result in ultimate survival of the company. Having said that, in some cases, for example the provisional liquidation of the United Medical Protection group of companies, provisional liquidation under the control of the court served a purpose of allowing those companies to ultimately resume trading: Re United Medical Protection Ltd [2003] NSWSC 1031; (2004) 22 ACLC 56; (2002) 41 ACSR 623. A company is prevented from appointing a voluntary administrator if a provisional liquidator is appointed: s 436A(2). However, in such a case the provisional liquidator may themselves appoint a voluntary administrator over the company: s 436B.

Provisional liquidation and receivership [12.90]

The fact that a receiver has been appointed under Pt 5.2 of the Corporations Act does not preclude the appointment of a provisional liquidator: National Investment Institute Pty Ltd v Property Corporate Services Pty Ltd [2004] FCA 175; (2004) 48 ACSR 508. However, the appointment of a provisional liquidator may be refused where a receiver has been appointed subsequent to the filing of an

[12.100]

12 Provisional Liquidation

495

application to wind up and the receiver’s control of the assets of the company is consistent with maintaining the status quo. In fact a receiver may in some cases be a more appropriate appointment. In Re United Medical Protection Ltd [2002] NSWSC 413; (2002) 41 ACSR 623, Austin J considered whether a receiver should be appointed to the UMP group of companies. In considering the matter, he said (at [5]): “Occasions for comparing provisional liquidation with receivership have not often arisen in the decided cases … Receivership is a very flexible equitable remedy … not limited to the interim preservation of assets. While a receiver and manager may be personally liable for debts incurred in continuing the company’s business … it may be possible for the Court to avoid that outcome in an appropriate case by directing the receiver to make contracts in the company’s name and on its behalf. On the other hand, a provisional liquidator has the power to conduct the company’s business on behalf of the company and in its name, and it is nowadays more common than it once was for the appointment of a provisional liquidator to be made where it is not intended that the company’s business be immediately shut down.” (References omitted.)

Provisional liquidation preceding a scheme [12.95] Provisional liquidation has also been used where the company is in financial difficulties and wishes to initiate a scheme of arrangement under Pt 5.1 of the Corporations Act. A scheme takes some time to formulate and to be sanctioned by the court. The early appointment of a provisional liquidator may relieve the concerns of creditors and demonstrate the good faith of the directors. The stay on all proceedings against the company – either to commence proceedings or continue existing proceedings – unless with court leave assists the process of a scheme being approved. In that respect, a scheme of arrangement of itself provides no stay against creditor claims. END OF THE APPOINTMENT [12.100] Provisional liquidation usually comes to an end either when a winding up order is made, or when the application to wind up is dismissed or withdrawn: Registrar-General (ACT) v Inanna Inc [2017] ACTSC 62 at [3]. However, the administration will come to an end if the appointee resigns or is dismissed, or an appeal against the appointment succeeds. The court may also terminate the appointment where there is no longer any need for it: Grace v Grace (No 5) [2013] NSWSC 601 (pending winding up no longer pursued and no risk to assets). In some cases, the conduct of the provisional liquidation will have allowed the company’s fortunes to be restored. In Re United Medical Protection Ltd [2003] NSWSC 1031; (2003) 47 ACSR 705, on ordering the end of the provisional liquidation of the UMP group of companies, Austin J said (at [158]) that he was: “satisfied that the purposes for which … a provisional liquidator was appointed to the four companies have been exhausted and there is no longer any good reason for a provisional liquidator to remain in control of them. Termination of the appointment will not operate in a manner contrary to the interests of creditors, … it is in the public interest to make the orders for termination.”

The provisional liquidator must lodge and end of administration return: IPSC, s 70-6.

496

Keay’s Insolvency: Personal and Corporate Law and Practice

[12.105]

A provisional liquidator who is succeeded by another registered liquidator as liquidator appointed pursuant to a winding up order must account to that new liquidator and transfer any money, property, books and papers of the company over which he or she has custody: IPSC, s 70-30.

CONCLUSION [12.105] Having given an overview of liquidation processes, and the types of liquidation that may occur, we now address the detail of the effect of liquidation on the company and its directors, and on related and third parties, and how liquidations are administered, to the company’s final deregistration. Chapter 12 – Provisional Liquidation Pt 5.4B Winding up in insolvency or by the court – ss 465 – 489E Pt 5.6 Winding up generally – ss 513 – 581 Reg 5.4.01A Corporations Regulations ASIC – Court Rules Courts’ Corporations Rules, Div 6 Provisional Liquidators – rr 6.1 – 6.2, 9.3 Corporations Act

13

Effects of Winding Up [13.05] EFFECT ON THE COMPANY’S BUSINESS ................................................................. 497

[13.10] Company retains ownership of its property ............................................... 498 [13.15] Company litigation ........................................................................................... 499 [13.20] Publication of liquidation and change of former name ............................ 499 [13.25] EFFECT ON THE DIRECTORS AND OTHER OFFICERS ........................................ 499

[13.25] Directors ............................................................................................................. 499 [13.30] Report as to affairs ............................................................................................ 500 [13.35] Company books ................................................................................................ 500 [13.40] Obligations of directors and other officers ................................................... 501 [13.45] EFFECT ON THE MEMBERS ......................................................................................... 501 [13.50] EFFECT ON THE CREDITORS ...................................................................................... 503

[13.55] Stay of legal action, subject to the court’s leave ......................................... 503 [13.60] Foreign insolvency proceedings ................................................................................ 506 [13.65] Criminal or regulatory proceedings ......................................................................... 507

[13.70] Secured and other creditors ............................................................................ 507 [13.72] Other priority claims ................................................................................................... 508

[13.75] Claims against creditors .................................................................................. 509 [13.80] EFFECT ON EMPLOYEES ............................................................................................... 509 [13.85] EFFECT ON CONTRACTS .............................................................................................. 510 [13.90] EFFECT ON OTHER ADMINISTRATIONS ................................................................. 510

[13.95] Receivership ....................................................................................................... 511 [13.100] Part 5.3A administration ................................................................................ 511 [13.105] EFFECT ON THE AUDITOR ........................................................................................ 512 [13.110] CONCLUSION ................................................................................................................. 512

[13.02]

As one might expect, winding up has a substantial impact, including on the company itself and its directors and shareholders.

EFFECT ON THE COMPANY’S BUSINESS [13.05] While the company continues to exist as a legal entity and therefore its corporate state and powers continue until deregistration, it is subject to marked changes when liquidation occurs. An initial impact of liquidation is on the continued conduct of the company’s business. In both voluntary (Corporations Act, s 493(1)) and compulsory liquidations (s 477(1)(a)) the company must cease to carry on business except to the extent that

498

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.10]

the liquidator believes that it will assist or be necessary for the beneficial disposal of the business. We will examine the issue of continuation of the company’s business in Chapter 15.

Company retains ownership of its property [13.10]

Unlike the effect of a sequestration order in bankruptcy, a winding up order does not mean that the property of the company vests in the liquidator. The liquidator merely becomes the agent of the company and the company retains both the legal and beneficial ownership of the property.1 A liquidator may seek a vesting order from the court (Corporations Act, s 474(2)), although this is rare.2 Although the company retains ownership of its property, it can no longer deal with that property. Section 468(1) provides that any disposition of property of the company (other than an exempt disposition) made after the commencement of winding up (see s 513A(e) and [10.95] – [10.100]) is void unless the court otherwise orders. The court has a wide general discretion to validate any disposition of property caught by the subsection which is not “to be limited by any attempted classification of those cases which do, and those which do not, fall within them”, though a guiding principle is the interests of creditors: Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd [1984] FCA 247; (1984) 3 FCR 311. The court there said that a transaction entered into in good faith which offers actual or prospective advantage to the company or its general body of creditors would, ordinarily, be sanctioned by the court even if an incidental advantage were obtained by one creditor or one class of creditors. The onus lies on the recipient to show this: Conlan v Pratt [2013] FCA 19. Property of a company includes PPSA retention of title property where the security interest has vested in the company as grantor: s 465. It does not include property held by the company as trustee: Simpson & Anor v Tropical Hire Pty Ltd (in liq) [2017] QCA 274. This is discussed further in Chapter 14 at [14.15]. The term “disposition of property” in s 468 is also given a broad construction; it covers sales and encumbrances of company property and payments of money by the company.3 But as one might expect, dispositions by the liquidator are excluded from the effect of s 468(1): s 468(2)(a). Section 468(1) applies only to court liquidations, for no apparent policy or legal reasons. In Carter v New Tel Ltd [2003] NSWSC 128; (2003) 44 ACSR 661, the voluntary liquidators applied, under s 459P, to have a winding up order made by the court so as to attract the application of s 468 to the particular circumstances in hand.4 1 Commissioner of Taxation v Linter Textiles Pty Ltd [2005] HCA 20; (2005) 220 CLR 592; cf Ayerst v C & K (Constructions) Ltd [1976] AC 167 2 Owners of Strata Plan 5290 v CGS and Co Pty Ltd [2011] NSWCA 168; (2011) 81 NSWLR 285 at [39]. 3 See Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd [1984] FCA 247; (1984) 3 FCR 311; Pilmer v HIH Casualty and General Insurance Ltd (No 2) [2004] SASC 389; (2004) 90 SASR 465. 4 Illustrating the unnecessary division in Chapter 5 between the powers of a court-appointed and a voluntary liquidator.

[13.25]

13 Effects of Winding Up

499

Company litigation [13.15] As we discuss at [13.50] – [13.75], in the context of the effect of liquidation upon creditors, a significant effect on the company is that it is protected from creditors’ claims, which are automatically stayed: s 471B. As in bankruptcy, this protection offered by insolvency is a major purpose and effect of a formal insolvency occurring. While legal proceedings against the company are stayed, as in bankruptcy, existing proceedings by the company are not stayed. The liquidator will find it necessary to seek information from the company’s legal advisers as to the nature and position of any legal actions commenced by the company. The liquidator would then have to decide whether to continue such proceedings. There is no equivalent in the Corporations Act to s 60(2) – (3) of the Bankruptcy Act, whereby a trustee must elect within a certain time to continue on with litigation otherwise it is deemed abandoned: see [4.115]. The stay is discussed further at [13.55]. Publication of liquidation and change of former name [13.20] Finally, s 541 requires that in every public document, such as a business letter or invoice, or negotiable instrument of the company, the words “in liquidation” are to appear after the company’s name. The status of the company as being in liquidation is also shown on the records of ASIC. Section 161A provides that a company that changes its name during, or six months prior to, liquidation, or any type of external administration, should be required to disclose its former, as well as its current, name on its public documents for the period of that administration or any subsequent liquidation; contravention is an offence, unless the court gives leave. ASIC may allow a company to change its name, on the application of the liquidator, where it is in the interests of the company’s creditors as a whole to do so.

EFFECT ON THE DIRECTORS AND OTHER OFFICERS Directors [13.25]

One of the most crucial effects of winding up is that the directors lose their power to manage the company: Ayerst v C & K (Constructions) Ltd [1976] AC 167, 177. Their powers, in both voluntary and compulsory liquidations are suspended: s 198G. This prevents a director pursuing an appeal against a winding up order, or appointing an administrator, without court leave: Rock Bottom Fashion Market Pty Ltd v HR & CE Griffiths Pty Ltd [1997] QCA 399; [2000] 2 Qd R 573.5 But the directors do not lose their office in liquidation, although a court appointed winding up serves as notice of termination of employment contracts and so any executive roles the directors have may be terminated: McEvoy v Incat Tasmania Pty 5 The factors relevant to the court’s exercise of its discretion are discussed in DCT v Soiland Pty Ltd [2010] FCA 168. See also Buckland Products Pty Ltd v DCT [2003] VSCA 85; Land Enviro Corp Pty Ltd (in liq) v Hickie [2015] FCA 766.

500

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.30]

Ltd [2003] FCA 810; (2003) 46 ACSR 392. If the directors are contributories or creditors of the company they may seek to stay the winding up pursuant to their rights to do so under s 482. Statutory derivative actions under s 237 of Pt 2F.1A of the Act, whereby a member, director or other officer may, with court leave, bring proceedings on behalf of a company, are not available when the company is in liquidation although courts have found an inherent jurisdiction, as distinct from that under s 237, for permitting such proceedings to be brought: Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 227 FLR 43.

Report as to affairs [13.30] In a compulsory winding up, the directors and secretary of the company must prepare and submit to the liquidator a report as to the affairs of the company (RATA): s 475(1); ASIC Form 507. The RATA is a detailed statement of the assets and liabilities of the company, similar to a statement of affairs under s 54 of the Bankruptcy Act. Also, directors can be required by the liquidator to provide further information by way of a report (s 475(2)) which is to be given within 10 business days of the service of a notice requiring the information by the liquidator on the director: s 475(5). Failure to comply with any requirement in s 475 without a reasonable excuse is an offence: see Jovanovic v ASIC [2001] TASSC 6; (2001) 19 ACLC 510.6 Company books [13.35] Section 483(1) of the Corporations Act provides authority for the court to require delivery of all of the company’s property and books7 to the liquidator on the liquidator’s application (see for example, Blackjack Executive Car Services Pty Ltd v Koulax [2002] VSC 380), and where the liquidator has delegated authority to make calls on contributories under s 483(3): s 506(1)(d). Apart from this, it is normal for the liquidator to serve a demand on the directors to deliver all books and property of the company at the same time as the RATA is requested. However, the power under s 483 cannot be used by a liquidator for the purposes of pursuing contested proceedings involving those books: Re Mischel & Co Pty Ltd (in liq) [2014] VSC 140; (2014) 100 ACSR 125. In that case, the liquidator of a company that had sold its business sought access to the books of the purchaser, as the books were formerly owned by the company in liquidation, for the purpose of showing that the sale transaction was a sham and that the purchaser held the books as constructive trustee for the company in liquidation. In refusing the liquidator’s application, Robson J summarised the law in relation to s 483(1) as follows (at [96]): (1) The procedure under the subsection is summary only. (2) The jurisdiction of the court under the subsection is discretionary. (3) The procedure is not available to a liquidator where a claim is made, by the person in whose hands the assets are found, that is adverse to the company. 6 See also Keenan, “The Report as to Affairs: An Appraisal” (2012) 24 Aust Insolv J 10. ASIC Corporate Insolvency Update, Issue 5 (October 2017) says that a new format of the RATA is to be released. 7 As defined in s 9. The common term “books and records” is not used in either the Corporations Act or the Bankruptcy Act.

[13.45]

13 Effects of Winding Up

501

(4) The subsection may not be used to determine questions of ownership. (5) The application may only be brought in relation to any money, property of the company, or books in the person’s hands to which the company is prima facie entitled. (6) In other words, the application may not be brought in relation to such property to which the company may be prima facie entitled. (my emphasis) (7) The persons identified in the subsection are all persons who either derive their authority from the company or are accountable to it.

Obligations of directors and other officers [13.40]

Section 530A of the Corporations Act generally requires an officer of the company to co-operate with the liquidator. This is required given the fact that the liquidator comes to the company fresh and usually without any prior knowledge of the company’s affairs. The company’s affairs may also be disorganised and it is only reasonable for the liquidator to expect some assistance from the company’s directors and managers. The term “officer” is defined in s 9 and significantly includes the directors, the secretary and other senior persons in the company: see paras (a) and (b) of the definition in s 9. The section includes those persons who were, but are no longer, officers at the time of liquidation: s 530A(7).8

Officers are to deliver to the liquidator all relevant company books in their possessionand advise the whereabouts of any others: s 530A(1). Officers must assist the liquidator, give information concerning the company’s affairs, business and property, and attend such meetings of the company’s creditors or members as the liquidator reasonably requires: s 530A(2) . To supplement that, s 530A(3) and (4) provide that officers must do whatever a liquidator reasonably requires, both in relation to assisting in the winding up and in the exercising of the liquidator’s powers. Once an order is made for the winding up of a company, its officers are not permitted to perform or exercise any function or power as officers of the company except with the written approval of the liquidator, or with the approval of the court: s 198G. The winding up may also result in actions, including civil or criminal prosecutions, being initiated against directors. These are discussed at Chapter 16. The liquidator may also conduct public examinations of nominated persons concerning the affairs of the company (ss 596A, 596B) with directors being the most frequently examined persons. For a discussion of public examinations, see [15.125] – [15.200].

EFFECT ON THE MEMBERS [13.45] On a winding up, the members lose any right to control the management of the company’s business. Further, where the company being wound up is limited by shares, members are liable to pay any amount unpaid on their shares to the 8 Although included in the s 9 definition, a liquidator and an administrator are obviously not covered by s 530A.

502

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.45]

extent that debts remain owing after the realisation of the assets of the company: s 515. Naturally, in most cases shareholders will be required to pay all the amounts unpaid on their shares because the company will be well and truly insolvent: see s 516. Persons who were members within the year before the commencement of the winding up can also be liable in the same manner as present members, if the present members are unable to satisfy the creditors when paying what they owe on their shares. This only applies in respect of debts incurred before the past members ceased to be members: see Pt 5.6 Div 2. Liability arising under this Division will render the members “contributories” (defined in s 9). There is a general prohibition on the transfer of shares of the company in liquidation after the commencement of the winding up.9 A reason for this prohibition is to prevent members from avoiding their liability under their shares. Furthermore, any debts owed to members in their capacity as members will be subordinated in liquidation until creditors have been paid in full: s 563A. In 2007 the High Court of Australia, in the Sons of Gwalia decision,10 recognised that members who purchased shares over the ASX on the basis of allegedly misleading information and defective disclosure by the company could claim damages under ss 1041I and 1325 of the Corporations Act and such claims would not be owed to the members in their capacity as members and thus would not be subordinated in liquidation. However, the Corporations Act was changed in December 2010 to overturn the effect of the Sons of Gwalia case. Section 563A was rewritten to cover “subordinate claims” which include claims by members arising from buying, holding, selling or otherwise dealing in shares in the company. This would clearly cover the sorts of claims brought in the Sons of Gwalia litigation. The amendments also introduced s 600H which restricted the rights of a subordinated claimant to receive notices in external administration and prohibited voting by such claimants unless allowed by a court order. The position after these changes is that the High Court’s finding that members with claims for compensation arising from defective disclosure are still creditors, but they have more limited rights compared with other non-subordinated creditors (ie ordinary creditors, who are not claiming as members or because of dealings in shares). The liquidator has the power to consent to a share transfer if that is in the best interests of creditors as a whole: s 468A.11 The prospective transferor or transferee of shares, or a creditor, may apply to the court for an order authorising a transfer but only in circumstances where the liquidator’s consent has been unsuccessfully sought first. The liquidator has standing to be heard on any application. 9 A transfer of a share that is void under this section cannot effect a change in the equitable title to the shares: Perth Freight Lines Pty Ltd v BM2008 Pty Ltd (in liq) [2011] VSCA 62 at [37]. The effect is to void the transfer not the contract upon which the purported transfer was based or any equities arising therefrom: Re Commercial Indemnity Pty Ltd [2016] NSWSC 1125. 10 Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 231 CLR 160. Sections 468A (compulsory liquidation); 493A (voluntary liquidation) 11 See further Rosen v Georges [2014] VSC 193; (2014) 100 ACSR 258.

[13.55]

13 Effects of Winding Up

503

Liquidators also have the power to consent to an alteration in the status of the company’s members (s 468A(8) – (15)), with a right of review to the court. Such an alteration may not be approved unless it complies with the rules for alteration of class rights in Pt 2F.2 of the Corporations Act. An issue of shares does not necessarily alter the status of the company’s members.12 The same regime applies to voluntary liquidations: s 493A.

EFFECT ON THE CREDITORS [13.50] As we have seen, one of the major objects of the scheme providing for winding up in the Corporations Act, indeed of any insolvency regime, is to ensure that the assets are applied rateably among the creditors and in such a manner that no creditor is unduly favoured to the detriment of others. Consequently, creditors are prohibited by s 468(4) from enforcing their claims through execution proceedings against the company. The collective nature of liquidation means that creditors are required to swap their individual enforcement rights against the company (based on their statutory, contractual or other general law debt or claim) in exchange for a right to participate in the collective process of liquidation. Their right to participate is enlivened by having their proof of debt accepted by the liquidator. See further [15.250]. In Wight v Eckhardt Marine GmbH [2004] 1 AC 147 at 155-156, Lord Hoffmann explained the position of creditors: “The winding up leaves the debts of the creditors untouched. It only affects the way in which they can be enforced. When the order is made, ordinary proceedings against the company are stayed … The creditors are confined to a collective enforcement procedure that results in pari passu distribution of the company’s assets. The winding up does not either create new substantive rights in the creditors or destroy the old ones. Their debts, if they are owing, remain debts throughout. They are discharged by the winding up only to the extent that they are paid out of dividends. But when the process of distribution is complete, there are no further assets against which they can be enforced. There is no equivalent of the discharge of a personal bankrupt which extinguishes his debts. When the company is dissolved, there is no longer an entity which the creditor can sue. But even then, discovery of an asset can result in the company being restored for the process to continue.”

Stay of legal action, subject to the court’s leave [13.55] Not only does winding up prevent the enforcement of claims through execution, it also acts as an automatic stay on the prosecution or initiation of legal proceedings in a court against the company (s 471B for court liquidation; s 500(2) for voluntary liquidation); the claimant creditor is generally required to lodge its claim with the liquidator as a proof of debt. This is a fundamental aspect of both personal and corporate insolvency. This stay is designed to allow the liquidator to avoid expensive and time-consuming litigation, the word “expensive” meaning relative to the limited resources available to the liquidator, particularly in 12 Sellers; Re Beckley Forge Pty Ltd [2003] FCA 523, considering the equivalent provision in voluntary administration s 437F, applied in relation to s 468A in Lollback v Brakepower Pty Ltd [2010] NSWSC 1457 at [49].

504

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.55]

comparison with the cost of the proceedings for which leave is being sought.13 In the leading case Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314, 317, McPherson J said: What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a Judge, who determines that appeal de novo primarily on affidavit material … .

Nevertheless, a creditor can seek leave from the court to commence or continue its litigation claim. As McPherson J went on to explain (at 317): The effect of [s 471B] is to require the claimant to adopt the course of lodging [a] proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. … It, of course follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed.

The “court” in s 471B, in which claims against the company are being brought at the time of its liquidation, is construed broadly and includes proceedings being brought against the company in industrial commissions, such as the Australian Industrial Relations Commission, and in other civil tribunals.14 Given the national corporations scheme that now operates under the Corporations Act, it is not necessary for the creditor to make the application for leave to the same court that made the winding up order.15 The section itself is silent as to the principles pursuant to which leave to proceed will be granted. The court’s discretion is broad but is not absolute, and it must be exercised fairly and can only be exercised if a serious question is shown: Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749; (2009) 72 ACSR 627.16 The court will necessarily consider whether the creditor has a good cause of action which gives rise to a serious dispute, whether the action will affect the orderly winding up of the company and whether any action taken would prejudice the other creditors.17 To obtain leave a court must be satisfied that the claim against the company has a solid foundation and gives rise to a serious dispute. A proprietary claim, particularly one that has a substantial basis, is of a kind that should proceed 13 Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314, 316; Global Partners Fund Ltd v Babcock & Brown Ltd [2010] NSWCA 196; (2010) 79 ACSR 383; DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 86 NSWLR 293. 14 Australian Liquor, Hospitality & Miscellaneous Workers Union v Home Care Transport Pty Ltd [2002] FCA 497; (2002) 117 FCR 87; Melbourne University Student Union Inc v Sherriff [2004] VSC 266. See however Krebs v Pika Wiya Health Service Aboriginal Corporation [2015] FMWC 1232, in relation to the Fair Work Commission. 15 Sihota v Pacific Sands Motel Pty Ltd [2003] NSWSC 119; (2003) 56 NSWLR 721. 16 See further Re Wan Ze Property Development (Aust) Pty Ltd [2013] NSWSC 189; Gunns Finance Pty Ltd (recs and mgrs apptd) (in liq) v Correy [2015] VSC 385 at [65]. 17 Re Gordon Grant and Grant Pty Ltd [1982] 2 Qd R 31; DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 99 ACSR 121 at [54] – [57] per Leeming JA (while lack of prejudice to

[13.55]

13 Effects of Winding Up

505

to action by judgment rather than being dealt with by proof of debt in the winding up, hence leave will usually be granted.18 If the company is insured in relation to the claim, it is more likely that leave will be given.19 Leave might be given where it is convenient or necessary for a court to determine any aspect of a claim to assist the liquidator (for example, a dispute over the quantum of a complex claim).20 Leave may also be granted where there is evidence to suggest that the creditor’s claim would be rejected and an appeal from the liquidator’s decision would be initiated in any event.21 A creditor may obtain leave to proceed where its litigation proceedings against the company are prepared or well under way at the time the company goes into liquidation.22 Even if leave is given, the court may impose conditions, such as the requirement that the creditor will not attempt to enforce against the company any judgment that it obtains, without the further leave of the court. A creditor should seek and obtain leave before commencing or continuing the proceedings; but leave may be granted in retrospect – nunc pro tunc – if the court so allows.23 A creditor requires leave even if taking some defensive action as a respondent against a claim by the liquidator, such as an appeal against a decision in favour of the liquidator or the company: Distinctive FX 9 Pty Ltd v Statewide Developments Pty Ltd [2012] NSWCA 393;24 or a cross-claim: Active Adult Management Pty Ltd v Milstern Retirement Living Pty Ltd [2017] NSWSC 1238. However, a procedural application brought by a respondent in proceedings initiated by the company in liquidation may not require leave; for example, an application for summary dismissal for want of prosecution (Dealquip Australia Pty Ltd v 33 Electra Pty Ltd (No 2) [2013] NSWSC 1382), or an application for security for costs (BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339).

creditors is not required to be proved, an inability to demonstrate this will tell against the application for leave). Lists of factors are also found in Swaby v Lift Capital Partners Pty Ltd (2009) 72 ACSR 627 at [29] and Ong v Lottwo Pty Ltd [2013] SASCFC 57 at [61]. See also Vagrand v Fielding (1993) 41 FCR 550. 18 Ong v Lottwo Pty Ltd [2013] SASCFC 57; (2013) 116 SASR 280 at [61]. 19 Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314. 20 See, for example, Wingecarribee Shire Council v Lehman Brothers Australia Ltd (No 3) [2010] FCA 747, where disputes about the treatment of claims were raised during the liquidation. 21 Capita Financial Group Ltd v Rothwells Ltd (No 2) (1989) 7 ACLC 634. 22 Ibbco Trading Pty Ltd v HIH Casualty and General Insurance Ltd [2001] NSWSC 346; (2001) 19 ACLC 1093. 23 Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (1993) 11 ACSR 516; Ong v Lottwo Pty Ltd [2013] SASCFC 57; (2013) 116 SASR 280 at [59]. See also Emanuele v Australian Securities Commission (1997) 188 CLR 114 (considering similar issues with regard to the requirement for leave under s 459P of the Corporations Act). 24 The court noted several authorities to the contrary, including Skinner v Jeogla Pty Ltd [2001] NSWCA 15; (2001) 19 ACLC 1163. But see Naaman v Sleiman [2015] NSWCA 259 at [82]; Commissioner of Taxation v 4 Doonan Street Collinsville Pty Ltd (in liq) [2016] NSWCA 69 at [31].

506

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.60]

Foreign insolvency proceedings Art 20 of the Model Law on Cross-Border Insolvency25 allows an insolvency administrator from another country, a “foreign representative”26 to apply to an Australian court to pursue proceedings here.

[13.60]

The representative may apply for recognition of their “foreign main proceeding”; that is, a foreign proceeding taking place in the country where the debtor has the “centre of its main interests”, often referred to as COMI.27 The Model Law does not require reciprocity from the foreign country; that is, it is not necessary that the country of the foreign representative has itself agreed to adopt the Model Law. The Model Law contains provisions concerning cooperation and communication between local and foreign courts.28 Article 16 of the Model Law provides that in the absence of proof to the contrary, the COMI of a corporate debtor is the address of its registered office, usually in the foreign country.29 Under Art 20, that recognition serves to automatically stay actions and execution against the debtor by creditors, suspends the debtor’s right to dispose of its assets and allows proceedings to claw back the benefit of antecedent transactions to be commenced by the foreign representative.30 Different rules apply if the foreign representative’s proceedings are based in a country where the debtor does not have a COMI but has an “establishment”, defined to include a place where the debtor carries out a “non-transitory economic activity”: Art 2(f). Those proceedings are termed a “foreign non-main proceeding”: Art 2(c). It is necessary for a representative of a foreign non-main proceeding to apply to the Australian court for a stay or suspension and satisfy the court that the relief sought relates to assets that, under Australian law, should be administered in the foreign non-main proceeding.31 The effect of s 16 of the Cross-Border Insolvency Act is that upon recognition of a foreign main proceeding, the rules as to any stay or suspension are the same as are available under the relevant parts of Ch 5 of the Corporations Act: see Kim v Daebo 25 Cross-Border Insolvency Act 2008 (Cth), Sch 1. 26 A foreign insolvency administrator: see Model Law, Art 2. 27 Model Law, Art 2. See also Maiden, “Guarding Against Foreign Insolvency Proceedings: The Importance of the Centre of Main Interests in Transaction Planning” (2012) 86 ALJ 697. 28 See Federal Court Practice Note CORP 2 – Cross-border insolvency, cooperation with foreign courts or foreign representatives. 29 See Moore v Australian Equity Investors [2012] FCA 1002; Akers v Saad Investments Co Ltd [2010] FCA 1221; (2010) 190 FCR 285; Young Jr in the matter of Buccaneer Energy Ltd v Buccaneer [2014] FCA 711. 30 Maritime law and cross-border insolvency present particular issues. See Federal Court Practice Note ADM 1 – Admiralty and maritime work in the Federal Court of Australia. As to the operation of this Article 20 and maritime liens, see Kim v Daebo International Shipping Co Ltd [2015] FCA 684; (2015) 232 FCR 275; Butler, Mason and Murray, “Maritime Law and Insolvency Law: Averting Collisions?” (2016) 24 Insolv LJ 70. 31 See generally, Maiden, “A Comparative Analysis of the Use of the UNCITRAL Model Law on Cross-Border Insolvency in Australia, Great Britain and the United States” (2010) 18 Insolv LJ 63; Trichardt, “The New Cross-Border Insolvency Regime” (2008) 20(2) A Insol J 12. As to text books, see Gopalan and Guihot, Cross-Border Insolvency Law (LexisNexis, 2016); Hannan, Cross-Border Insolvency: The Enactment and Interpretation of the UNCITRAL Model Law (Springer 2017).

[13.70]

13 Effects of Winding Up

507

International Shipping Co Ltd [2015] FCA 684; (2015) 232 FCR 275; Suk v Hanjin Shipping Co Ltd [2016] FCA 1404. That recognition does not destroy the rights of local Australian creditors: Akers v Deputy Commissioner of Taxation [2014] FCAFC 57; (2014) 223 FCR 8. In that case, the order for recognition did not prevent the court from varying the recognition order so as to protect the rights of the Deputy Commissioner to take action against local assets. Criminal or regulatory proceedings

[13.65]

Section 471B of the Corporations Act applies only to compulsory liquidations. Section 500(2) is a similar provision applicable to creditors’ voluntary liquidations but it refers to an “action or other civil proceeding”. On that basis, it has been held that leave of the court is required not only for civil but also for criminal proceedings against a company in compulsory liquidation, but that no leave is required in respect of criminal proceedings against a company in voluntary liquidation.32

In any event, a fine or penalty imposed by a court in respect of an offence is not a provable debt: see [15.275]. However, in cases involving regulatory proceedings under the Competition and Consumer Act 2010 (Cth) the court has imposed penalties on companies in liquidation. This is done for the purpose of general deterrence, for example, to signify to businesses in a discrete industry that such a penalty is being imposed and may be imposed in the future if others in that industry engage in the same or similar conduct: ACCC v Dataline.net.au Pty Ltd [2007] FCAFC 146; (2007) 161 FCR 513. In ACCC v Get Qualified Australia Pty Ltd (in liq) (No 3) [2017] FCA 1018, although the company was in liquidation, the court imposed a penalty of $8 million, with a view to deterring other education providers from taking unfair advantage of students, the court noting that “exploitation in the education sector is rife”.33

Secured and other creditors [13.70]

Secured creditors retain the right to their security interest in the company’s property after the company is wound up: Corporations Act, s 471C. This includes the right to appoint a receiver. If a secured creditor needs to take proceedings in order to realise the security, the court will usually grant leave to allow those proceedings against the company: SA Asset Management Corporation v Sheahan (1995) 65 SASR 59. But a receiver cannot simply seize the company’s secured assets as this would be interfering with the conduct of the liquidation and leave must be sought: see Re Landmark Corporation Ltd (in liq) [1968] 1 NSWR 705; Queensland Nickel Pty Ltd (in liq) v Martino [2017] QSC 95. The introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) from 30 January 2012 has broadened the scope of the class of secured creditors. Prior to the PPSA, a supplier with retention of title rights and a lessor were not classified as secured creditors, but rather as owners of property held or used by the company. 32 WorkCover Authority of NSW v Josef & Sons (contracting) Pty Ltd [2002] NSWIR Comm 226. 33 See Murray, “Kicking a Company When It’s Down” (2008) 8 INSLB 69; Symes, “The Insolvent Company as Criminal” (2006) 19 AJCL 316.

508

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.72]

The PPSA provides a broad definition of a security interest under s 12, which includes both traditional security devices such as mortgages and charges, and also includes other arrangements that are in substance used to confer security rights, such as finance leasing arrangements and retention of title arrangements. Section 51E of the Corporations Act provides that a secured creditor is a creditor who has a debt secured by a security interest. The term “security interest” is defined in s 51A as meaning either a PPSA security interest or a charge, lien or pledge. This means that secured creditors for the purposes of s 471C include traditional secured parties (such as a finance company with a fixed and floating charge) and other PPSA secured parties (such as certain lessors and retention of title (ROT) suppliers) and other secured parties whose arrangements do not fall within the PPSA who have a charge, lien or pledge.34 One important element of the PPSA regime is the need for the secured party to perfect its security interest. There are a number of ways to perfect, with several steps involved in the perfection process under the PPSA. The most common step (but one which is not sufficient on its own) is the notification of the security interest on the PPS Register.35 If creditors fail to “perfect” their security interest prior to the company’s liquidation they may be unable to enforce the security interest as the security interest can vest in the company and come under the control of the liquidator: see s 267 of the PPSA.36 If the secured creditor registers on the PPSR outside of “critical time”, its security interest may also vest in the company: Corporations Act, s 588FL. It is possible to obtain an extension of time to register from the court under s 588FM: see Re Appleyard Capital Pty Ltd [2014] NSWSC 782; (2014) 101 ACSR 629; Carrafa v Doka Formwork Pty Ltd [2014] VSC 570; (2014) 104 ACSR 163. See further Chapter 15. Other priority claims

[13.72] Although not in the nature of being a secured creditor, a creditor may enter into an arrangement with a debtor company that subsequently goes into liquidation, that serves to give that creditor priority rights outside the liquidation. This can apply in clearing house arrangements in certain industries where payments between members of the clearing house are dealt with by mutual set-off. In insolvency terms, such an arrangement serves to negative the debtor–creditor relationship in respect of the obligations to which the arrangements apply. Such an arrangement in the airline industry was upheld by the High Court in International Air Transport Association (IATA) v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151. The Court rejecting an argument that it was contrary to public policy in altering the pari passu principle. In similar industry arrangements, the House of Lords in British Eagle International Airlines v Compagnie Nationale Air France [1975] 2 34 Personal Property Securities Act 2009 (Cth), s 8 (exclusions from the PPSA). 35 See http://www.ppsr.gov.au. 36 Re Maiden Civil (P&E) Pty Ltd; Albarran and Pleash v Queensland Excavation Services Pty Ltd [2013] NSWSC 852; Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd) [2017] NSWCA 8.

[13.80]

13 Effects of Winding Up

509

All ER 390 had come to the opposite conclusion. At lease in the particular circumstances in Ansett, the High Court found no such public policy issue arose.37 A related issue is the anti-deprivation principle, which serves to void terms that attempt to elevate the priority of one party to a contract or other arrangement upon the insolvency of the other party. In Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38; [2012] 1 AC 383, the UK Supreme Court held that a clause in a complex finance contract that switched priority upon insolvency did not infringe the anti-deprivation principle, in part because there was no intention to evade insolvency law priorities.38

Claims against creditors [13.75] After a review of the company’s affairs, the liquidator may decide to take proceedings to challenge any preference payments to creditors or transfers of property to third parties, if these occur in the relevant periods before the commencement of the winding up. This is discussed in detail in Chapter 14. If a liquidator decides not to take such legal proceedings there is power in the court itself to authorise creditors and guarantors of the company to conduct the litigation.39

EFFECT ON EMPLOYEES [13.80] If a winding up order is made by the court, its publication operates as a notice of dismissal to all of the employees of the company: Re General Rolling Stock Co (1866) 1 Eq 346.40 Hence, an employee who was engaged subject to a contract of employment for a fixed term, or an employee who is entitled to a period of notice, may claim damages for a breach of contract and lodge a proof of debt accordingly: Re RS Newman Ltd [1916] 2 Ch 309; Re Kanedale Pty Ltd (1987) 12 ACLR 449; (1988) 6 ACLC 359. The same rule does not apply in voluntary liquidation however.41 If a liquidator wishes to continue the company’s business for a short period of time in order to assist in the realisation of assets, there will be a need to retain some or all of the employees. In such circumstances, the liquidator may waive the notice of dismissal and the employee’s service continues under the existing employment contract: Re Associated Dominions Assurance Society Ltd (1962) 109 CLR 516. However, a liquidator may unequivocally dismiss employees and re-employ them on his or her own terms so that the liquidator is not subject to existing employment terms. 37 See Lishman, “Australian Court Shoots Down British Eagle” (2009) 27 C&SLJ 219. 38 See Kulkarni, “The Anti-deprivation Rule in Australia” (2014) 88 ALJ 722; Petch, “Derivatives and the Elusive Principles of Insolvency in Australia: A Post-Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Analysis” (2012) 30 C&SLJ 253. 39 Cape Breton Company v Fenn (1881) 17 Ch D 198; Russell v Westpac Banking Corp (1994) 61 SASR 583; Ragless v IPA Holdings Pty Ltd [2008] SASC 90; (2008) 65 ACSR 700. 40 Discussed in McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503. See further Darvas, “Employees’ Rights and Entitlements and Insolvency: Regulatory Rationale, Legal Issues and Proposed Solutions” (1999) 17 C&SLJ 103; McPherson’s Law of Company Liquidation (Thomson Reuters, Westlaw AU) at [7.610]. 41 McPherson’s Law of Company Liquidation (Thomson Reuters, Westlaw AU) at [7.620].

510

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.85]

The liquidator may require persons (who may be employees) to provide information which might assist in the winding up of the company: s 475(2) – see also [13.30]. Employees might also be regarded as “officers” under s 9 and, therefore, they will be subject to the requirements contained in s 530A which deal with assisting the liquidator – see [13.40]. ASIC’s Liquidation: A guide for employees, INFO 46, provides information for employees of companies in liquidation, including as to their rights to claim on the Fair Entitlements Guarantee (FEG) scheme.

EFFECT ON CONTRACTS [13.85] The appointment of a liquidator does not necessarily constitute grounds for the termination of a continuing contract or a repudiation of it: Smith v DCT (1996) 71 FCR 150. The effect of the appointment will depend upon the terms of the contract involved. A contract containing an “ipso facto” clause will allow the other contracting party to terminate the contract. The liquidator may be able to negotiate the continuation of such contracts if the company relies on them for its ongoing business so as to enable the liquidator to sell the business, or the profitable part of it, as a going concern. On the other hand, if the contractor chooses to terminate the contract, relying on the ipso facto clause, whatever business the company had remaining may collapse and the liquidator will be left with the task of selling its property and other assets for less than any going concern value. In that regard, there is no section in the Corporations Act equivalent to s 301 of the Bankruptcy Act which renders void such ipso facto clauses on the personal insolvency of the contractor. The 2017 amendments to the Corporations Act to offer protection against ipso facto clauses only operate in creditors’ schemes of arrangement, receivership and voluntary administration. However, if a company transitions from voluntary administration into a creditors’ voluntary liquidation then the stay against ipso facto clauses will continue “until the affairs of the company have been fully wound up”: s 451E(2). However, the stay will only apply to the appointment of the administrator and will not prevent an ipso facto clause that is triggered simply by the commencement of voluntary liquidation. The court may lift or vary this stay: ss 451E(3), 451F. During the operation of the stay the company in voluntary liquidation cannot require the provision of further credit or advances from a creditor whose rights are stayed: s 451E(8). There are likely to be numerous exceptions to the stay recognised in regulations, but at the time of writing these were not yet released. The new law is due to commence by 1 July 2018.

EFFECT ON OTHER ADMINISTRATIONS [13.90] It is not uncommon to find a liquidation commencing while another insolvency administration is taking place in respect of the same company.

[13.100]

13 Effects of Winding Up

511

Receivership [13.95] The most common administration to precede liquidation is receivership. In fact, the appointment of a receiver by a secured creditor may often precipitate the company’s liquidation. If a receivership is already in existence, the effect of liquidation is to revoke the receiver’s authority to incur debts as agent of the company.42 However, s 420C allows the receiver to continue to run the business with the liquidator’s or the court’s approval. In such a case, the receiver is deemed to be acting as agent for the company. See s 420C(3) and [18.165]. As we have seen, the commencement of winding up does not prevent a receiver being subsequently appointed by a secured creditor. This is discussed further in Chapter 18.

Part 5.3A administration [13.100] As a general rule a company under voluntary administration can only be wound up, voluntarily, if s 446A of 446AA of the Corporations Act apply. That is a central aspect of the voluntary administration regime, that the creditors may resolve that the company be wound up rather than being allowed to proceed to a deed of company arrangement. Section 446A(1)(a) therefore provides, inter alia, that at the second meeting held under s 439A the creditors may resolve under s 439C(c) that the company be wound up and the administrator then becomes the liquidator. Section 446AA provides for transition to voluntary liquidation where a DOCA is terminated by the court or where the DOCA provides for termination followed by liquidation. If a creditor applies to the court to wind up a company, and the hearing is pending, the directors will often react by resolving to appoint a voluntary administrator. In such cases, the court must adjourn the application where it is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up: s 440A(2). In assessing such cases, the court will be wary of any abuse of the Pt 5.3A process, for example in directors seeking to shift the relation-back day, or simply delaying an inevitable winding up. On the other hand, the directors, although prompted by the winding up application, may be genuinely seeking to save the company by offering creditors some proposal through a deed of company arrangement. Changes to the definition of “relation-back day” for the purposes of voidable transaction proceedings in 2017 have removed the ability to seek a later relation back day by appointing an administrator in the face of a winding up application, because the relation-back day (assuming the company subsequently enters liquidation by a court order) will be the date of the filing of the court application not the date of the appointment of the administrator: s 91 (table item 2). This is discussed further in Chapter 19.

42 Gosling v Gaskell [1897] AC 575; Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407, 432-433.

512

Keay’s Insolvency: Personal and Corporate Law and Practice

[13.105]

EFFECT ON THE AUDITOR [13.105] An auditor of the company ceases to hold office at the time when the company resolves to wind up or a winding up order is made: s 330. CONCLUSION [13.110]

A significant effect or impact of a winding up is on the property of the company, which then comes under the control of the liquidator. In addition, the liquidator has power to recover property that may have been transferred by the company in contemplation of liquidation, or to otherwise attack pre-liquidation transactions that would otherwise diminish the assets available for unsecured creditors. We therefore now examine what assets of the company are available to a liquidator and what means there are of recovering them, including those assets that have already been disposed of.

Corporations Act

Cross Border Insolvency Act 2008 (Cth) Regulations ASIC Court Rules

Chapter 13 – Effects of Winding Up Pt 5.4B Division 1A Effect of winding up order – ss 471 – 471C Pt 5.6 – Winding up generally – ss 513 – 581 Section 500 Arts 2, 16 – – Courts’ Corporations Rules, Div 15A Proceedings under the Cross-Border Insolvency Act – rr 15A.1 – 15A.9

14

Assets Available to the Liquidator [14.10] ASSETS OF THE COMPANY ......................................................................................... 514

[14.15] Property held in trust ....................................................................................... 515 [14.20] Retention of title ................................................................................................ 516 [14.25] RECOVERY BY AVOIDING PRE-LIQUIDATION TRANSACTIONS ..................... 518

[14.30] The reasons for these rights of recovery ...................................................... 518 [14.35] Part 5.7B Div 2: the avoidance regime .......................................................... 519 [14.40] Relation-back day ......................................................................................................... 520 [14.45] Related entity ................................................................................................................ 521 [14.50] Transaction .................................................................................................................... 521

[14.55] Insolvent transactions ...................................................................................... 522 [14.60] Section 588FF: orders that can be made ....................................................... 523 [14.65] UNFAIR PREFERENCES ................................................................................................. 523

[14.65] Background ........................................................................................................ 523 [14.70] Reasons for the giving of preferences ........................................................... 523 [14.75] Section 588FA: the conditions for a preference ........................................... 524 [14.80] Transaction .................................................................................................................... 525 [14.85] Receiver’s liability for repaying preferences ........................................................... 526 [14.90] An insolvent transaction under s 588FC ................................................................. 527 [14.95] Within the relevant six-month time period ............................................................. 527 [14.100] Four-year extended time period for related entities ........................................... 527 [14.105] The creditor was preferred ....................................................................................... 528

[14.115] Presumptions of insolvency .......................................................................... 529 [14.120] Running accounts ........................................................................................... 530 [14.125] Defences ............................................................................................................ 532 [14.130] Effect of a finding that a preference was given ........................................ 532 [14.135] UNCOMMERCIAL TRANSACTIONS ........................................................................ 533 [14.140] DEFEATING OR DELAYING OR OBSTRUCTING CREDITORS .......................... 536

[14.142] Statute of Elizabeth I ...................................................................................... 537 [14.145] Recovering related-entity benefits from insolvent transactions ............. 537 [14.150] UNFAIR LOANS ............................................................................................................. 538 [14.155] UNREASONABLE DIRECTOR-RELATED TRANSACTIONS ................................ 539

514

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.05]

[14.160] TRANSACTIONS DURING VOLUNTARY ADMINISTRATION AND DEED OF COMPANY ARRANGEMENT ...................................................................................... 541 [14.165] AVOIDANCE OF CIRCULATING SECURITY INTERESTS .................................... 542 [14.170] COURT ORDERS: S 588FF ............................................................................................. 544

[14.175] Time within which an application should be made ................................. 545 [14.180] PROTECTIVE PROVISIONS ......................................................................................... 546

[14.185] Section 588FG .................................................................................................. 546 [14.190] Non-party .................................................................................................................... 547 [14.195] A party to the transaction ........................................................................................ 547

[14.200] Good faith ........................................................................................................ 548 [14.205] Section 588FG(2)(b) ......................................................................................... 548 [14.210] Reasonable grounds and suspect ............................................................................ 549 [14.215] Suspicion ...................................................................................................................... 550 [14.220] Valuable consideration .............................................................................................. 551 [14.225] Change of position ..................................................................................................... 551 [14.230] No in the ordinary course of business test ........................................................... 551

[14.235] Cross-border recoveries ................................................................................. 552 [14.237] Assistance to overseas liquidators with Australian assets ................................. 552 [14.239] Assistance to Australian liquidators with overseas assets ................................. 553

[14.240] Proceeds of execution and attachments – s 569 ........................................ 554 [14.245] Recoveries from sheriffs and courts ............................................................ 554 [14.250] Void dispositions ............................................................................................. 555 [14.255] Disposition of property ............................................................................................. 556 [14.260] Execution against company assets: s 468(4) .......................................................... 556 [14.265] Court ordered liquidations only .............................................................................. 557

[14.270] Invalidation of security interests .................................................................. 557 [14.270] Unperfected security interests ................................................................................. 557 [14.275] Security interests in favour of relevant persons ................................................... 560 [14.280] CONCLUSION ................................................................................................................. 560

[14.05] One of the primary concerns of the liquidator in administering a liquidation is to ascertain the extent of the property owned by the company so that it can be realised and the proceeds distributed to the creditors. As well, the liquidator will seek to recover property of the company that has been transferred to others prior to liquidation, or to set aside transactions in that period, so as to recoup moneys for the creditors. In this chapter, we examine what existing property the liquidator can obtain, and what former property of the company can be retrieved.

ASSETS OF THE COMPANY [14.10]

As to existing property, the liquidator is entitled to all of the assets that belonged to the company at the commencement of the winding up; all assets disposed after that point of time are void unless validated by the court: Corporations

[14.15]

14 Assets Available to the Liquidator

515

Act, s 468. Section 474(1) provides that a liquidator is entitled to take into custody or control all the property to which the company is entitled. The liquidator does this as the company’s agent. A voluntary winding up is usually “taken to have begun or commenced” on the date on which the special resolution for winding up was passed: s 513B(e). As we have explained at [10.100] the legislation also specifies situations where a different date of commencement of the winding up applies: see s 513B(a) – (da). Where there is a compulsory liquidation ordered by the court under ss 232, 459A, 459B or 461, the winding up is usually taken to have begun or commenced on the day of the court’s order: s 513A(e). Other commencement dates are specified in the legislation, depending on the circumstances (see s 513A(a) – (d)) and notably where the company had previously commenced to be wound up voluntarily. The commencement date in such a case is the earlier date when the voluntary liquidation is deemed to have commenced: s 513A(a).

Property held in trust [14.15] Many businesses in Australia operate using companies as trustees, known as a “trading trust”, which can give rise to complex issues if the company enters liquidation.1 The Corporations Act does not specify what assets may fall outside of the liquidator’s power and control on the grounds that they are not the “property of the company”. At general law, a trustee holds the legal interest in property held in trust for another, and the beneficiaries hold an equitable (beneficial interest), which means that the trustee is not able to deal with the property as the full owner: see Re Stansfield DIY Wealth Pty Ltd [2014] NSWSC 1484; (2014) 103 ACSR 401. This has the result that the liquidator of a company that is (or was) acting as a trustee cannot rely upon the power to deal with the trust assets under s 477: Re Aced Kang Investments Pty Ltd [2017] FCA 476. If the company has not been replaced as trustee of the trust, then the liquidator may exercise the same rights that the trustee has, such as the right to sell trust property under the terms of the trust deed, and will need to administer the trust property in the interests of the beneficiaries: Re Crest Realty Pty Ltd [1977] 1 NSWLR 664. However, it is common for companies acting as trustee to be removed from their trustee office by ipso facto (ejection) clauses in trust deeds.2 Where this occurs, the company may continue to hold the trust assets, but will do so as a bare trustee, and this will severely limit its powers to deal with the trust assets: see generally Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677; Jones v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 (Killarnee). The company may however have a right of indemnity against the trust assets, supported by an equitable lien, for fees and expenses properly incurred in the due administration of the trust, and if so then the right of indemnity will be property of the company: Commonwealth v Byrnes [2018] VSCA 41 (the Amerind appeal); 1 See further Agardy, Trading Trusts Explained (LexisNexis Butterworths, 2018). 2 See further D’Angelo, “Trustee ‘Ejection Clauses’: Consequences for Liquidators, Receivers and Creditors” (2016) 17 INSLB 96.

516

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.20]

Killarnee. It is clear that the company’s liquidation does not extinguish that right of indemnity, even if the company is removed as trustee, which is then exercisable by the liquidator to pay debts properly incurred on behalf of the trust: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. However, the fact that the right of indemnity is property of the company does not allow the liquidator to simply sell trust assets in order to realise the indemnity; the trustee company may not have a full beneficial interest in them and its lien to protect its indemnity does not provide a power of sale: Killarnee. While there remains some debate about the application of the liquidator’s powers under s 477 to trust property,3 the preferable view is that the liquidator should seek court directions (either as liquidator or through the company as trustee under the State and Territory Trustee Acts) and if necessary to seek appointment as a receiver for sale: Killarnee; Stansfield DIY Wealth.

Retention of title [14.20] Naturally, any assets to which the company does not have title are not available to the liquidator. As a consequence, many suppliers of goods to companies include a retention of title clause (ROT) in their terms of supply so that a liquidator is not entitled to retain the goods if the purchasing company goes into liquidation and the supplier has not been paid. While this may have been an effective strategy prior to the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) (which commenced on 30 January 2012), it now comes with risks for the supplier if it fails to comply with the perfection requirements of the PPSA. The PPSA covers almost all transactions that in substance provide for rights in personal property (such as goods supplied under a ROT arrangement) as security for the repayment of a debt or the performance of an obligation. The supplier of goods who retains title until payment is retaining title as security to ensure that payment is made, and hence takes a security interest under s 12(1) of the PPSA.4 The characterisation of a ROT arrangement as a PPSA security interest is of critical importance for the supplier because of the operation of the vesting rules in liquidation, and also because of the operation of the PPSA priority rules. The vesting rules in the PPSA provide that an unperfected security interest will vest in the grantor of the security interest5 at the time the grantor company goes into liquidation: PPSA s 267.6 This means that the supplier will not be able to rely on its title to the goods to defeat the liquidator’s claim over the supplied goods. The supplier’s ROT arrangement is deemed to be a security interest and if the supplier 3 Compare Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344 and Apostolou v VA Corporation Aust Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84. 4 See also PPSA, s 12(2) which lists retention of title as one example of a security interest. 5 That is, the customer who has received the goods under a ROT arrangement. The customer is able to grant a security in goods that it possesses: PPSA, s 19(5). 6 There is also a vesting rule where the perfection by registration occurs more than 20 business days after the entry into the contract and within six months of the commencement of the liquidation: see Corporations Act, s 588FL. It is possible to obtain a court order to extend the time to register to avoid vesting under s 588FL: s 588FM. See further Re Appleyard Capital Pty Ltd [2014] NSWSC 782; (2014) 101 ACSR 629; Re Carpenter International Pty Ltd [2016] VSC 118; Re OneSteel Manufacturing Pty Ltd (admin apptd) [2017] NSWSC 21; KJ Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing

[14.20]

14 Assets Available to the Liquidator

517

fails to perfect by the time the company enters liquidation it will lose its security rights because they will vest in the company. The court’s power to extend time to register on the PPSR under Corporations Act under s 588FM only applies where the security interest has not already vested on liquidation: Re OneSteel Manufacturing Pty Ltd (admin apptd) [2017] NSWSC 21. A supplier may also lose priority over the “collateral” (PPSA, s 10) to another secured creditor who has properly perfected their security interest over the same collateral: see PPSA Pt 2.6. The changes introduced by the PPSA regime have significantly enhanced the position of a liquidator who may be able to increase the extent of assets available for all creditors by relying upon the vesting rules.7 It should be noted that a secured creditor, such as a ROT supplier, may be vulnerable even where it has attempted to perfect its security interest, for example by registering its interest on the PPS Register,8 but has failed to properly perfect its interest. For example, the failure to properly record the VIN9 of a motor vehicle covered by a security interest, or recording the grantor’s ABN rather than its ACN, will mean that the registration is not effective and the security interest is therefore unperfected: PPSA, s 165.10 See further Re OneSteel Manufacturing Pty Ltd (admin apptd) [2017] NSWSC 21. Retention of title arrangements can be characterised as purchase money security interests (PMSIs) which, when properly perfected, enjoy “super-priority” over most other security interests, provided that certain notification requirements are met: PPSA, s 62.11 One of the significant points for insolvency practitioners concerning ROT supplies is the fact that PPSA security interests can extend to “proceeds”: PPSA, s 31. Prior to the PPSA it was common for retention of title clauses to include trust provisions requiring proceeds to be held on trust to give greater protection for the supplier and to allow for tracing rules to apply to the funds. The PPSA rules on proceeds are easier to apply than equitable tracing rules as they allow for a security interest (and its priority position) to automatically attach to the proceeds: PPSA, s 32. A security interest will be perfected against proceeds if the PPSR registration covers the proceeds (s 33(1)(a)) or if the collateral description itself covers the proceeds (s 33(1)(b)) or in circumstances where the proceeds consist of currency, an ADI account, a cheque or compensation for loss of the collateral: s 33(1)(c). Pty Ltd v OneSteel Manufacturing Pty Ltd [2017] FCA 325; Mirzai and Harris, The Annotated Personal Property Securities Act 2009 (Cth) (Wolters Kluwer, 3rd ed, 2018). For a discussion of vesting, see Broderick and Morrison, “Vesting of Personal Property in Insolvency under the PPSA” (2014) 22 Insolv LJ 20. 7 Corporations Act, s 513AA further provides that the property of the company (for the purposes of Pt 5.6 of the Act) includes PPSA ROT property that has vested in the company. 8 http://www.ppsr.gov.au. 9 Vehicle Identification Number, a unique serial number used by the car industry to identify individual vehicles. 10 Certain types of collateral may be perfected by control or by possession, but ROT arrangements will not involve these situations. 11 See Alleasing Pty Ltd; Re OneSteel Manufacturing Pty Ltd [2017] FCA 656. See also Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) Ch 9.

518

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.25]

For liquidators, this means that where the ROT supplier has perfected its security interest, and where s 33 is satisfied (to obtain perfection of the security interest in the proceeds), the supplier will have the same priority in the proceeds themselves. The proceeds from the sale of trading stock (which is usually supplied under ROT arrangements) will usually be the funds that liquidators will want to use to fund the liquidation, but these may be covered by the security interest of the supplier. Where the liquidator sells the goods covered by a ROT and a perfected security interest in order to generate the proceeds, the liquidator will have a right of indemnity and an equitable lien against the fund to cover their fees and expenses in generating the fund that will rank in priority to another security interest: Stewart v Atco Controls Pty Ltd [2014] HCA 15; (2014) 252 CLR 307.

RECOVERY BY AVOIDING PRE-LIQUIDATION TRANSACTIONS [14.25] Apart from existing property of the company, a liquidator can claim various other forms of property. A number of statutory provisions permit the liquidator to recover property or money from other persons, or to avoid certain transactions. It is with these provisions that this section is primarily concerned. The reasons for these rights of recovery [14.30] We have explained the reasons for the rights of recovery available to a trustee in the context of bankruptcy: see Chapter 5. Although the following explanation in the context of corporate insolvency will be similar, it is useful for the issues to be restated in the corporate context. The provisions considered here relate to dispositions by the company in favour of third persons, particularly during the time immediately before the commencement of the winding up. During this period the controllers of a company may well be aware that the company is insolvent and that liquidation is imminent. Realising this, they may attempt to favour associated parties or so order the affairs of the company that they themselves are benefited at the expense of the general body of creditors. Sometimes third parties are benefited without any intention on the part of the controllers of the company to act improperly or unfairly; the benefits are bestowed randomly. However, as far as the law of liquidation is concerned the reason for providing a benefit does not matter; the law in this area is preoccupied with a concern for a fair and rateable distribution amongst the creditors. The giving of benefits by the company before liquidation is likely, generally speaking, to affect the fair distribution principle. As mentioned previously, the law of liquidation is based on bankruptcy law, and this is clearly seen in the area under discussion. Like bankruptcy, the law of liquidation provides for a collective process in that liquidation binds all unsecured creditors in relation to the assets of the company that are realised and distributed among creditors. The process is supported by the pari passu principle of bankruptcy and liquidation law of an equal distribution of assets among the general body of creditors. The collective process, in effect, restricts individual creditors for the benefit of the whole body of creditors by prohibiting certain transactions before liquidation. The legislature has taken the view, and it is a long-established one, that transactions by

[14.35]

14 Assets Available to the Liquidator

519

which an insolvent company has disposed of property within a certain time zone prior to winding up, in circumstances which are unfair to the whole group of creditors, should be subject to avoidance. The consequence of such a policy is that transactions which effect the disposition of assets before the commencement of winding up may be reviewed and if they are avoided, the assets disposed of by the company may be recovered and made available to meet the claims of the creditors of the company. An avoidance policy prevents the unjust enrichment of the party who receives the property from the company to the detriment of the other creditors, if the recipient is a creditor, or to the detriment of all unsecured creditors if the recipient is not a creditor.

Part 5.7B Div 2: the avoidance regime [14.35] At common law transactions entered into by a company prior to liquidation are not, in general, voidable, even if the company was insolvent. Consequently it has been left to the legislature to construct some parameters as to the kinds of transactions that a company can enter into if it is later the subject of liquidation. Part 5.7B Div 2 of the Corporations Act contains provisions defining these parameters.12 The provisions contained within the Division may be referred to collectively as the avoidance or clawback provisions as the thrust of the Division is to specify what pre-liquidation transactions are voidable on the application of the liquidator. Similar terminology is used in bankruptcy. The Division, in effect, constitutes an avoidance code in relation to pre-liquidation transactions. Division 2 sets out the transactions which are voidable, in what circumstances, and fixes the time zones within which the transactions must have occurred if they are to be set aside, together with indicating when transactions, which are voidable prima facie, are protected from being set aside. Division 2 represents something of a departure from the situation that formerly existed13 where reliance was placed on provisions in the Bankruptcy Act which applied to companies. The present regime has concepts different from bankruptcy, meaning that the provisions apply to companies in a more appropriate manner. In some cases, there are subtle changes of approach leading to a further departure from personal insolvency concepts. There are other sections of the Corporations Act beyond Div 2 that enable a liquidator to recover company property that has been disposed of improperly (see [14.250]), but principally the provisions contained in Div 2 represent the major grounds upon which a liquidator can attack a pre-liquidation transaction. The framework of Div 2 can be difficult to understand. There are essentially several types of transactions that are voidable: 1. unfair preferences – s 588FA; 12 The provisions in Pt 5.7B Divs 2A and 2B that deal with PPSA security interests are discussed at [14.270]. 13 For a history of the provisions, see Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis, 2015) Ch 1.

520

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.40]

2. uncommercial transactions – s 588FB; 3. transactions with the purpose of obstructing creditors’ rights – s 588FE(5); 4. unfair loans – s 588FD; and 5. unreasonable director-related transactions – s 588FDA. Categories 1-3 are only voidable where they are also “insolvent transactions”: s 588FC. That is, the insolvency of the company must be proved in order to set aside the transaction. There are differing time periods within which such transactions can be set aside, including if the transactions were with a related entity. This is summarised in the following figure. Timeline D: Time period within which a transaction can be voidable under Pt 5.7B of the Corporations Act

In addition, the liquidator may challenge uncommercial transactions occurring from the relation-back day to the date of a liquidation that arise out of a voluntary administration or deed: s 588FE(2A), (2B). Relation-back day

[14.40] The term “relation-back day” is obviously crucial to these timelines. The ILRA changed the prior definition of relation-back day in s 9 to insert a new detailed definition comprising a table with 15 scenarios to determine the relation-back day in each. Many of these refer back to commencement times as determined by Pt 5.6 Div 1A of the Corporations Act – ss 513A, 513B and 513C. Some of the common scenarios are: • When the court orders the winding up of the company where there is no prior administration or liquidation: the relation-back day is the day that the court application was filed (s 91 table item 14);

[14.50]

14 Assets Available to the Liquidator

521

• When the court orders the winding up where the company entered administration after the application for winding up was filed: the relation-back day is the day the application was filed (s 91 table item 2); • When the company enters voluntary liquidation and there was no prior liquidation or administration: the relation-back day is the day that the special resolution was passed (s 91 table item 15; s 513B) The chief importance of the relation-back day is that it is the point which is used for measuring the time periods prior to winding up within which transactions must be entered into if they are to be classified as subject to review by the liquidator. It should be remembered, however, that the words “relation-back” bear no real comparison to the concept of relation-back in bankruptcy. The importance of the relation-back day has been explained14 as relating: “... to the fact that various provisions in the Act operate inter alia to invalidate certain transactions entered into during the pre-liquidation period which is determined by reference to the relation-back day. The relation-back day is also relevant to other matters under the Act, including the making of presumptions in recovery proceedings (s 588E(3)(b)) and the personal liability of a person managing a company for the company’s debts and liabilities (see s 588Z).”

Related entity

[14.45] Another term that is of importance is “related entity”. It is a broad term that is defined in s 9 which provides that certain persons and entities are to be regarded as related to a body corporate. In relation to a company these persons and entities include a promoter, a director or a relative of a director, a director of a related corporation, a related corporation itself and a beneficiary of a trust of which the company under examination is or has at any time been a trustee. The rationale for the inclusion of the term is to widen the application of the avoidance provisions and provide a liquidator with greater opportunities to recover assets that have been disposed of to related entities of the company: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [358]. For instance, an unfair preference given to a creditor can be recovered if it was given during the six months prior to the relation-back day, but if the preference was given to a related entity then a liquidator can attack it if it was given at any time during the four years prior to the relation-back day: s 588FE(2), (4). This implements the view of the Harmer Report that related creditors should not be treated equally because they are more likely to be aware of a company’s financial affairs and may be able to exert influence on the owners of the company (if they are not themselves the owners) to obtain an advantage, and experience suggests that when a company is suffering financial difficulties related creditors are favoured: Harmer Report, at [636]. Transaction

[14.50] Naturally, as the Division is about voidable transactions the meaning of “transaction” is crucial. The word is defined in broad terms in s 9 of the 14 CBA Corporate Services (NSW) Pty Ltd v Walker and Moloney, in the matter of ZYX Learning Centres Ltd [2013] FCAFC 74; (2013) 212 FCR 444 at [16]. See also Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) Ch 2.

522

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.55]

Corporations Act and does not purport to be exhaustive. The definition sets out a number of examples such as conveyances, transfers, charges, payments and loans. It includes a transaction that has been completed or given effect to or that has terminated. Most of the types of transactions referred to are mentioned in s 122 of the Bankruptcy Act in the context of preferences (see [5.125] – [5.235]). The case law has developed such that the terms used in s 122 have been widely interpreted and the courts give the terms the same sort of wide scope when they are considered in the context of the avoidance provisions in Pt 5.7B Div 2 of the Corporations Act. This term is best explained by reference to particular facts in the cases which are discussed below.

Insolvent transactions [14.55] As mentioned above, voidable transactions are either unfair loans or unreasonable director-related transactions, or insolvent transactions. The latter category is the more important of the two, comprising preferences and uncommercial transactions. Also, s 588FE(5) of the Corporations Act requires insolvency to be proved in relation to a transaction seeking to defeat, delay or interfere with the rights of creditors. There are differing time periods within which such transactions can be set aside, including if the transactions were with a related entity.15 For a transaction to be deemed to be an insolvent transaction it must have been entered into, or had an act done or an omission made for the purpose of giving effect to the transaction, at a time when the company (now in liquidation) was insolvent or became insolvent as a consequence of entering into the transaction: s 588FC. Thus if the transaction causes the insolvency of a solvent company, it will be an insolvent transaction.16 The mere payment of a loan facility will not necessarily constitute an act done for the purpose of giving effect to the loan transaction: International Cat Manufacturing Pty Ltd v Rodrick [2013] QSC 91 (loan repayment was not made to give effect to the creation of a charge to cover present and future debts).17 In the leading case of Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 at [138] the NSW Court of Appeal stated: “Directors should be in a position to conduct their company’s affairs without running foul of the avoidance provisions, and I do not think an expansive notion of causation is consistent with their purpose. Where s 588FC(b) looks to an act or omission causing or contributing to insolvency, the insolvency should be quite closely related to the entry into or giving effect to the transaction; if it were not so, the provisions would not guide conduct towards validity, but would avoid transactions because of the turn of later events.”

As the proving of insolvency can be difficult the legislature has provided that in certain cases insolvency can be presumed; this was discussed in Chapter 1. The presumptions, contained in s 588E are discussed at [14.115]. However, it must be 15 See Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis, 2015) Ch 2. 16 See Broderick and Lenicka, “Uncommercial Transactions – Corporate Governance for Insolvent Companies” (2004) 22 C&SLJ 7, 22. 17 Appeal dismissed: International Cat Manufacturing Pty Ltd v Rodrick [2013] QCA 37; (2013) 97 ACSR 200.

[14.70]

14 Assets Available to the Liquidator

523

noted that the presumptions are not limited to the establishment of insolvency where a preference is being claimed – the presumptions may also be used where the liquidator is attacking a transaction as an uncommercial transaction.

Section 588FF: orders that can be made [14.60] The orders that are sought in any challenge to a voidable transaction are those contained in s 588FF of the Corporations Act. An application under that section is made in the name of the liquidator, not the company: Tolcher v National Australia Bank [2003] NSWSC 207; (2003) 44 ACSR 727. If liquidators as plaintiffs lose such actions, costs orders are made against them personally, and are not restricted to any indemnity the liquidators can obtain from the company in liquidation. But it is unlikely that an order for security for costs will be made in avoidance actions.18 Section 588FF goes on to state that the court that hears an application by a liquidator for the setting aside of a transaction has the right to make one or more of 10 orders. This provides flexibility in that justice can be done between all of the parties involved in voidable transactions: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [1056]. The range of orders that can be made is discussed in detail at the conclusion of the review of the various voidable transaction provisions: see [14.170].

UNFAIR PREFERENCES Background [14.65] We have explained the purpose and rationale for the existence of laws concerning preferences in the context of bankruptcy and readers are referred to that commentary at [5.125]. That applies in most respects as much to corporate insolvency as it does to bankruptcy, indeed, the right to recover preferences has been inherited by corporate insolvency law from bankruptcy. The law as it has developed in relation to the provision that covers preferences in bankruptcy, s 122 of the Bankruptcy Act, can be applied, in general, to the comparable company provision, s 588FA of the Corporations Act. Nevertheless there are some differences in wording between the respective preference provisions. As we earlier explained, the trustee or liquidator’s power to recover preferential payments reflects one of the purposes of any insolvency law – to ensure that the assets of the insolvent person or company are distributed equally among the creditors and that no one creditor receives preferential treatment unless permitted by law.

Reasons for the giving of preferences [14.70] We have explained that preferences may be given for a variety of reasons. In the company context, the officers of the company that is in distress may recognise the company’s impending demise and so they may decide to pay the debts owed to them over and above other creditors; or they may pay their 18 Re MGT Samorr Knitting Pty Ltd [2000] VSC 93; (2000) 18 ACLC 333; Green v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105.

524

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.75]

associates and relatives. Alternatively, a creditor may exert pressure on a trading company, for example by threatening to discontinue the supply of crucial goods or by serving a s 459E demand, so that the company feels that it must pay that creditor rather than the others. It is also common for the Australian Taxation Office to pressure companies into paying tax obligations by issuing a director penalty notice, which is discussed in Chapter 16. Often companies that are in financial difficulty, particularly where their books and records are poorly kept or where there is a lack of competent corporate management, may pay creditors haphazardly and creditors are inadvertently granted preferences. In contrast to bankruptcies,19 preference recoveries are often pursued by liquidators. The business environment in which a trading company operates will often mean that demanding creditors are paid in the period leading up to insolvency in circumstances where those creditors know or reasonably suspect that the company is in financial trouble to the point of insolvency. It is relatively straightforward for a liquidator to threaten recovery proceedings against a creditor with the matter then settling by agreement and the creditor paying a lesser sum to the liquidator than may be claimed in settlement of the dispute.

Section 588FA: the conditions for a preference [14.75] Unfair preferences are dealt with in s 588FA of the Corporations Act. A transaction is an unfair preference if the company and the creditor are parties to the transaction and the transaction results in the creditor receiving from the company, in relation to an unsecured debt owed to the creditor,20 a greater amount than it would have received in relation to the debt in a winding up of the company. This applies even if the transaction is entered into because of a court order: s 588FA(1). A contingent creditor can receive a preference but it must have the relevant character of a creditor at the time of the transaction rather than acquiring that character as a consequence of the transaction in question.21 An upfront payment as a fee for entering into a contract is not a preference just as pre-payments are not preferences, they are an exchange of equivalent value: Tamaya Resources Ltd v Claymore Capital Pty Ltd [2015] FCA 357; Re Employ (No 96) Pty Ltd [2013] NSWSC 61 at [37] (and the cases there cited). A creditor for the purposes of voidable preferences includes a person who had existing rights in relation to monetary claims against the company and who could have proved in the company’s winding up.22 The burden of proof of the elements of a preference claim, including to prove insolvency, is on the liquidator and on the balance of probabilities.23 What are the conditions for a preference to exist? 19 See [5.125]. 20 See further Sise, “How Does s 588FA Apply to the Granting of a Security Interest Over an Unsecured Debt?” (2015) 23 Insolv LJ 59. 21 Re Jaques McAskell Advertising Freeth Division Pty Ltd [1984] 1 NSWLR 249. 22 Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83 at [122] per Gordon J. 23 Totterdell v Nicol-Burmeister (1995) 13 ACLC 1521, 1527.

[14.80]

14 Assets Available to the Liquidator

525

Transaction

[14.80] First, a liquidator will have to prove that the alleged preference is a “transaction” within the definition of that term. This term is defined in s 9 of the Corporations Act very broadly. The definition sets out a number of examples and does not purport to be exhaustive; notably it encompasses more types of transaction than those mentioned in s 122 of the Bankruptcy Act. The transaction must be one to which both the company and the creditor are parties, even if someone else is also a party.24 A debtor–creditor relationship must exist. But where, under tax legislation, the Commissioner of Taxation issued an amended assessment for the taxpayer, pursuant to which a credit arose in the company taxpayer’s favour, which the Commissioner applied to other amounts owing by the company for income tax, there was no relevant transaction – the company was not a party to the application of credits by the Commissioner.25 It may include a series of events or steps in a course of dealings26 and these can occur at different times and in different forms: for example the transaction in Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 involved the delivery and payment of stock on several occasions. However, merely because the payments involve the same parties does not mean that they will constitute a transaction. The series of dealings must be connected in being directed to bring about a change in the company’s rights, liabilities or property.27 The courts look at the whole of the transaction: “The complexity of modern business relations necessarily requires the court to look objectively at the totality of the relationship between the parties in identifying and characterising the ‘transaction’ for the purposes of the relevant provisions of Part 5.7B of the Corporations Act.”28

The payment to the creditor must come from the company, so a payment made by a third party is not covered by s 588FA: Re Evolvebuilt Pty Ltd [2017] NSWSC 901. But there can be a preference in such a case where, if company A owes money to creditor C, and A directs B, who owes money to A, to pay C instead, C is a party to the transaction even though it did not receive payment directly from A. In such a case, C may have received a preference in the insolvency of A even though the money was paid by third party B.29 In Australian Kitchen Industries Pty Ltd v Albarran [2005] NSWSC 1047; (2005) 51 ACSR 604, Barrett J said (at [24]) that the breadth of the term “transaction” is illustrated: 24 Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83. 25 Driver v DCT [2000] NSWCA 247. 26 Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557; Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw [1997] FCA 667; (1997) 147 ALR 281, 299-300. 27 Re Employ (No 96) Pty Ltd [2013] NSWSC 61; (2013) 93 ACSR 48 at [15] (and cases there cited). 28 Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83, citing among others Mulherin v Bank of Western Australia Ltd [2006] QCA 175. 29 Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw [1997] FCA 667; (1997) 147 ALR 281, 299-300. See also Commissioner of Taxation v Kassem [2012] FCAFC 124; (2012) 205 FCR 156.

526

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.85]

“by a number of cases in which a series of steps over a period, involving several parties and not always contractual consequences, have been held to be a ‘transaction’. ‘Transaction’ includes an arrangement giving rise to an estoppel under which one party may not resile from a position. And, as the definition itself makes clear (for example, by referring to a disposition of property), a ‘transaction’ may be unilateral in character.”

A transaction has been found to exist in circumstances where the creditor agreed to pay the debtor company for its business and its goodwill and the creditor was to set-off the payment for goodwill against amounts owing to it by the company. There was found to be a transaction under which the creditor received benefits greater than it would receive in a liquidation. The term “transaction” is sufficiently broad to cover such an arrangement.30 If there is a payment made to a company for a particular purpose and that purpose fails, such that the money must be refunded, there may be no preference. The funds would be impressed with a Quistclose trust such that they are not property of the company.31 See Chapter 5 at [5.150]. Finally, it should be noted that the term is not confined to transactions that are lawful or enforceable. Receiver’s liability for repaying preferences

[14.85]

Where a receiver of the insolvent company makes payments to creditors out of assets of the company over which the receiver’s appointor has a security interest, such payments do not constitute preferences if liquidation follows the receivership and if the payments were made to discharge a personal liability of the receiver (resulting from a personal obligation undertaken by the receiver). There is not a “transaction” involving the company and the creditor is receiving the payment, not as a creditor of the company, but as a creditor of the receiver: Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407. This would not be the case if the receiver was making payments to discharge obligations of the company and the receiver could be regarded as the agent of the company. In such cases, a receiver or controller is not protected from the voidable transaction provisions if liquidation follows the receiver’s appointment. Transactions entered into by the receiver after the winding up begins are not subject to recovery.32 Furthermore, if the creditor is paid more than the value of the security, the excess could be regarded as a preference. So, where a secured creditor’s security is only worth $100,000 and it is owed $140,000, if the receiver on behalf of the company paid $120,000 to the secured creditor, the latter has been preferred to the extent of $20,000.33 The granting of security may itself be a preference: Re Ashington Bayswater Pty Ltd [2013] NSWSC 1008. 30 Bartercard v Wily [2001] NSWCA 262; (2001) 39 ACSR 94. 31 Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217. 32 CAMAC recommended against introducing any blanket exemption against voidable transactions for conduct by receivers on the basis that receivers are obliged to act in the best interests of the secured creditor who appointed them: CAMAC, Issues in External Administration (Report, November 2008), at [5.3]. 33 See Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 84 FCR 423. See also the comments of the High Court in G & M Aldridge Pty Ltd v Walsh [2001] HCA 27; (2001) 203 CLR 662.

[14.100]

14 Assets Available to the Liquidator

527

Section 588FA(2) provides that where a portion of the secured debt is without value, it is taken to be unsecured. It was held that this is to be assessed at the date of the liquidation in Matthews v The Tap Inn Pty Ltd [2015] SADC 108,34 however that was determined as a separate question of law and the Full Court of the Supreme Court of South Australia overturned this determination because the underlying facts of the case had not yet been determined and were still in dispute: Tap Inn Pty Ltd v Matthews [2015] SASCFC 188. Nonetheless, the lower court decision offers a useful discussion of the issues.35 A retention of title clause in a supply contract can be a security interest to render the creditor secured at the time of payment: Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62 at [165].36 An insolvent transaction under s 588FC

[14.90] The second condition, according to s 588FE of the Corporations Act, is that the transaction, alleged to be a preference, can only be set aside if the liquidator establishes that the company was insolvent at the time of the giving of the alleged preference, that is, that it is an insolvent transaction pursuant to s 588FC. Again, the onus is on the liquidator to prove insolvency.37 Within the relevant six-month time period

[14.95] Thirdly, the transaction must have occurred within a specific time zone, that is, within six months of the relation-back day or between that day and the commencement of the winding up: s 588FE(2). In most cases the transaction will be confined enough in time for this requirement to be determined. In other cases, where the transaction may be a “multi-stepped arrangement”, it may be less clear when some parts of the transaction occur outside the six-month period. The section does not require all acts giving effect to the transaction to have occurred in the relevant period, only that the parties entered it, or performed some act giving effect to it, in that period.38 Four-year extended time period for related entities

[14.100] If the creditor who was a party to the transaction was a related entity of the company, the time zone in which the preference must have occurred is the four-year period before the relation-back day: s 588FE(4). 34 A partial payment may be made by a creditor when the debt is secured at the time of payment, but the debt may later become unsecured because of the impact of the PPSA, and related provisions in the Corporations Act: see Sise, “Now You’re Secured, Now You’re Not” (2015) 27(3) A Insol J 36. See also fn 1. 35 See also the obiter discussion in Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62 at [168]–[180]. See further Hanna, “Timing is Everything: When Should a Security Be Valued for the Purpose of s 588FA(2) of the Corporations Act 2001 (Cth)?” (2017) 25 Insol LJ 73. 36 See further Pearce, “Retention of Old Titles: Pre-PPSA Retention of Title Agreements and Unfair Preferences” (2016) 44 ABLR 397. 37 See MCG Quarries Pty Ltd v Offermans [2015] QCA 103 where a preference claim failed because, on appeal, the liquidator was found not to have proved insolvency at the relevant time. 38 Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83.

528

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.105]

As we discussed earlier (see [14.45]), the reason for the longer time zone for related parties recognises that directors and persons associated with the directors may have the foresight to see liquidation as a distinct probability well in advance of others. Where such foresight occurs, it may be tempting for directors to take action or exert influence on the company in order to safeguard their own interests or the interests of associates. Because of inside knowledge and influence, related entities may obtain satisfaction of the debts owed to them outside the six-month time zone which generally applies. The creditor was preferred

[14.105] Fourthly, it must be proved that the creditor received more through the payment of the money than it would have received in a winding up,39 that is, an advantage or preference was received. In most instances, that will clearly be the case. This wording of s 588FA(1)(b) of the Corporations Act should be contrasted with s 122 of the Bankruptcy Act which refers to a transfer being a preference if it “had the effect of giving the creditor a preference, priority or advantage over other creditors”. Section 588FA of the Corporations Act directs attention to the advantage received by the creditor. It is not necessary to show some adverse effect upon the assets of the company. That is, the section does not look to the effect of a transaction on other creditors; rather the question is whether the transaction resulted in the creditor receiving more than it would in a winding up if the transaction were to be set aside and the creditor were to prove for its debt.40 Hence, for example, payments to creditors out of assets not generally available to the unsecured creditors may still be preferential: G & M Aldridge Pty Ltd v Walsh [2001] HCA 27; (2001) 203 CLR 662. In New Cap Reinsurance v All American Life Insurance [2004] NSWSC 366; (2004) 49 ACSR 417, 420 the court said that “arrangements that have a neutral effect on the assets of a company may constitute transactions”, giving as an example “a put option for an off-market sale of listed shares at the last on-market price per share”. Despite the difference in wording from the present s 122 of the Bankruptcy Act, in that s 588FA of the Corporations Act does not expressly state that there must be a preference, priority or advantage given, it seems that this is implied in its wording and that no fundamental change in the law from this and other differences in

39 For a discussion of the nature of the winding up posed by this element (ie, “a” winding up rather than “the” winding up actually undergone) see McPherson’s Law of Company Liquidation (Thomson Reuters, Westlaw AU) at [11.780]; Morrison, “What is the Date of Preferential Effect in Construing s 588FA of the Corporations Act?” (2010) 18 Insolv LJ 26; Hoyer, “Section 588FA of the Corporations Act – Change of Wording But No Change to Meaning?” (2010) 18 Insolv LJ 77; Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) Ch 4. 40 Commissioner of Taxation v Kassem [2012] FCAFC 124; (2012) 205 FCR 156. See further Hartley, “Section 588FA, Burness, and Kassem: When are Payments by Third Parties Preferential?” (2014) 22 Insolv LJ 65.

[14.115]

14 Assets Available to the Liquidator

529

wording between the two provisions appears to have been intended by the legislature in enacting s 588FA.41 Both provisions give emphasis to the ultimate “effect” of the transaction.42

Presumptions of insolvency [14.115]

The liquidator will need to prove that the company was insolvent at the time of the payment. The Corporations Act recognises the difficulty that can be experienced by liquidators in proving insolvency by way of provisions that allow for insolvency to be presumed in certain circumstances: s 588E(3), (4), (7), (8). Section 588E is designed to facilitate proof of facts and so avoid the time and cost expended in establishing in later actions what has already been established by facts proved at a hearing before a court which has pronounced judgment: Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525; (2002) 55 NSWLR 64. While the benefits conferred by s 588E are available to liquidators, a defendant can also rely on the presumptions; see s 588E(8) which also creates presumptions where a defence has been established. Broadly, presumptions of insolvency can apply: • if a company is proved to be insolvent, or it is presumed to be insolvent because it either breached s 286(1) by failing to keep adequate accounting records or it was proved to be insolvent in another recovery proceeding at a point of time within the 12 months immediately preceding the relation-back day. In that case, the company is presumed to be insolvent from that point of time until the relation-back day: s 588E(3). This in effect provides for a continuing presumption of insolvency in the period specified;43

• if a company has breached s 286(1) by failing to keep adequate accounting records44 (s 588E(4)(a)) or it has breached s 286(2) by failing to retain such records for a period of seven years (s 588E(4)(b)) it is presumed to be insolvent for the period to which the inadequacy or absence of the records relates. The presumption as contained in s 588E(4)(a) does not apply where there are minor or technical breaches of s 286(1): s 588E(5).45 Furthermore, the presumption does not apply in so far as it would prejudice a right or interest of a person where the accounting records of the company are destroyed, concealed or removed and the person was not knowingly or recklessly involved in such action: s 588E(6).46

41 Keay, Avoidance Provisions in Insolvency Law (LBC, 1997), pp 170-172. 42 McKern v Minister Administering Mining Act 1978 (WA) [2010] VSCA 140; (2010) 28 VR 1. 43 See, for example, Tolhurst Druce & Emmerson (a firm) v Maryvell Investments Pty Ltd [2007] VSC 271 where this presumption applied in a s 588FB application. 44 This requires not only completeness but also accuracy of records: Gordon v Leon Plant Hire Pty Ltd [2015] NSWSC 397. 45 See Re SSET Construction Pty Ltd [2010] NSWSC 102. 46 See Trinnick v Forgione [2015] FCA 642; (2015) 106 ACSR 600.

530

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.120]

Importantly, the presumption in s 588E(4) can only be employed in an unfair preference action if the creditor who received the alleged preference is a related entity of the company: s 588E(7);47 • if a company has been proved to be insolvent in other recovery proceedings it is presumed to be insolvent: s 588E(8). In support of the safe harbour reforms, s 588E(8A) provides that where evidence has been adduced that suggests that the director or holding company falls within the safe harbour provisions under s 588GA(1) or 588WA(1), it is presumed that the evidence has been adduced in relation to other proceedings relating to the same matter. Any of the presumptions can be rebutted if the contrary is proved: s 588E(9). In relation to s 588E(8), it is not sufficient that insolvency is established by concession or presumption in the prior proceedings, it must be proved: Re Harris Scarfe Ltd; Dwyer v R-Jay Pty Ltd [2007] SASC 115; (2007) 97 SASR 377. In Woodgate v Network Associates International BV [2007] NSWSC 1260, by virtue of s 588E(8), insolvency was in fact proved in the earlier court proceedings and the presumption applied. That view may also be taken of s 588E(8A).

Running accounts [14.120] It is important to note that s 588FA(3) of the Corporations Act codifies the running account principle developed by the courts in relation to preferences in bankruptcy.48 Running accounts occur, for example, where a supplier of goods supplies goods on credit to a company and the price of the goods and payments received are recorded on a running account statement and moneys are paid on account by the debtor company without differentiating between past and future goods supplied. If the preference provisions were applied strictly to such accounts all payments would be considered to be preferences. The courts have said,49 and the legislature has obviously agreed, that this would be too harsh a consequence. The running account principle is not a defence to an action under s 588FA(1) but rather acts as an alternative cause of action that is used where its elements are satisfied.50 The running account principle was explained in Re Employ (No 96) Pty Ltd [2013] NSWSC 61; (2013) 93 ACSR 48 at [43] as follows: “[s 588FA(3)] provides that transactions that are an integral part of a continuing business relationship between the company and a creditor, such as a running account, are treated as a single transaction; whether an unfair preference is being given is determined by 47 The Harmer Report recommended that there be a general rebuttable presumption in relation to preferences that the company was insolvent during the 90-day period immediately preceding the relation-back day: at [641]. See also Keay, “Liquidators’ Avoidance of Preferences: Issues of Concern and a Proposal for Radical Reform” (1996) 18 Adel LR 159. 48 See [5.185]. See also the summary of the law in Re Employ (No 96) Pty Ltd [2013] NSWSC 61; (2013) 93 ACSR 48. 49 For example, see Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; Petagna Nominees Pty Ltd v Ledger (1989) 1 ACSR 547. 50 Clifton v CSR Building Products Pty Ltd [2011] SASC 103 at [66].

[14.120]

14 Assets Available to the Liquidator

531

reference to that single transaction; and the amount of any unfair preference is limited to the difference between the highest amount owing during the relevant period and the amount owing on the last day of the period.”

The calculation of the preference amount is based on the “peak indebtedness” of the company to the creditor during the relevant period compared with the final amount, if any, owing, thus allowing a liquidator to choose the highest amount in order to maximise the amount of the preference recovery.51 Thus in Air Services Australia v Ferrier (1996) 185 CLR 483 the running account constituted statutory charges imposed by the Civil Aviation Authority under the Civil Aviation Act 1988 (Cth) on Air Services. Payments totalling over $10 million were paid in the six-month period prior to the liquidation of Air Services. The liquidator sought to recover these as unfair preferences. The High Court held (by majority) that s 588FA(3) applied to exempt these payments from recovery. The court said that if the payment is part of a running account between the debtor and the creditor, the purpose and effect of the payment must be assessed in terms of whether it has given that creditor a priority over other creditors. If that purpose is merely to pay an existing debt, then there is no protection given by the section. But if there is also a purpose involved to induce the creditor to continue to provide existing services (here, airport access and services), the payments are not to be assessed separately and will not be preferences unless the total payments overall exceed the value of the goods or services acquired. If the effect of the payments has reduced the overall indebtedness owing to the creditor, then only the amount of the reduction would be recoverable as a preference. The fact that the creditor suspected or knew of the company’s insolvency is not relevant; that does not of itself negate the existence of a running account.52 In Wily v Eastern Elevators [2003] NSWSC 377; (2003) 45 ACSR 261 the court found there was no running account for reasons that included that although it was claimed that the payments were made to secure the provision of future services, those future services were not of greater value than the amount of the impugned payments; and the “transactions between the parties did not result in a fluctuating balance with payments made from time to time against services provided and to be provided, that is, to the general balance of the account, but each payment was specifically related to a specific invoice representing a particular ‘progress payment’ for past work”. Conversely, in Sutherland v Lofthouse [2007] VSCA 197; (2007) 214 51 The validity of the peak indebtedness rule has been questioned. See Russell and Russell, “Unfair Preferences: Putting an End to the Peak Indebtedness Rule” (2016) 24 Insolv LJ 111; Thompson, “‘Peak Indebtedness’ Theory: An Abuse of the ‘Running Account’ Defence?” (2011) 85 ALJ 374; and McAloon, “‘Utimate Effect’ or Maximum Recovery? Should Liquidators be able to Apply the ‘Peak Indebtedness Rule’ to Running Accounts when Pursuing Unfair Preference Claims?” (2006) 14 Insolv LJ 90. The New Zealand Court of Appeal has in fact rejected the peak indebtedness rule in determining the amount to be recovered as a preference, despite the New Zealand provision being based on s 588FA(3), see s 292(4B) of the Companies Act 1993 (NZ): Timberworld Limited v Levin [2015] NZCA 111. See also Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis, 2015) at [4.42]-[4.51]. 52 Clifton v CSR Building Products Pty Ltd [2011] SASC 103 at [69]; Carello v Perrine Architecture Pty Ltd [2016] WASC 145 at [253]–[254].

532

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.125]

FLR 157, an examination of the statement of the account implied that it was mutually assumed from a business point of view that each particular payment was connected with the subsequent provision of goods or services on account. It was implicit in the circumstances in which each payment was made that there would be a continuance of the relationship of buyer and seller with the resultant continuance of the relation of debtor and creditor. Hence the defence applied. Payments may in fact be made for concurrent purposes, for the dual purpose of discharging an existing indebtedness of the company as well as to ensure further supply. This does not negate the availability of the running account defence. In practice, the discharge or reduction of an existing indebtedness is often a prudent step taken by a customer to ensure the availability of continued supply: Sutherland v Eurolinx [2001] NSWSC 230; (2001) 19 ACLC 633.

Defences [14.125] A creditor who has been the recipient of a benefit under a transaction that can be classified as an unfair preference might be able to rely upon s 588FG of the Corporations Act which protects the transaction in certain circumstances. This section is discussed at [14.185] after all of the different types of voidable transactions have been examined because s 588FG may be invoked in any action involving any voidable transaction. Effect of a finding that a preference was given [14.130] If a transaction is held to constitute a preference, the recipient will be required to repay the benefit received to the liquidator for the benefit, if there are sufficient funds, for the general body of creditors. There may not in fact be sufficient funds. Recovery of a small amount from a creditor may only serve to reimburse the liquidator for his or her remuneration and expenses of the liquidation, including the costs of bringing the preference claim.53 If there are sufficient funds to pay a dividend to creditors, the creditor who repaid the preference may prove in the liquidation in respect of the amount which is owed by the company to that creditor: s 588FI. Therefore there is no penalty attached to the receipt and retention of a preference.54 There are divergent lines of authority in relation to whether a creditor who has received a preference may claim a set off against the liquidator under s 553C: see the review of the authorities in Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62 at [226]-[246].55

53 See Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330; on appeal Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99. 54 Keay suggests that this provision serves only to encourage creditors to receive and retain, even in the face of legal proceedings, the benefit of preferential transactions: see Keay, “An Exposition and Assessment of Unfair Preferences” (1994) 19 MULR 545. 55 See also Derham, “Set-off against Statutory Avoidance and Insolvent Trading Claims in Company Liquidation” (2015) 89 ALJ 459.

[14.135]

14 Assets Available to the Liquidator

533

UNCOMMERCIAL TRANSACTIONS [14.135] Uncommercial transactions56 are “insolvent transactions” under s 588FC of the Corporations Act and if, in addition, they were entered into during the two years prior to the relation-back day (s 588FE(3)) (or within four years of the relation-back day if a related entity is a party to it – s 588FE(4)) they are voidable transactions within s 588FE. An uncommercial transaction is a transaction of the company that a reasonable person in the place of the company would not have entered into, taking into account the benefits and the detriments to the company, the respective benefits to the other parties involved and any other relevant matter. It is equivalent to s 120 of the Bankruptcy Act, and was introduced, in part, to allow liquidators to avoid settlements entered into by companies before liquidation where the settlement did not advantage the company but advantaged some other party, who may well be a related entity. Section 588FB of the Corporations Act applies, inter alia, where a company: • • • •

gives a gift of its property, that is, for no consideration; undertakes a burden for no consideration; sells property at an amount below market value; or agrees to pay for services or property in an amount that is significantly greater than the market value.

The legislature, in introducing s 588FB, was obviously concerned to prevent transactions that involve clear inequality of exchange, for example, the company receives insufficient consideration for its property. While not dealing exclusively with undervalue, undervalue is at the heart of the section, that is, if the company received less than what is reasonable from the transaction the liquidator may attack it. In many cases courts will need to compare the value of what the company received in exchange for what it gave or vice versa. For example, an arrangement whereby an accounting firm charged double its normal rates was found to be an uncommercial transaction as there was no apparent need for the increased charges: Re Employ (No 96) Pty Ltd [2013] NSWSC 61; (2013) 93 ACSR 48. The court rejected the contention that the work was especially complex and found that the purpose of the transactions was to recover a debt outstanding between the parties. One must assess whether the party involved with the insolvent was a “buyer” in a commercial sense. This approach is implicit given the wording of s 588FB. The principles underpinning s 588FB were summarised by Gordon J in the leading Full Federal Court decision in Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83 at [129] as follows (citations omitted):57 56 For further discussion, see Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015); De Jong, “The Corporations Act Approach to Uncommercial Transactions: Is it Working?” (2003) 11 Insolv LJ 199; Aitken, “Two ‘Simple’ Problems with the ‘Uncommercial Transaction’” (2012) 86 ALJ 47. For a discussion of the differences between ss 588FA and 588FB see: Featherstone v Ashala Model Agency Pty Ltd (in liq) [2017] QCA 260;. 57 The company needs to receive at least fair equivalence of value: Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47 at [82] per Young JA.

534

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.135]

1. as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial; 2. four criteria are to be considered – the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));58 3. the objective criteria are not considered in some vacuum but by reference to “the company’s circumstances” which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors; and 4. for a transaction to be “uncommercial” it must result in “the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice” or where “the consideration … lacks a ‘commercial quality’”.59

The test is not as high as requiring proof that no reasonable board of directors would have entered into the transaction60 and reasonableness must be assessed at the time of the transaction and without the benefit of hindsight. In the case of directors whose decision to settle the company’s monetary claim was challenged under s 588FB, the court found it was “difficult to see why a reasonable person in the company’s circumstances would not have entered into the [settlement] transaction”, given the lack of reliability of the company’s financial records, and the risks of commercial litigation and the associated costs: Shot One Pty Ltd (in liq) v Day [2017] VSC 741. The liquidator’s claim was accordingly dismissed. Where the transaction involves family or related entities the court will scrutinise the bargain particularly closely.61 If a director creditor acts to ensure that they are paid but that other creditors (such as the ATO) are not paid, then this is likely to be an uncommercial transaction on the basis that a reasonable person in the circumstances would not have acted in a similar manner: Ashala Model Agency Pty Ltd (in liq) v Featherstone [2016] QSC 121; (2016) 309 FLR 321 (appeal dismissed by a 2-1 majority in Featherstone v Ashala Model Agency Pty Ltd (in liq) [2017] QCA 260). This is not to say that good faith and valuable consideration are not important – they are aspects of the defence to a s 588FB claim in the defence provision: s 588FG. Good faith was in issue in the case of a lease of company property to a director on terms very favourable to the director: Tolhurst Druce & Emmerson (a firm) v Maryvell Investments Pty Ltd [2007] VSC 271. The problem that s 588FB often provokes is ascertaining what is the correct valuation of property that was either conveyed by or to the company in the 58 The effect of the transaction on the company’s creditors is a relevant consideration for making this assessment: 640 Elizabeth Street Pty Ltd (in liq) v Maxcon Pty Ltd [2015] VSC 22 at [37]. 59 See also the leading decision in Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535, 548. See further Re Ashington Bayswater Pty Ltd [2013] NSWSC 1008 (grant of charge to secure pre-existing debt conferred little benefit on the company and was uncommercial); Campbell Street Theatre Pty Ltd v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 (agreeing to pay a large up-front fee in exchange for vague commitment to provide unspecified services was uncommercial). 60 Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496 at [22]. 61 Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [56]; Old Kiama Wharf Company Pty Ltd v Betohuwisa Investments Pty Ltd [2011] NSWSC 823; (2011) 85 ACSR 87.

[14.135]

14 Assets Available to the Liquidator

535

particular market at the time.62 It is important for the liquidator to provide evidence of how the transaction affected the company and its assets. Merely asserting detriment will not be sufficient: Rafeletos v Great Wall Resources Pty Ltd (No 4) [2012] FCA 1168. In construing s 588FB courts should be inclined to favour that construction which benefits the unsecured creditors in whose interests the liquidator is acting in bringing the proceedings for recovery: Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535. In that case, C contracted to sell a residential unit to D for $180,000 but to forgo $120,000 of this amount which represented a debt due by V to D. Subsequently, C and D entered into a deed by which the agreement for sale was rescinded on payment of the $120,000 by C to D. C then went into liquidation. The court found this to be an uncommercial transaction (s 588FB) because it conferred no benefit on C or, indirectly, on its creditors and D had obtained, at C’s expense, a bargain of such magnitude that it could not be explained by normal commercial practice. It was also an insolvent transaction within s 588FC because the acts of C and D in entering into the deed resulted in C becoming insolvent. In that respect, it is important to note that for the transaction to be challenged it must have either occurred when the company was insolvent or it precipitated the insolvency of the company.63 Unlike the unfair preference, the transaction does not have to be between the company and one of its creditors; it may be between the company and any other party and is in fact more likely to be: s 588FB(2)(a). Thus, and as earlier explained in the context of preferences, the term “transaction” is a word of wide meaning. It may include a series of events or steps in a course of dealings initiated by a debtor intended to extinguish a debt, some or all of which may also be properly described individually as transactions and the steps or events can occur at different times and in different forms. Ultimately the steps must be connected in a manner that is relevant for the purpose of s 588FB, that is, as showing that the company disposed of property or incurred an obligation in an “uncommercial” way to its disadvantage. In recognition of the complexity of modern business relations, the court will look objectively at the totality of the relationship between the parties in identifying and characterising the “transaction”: Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83, citing among others Mulherin v Bank of Western Australia Ltd [2006] QCA 175. However, in relation to s 588FB, the transaction must be “of the company”. It is not enough that the transaction was one to which the company was a party as is the case with preferences: cf Prentice v St George Bank Ltd [2002] NSWSC 358; (2002) 20 ACLC 923 at [24]. This will depend on the facts and involves more than simply being a party to the transaction: Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 62 The case of Kitay v Strathfield Holdings Pty Ltd (1998) 27 ACSR 716 shows the difficulties with valuations. 63 Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535.

536

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.140]

191; (2007) 63 ACSR 557; Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83. Where a transaction is entered into by a person under a power of attorney, that can still be a transaction “of the company”: Great Investments Ltd v Warner [2016] FCAFC 85; (2016) 243 FCR 516 at [136]. One particular issue identified with s 588FB is that there is no allowance for a person ordered to repay the amount of an uncommercial transaction to be able to prove as a creditor in the liquidation for that amount. The court in Employ (No 96) Pty Ltd [2013] NSWSC 61 said that if the defendant were to be ordered under s 588FF to repay the amount received for services provided, it could not then prove in the winding up for the value of the services that it had in fact provided, and other creditors of the company would be advantaged at its expense. This is further addressed in relation to the types of orders that can be made under s 588FF: see [14.170]. In comparison with an earlier 2004 assessment of the provision, that it has been “relatively slow to develop … [with] … few judicial decisions on the new regime …”,64 section 588FB has proved to be a useful provision, with the courts adopting a purposive interpretation that seeks to undo the disposal of assets by a company outside normal commercial practice.65

DEFEATING OR DELAYING OR OBSTRUCTING CREDITORS [14.140] If transactions were able to be categorised as unfair preferences or uncommercial transactions they might be voidable even if entered into outside the time zones usually applied to such transactions. This is the case if they were entered into by the company for the purpose of defeating, delaying or interfering with the rights of any or all of its creditors66 and if they were entered into during the 10 years prior to the relation-back day: Corporations Act, s 588FE(5).67 The transactions are voidable even if the purpose of defeating creditors was only one of the company’s purposes: Featherstone v Ashala Model Agency Pty Ltd (in liq) [2017] QCA 260. Section 588FE(5) is the corporate equivalent of s 121 of the Bankruptcy Act, whose wording is similar in the use of the words “prevent, hinder and delay”. Like the present s 121, s 588FE(5) of the Corporations Act disposes of the need for the liquidator to prove what was formerly the central ingredient of a fraudulent disposition under s 121, that is, that there was an intent to defraud creditors. This ingredient had always been difficult for liquidators and trustees in bankruptcy to prove. The Harmer Report recommended the removal of any connotation of fraud because the concept has overtones of criminality, even though the fraud referred to 64 See Broderick and Lenicka, “Uncommercial Transactions – Corporate Governance for Insolvent Companies” (2004) 22 C&SLJ 7, 21. 65 See Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) Ch 5. 66 For a more detailed discussion, see Keay, “Challenging Fraudulent Transactions and Unfair Loans as Voidable Pre-liquidation Transactions” (1995) 2 Deakin Law Review 53, 54-60. 67 For a case in which a transaction was supposedly covered by s 588FE(5)(b) of the Corporations Act, see Re Solfire Pty Ltd [1998] 2 Qd R 92.

[14.145]

14 Assets Available to the Liquidator

537

here does not mean deceit in the criminal sense.68 In many ways the fraudulent disposition provision has not been changed greatly, as s 588FE requires proof that the company intended to defeat, delay or interfere with the rights of creditors which is, in essence, the meaning given to “to defraud creditors” by the courts: Lloyd’s Bank Ltd v Marcan [1973] 1 WLR 1317, 1392. However, despite its comparable wording to s 121 of the Bankruptcy Act, s 588FE(5) of the Corporations Act appears to have been little used by liquidators. One difference is that liquidators need to prove the insolvency of the company at the time of the impugned transaction. In comparison, proof of insolvency is not necessarily required under s 121 of the Bankruptcy Act.

Statute of Elizabeth I [14.142] It should be noted that liquidators can use the Statute of Elizabeth I provisions in State laws to recover moneys paid by a company with an intent to defeat its creditors – for example s 37A of the Conveyancing Act 1919 (NSW) or s 89 of the Property Law Act 1969 (WA).69 This avenue of recovery was discussed in Chapter 5 in the context of s 121 of the Bankruptcy Act, and that section, and s 588FE(5) of the Corporations Act, are broadly founded on that 16th century provision in English law. Recovering related-entity benefits from insolvent transactions [14.145] The precursors of the Corporations Act, s 588FH (see, for instance s 567(5), (6) of the Corporations Law) were introduced in an attempt to recover indirect preferences – payments made to a principal creditor, prior to liquidation (usually when the liquidation is inevitable) which have the effect of discharging officers of the company who had guaranteed to the creditor that they would pay the company’s debt owed to it if the company failed to pay. The classic case is Matthews v Geraghty (1986) 43 SASR 576 where the directors had personally guaranteed their company’s overdraft with the company’s bank. Just prior to liquidation, moneys were deposited into an account to enable the bank to transfer funds in discharge of the overdraft. The predecessor provision to s 567(5) (s 453(5) of the Companies Act 1981 (Cth)) was held to enable the liquidator to recover from the directors an amount equal to the deposit made in the account. Section 588FH provides that where there is an insolvent transaction that is voidable under s 588FE and has the effect of discharging a liability of a related entity of the company, the liquidator can recover the sum paid to discharge the liability of the related entity, from the related entity. It is likely that the liability that will be discharged in most cases will be liability under a guarantee, but it is to be emphasised that the section is not limited in its scope to guarantees. The provision has a wide ambit as it applies where the effect of the transaction is to reduce the liability of the related entity, and not just when the defendant’s liability 68 Harmer Report, at [679]. See Re World Expo Park Pty Ltd (1994) 12 ACSR 759. 69 See Robertson and Ryan, “Phoenix Activity – Alternative to Section 588FE” (2013) 25(3) A Insol J 12, discussing International Skin Care Suppliers v Whyte [2011] NSWSC 463. See also Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546.

538

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.150]

has been discharged. The most common case where an action is likely to be taken is where a company officer who guaranteed a debt of the company, caused the company to satisfy the debt, with the result that the officer is discharged from his or her liability as a guarantor. This was the case in Re The Walker Group Pty Ltd (1995) 13 ACLC 434. A director had guaranteed the payments under her company’s lease of equipment from a supplier. The company, prior to its liquidation, paid the residual value of the equipment under the lease to the supplier. On appointment, the liquidator successfully claimed, under s 588FH, the payment of the residual from the director. In making any order a court must take into account any sum recovered from the related entity: s 588FH(3). If the liquidator demands payment under this section and the related entity satisfies that demand, then the related entity has the same rights of indemnity or contribution against the company or some other party as it would have had, had it discharged the relevant liability: s 588FH(4). While the section is likely to apply where a preference has been given it is not limited to situations involving preferences; the section applies to any insolvent transaction that is voidable under s 588FE. Consequently, the transaction that precipitates the use of s 588FH could occur in the period of six months, two years, four years or 10 years before the relation-back day. A benefit for a liquidator in taking proceedings under s 588FH is that the defendant is unable to rely on the protective provisions in s 588FG.

UNFAIR LOANS [14.150] This represents an avoidance provision that has no precursor in Australian law. It is designed to prevent the rights of the general body of unsecured creditors from being prejudiced by the fact that the company entered into a loan agreement for which the consideration was excessive: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [1048]. It is not aimed at loans that in hindsight may be regarded as bad bargains, but at transactions that are grossly unfair: [1048]. According to s 588FD of the Corporations Act, an unfair loan70 is a loan that provides for interest which is extortionate or the charges relating to the loan are extortionate. Whether interest or charges are extortionate will depend on an examination of the factors listed in s 588FD(2). They are: • the risk assumed by the company in lending; • the value of any security in respect of the loan; • the term of the loan; • the schedule for payments of interest and charges and for repayments of principal; and • any other relevant matter. In the equivalent provision in the United Kingdom, to be deemed to be “extortionate” a loan must require “grossly exorbitant payments” or be grossly 70 For a more detailed discussion, see Keay, “Challenging Fraudulent Transactions and Unfair Loans as Voidable Pre-liquidation Transactions” (1995) 2 Deakin Law Review 53, 60-63.

[14.155]

14 Assets Available to the Liquidator

539

unfair, having regard to the risk accepted by the credit provider.71 Prima facie it would appear that it would be easier to establish an unfair loan under the Australian legislation than under the British. No time zone applies in regard to this avoidance provision. Theoretically, a loan capable of being deemed to be unfair can be avoided, no matter how long before the relation-back day it was entered into: s 588FE(6). In practice, though, one would think that it is likely that the further away from the relation-back day a loan was made the more chance it has of not being challenged. Importantly, to be able to be challenged successfully the transaction does not have to be an insolvent transaction, that is the liquidator does not have to prove that either the company was insolvent when entering into the transaction or that the transaction resulted in the insolvency of the company. There are few cases dealing with transactions as unfair loans. In one recent case (Re Essendon Apartment Developments Pty Ltd (No 2) [2013] VSC 210) loans that carried interest of 60% p/a, or 5% per month, with a default rate of 70% were held not to be unfair given the nature of the risk taken by the lender (2nd mortgage over undeveloped property). The court also noted that the plaintiff had not produced any evidence or submissions as to why this rate was extortionate, apart from simply noting the high interest rate.

UNREASONABLE DIRECTOR-RELATED TRANSACTIONS [14.155] These provisions were introduced by the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth). The intent is to permit liquidators to reclaim unreasonable payments made to directors, in particular by way of a bonus, by companies prior to a liquidation. The provisions relate to transactions made to, on behalf of, or for the benefit of a director or “close associate” of a director. To fall within the scope of the amendments, the transaction must have been unreasonable, and entered into during the four years leading up to a company’s liquidation. Significantly, liability is determined regardless of the company’s solvency at the time the transaction occurred. Furthermore, the defences under s 588FG of the Corporations Act are not available for this category of voidable transaction. Section 9 defines “close associate” as a relative of the director, or a relative of a spouse of the director. In both cases, de facto spouses are included. “Relative” is separately defined under s 9. But the benefit obtained by that third person that will bring a close associate of a director within the statutory provision must be a direct benefit: thus a sole shareholder of a company does not relevantly benefit by a disposition of property to that company. It was not the intention of the legislature

71 Insolvency Act 1986 (UK), s 244; see Goode, The Principles of Corporate Insolvency Law (4th ed, Sweet and Maxwell, 2011), pp 597-598; Keay and Walton, Insolvency Law, Corporate and Personal (3rd ed, Jordans, 2012), Ch 42.

540

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.155]

to include derivative interests constituted by value increases in shares of a company: Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693.72 In Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627 at [19], Nettle JA explained the purpose of the provision and what scope of benefits it was intended to apply to: “s 588FDA is self-evidently an anti-avoidance provision aimed at preventing errant directors from stripping benefits out of companies to their own advantage. It is to be presumed, therefore, that Parliament deployed the language of the section with the intention of achieving that objective. According to ordinary acceptation, ‘benefit’ includes both direct and indirect benefits and, prima facie, that accords with the apparent objective of the section. If so, why should the notion of benefit be confined to direct benefit for the purposes of the section?”

This was applied in Pearce v Gulmohar Pty Ltd [2017] FCA 660. Section 588FDA provides that a transaction of a company is an “unreasonable director-related transaction” if it is made to a recipient in circumstances where a reasonable person in the company’s circumstances would not have entered into the transaction. In Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416, the court explained (at [91]): “The ‘company’s circumstances’ encompass all relevant matters, starting with its status as a company and what flows from that; its controllers, shareholders, business and other activities; and the facts and circumstances of, and surrounding, the transaction.”

The reasonableness of the transaction is determined with regard to the respective costs and benefits to the company,73 and benefits to the recipient,74 of entering into the transaction.75 All the circumstances of the transaction should be examined: Crowe-Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414. In that case, Beazley P stated (at [89]): “A common thread in the uncommercial transaction cases is that, where there is limited evidence of the nature or purpose of a transaction, but the surrounding circumstances show it to be a departure from normal commercial practice and to raise inferences as to a lack of benefit to the company, detriment caused to the company, or benefit accruing to other parties, absent some commercial explanation, courts may infer the transaction was uncommercial, without requiring the liquidator to prove its precise uncommercial nature. The same may be said with respect to the identification of unreasonable director-related transactions.”

In Merrag Pty Ltd v Khoury [2009] NSWSC 915 the court held that the sale of real property for less than half of the market price was an unreasonable director-related transaction (as well as being an uncommercial transaction) in circumstances where the director made a significant profit out of the transaction. Transferring funds to a 72 Applied in Re Great Wall Resources Pty Ltd [2013] NSWSC 354. 73 For a discussion of the concept of consideration and s 588FDA see: Golden Heritage Golf Pty Ltd (in liq) (recs and mgrs apptd) v Sun [2016] VSC 167; (2016) 113 ACSR 550. 74 See Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627. 75 See for example, Fielding v Dushas [2013] QCA 55 (payments to director’s mother for personal expenses); Kijurina v Taouk [2015] FCA 424; (2015) 105 ACSR 686 (transfer of all company assets to spouse).

[14.160]

14 Assets Available to the Liquidator

541

director shortly before a tax debt crystallised which would make the company insolvent was found to be an unreasonable director-related transaction and an uncommercial transaction in Gordon v Leon Plant Hire Pty Ltd [2015] NSWSC 397. The fact that the transaction would be a breach of directors’ duties is not part of the assessment as to whether it is an unreasonable director-related transaction: Smith v Starke (No 2) [2015] FCA 1119; (2015) 109 ACSR 145 (approved in Crowe-Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414). In Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 at [79] the court said: “The focus in s 588FDA is not the director’s conduct but the reasonableness of the company’s conduct, objectively assessed, in entering into the transaction.” In that case the court held (at [93]) that the degree to which the company is solvent is relevant depends on all of the circumstances so that a transaction may be so unreasonable that solvency does not matter, while in other cases it may be the company’s insolvency that contributes to the unreasonableness of the transaction. Transactions covered include payments; conveyances, transfers and other dispositions of property; the issue of securities (including options); and the incurring of an obligation to enter into these arrangements. A mortgage of property is a disposition under s 588FDA(1)(a)(ii) (Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693) as is the creation of a floating charge (now called a circulating security interest): Re Helmar Pty Ltd (1992) 8 ACSR 301. Section 588FDA(2) provides that the reasonableness of entering into the transaction is determined at the time the company actually enters into the transaction, regardless of its reasonableness at the time the company incurred the obligation to enter the transaction. The court will take into account whether the company was able to obtain commercial finance before entering into a loan transaction with a close associate.76 Under s 588FDA(3), a transaction may be caught regardless of whether a creditor of the company is a party to the transaction, or if the payment was made pursuant to a court order. This mirrors existing provisions in Pt 5.7B in relation to uncommercial transactions entered into by an insolvent company: s 588FB(2).77

TRANSACTIONS DURING VOLUNTARY ADMINISTRATION AND DEED OF COMPANY ARRANGEMENT [14.160] If a company enters into uncommercial transactions during the period of administration or under a DOCA, and then later enters liquidation, those transactions may not be voidable because of the requirement that an uncommercial transaction is also an insolvent transaction. Under s 588FC of the Corporations Act the company’s own insolvency is an element of the definition of an insolvent transaction. In contrast, unfair loans and unreasonable director-related transactions are voidable under s 588FE(6) and (7) respectively, regardless of whether they are also insolvent transactions. 76 Woodgate v Fawcett [2008] NSWSC 868; (2008) 67 ACSR 611. 77 See Universal Financial Group v Mortgage Elimination Services [2006] NSWSC 1132; (2006) 205 FLR 186.

542

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.165]

To avoid potential abuse, uncommercial transactions entered into during a voluntary administration or DOCA immediately preceding a liquidation are voidable, regardless of whether the company was insolvent at the time of the transaction or became insolvent due to the transaction. The same applies to unfair preferences, unfair loans and unreasonable director-related transactions. However, any transactions done by or under the authority of the administrator or deed administrator are not voidable. Section 588FE(2A) applies when the company concerned was under administration immediately before the company resolved that it be wound up, or the court ordered that it be wound up. Section 588FE(2B) applies when the company was subject to a DOCA immediately before those events.

AVOIDANCE OF CIRCULATING SECURITY INTERESTS [14.165] Section 588FJ of the Corporations Act provides that a circulating security interest78 created in the six months prior to the relation-back day or after the relation-back day but before the commencement of the winding up is void except to the extent that it secures the following (s 588FJ(1), (2)): • an advance paid to the company (or at its direction) as consideration for the charge or interest paid on such an advance; • an amount of a liability under a guarantee or other obligation undertaken at or after that time on behalf of, or for the benefit of, the company;79 • an amount payable for property or services supplied to the company after the charge’s creation; and • interest payable on any of the above amounts. Any circulating security interest which is covered by s 588FJ(1) is not void if the company was solvent after the creation of the security interest: s 588FJ(3). Section 588FJ(4) limits the scope of the exceptions in s 588FJ(2)(a) – (b) in that an advance in consideration of the creation of a security interest is not saved if it was applied to discharge an unsecured debt owed to the secured party. The reason for this is explained by Singer:80 “Subsection (4) aims to prevent a ‘preference’ being given to an unsecured creditor, where the unsecured creditor agrees to make an advance or to further extend credit on condition that the debtor gives security for the further advance or continued credit, the advance then being used to pay off or reduce the unsecured debt thereby converting the unsecured creditor to a secured creditor.” 78 For a discussion of the concept of a circulating security interest see: Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (rec and man apptd) [2017] WASC 152 (at the time of writing this decision was subject to an appeal); Commonwealth v Byrnes [2018] VSCA 41 (the Amarind appeal). 79 See Cuthbertson & Richardson Sawmills Pty Ltd v Thomas [1999] FCA 315; (1999) 93 FCR 141. 80 Singer, “Invalidation of Antecedent Transactions Under the Corporate Law Reform Act 1992” (1994) 2 Insolv LJ 36, 37. See also CBA Corporate Services (NSW) Pty Ltd v Walker and Moloney, in the matter of ZYX Learning Centres Ltd [2013] FCAFC 74; (2013) 212 FCR 444 at [21].

[14.165]

14 Assets Available to the Liquidator

543

Section 588FJ thus really seeks to prevent failing companies from creating circulating security interests to secure past debts.81 As noted above (at [14.135]), the conferral of a security interest to secure the repayment of a pre-existing debt may also be an unfair preference and/or an uncommercial transaction. In Lucas v Currie [2013] FCA 1404 at [59] the court explained (in pre-PPSA terms): “Broadly speaking, s 588FJ seeks to ensure that a floating charge created in the six months before the relation-back day secures against the liquidator, only advances made on or after the date of the creation of the charge and from which the company derives a tangible benefit. However the section does not invite an overall comparison of the company’s position with and without the purportedly secured advance. Rather, the section directs attention to the way in which any advance has been applied. Such a charge will not secure an advance which has been applied in discharge, directly or indirectly, of an unsecured debt owed to the chargee or to a related entity of the chargee.”

A circulating security interest is void to the extent that it secures an amount in excess of the market value of the property or services as consideration for it: s 588FJ(5). The rationale for this is to ensure that security is not obtained in relation to prior debts owing to the secured party by inflating the value of the consideration for the security interest. Section 588FJ(6) provides that if in the period covered by s 588FJ a debt secured by a circulating security interest encompassed by the section was discharged out of company money or property, the liquidator may recover from the secured party as a debt due an amount equal to an amount set out in a specified formula. In determining whether a company was solvent for the purposes of s 588FJ(3), the secured party has the onus of proving solvency in s 588FJ, whereas under s 588FA the liquidator has to prove insolvency. The exception in s 588FJ(2)(a), that is, a circulating security interest is created where an advance was paid to the company, obviously purports to provide an exception where funds are lent in order to revitalise a failing company. Persons who lend in such circumstances should be entitled to their security: M Hoffman Nominees Pty Ltd v Cosmas Fish Processors International Pty [1983] 1 VR 349. Whether there has, in fact, been money advanced by the secured party within s 588FJ will depend on the circumstances. In considering the circumstances the courts will examine substance and not form and ask: “Is the transaction to be regarded as one which was intended bona fide for the benefit of the company or was it intended only to benefit certain creditors to the prejudice of others?”: Re Matthew Ellis Ltd [1933] Ch 458. Only the former type of transaction is safe from attack. In the latter case, the security interest is invalid. In other words, the courts will not necessarily be persuaded by the fact that money has been advanced – the courts will look at the real effect. Cash does not necessarily have to be paid: Re Matthew Ellis Ltd [1933] Ch 458. A sale of goods on credit is not a cash payment: Re Peruss Pty Ltd (1980) 2 NSWLR 443. The advancing of money may not be sufficient to save the security interest if the advances are, in substance, merely part of a scheme to avoid the effect of s 588FJ. For instance, in Re Orleans Motor Co [1911] 2 Ch 41, directors who had 81 Re Orleans Motor Co [1911] 2 Ch 41, 45; Pennywise Smart Shopping (Australia) Pty Ltd v Sommer & Co Pty Ltd (1992) 6 ACSR 447, 452.

544

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.170]

guaranteed the company’s overdraft with a bank, took a floating charge (security interest) over the company’s assets to secure an advance made to the company. The advance was subsequently used to satisfy the guarantee. This exercise was held to be a transparent subterfuge; in effect no money was paid to the company. The directors merely used the company as a channel to pay the bank – the money was never part of the company’s assets. The security interest was invalid. Unlike the other transactions covered by Pt 5.7B Div 2, one covered by s 588FJ is void and not voidable. It should be noted that there is no “winding up in insolvency” for the purposes of s 588FJ unless the winding up is by court order under s 459A. A company that is being wound up under a creditors’ voluntary liquidation, for example, pursuant to a resolution of creditors after a process of voluntary administration, is not a company that is being “wound up in insolvency” and s 588FJ does not apply: Carter v New Tel Ltd [2003] NSWSC 128; (2003) 44 ACSR 661. An option for a liquidator in such a case is to apply to have the company in voluntary liquidation formally ordered to be wound up by the court.82

COURT ORDERS: S 588FF [14.170] Until the advent of the avoidance regime discussed here, a liquidator would simply ask the court for a declaration that a particular transaction was a preference or some other voidable transaction and hence void, and that a sum be paid or property be returned by the defendant. However, now Corporations Act, s 588FF83 provides a court with the power to be far more flexible, so that it can do justice between the parties involved. A court can make 10 different types of orders. Most orders made by courts fall within s 588FF(1)(a), (b) or (c). The court may: • direct a person to pay to the company in liquidation an amount equal to some or all of the money paid by the company pursuant to the impugned transaction – s 588FF(1)(a); • direct a person to transfer to the company in liquidation property that was transferred by the company under the impugned transaction. This, in effect, amounts to a reinstatement of the company’s previous position in relation to property that was disposed of. It is of particular use where an uncommercial transaction has been entered into or an unfair preference has been given, whereby company property was transferred – s 588FF(1)(b); • order a person to pay to the company in liquidation an amount which fairly represents some or all of the benefits received by the person under the voidable transaction – s 588FF(1)(c). While some paragraphs in s 588FF(1) are included primarily to give relief in relation to specific voidable transactions – for example, para (a) will apply to most transactions which are unfair preferences, para (f) is directed at unfair loans and 82 In relation to that, and consequential issues, see CBA Corporate Services (NSW) Pty Ltd v Walker and Moloney, in the matter of ZYX Learning Centres Ltd [2013] FCAFC 74; (2013) 212 FCR 444. 83 For a more detailed discussion, see Assaf, Shields and Kincaid, Voidable Transactions in Company Insolvency, (LexisNexis Butterworths, 2015) Ch 8; Broderick, “Voidable Transactions – Extending the Limitation Period under s 588FF(3) of the Corporations Act 2001 (Cth)” (2009) 17 Insolv LJ 121.

[14.175]

14 Assets Available to the Liquidator

545

para (c) will apply, in the main, to uncommercial transactions – many of the paragraphs can be used by the courts in respect of various types of voidable transactions.84 For instance, para (b) can be used in making orders where either an unfair preference or an uncommercial transaction is found to have been entered into. It is uncertain whether the court’s discretion extends to declining to make an order under s 588FF in favour of the company even if it finds that a transaction is voidable.85 Nevertheless, the courts generally accept that the section can be used flexibly in order to give effect to the statutory scheme under Pt 5.7B. As noted earlier ([14.130]), a court should not refrain from making an order pursuant to s 588FF simply because any payment ordered to be made by the defendant to an avoidance action will not benefit the creditors although in those circumstances there may be wider issues as to the conduct of the liquidator in bringing the proceedings. A particular provision that assists is s 588FF(4) which provides that, in the case of an unreasonable director-related transaction, the court may make orders only in relation to the unreasonable portion of the total transaction, taking into account the reasonable value (if any) that is attributable to it.86 In that respect, and in comparison with s 588FB the court in Employ (No 96) Pty Ltd [2013] NSWSC 61, noted that the section grants no right for a person ordered to repay the amount of an uncommercial transaction to be able to prove as a creditor in the liquidation for that amount: see [14.135]. The court exercised its discretion under s 588FF by ordering the defendant to pay only half of the moneys otherwise owing. Apart from such considerations, if an order is made under s 588FF, the defendant is usually ordered to pay interest on the judgment from the date of the demand for payment by the liquidator to the date of judgment.87

Time within which an application should be made [14.175] An application for an order pursuant to s 588FF must be made during the period beginning on the relation-back day and ending three years after that day, or, 12 months after the first appointment of the liquidator, whichever is the later: s 588FF(3)(a).88 A court may order an extension of that time, on an application by

84 See for example, Re Employ (No 96) Pty Ltd [2013] NSWSC 61; (2013) 93 ACSR 48. 85 The English courts have such a discretion: Re Paramount Airways Ltd [1993] Ch 223, 239 and see Keay and Walton, Insolvency Law, Corporate and Personal (3rd ed, Jordans, 2012), at [38.7]. See further: Great Investments Ltd v Warner [2016] FCAFC 85; (2016) 243 FCR 516 at [141] (and the cases cited therein). 86 See Fielding v Dushas [2013] QCA 55. 87 Sutherland v Lofthouse (2007) 214 FLR 157; Woodgate v Network Associates International BV [2007] NSWSC 1260. 88 See further, Broderick, “Voidable Transactions – Extending the Limitation Period under s 588FF(3) of the Corporations Act 2001 (Cth)” (2009) 17 Insolv LJ 121.

546

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.180]

the liquidator made within that subs (3)(a) period: s 588FF(3)(b).This is the exclusive power to extend time, and court rules allowing extensions of time cannot apply.89 The time limit in s 588FF(3) is concerned with the time for the making of an application for orders under s 588FF(1), not with the amendment of pleadings in proceedings commenced within time: Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liq) [2016] NSWCA 329; (2016) 93 NSWLR 251. In that case, it was also held that the time limit is not applied to each of the transactions impugned by the liquidation, but rather to the application to the court for orders. An application may be made for an extension of time to bring proceedings against unspecified creditors. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; (2015) 106 ACSR 38 at [24], the High Court accepted the use of so called “shelf orders” and stated: “There is, however, no independent basis for the assertion that any extension of time which does not identify a particular transaction or transactions must be an unreasonable prolongation of uncertainty militating against a construction which would allow such an order to be made. The section provides for the exercise of discretion by the court. Questions of what is a reasonable or an unreasonable prolongation of uncertainty and the scope of such uncertainty are more appropriately considered case-by-case in the exercise of judicial discretion than globally in judicial interpretation of the provision.”

If there is a specified proposed defendant, that person should, as a matter of procedural fairness, be given the opportunity to be heard on the extension application.90

PROTECTIVE PROVISIONS [14.180] As in bankruptcy, persons against whom a liquidator has succeeded in establishing the necessary elements to invoke the avoidance provisions have the right to avail themselves, in some circumstances, of protective provisions in the Corporations Act. Section 588FG is designed to protect certain recipients of benefits from a company which has subsequently gone into liquidation. The rationale for the protections in the section is to prevent what could be harsh and unjustified consequences for some persons who were unaware of the company’s insolvency at the time of the challenged transaction.

Section 588FG [14.185] Section 588FG of the Corporations Act sets out what must be proved by a defendant if the claim of a liquidator is to be resisted.91 It is to be emphasised that the section only has to be invoked by a defendant when the liquidator has proved 89 Grant Samuel Corporate Finance Pty Ltd v Fletcher [2015] HCA 8; (2015) 106 ACSR 31. See Re Parker, Worldwide Specialty Property Services Pty Ltd (In Liq) v Worldwide Specialty Property Services Pty Ltd (In Liq) [2017] FCA 687 for a summary of the applicable principles. For a discussion of the application of court rules and s 588FF(3) see: Horne v Retirement Guide Management Pty Ltd [2017] VSCA 47. 90 BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322. 91 The onus of proof is on the defendant: Levi v Guerlini (1997) 24 ACSR 159.

[14.195]

14 Assets Available to the Liquidator

547

everything which is required under Pt 5.7B Div 2 and the person who is under attack wishes to defend the liquidator’s claim. The section distinguishes between: • a person other than someone involved in the voidable transaction receiving the benefit of the transaction (s 588FG(1));92 and • a person who was a party to the voidable transaction being involved: s 588FG(2). This latter protection is not available where the voidable transaction was an unfair loan or unreasonable director-related transaction. A court is prevented by s 588FG(1), (2) from making an order pursuant to s 588FF where it would materially prejudice a right or interest of persons who can bring themselves within the protective provision. This seems to suggest that even if a person successfully invokes the section, a court is still permitted to make an order where the person’s interest or right would be affected in any but a materially prejudicial way. Non-party

[14.190] A person who is defending a liquidator’s claim and who was not a party to the voidable transaction must prove that he or she did not receive a benefit as a result of the transaction,93 or if there was a benefit received, it was received in good faith and at the time of receipt the person had no reasonable grounds for suspecting that the company was insolvent and a reasonable person in the recipient’s circumstances would have had no such grounds for so suspecting: s 588FG(1). This is designed to safeguard innocent parties who received a benefit from someone who directly or indirectly received the benefit because of a voidable transaction. In Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47, it was held that payments made by one company (Buzzle) through its related entities to Apple (its creditor) was a transaction to which Apple was a party and hence s 588FG(1) could not apply. Merely being the directing mind and will of a company in the transaction does not make a director a party to the transaction and hence they may be able to avail themselves of the defence in s 588FG(1): see Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416. A party to the transaction

[14.195] A person who was a party to the voidable transaction must prove that he or she (“the recipient”): • became a party to the transaction in good faith; • had no reasonable grounds at the time the recipient became a party to the transaction for suspecting that the company was insolvent or would become insolvent; and that 92 For an example of a case where a person who was not a party to a voidable transaction was able to rely on s 588FG(1), see Re Pacific Hardware Brokers (Qld) Pty Ltd (1998) 16 ACLC 442. 93 See Re Employ (No 96) Pty Ltd [2013] NSWSC 61; (2013) 93 ACSR 48 (merely being beneficiaries of a trust was not a direct causal benefit for the purposes of s 588FG(1)(a)).

548

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.200]

• a reasonable person in the recipient’s circumstances would have had no such grounds for so suspecting. In addition, the recipient must show either that they have provided valuable consideration under the transaction or that they have changed their position in reliance on the transaction: s 588FG(2).

Good faith [14.200] The protection in s 588FG(2) of the Corporations Act is the one that is the subject of the greater litigation. It is based on s 122(2) of the Bankruptcy Act as applied to preferences. As with s 122 there is a requirement of good faith. This was considered in Chapter 5. In essence the expression connotes honesty and propriety in the sense that there was no reason why the person should have questioned the transaction.94 In cases involving uncommercial transactions it is important to consider the knowledge of the transaction and motivations for entering into the transaction.95 Failure to make inquiries about a debtor may be of significance when good faith is being determined: Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 22 ACLC 1,528. If the defendant was a related entity or closely associated with a related entity, the task of establishing “good faith” is often more difficult. The test of good faith, as one might expect, is subjective: Downey v Aira Pty Ltd (1996) 14 ACLC 1068, 1075; Shot One Pty Ltd (in liq) v Day [2017] VSC 741. Good faith is often supported or contradicted by the value of the consideration paid.

Section 588FG(2)(b) [14.205] Section 588FG(2)(b) of the Corporations Act is important and is the focus of most defences to voidable transaction claims. It requires the defendant to show that, at the time when the person became a party to the transaction:96 (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in s 588FC(b); and (ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.

A defendant’s claim to be acting in good faith is of no effect unless it can also be proved that there were no reasonable grounds for suspecting that the debtor company was insolvent or would become insolvent as a result of the transaction and a reasonable person in the defendant’s circumstances would have no such grounds for so suspecting. This means that the subjective intention of the person against whom the liquidator is proceeding is not all-important. Unlike good faith, the test focuses on circumstances rather than the person’s state of mind. The inclusion of some form of objective test is fair given the fact that it is always difficult to impugn a statement of subjective good faith. As well, an objective test 94 Downey v Aira Pty Ltd [1996] VicSC 228; (1996) 14 ACLC 1068; Sutherland v Eurolinx [2001] NSWSC 230; (2001) 19 ACLC 633. 95 Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496. 96 See the summary of principles in Re Alsafe Security Products Pty Ltd (in liq) [2016] NSWSC 428 at [33]–[35]; Hussain v CSR Building Products Ltd (in liq) [2016] FCA 392; (2016) 246 FCR 62 at [190]-[196].

[14.210]

14 Assets Available to the Liquidator

549

tries to ensure that certain minimum standards of conduct of creditors are maintained. The relationship between s 588FG(2)(b)(i) and (ii) was explained in Chicago Boot Co Pty Ltd v Davies [2011] SASCFC 92; (2011) 85 ACSR 309 at [21] as follows:97 “subpara (b)(i) requires consideration of whether the particular creditor, with its perspicacity, the information available to it, and with such analysis (if any) of that information as it had made, had reasonable grounds to suspect the debtor’s insolvency. Subpara (b)(ii) on the other hand, requires consideration of whether a reasonable person in the creditor’s circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor’s insolvency. This is because a reasonable person in the circumstances of the creditor (subpara (b)(ii)) may have grounds for suspicion whereas the particular creditor, acting reasonably in its perception and analysis (if any) of the circumstances (subpara (b)(i)) may not, and vice versa.”

A concern with the defence is that the recipient of the benefit as defendant is obliged to prove, in effect, a negative. In Pegulan Floor Coverings Pty Ltd v Carter [1997] SASC 6299; (1997) 24 ACSR 651, 658 Doyle CJ said that s 588FG(2)(b) is: “cast in a demanding form. It requires a creditor, in the position of the present defendant, to establish a negative. The second of those negatives is, as subpara (ii) indicates, that a reasonable person in the defendant’s position would have had no reasonable grounds to suspect insolvency. That is a fairly demanding test.”

“Reasonable grounds” and “suspect”

[14.210] In considering this second element of s 588FG(2) the meaning of “reasonable grounds” and “suspect” are critical. In Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 22 ACLC 1,528, the NSW Court of Appeal held that the words “a reasonable person in the person’s circumstances” in s 588FG(b)(ii) require an objective “reasonable business person” test to be applied; the words do not require the court to take into account the acumen, perspicacity and resources of the particular creditor.98 But evidence of the defendant’s knowledge and business qualifications may be relied upon in a limited manner to establish the circumstances that are to be considered in applying the test: Sims v Celcast Pty Ltd (1998) 71 SASR 142. In Tamaya Resources Ltd v Claymore Capital Pty Ltd [2015] FCA 357 at [34], the court discussed how to assess whether there is a suspicion of insolvency: “the existence of reasonable grounds for suspicion should be determined by reference to commercial reality derived from the particular industry as applied to the facts at the time of the transaction without using hindsight. There is no single factor whose presence invariably establishes that there was, or should have been, reasonable grounds for suspicion.”

The court must be careful to avoid using hindsight to assess the existence or otherwise of a reasonable suspicion to suspect insolvency, which must be done by 97 Citing Sims v Celcast Pty Ltd (1998) 71 SASR 142. 98 See Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266.

550

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.215]

reference to the circumstances which existed at the time of payment.99 The circumstances are the actual circumstances as they existed on the date that the creditor entered into the transaction alleged to be a preference; hence a court does not need to take into account what a “reasonable person” would have done prior to that date. The relevant suspicion must relate to actual and existing insolvency at the time of the transaction, as distinct from a suspicion of impending or potential insolvency in the future.100 A reasonable person in the person’s circumstances would have information available to them about the debtor company at the time of the payment. Under s 588FG(b)(ii), the information is what was actually known by the creditor at the time: Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 22 ACLC 1,528. It does not include information that the creditor would have known if the creditor had made reasonable inquiries. Where reasonable inquiries have not been made a reasonable person would know that inquiries that could or should have been made have not been made but would not know the hypothetical result of such hypothetical inquiries. In Cussen, the court said (at 1,546): “There is no difficulty with the proposition that a ‘reasonable person’ in the circumstances of a particular creditor must be assumed to have the full range of information actually available to that creditor. That would include knowledge of the fact that some things were not known because no request for additional information had been made. In my opinion, however, this does not encompass information which is not in fact available but which a ‘reasonable person’ would have sought and, presumably, received.”

Suspicion

[14.215] “Suspect” has been considered by the courts in the context of preference claims and particularly where s 122(4)(c) has been the subject of argument. The regularly cited discussion of the issue comes from the judgment of Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266. In that case, a creditor was successfully sued by a liquidator of a company for recovery of moneys paid in circumstances where the initial payment cheques from the company were dishonoured; but in each case another cheque was provided by the company and met on presentation. The facts indicated that the cheques were dishonoured because of the company’s inability to pay its debts as they fell due. Kitto J said that for suspicion to exist there must be more than a mere “idle wondering”; there must be a positive feeling of actual fear or apprehension amounting to an opinion which is not supported by sufficient evidence. A reason to suspect that a fact exists, involves more than a reason to consider the possibility of its existence. Rather, the meaning of the phrase in the context of s 122(4)(c) envisages the fact that in all the circumstances a reasonable person would, if in the position of the creditor, have a fear that the debtor was unable to pay its debts. Knowledge of the indicia of insolvency will be a relevant consideration: Chicago Boot Co Pty Ltd v Davies [2011] SASCFC 92; (2011) 85 ACSR 309. In that case, the court held that while the mere service of a statutory demand to recover payment 99 Chicago Boot Co Pty Ltd v Davies [2011] SASCFC 92; (2011) 85 ACSR 309 at [23]. 100 Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113; (2008) 73 ATR 801 at [13].

[14.230]

14 Assets Available to the Liquidator

551

was not of itself proof of suspicion of insolvency, the use of such a demand in circumstances where the debtor was making underpayments of prior demands and the creditor was prepared to apply for winding up contributed to a reasonable suspicion of insolvency. Valuable consideration

[14.220] Recipients of benefits under voidable transactions must, in addition, prove that they gave either valuable consideration or that they “changed their position in reliance on the transaction”: s 588FG(2)(c). This is not a requirement to show that “full consideration” was given: Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47 at [162]. Those recipients who are creditors and in receipt of an unfair preference will, in general, have no difficulty with the requirement to show that consideration was given. In respect of tax liabilities, s 588FG(3) – (5) makes provision for consideration to be assumed if the moneys are paid in discharge of tax or other liabilities to the Commonwealth. Persons who will have difficulty are those who receive benefits pursuant to uncommercial transactions because in insolvency law valuable consideration usually means consideration which is real and substantial and has a commercial quality to it.101 Change of position

[14.225] As an alternative to establishing “valuable consideration”, defendants are entitled to demonstrate that they changed their position in reliance on the transaction. This limb constitutes a unique addition to the avoidance provisions as it has never featured as part of any previous protections.102 The change of position limb is similar to, and may be modelled on, former s 311A(7) of the Companies Act 1955 (NZ), which referred to the defendant having “altered his position in the reasonably held belief that the transfer or payment of the property to him was validly made and would not be set aside”. The New Zealand provision had been interpreted as requiring the creditor to enter into new commitments on the basis of what had been received in the transaction. A person’s position was regarded as not being changed within the meaning of the section by inaction except where the person’s failure to act was a consequence of a conscious decision.103 No “in the ordinary course of business” test

[14.230] While s 588FG of the Corporations Act is based on s 122 of the Bankruptcy Act there are important differences. Section 588FG has avoided use of the “in the ordinary course of business” element used in s 122(2). The reason given by the legislature is that the phrase was the subject of judicial uncertainty in its 101 Barton v Official Receiver (1986) 161 CLR 75; Official Trustee v Martin (1990) 24 FCR 504. 102 Such reliance is a factor in whether a court sets aside a liquidator’s disclaimer of property: s 568E(5)(b), see [15.225]. 103 Westpac Banking Corp v Nageela Properties Ltd (1986) 3 NZCLC 99,588 referred to in O’Donovan, “Undue Preferences: Some Innocents ‘Scape Not the Thunderbolt’” (1992) 22 UWALR 322, 335.

552

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.235]

interpretation.104 This is undoubtedly true, as can be seen from a reading of a range of cases dealing with the phrase. It would also seem appropriate that the element be omitted given the fact that s 588FG is not intended to merely act as a protection for creditors who received unfair preferences; it is designed to be a protection for the recipients of all types of voidable transactions (except for unfair loans where the recipient was a party to the transaction) where the recipient can establish the criteria contained in s 588FG.

Cross-border recoveries [14.235] As in bankruptcy, there are mechanisms available under both the Cross-Border Insolvency Act 2008 (Cth) and the Corporations Act to deal with cross-border insolvencies.105 Assistance to overseas liquidators with Australian assets

[14.237] In relation to overseas liquidations, upon their recognition of a foreign main proceeding in Australia, the foreign liquidator has standing under Art 23(1) of the Model Law, to initiate actions under Div 2 of Pt 5.7B of the Corporations Act, that is, ss 588FA – 588FJ.106 Those sections apply, with appropriate changes, in relation to an action for the purposes of a foreign main proceeding in the same way they would apply if the action were for the purposes of a proceeding in relation to a company. When the foreign proceeding is a foreign non-main proceeding, the court must be satisfied that the action relates to assets that, under Australian law, should be administered in the foreign non-main proceeding: Cross-Border Insolvency Act 2008 (Cth), s 17; Art 23(2) of the Model Law. Article 18 imposes an obligation on a foreign representative to notify the court if there is a substantial change in circumstances: Board of Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA v Rizzo-Bottiglieri-De Carlini Armatori SpA [2017] FCA 331. Section 581 of the Corporations Act is the equivalent of s 29 of the Bankruptcy Act in that it allows Australian courts to assist overseas courts, typically by way of acting on a letter of request from that overseas court; and the section also allows Australian courts to seek assistance overseas, also typically by sending a letter of request. 104 See [5.230], and Keay, “The ‘In the Ordinary Course of Business’ Element in Preference Law: Has it Passed Its Use By Date?” (1997) 5 Insolv LJ 41. 105 See the detailed discussion in Akers v DCT [2014] FCAFC 57; (2014) 223 FCR 8. See also a criticism of the legislative approach taken to cross-border insolvency in McCormack and Hargovan, “Australia and the International Insolvency Paradigm” (2015) 37(3) Sydney Law Review 389. 106 See [13.60] as to the effect of the stay on local proceedings against a company that may be imposed under the Cross-Border Insolvency Act 2008 (Cth) and the Model Law. See further Maiden, “A Comparative Analysis of the Use of the UNCITRAL Model Law on Cross-border Insolvency in Australia, Great Britain and the United States” (2010) 18 Insolv LJ 63; Wade, “Avenues for Assistance to Administrators in Australia: Part 1” (2010) 31 Company Lawyer 298; Butler, Mason and Murray, “Maritime Law and Insolvency Law: Averting Collisions” (2016) 24 Insolv LJ 70; Mason and Wellard, “Global Rules on Conflict-of-Laws Matters in International Insolvency Cases: An Australian Perspective” (2015) 23 Insolv LJ 5. See the Federal Court (Corporations) Rules 2016, Div 15A.

[14.239]

14 Assets Available to the Liquidator

553

Section 581(2) provides that relevant Australian courts “must severally act in aid of, and be auxiliary to, each other in all external administration matters” and in relation to, among others, “prescribed” countries that have jurisdiction in external administration matters; and that Australian courts may act in aid of, and be auxiliary to, courts of other countries with that jurisdiction. Where a letter of request from another court requesting aid is filed, the Australian court may exercise such powers with respect to the matter as it could exercise if the matter had arisen in its own state or federal jurisdiction: s 581(3). Assistance to Australian liquidators with overseas assets

[14.239] An Australian liquidator who wishes to pursue investigations and assets overseas will either apply for recognition of their proceedings107 under the Model Law if the country in which assets are being pursued has itself adopted the Model Law, such as the United Kingdom or Japan. In the case of other countries, s 581 can be used. In the same way that the section allows an Australian court to act on a letter of request from a foreign court, the section allows an Australian court to request a foreign court to assist it in relation to an external administration in Australia, for example in relation to the recovery of overseas assets on behalf of an Australian liquidator: s 581(4). In the case of assets located in a country that has itself adopted the Model Law, an Australian liquidator therefore has two options, to either apply for recognition of the Australian proceedings under the cross-border laws of that foreign country, or to apply under s 581 to an Australian court to issue a letter of request to a court in that foreign country. There is the potential for inconsistency with Art 25 of the Model Law in that s 581 imposes a mandatory obligation on the court to assist the courts of external territories and prescribed countries.108 In relation to other foreign courts, the court is permitted to exercise its discretion as to whether it should provide assistance.109 Another area of inconsistency arises in relation to Pt 5.7 of the Corporations Act which concerns the winding up of bodies other than companies. A “Part 5.7 body” is defined in s 9 to mean, in respect of a registrable body that is a foreign company, one that is also either registered under Pt 5B.2, Div 2 or is unregistered but carries on business in Australia. Thus an unregistered foreign company that does not carry on business in Australia cannot be wound up under s 583, which provides for the winding up of such bodies.110 107 For consideration of the Foreign Judgments Act 1991 (Cth) see Talacko v Bennett [2017] HCA 15; (2017) 343 ALR 242. 108 Prescribed countries are listed in Corporations Regulations 2001 (Cth), reg 5.6.74; they are the Bailiwick of Jersey, Canada, Papua New Guinea, Malaysia, New Zealand, Singapore, Switzerland, the United Kingdom and the United States of America. 109 Rolfe v Transworld Marine Agency Co NV [1998] FCA 532; (1998) 83 FCR 323 – a request from a Belgian trustee in bankruptcy was refused. Belgium was not then and is not now a prescribed country. 110 Davidson v Global Investments International Ltd (1995) 14 ACLC 208; see also ASIC v ActiveSuper Pty Ltd (in liq) [2015] FCA 342.

554

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.240]

In relation to a Pt 5.7 body, a winding up order under s 583 creates a separate insolvency administration in Australia; the section does not give recognition to any foreign insolvency proceeding. For example, s 582(3) provides that a body may be wound up despite, among other things, a concurrent winding up in a foreign jurisdiction. In relation to such inconsistencies, the Cross-Border Insolvency Act (s 22) provides that, if a provision of the Model Law or a provision of the Act is inconsistent with Div 9 of Pt 5.6 or Pt 5.7 of the Corporations Act that provision in the Model Law or provision of the Act will prevail.

Proceeds of execution and attachments – s 569 [14.240] The period of a company’s life which will be subjected to the greatest scrutiny will be the six months immediately preceding the commencement of winding up. One matter with which the liquidator will be concerned is ascertaining whether any creditor issued execution against the company’s property, instituted proceedings to attach a debt due to the company or instituted proceedings to enforce a charge111 against property of the company within this period. If any creditor has done any of these things, it is required to pay to the liquidator an amount equal to the amount received as a result of the execution, attachment or enforcement of the charge, less an amount for costs: s 569(1).112 Unlike other recovery actions by liquidators against creditors, a creditor cannot rely on the fact that it acted in good faith and without any knowledge of the company’s insolvency. After repaying the recovered amount, the creditor is entitled to prove for the debt as an unsecured creditor in the winding up: s 569(2). Section 569(3) provides that it is not competent for a creditor to take any or further action to attach a debt or enforce a charge against company property if the creditor has been notified in writing of an application for winding up or of the convening of a meeting of the company to consider a resolution to wind up voluntarily. Third parties who purchase property in good faith from a sale conducted by a sheriff as a result of execution or as a result of the enforcement of a charge are not affected by s 569(1). The third party is protected, and acquires a good title to the property as against the liquidator and the company: s 569(6).

Recoveries from sheriffs and courts [14.245] Liquidators are able to avail themselves of provisions other than the avoidance provisions contained in Pt 5.7B Div 2, which are within the Corporations Act, in order to recover property as well as relying upon some common law principles. Section 570(1) is designed to deal with the situation where a creditor has issued a process of execution or has taken steps to attach a debt due to the debtor. If the 111 This is defined as a charge created by a law upon registration of a judgment in a registry: Corporations Act, s 569(7). 112 See also Bruton Holdings Pty Ltd v Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346 for a discussion of the history of s 569 in the context of considering s 500.

[14.250]

14 Assets Available to the Liquidator

555

sheriff is given notice in writing of an application for the winding up of the company or has received notice in writing of the convening of a meeting of the company to consider a resolution to wind up voluntarily, the sheriff must refrain from taking action to sell any of the company’s property, or to pay to the creditor the proceeds of any sale under execution process, or to pay any moneys received in order to avoid the seizure or sale of property of the company under an execution process. The same injunction applies to the registrar of a court who has received the proceeds of the sale of property of a company from a sheriff acting pursuant to a process of execution: s 570(3). Where a company has been wound up, the liquidator can serve written notice on the sheriff or registrar. The holder of any company property under execution process, or of any proceeds of sale under such process, is then to deliver the property or moneys to the liquidator: s 570(5), (6). In such a case, the costs of execution are a first charge on the property or proceeds of sale and the sheriff or registrar may retain, on behalf of the creditor who issued the process, such amount from the proceeds of sale as is necessary to cover the costs: s 570(7), (8).

Void dispositions [14.250] Section 468(1) of the Corporations Act generally provides that dispositions (or transfers) of company property made after the commencement of a winding up by the court are void, unless the court otherwise orders. This is one of a group of provisions (including the avoidance provisions) the purpose of which is to ensure that the assets are divided rateably among the creditors. The previous s 468 covered only disposals of property between the date of the filing of the winding up application and the date of the winding up order.113 The court is given a wide discretion in being able to “otherwise order” that a disposition is void.114 Dispositions caught by s 468 are void, not voidable. Transactions which can be classified as unfair preferences or uncommercial transactions, for instance, are voidable, in that they are only void, in effect, if the liquidator takes action and the court makes the appropriate order under s 588FF. The effect of s 468 is that the transaction is void for all purposes related and incidental to the administration of the winding up of the company – the transaction is treated as never having occurred: National Acceptance Corporation Ltd v Benson (1988) 12 NSWLR 213. A claim by a liquidator against a person who has received company property pursuant to s 468 involves an investigation of what happened to the property disposed of and the recovery of that property on the basis that the transaction was void: Re Mal Bower’s Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254. Section 468(2) necessarily exempts dispositions effected by transactions of liquidators and voluntary and deed administrators, and certain payments by banks. 113 While this period is still retained in s 468(3), allowing the court to validate transactions occurring during that time period, it is difficult to see how that would apply because a disposition made after the filing of the application but before the order was made is not caught by s 468(1). 114 Tellsa Furniture Pty Ltd v Glendave Nominees (1987) 9 NSWLR 254; 5 ACLC 662; Jordanlane Pty Ltd v Kitching [2008] VSC 426; (2008) 222 FLR 14.

556

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.255]

Transactions by receivers are not subject to s 468, given that a company in receivership no longer has a beneficial interest in the relevant property.115 There is no terminating point for the operation of the section, but one would assume that it is the finalisation of the liquidation. Disposition of property

[14.255] The phrase “disposition of property” has been held to have the widest significance; it should not be restrictively interpreted: Re Mal Bower’s Macquarie Electrical Centre Pty Ltd (in liq) (1974) CLC ¶40-109; (1974) 1 NSWLR 254. It includes sale, encumbrance, payment, transfer, and alienation: Re Loteka Pty Ltd [1990] 1 Qd R 322; (1989) 7 ACLC 998, 1001. However, it only operates in respect of property in which the company has a beneficial interest, that is, property which would be available in the winding up and only to the extent of that interest; the company must have been free to deal with that property: Wily v Commonwealth (1996) 66 FCR 206; Pilmer v HIH Casualty and General Insurance Ltd (No 2) [2004] SASC 389; (2004) 90 SASR 465. There must be some change that removes from the company at least that beneficial ownership in an asset of the company and gives it to some other person: Re Loteka Pty Ltd. A disposition is covered by s 468 whether or not it was made by the company or by a third person on its behalf: Brinhaven Pty Ltd v Roticil Pty Ltd (1988) 6 ACLC 503. Therefore a tax garnishee notice – issued by the ATO under s 260-5 in Sch 1 to the Taxation Administration Act 1953 (Cth) – is a disposition of property of the taxpayer company, even if the action that created the charge did not emanate from the company: Macquarie Health Corporation Ltd v Commissioner of Taxation [1999] FCA 1819; (1999) 96 FCR 238. Execution against company assets: s 468(4)

[14.260] Section 468(4) provides that any execution against the property of the company after the commencement of the winding up by the court is void, thus preventing a creditor seeking execution of a judgment or a garnishee order. The term “attachment” is broad enough to encompass both a curial and non-curial process: Macquarie Health Corporation Ltd v Commissioner of Taxation [1999] FCA 1819; (1999) 96 FCR 238. Section 468(4) applies only to court-ordered liquidations, and is relevantly in the same terms as s 500(1). The decision of the High Court in Bruton Holdings Pty Ltd v Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346 that s 500(1) prevents the service of a tax garnishee notice after the commencement of the voluntary winding up, is equally applicable to s 468(4): Bell Group Ltd (in liq) v DCT [2015] FCA 1056. In that case, the DCT unsuccessfully tried to demand payment by the company in liquidation of post-liquidation tax-related liabilities by way of a garnishee notice. 115 McPherson’s Law of Company Liquidation (Thomson Reuters, Westlaw AU), at [7.170]. Presumably the same law would apply to transactions by other controllers. See the CAMAC report mentioned at [14.85], fn 1.

[14.270]

14 Assets Available to the Liquidator

557

Court ordered liquidations only

[14.265] Section 468(1) does not apply unless there is a liquidation by order of the court, whether in insolvency or on other grounds. There is no equivalent provision where a company is in voluntary winding up: United Petroleum Pty Ltd v Bonnie View Petroleum Pty Ltd (In Liq) [2017] VSC 185; Carter v New Tel Ltd [2003] NSWSC 128; (2003) 44 ACSR 661. In Carter, the voluntary liquidator obtained an order that the company be wound up by the court, so that the section could apply. However there must be valid reasons for making such an order; typically, the possibility that a court-appointed liquidator will be able to realise additional assets not available to a voluntary liquidator will provide such justification: Re Evcorp Grains Pty Ltd (No 2) [2014] NSWSC 155. Invalidation of security interests Unperfected security interests

[14.270] Where a company has given security, it is the liquidator’s task to be satisfied that it is enforceable against the assets held or used by the company as collateral. A liquidator will therefore carefully examine any security interests that were granted by the company in favour of secured creditors. This will include both security interests under the PPSA and other security interests not covered by the PPSA, such as mortgages over land or charges, liens or pledges over personal property that are excluded from the PPSA.116 If a security interest is enforceable, the secured creditor who holds it will be entitled to have its debt discharged from the assets in which the secured creditor holds a security interest before the liquidator can have recourse to those assets for the unsecured creditors.117 Consequently, if a liquidator can establish that a security interest is invalid, it will benefit the unsecured creditors as they will not have to wait until the holder of the security interest is paid. In fact, the secured creditor will simply join the general body of unsecured creditors. There are a number of ways that a security interest may be rendered invalid. Security interests will be invalidated under s 588FA of the Corporations Act if they constitute unfair preferences. Some circulating security interests, created in the six months preceding the relation-back day, may be invalidated under s 588FJ: see [14.165]. One of the main tasks that a liquidator will undertake upon appointment is an assessment of the perfected status of each security interest claimed in the company’s property. Prior to the introduction of the PPSA on 30 January 2012 company charges (now called security interests) were required to be registered, and could be invalidated if not registered within a specified period of time. Both the PPSA and the Corporations Act have a requirement that the security interest be perfected within a particular time prior to the liquidation commencing. Perfection occurs under the rules of the PPSA, which may involve the registration of a valid financing statement on the PPS Register (PPSR), but may also involve taking 116 Corporations Act, ss 51A, 51B. 117 As noted in Chapter 15, there is a qualification for circulating security interests.

558

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.270]

possession or control of the collateral (for certain types of collateral only). However, if the collateral is under the possession or control of the secured creditor it is unlikely that the liquidator will have access to it or be able to sell it to recover funds for creditors, unless there are defects in the underlying security document between the company (now in liquidation) and the secured creditor: see PPSA, s 20. The liquidator is therefore likely to focus on the perfected status of the security interest by examining the registration of the financing statement on the PPSR to see if it can be invalidated. This may be done by establishing that there is a seriously misleading defect or, for serial numbered property, there is an error in recording the serial number on the financing statement. For example, a company that has granted security interests in motor vehicles to a secured creditor goes into liquidation. Prior to the company’s liquidation the secured party executes a valid security agreement (for PPSA purposes) and registers their security interest through a financing statement on the PPSR. However, if there are defects in the registration, such as incorrect Vehicle Identification Numbers, or inclusion of the grantor’s ABN instead of its ACN, there will be an ineffective registration and the secured party will have an unperfected security interest that will vest on liquidation under PPSA, s 267 if not corrected before liquidation. Third parties who acquire the collateral for new value from the secured party or from a receiver without knowledge of the liquidation are protected by PPSA s 267(3). There are a small number of specific exceptions to this vesting rule: see PPSA, s 268. Certain secured party consignors and lessors and bailors whose security interest vests in the company in liquidation as grantor have a right to seek compensation from the company: PPSA, s 269. Section 588FL of the Corporations Act contains a further vesting rule,118 which is concerned with late registration of a financing statement on the PPSR.119 This rule differs from the PPSA vesting rule which is concerned with a failure to register (whereas s 588FL is concerned with late registration): Re OneSteel Manufacturing Pty Ltd (admin apptd) [2017] NSWSC 21; (2017) 93 NSWLR 611; KJ Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd [2017] FCA 325; (2017) 120 ACSR 117. The rule in s 588FL provides that the security interest120 will vest in the grantor

118 For the exceptions to this rule, see s 588FN. There are similar compensation entitlements as under the PPSA: s 588FO. 119 Section 588FL is the successor to the former s 266 of the Corporations Act which dealt with late registration of a company charge. That provision was included in Ch 2K of the Act, which was repealed on 30 January 2012 when the PPSA commenced. At that time the new s 588FL was introduced, along with the other provisions in Pt 5.7B Div 2A and 2B. 120 The security interest must be enforceable against third parties within the meaning of the PPSA (see PPSA, s 19) and must be perfected by registration and no other means (ie not also by control or possession under the PPSA): Corporations Act, s 588FL(2)(a).

[14.270]

14 Assets Available to the Liquidator

559

company121 if it is not perfected by registration122 on the PPSR within a certain time prior to the commencement of the liquidation (known as the “critical time”).123 The time period is the later of: 1. six months before the critical day; 2. the end of 20 business days after the security agreement that created the security interest came into force;124 or 3. a time ordered by the court under s 588FM.125 For example, assume Company A commences liquidation under s 513A on 3 July 2017. If a secured party enters into a security agreement that creates a security interest in Company A’s collateral on 3 May 2017, then the secured party must either register by the end of 20 business days after 3 May or must apply for a court order under s 588FM extending the time period for registration. In this case the 20 business day period (or court extension) would be later than 6 months before the liquidation starting on 3 July 2017. See further KJ Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd [2017] FCA 325; (2017) 120 ACSR 117. If a security interest is granted by a company in administration, under a DOCA or in liquidation then the security interest will vest unless an extension is granted by the court under s 588FM: KJ Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd [2017] FCA 325; (2017) 120 ACSR 117. As with the vesting rule in the PPSA, there is protection for a third party who acquires the collateral for value from a secured party without knowledge of the liquidation: s 588FL(5). The court’s power to extend the time for a valid registration under s 588FM is similar to the power of the court to extend time for registering a charge under the prior Ch 2K of the Corporations Act. The court may extend the time for registration on an application by the company or any interested persons. The grounds for an extension of time include failure to register on time due to inadvertence126 or where it was accidental or for some other sufficient cause or where the extension is not of such a nature as to prejudice the position of creditors or shareholders or where it is just and equitable to grant the extension: s 588FM(2). However, the concept of prejudice to unsecured creditors is not merely the prejudice of subordination that unsecured creditors face against secured creditors. Unsecured creditors may be able to establish prejudice if they can prove that they extended credit on the basis that there were no security interests registered on the PPSR: Re Appleyard Capital Pty Ltd 121 The vesting of the security interest occurs at the time immediately before the critical time or for security interests that arise after the critical time, immediately before the security interest arises: s 588FL(4). 122 See Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd [2014] FCA 1034; (2014) 225 FCR 305. 123 Or if the security interest arises after the critical time, then when the security interest arises: s 588FL(2)(a). 124 Or if that day is after the critical time, then the critical time: s 588FL(2)(b). 125 There is another time period that applies to security interests that arise under foreign law: s 588FL(2)(b)(iii). 126 See Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 at [15].

560

Keay’s Insolvency: Personal and Corporate Law and Practice

[14.275]

[2014] NSWSC 782; (2014) 101 ACSR 629. The court has the power to grant an extension of time on conditions: s 588FM(3). The cases that developed under the prior s 266 (in the former Ch 2K) are applicable to the successor provision, s 588FM: Re Barclays Bank plc [2012] NSWSC 1095; Re Cardinia Nominees Pty Ltd [2013] NSWSC 32; Re Appleyard Capital Pty Ltd [2014] NSWSC 782; (2014) 101 ACSR 629. Security interests in favour of relevant persons

[14.275] Section 588FP of the Corporations Act provides that a security interest127 (and any powers conferred under it) is void128 and are taken to have always been void where the security interest is granted to certain persons and they take a step to enforce the security interest129 within six months after the security agreement was made. This is the successor provision to the previous s 267 of the Corporations Act which was repealed when the PPSA commenced on 30 January 2012. The list of persons who are included within this prohibition are officers, former officers (who were officers at any time during the six-month period) and associates of such officers: s 588FP(2). The court may give permission for a prohibited person to take such enforcement action if the company was solvent immediately before the action was taken and it is just and equitable to give permission: s 588FP(1)(c), (4). There is protection for purchasers of the secured assets from the prohibited person: s 588FP(7). This provision is designed to remedy the situation where a company that is insolvent or verging on insolvency grants a security interest to a person(s) associated with the company to secure loans, with the consequence that a receiver appointed under that security obtains control of the company.130 Such an arrangement might constitute a preference, but for one reason or another a liquidator may be unable to take proceedings to enforce his or her rights so this provision simply voids the security itself, unless the court grants leave to the person to take enforcement action.

CONCLUSION [14.280] Gathering in the assets and funds of the company, and taking any action under the voidable transaction provisions, are particular aspects of the liquidator’s administration of the winding up. We now examine other aspects, 127 PPSA retention of title property (see Corporations Act, s 51F) is excluded from the operation of this provision: Corporations Act, s 588FP(5). 128 The underlying debt is not affected, only the security interest and rights it conferred: s 588FP(6). Thus, the person may still prove in the liquidation. 129 Examples of taking steps to enforce include appointing a receiver or otherwise seizing control of the secured assets: s 588FP(3). 130 For a discussion of this area, under the former law, see Collier, “Enforcement of Company Charges by Directors and Other ‘Relevant Persons’ under Section 267 of the Corporations Law” (1995) 3 Insolv LJ 168. See also Re Quality Blended Liquor Pty Ltd [2014] QSC 234; (2014) 102 ACSR 451.

[14.280]

14 Assets Available to the Liquidator

561

including the liquidator’s examination of the company’s books and records, the conduct of examinations, the assessment of claims and the payment of dividends. Chapter 14 – Assets Available to the Liquidator Pt 5.4 Div 1– When Company to be Wound Up in Insolvency – ss 459A-459D Pt 5.5 Div 3 – Creditors’ Voluntary Winding Up – ss 497-500 Pt 5.5 Div 4 – Voluntary Winding Up Generally – ss 501-510 Pt 5.7B Div 1 – Preliminary – ss 588C-588F Pt 5.7B Div 2 – Voidable Transactions – ss 588FA-588FJ Courts’ Corporations Rules Div 15A – Proceedings Under the Cross-Border Insolvency Act – rr 15A.115A.9

Corporations Act

15

Administration of the Winding Up [15.05] INTRODUCTION .............................................................................................................. 565 [15.10] INITIAL TASKS OF THE LIQUIDATOR ...................................................................... 566

[15.10] Determining the commencement date and relation back day ................. 566 [15.15] Obtaining and examining the books of the company ............................... 566 [15.20] Assistance from officers and employees ....................................................... 567 [15.25] Taking possession of property ........................................................................ 567 [15.30] Giving notice ...................................................................................................... 568 [15.35] RELATIONS WITH CREDITORS ................................................................................... 569

[15.40] Committees of inspection ................................................................................ 569 [15.45] Informing creditors ........................................................................................... 571 [15.50] Relevance and breach of duty ................................................................................... 572 [15.55] Reasonable or unreasonable ....................................................................................... 572 [15.60] The decision of the liquidator .................................................................................... 573

[15.65] Other rights of creditors .................................................................................. 573 [15.70] Meetings of creditors ........................................................................................ 574 [15.75] Notice ............................................................................................................................. 576 [15.80] Quorum .......................................................................................................................... 576 [15.85] Chair ............................................................................................................................... 576 [15.90] Minutes .......................................................................................................................... 576 [15.95] Adjournment ................................................................................................................. 576 [15.100] Right to vote ............................................................................................................... 577 [15.105] Resolutions .................................................................................................................. 577 [15.110] INVESTIGATIONS .......................................................................................................... 578

[15.115] Statutory report after three months ............................................................. 579 [15.120] Further report to ASIC: s 533 ....................................................................... 579 [15.125] EXAMINATIONS ............................................................................................................ 580

[15.130] Section 596A .................................................................................................... 580 [15.135] Section 596B ..................................................................................................... 580 [15.140] Eligible applicant may apply ........................................................................ 581 [15.145] Rationale for examinations ............................................................................ 581 [15.150] Benefits .............................................................................................................. 582 [15.155] Nature of the power ....................................................................................... 582

564

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.160] Function of examinations .............................................................................. 583 [15.165] Abuse of process ............................................................................................. 584 [15.170] Examinable affairs ........................................................................................... 586 [15.175] Connected entity ........................................................................................................ 587

[15.180] Application for summonses .......................................................................... 588 [15.185] Examination procedure: s 597 ...................................................................... 589 [15.190] Incrimination ............................................................................................................... 589 [15.195] Legal professional privilege ..................................................................................... 590

[15.200] Obtaining information by affidavit .............................................................. 591 [15.205] DISCLAIMER OF ASSETS ............................................................................................. 591

[15.210] Section 568A procedure ................................................................................. 593 [15.215] Section 568B: challenge to proposed disclaimer ....................................... 593 [15.220] Effect of disclaimer ......................................................................................... 593 [15.225] Section 568E: subsequent challenge to disclaimer .................................... 594 [15.230] Not all liabilities are ended ........................................................................... 594 [15.235] CARRYING ON BUSINESS ........................................................................................... 594 [15.240] REALISING THE ASSETS ............................................................................................. 595 [15.245] CLAIMS OF CREDITORS .............................................................................................. 596

[15.250] Proof of debts and claims .............................................................................. 597 [15.255] Calculation of proofs of future debts ..................................................................... 597 [15.260] Rule against double proofs ...................................................................................... 597 [15.270] SGC and the Fair Entitlements Guarantee (FEG) ................................................ 598 [15.275] Penalties and fines ..................................................................................................... 598 [15.280] Estimate of claims of uncertain value – s 554A ................................................... 599 [15.285] Set-off ............................................................................................................................ 599 [15.290] Contributories’ claims: s 553A ................................................................................. 600 [15.295] Role of the liquidator in deciding upon proofs of debt ..................................... 601

[15.305] Secured creditors ............................................................................................. 603 [15.310] Pooling .............................................................................................................. 605 [15.315] Voluntary pooling ...................................................................................................... 605 [15.320] Court-ordered pooling .............................................................................................. 607 [15.325] General ......................................................................................................................... 607 [15.330] DISTRIBUTION OF THE COMPANY ASSETS .......................................................... 608

[15.335] Payment of dividends .................................................................................... 608 [15.340] Special priorities .............................................................................................. 609 [15.345] Section 555: pari passu .............................................................................................. 609 [15.350] Section 556: special priorities ................................................................................... 609 [15.355] Costs and expenses relating to company property: s 556(1)(a) ......................... 613 [15.360] Taxed costs of applicant for winding up order: s 556(1)(b), (ba) ...................... 613 [15.365] Certain debts of an administrator: s 556(1)(c) ...................................................... 614

[15.05]

15 Administration of the Winding Up

565

[15.370] Company resolves to wind up voluntarily – s 556(1)(daa) ................................ 614 [15.375] Other liquidation expenses: s 556(1)(dd) ............................................................... 614 [15.380] Deferred expenses: s 556(1)(de) ............................................................................... 615 [15.385] Expenses of members of committee of inspection: s 556(1)(df) ........................ 615 [15.390] Wages, superannuation contributions and the superannuation guarantee charge: s 556(1)(e) ..................................................................................................................... 615 [15.395] Leave entitlements of employees: s 556(1)(g) ....................................................... 616 [15.400] Retrenchment payments to employees: s 556(1)(h) ............................................. 616 [15.405] Tax obligations ............................................................................................................ 617 [15.410] Advances to pay employee entitlements: s 560 ................................................... 617 [15.415] Fair Entitlements Guarantee Act 2012 .................................................................... 617

[15.420] Indemnifying creditors .................................................................................. 618 [15.425] Assets overseas and cross-border issues .................................................... 620 [15.430] Overseas assistance to an Australian liquidator .................................................. 620 [15.435] Australian assistance to a foreign liquidator ........................................................ 622

[15.440] Surplus assets .................................................................................................. 623 [15.445] CONCLUSION ................................................................................................................. 624

INTRODUCTION [15.05] A liquidator will administer the winding up of a company in a manner similar to the way in which a trustee in bankruptcy administers the estate of a bankrupt. These similarities have been further entrenched by the harmonisation efforts brought about by the ILRA, which imposes similar (and in many cases, the same) duties, powers and responsibilities on liquidators (and other external administrators such as voluntary administrators) bankruptcy trustees. Readers should, therefore, refer to Chapter 6 for a discussion on how bankruptcies are administered. This chapter focuses primarily on aspects of insolvency administration that are peculiar to liquidations and only deals briefly with those matters already discussed in Chapter 6 in relation to bankruptcy. The ILRA has made significant changes to the administration of liquidations, particularly through Pt 3 of the IPSC and IPRC, which cover matters such as remuneration approval (Div 60), reporting obligations and providing information to creditors (Div 70); conducting creditor meetings (Div 75); committees of inspection (Div 80); directions from creditors (Div 85); court powers (Div 90) and the power to assign personal rights of action (Div 100). As we discussed in Chapter 1, our focus in writing this 10th edition is not to cover the transitional rules relating to the implementation of the ILRA. We, instead, assume that readers are operating with the new law. Our aim is to explain the law as we see it, not to compare and contrast what the law is, with what it used to be. One essential aspect of the liquidator’s administration of a winding up is the location and recovery of property that is available to the creditors, discussed in Chapter 14. In Chapter 16 we will examine a particular aspect of recovery of property, that is, from directors and others.

566

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.10]

In administering a company which is in the process of being wound up, a liquidator must bear in mind two of the purposes of liquidations which were identified earlier: first, liquidation provides a procedure which allows for an equitable and fair distribution of the assets of the company among its creditors after the orderly collection and realisation of the assets, and secondly, liquidation is designed to allow for an investigation of the company’s affairs. In essence, the administration of a winding up involves taking possession of assets of the company, realising those assets, determining who are creditors of the company, applying the proceeds of the company’s assets towards payment of the creditors, and having the company deregistered. Deregistration is discussed in Chapter 17.

INITIAL TASKS OF THE LIQUIDATOR Determining the commencement date and relation back day [15.10] As in bankruptcy, a liquidator must initially assess the date of the relation-back day, under s 9, and the date when the winding up is taken to have begun or commenced, under Pt 5.6, Div 1A. These dates are relevant for determining the time within which voidable and other transactions may be challenged by the liquidator: for example, see s 588FE. Obtaining and examining the books of the company [15.15] Early in the liquidation, the liquidator will need to see the books of the company from which this and other information may be obtained. These documents may be in the hands of others, often the officers of the company. As we explained at [13.40], if officers hold the books they are subject to a duty under s 530A of the Corporations Act to deliver them to the liquidator as soon as practicable after the winding up, or to inform the liquidator where they are. In any event and in relation to books and records held by anyone the liquidator may demand them by giving at least three days’ written notice: s 530B, with penalties for refusal of a fine of up to $10,500 or a one-year jail term or both: Sch 3. Section 530C allows a liquidator to apply to the court for a warrant to search for and seize property or books of a company. This can include electronic information which can be seized by copying it: Re Ezyclad Pty Ltd [2014] VSC 66; (2014) 98 ACSR 38. The court must be satisfied that the property or books are in the possession of a person who has concealed or removed them, or the person has concealed, destroyed or removed the books or is about to do so: s 530C: see Bassoak Pty Ltd v Rellgrove Pty Ltd [2006] NSWSC 262; (2006) 57 ACSR 86. It is seen by the courts as a remedy of last resort.1 The court itself may also order that certain persons, including officers, contributors and bankers deliver to the liquidator any money, property or books to which the company is prima facie entitled: s 483(1). This is a summary, discretionary process 1 Pattison v May [2005] VSC 454; (2005) 228 ALR 620, 621. A form of the warrant is shown in ASIC v Samson [1997] FCA 739; (1997) 24 ACSR 555, applied in Crisp, in the matter of Buchanan Group Holdings Pty Ltd v Iliopoulos [2011] FCA 1527.

[15.25]

15 Administration of the Winding Up

567

and is not to be used to determine questions of ownership; that is, where there may be a prima facie entitlement: Re Mischel & Co Pty Ltd (in liq) [2014] VSC 140.

Assistance from officers and employees [15.20]

In the initial stages of the winding up, the liquidator will usually want to interview the officers or the former officers of the company (such as directors and the company secretary) and those employees involved in the company’s management. This is done for a variety of reasons, including: • ascertaining the extent of the company’s property and debts; • discovering the reason for the failure of the company; • ascertaining whether there has been any wrongdoing; and • generally obtaining a grasp of the company’s affairs. Specific duties, which are akin to those that are placed on bankrupts, are imposed on the officers or former officers of companies in liquidation to assist the liquidator. If the directors don’t assist the liquidator, or where they don’t complete the Report As To Affairs of the company (the RATA), then they will lose the benefit of any safe harbour period that may apply in respect of debts incurred prior to the commencement of the liquidation: s 588GA(5). Section 530A also requires officers attend on the liquidator and give information about the company’s affairs and business and attend at any members’ and creditors’ meetings as the liquidator reasonably requires (s 530A(2)), and assist generally in the winding up: s 530A(3). They must provide the liquidator, on request, with their residential and business addresses: s 530A(5). As an officer of the company, a receiver is subject to s 530A and must generally attend to whatever is reasonably required by the liquidator to assist in the winding up of the company: Re Photosprint Australia [2005] FCA 1504; (2005) 51 ACSR 479. The liquidator may choose to examine any officer or other person involved with the company on oath before a court (under ss 596A or 596B) at a later stage. Public examinations are discussed at [15.125] – [15.200].

Taking possession of property [15.25] The liquidator’s principal duty is to take possession of the company property. Section 478(1) of the Corporations Act requires the liquidator to do everything to collect the property of the company and s 474(1) provides the liquidator with authority to take into custody all of the property to which the company is, or appears to be, entitled.2 A liquidator will do this as soon as possible so that assets cannot be disposed of or concealed. In some cases it may be necessary for a liquidator to arrive on the doorstep of a company’s office or factory soon after the making of a winding up order where there is concern about the security of the assets or books of the company. 2 This includes PPSA retention of title property: Corporations Act, s 465.

568

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.30]

If property is in the hands of a third party who refuses to hand it over, the liquidator may seek an order from the court requiring that person to deliver it up: s 483(1). We have referred at [15.15] to s 530C which allows the liquidator to apply to the court for a warrant of search and seizure in the context of recovering books of the company; the warrant can also be used to recover other company property.

Giving notice [15.30] It is prudent for the liquidator to give notice to certain persons that he or she has been appointed. The liquidator can prove the appointment by producing a copy of the court order winding up the company, or, in a voluntary liquidation, a copy of the resolution of appointment. Notice of the appointment will also be on the ASIC database. The liquidator is also required to give certain notices to the creditors, which include: • the initial information, which includes the fact of the appointment and outlines creditor rights (IPRC, s 70-30); • the statutory report within 3 months of appointment, which includes prospects of recoveries and dividends (IPRC, s 70-40; Form 5601); • initial remuneration notice (IPRC, s 70-35); and • report to assist with remuneration determinations (IPRC, s 70-45). The liquidator’s various statutory reports to creditors Report or notice Initial information report, which includes the fact of the appointment and outlines creditors’ rights to information etc Initial remuneration notice

Report on prospects of recoveries and dividends Report to assist with remuneration determinations

IPRC section s 70-30

Timing Court winding up – within 20 business days after appointment; Voluntary winding up – within 10 business days after the company resolves to wind up

s 70-35

Court winding up – within 20 business days after appointment; Voluntary winding up – within 10 business days after the company resolves to wind up s 70-40; Within three months of the commencement of the Form winding up 5601 s 70-45 At time of sending the notice of meeting to consider the remuneration determination

Those usually advised of the liquidation are banks and other financial institutions at which the company has accounts, and creditors and debtors of the company, in order to ensure that they pay the liquidator and not the company officers. There are statutory obligations to notify the Australian Taxation Office and the various State Commissioners for Pay-Roll Tax.

[15.40]

15 Administration of the Winding Up

569

A liquidator must also notify the Commonwealth Department of Human Services of their appointment, if the company was a paid parental leave employer: Corporations Act, s 600AA. This would be the case if any of the company’s employees were on paid parental leave under the Paid Parental Leave Act 2010 (Cth).

RELATIONS WITH CREDITORS [15.35] Creditors can suffer significantly in a liquidation and it is wise and also necessary that the liquidator maintain open and informed relations with them. Apart from being under a duty to realise and recover company assets in order to maximise the ultimate dividends, if any, paid to creditors, the liquidator will need to explain to the creditors the reasons why the company failed and generally to report on the company’s affairs. The liquidator needs to be sensitive to the losses that creditors have suffered. In City & Suburban v Smith (1998) 28 ACSR 328, 338, the court found that the liquidator had: “carried out his tasks in respect of the liquidation with some insensitivity to the angst of the members of the Committee of Inspection who represent trade creditors that suffered significant losses as a result of Conpac’s liquidation.”

His conduct gave some justification for the apprehension of members of the Committee in light of his approval, as administrator, of payment of entertainment expenses for a “director’s wake following the appointment of a voluntary administrator”. Apart from that aspect of dealing with creditors, and as we explained in the context of bankruptcy in Chapter 6, creditors may know much about the assets and the dealings of the company and its directors in the period leading up to the company’s liquidation which will be of assistance to the liquidator. The ILRA has made a large number of changes to the Corporations Act which provide further rights and powers to creditors, including: • the power to remove a liquidator (IPSC, s 90-35); • the power to require a meeting to be convened (IPSC, s 75-15); and • • the power to request information, documents or reports to be provided (IPSC, s 70-40). These will be discussed further below. We first explain the increased authority given to committees of inspection by the ILRA.

Committees of inspection [15.40] Sometimes there are so many creditors in a liquidation that any creditors’ meeting is too large and cumbersome to be able to assist in and supervise the administration of a liquidation. A smaller group – a committee of inspection – may be constituted by all the creditors to supervise and assist the liquidator.3 Additionally, members of the committee may be appointed to safeguard the interests of particular groups or people. 3 Harris, “Committees of inspection under the Insolvency Law Reform Act 2016” (2017) 18 Insolv LB 179; Harris, “Enhancing the Role of Creditors’ Committees in Corporate Rescue Laws” in Sarra (ed), Annual Review of Insolvency Law 2011 (Carswell Thomson Reuters, 2011) pp 675-701.

570

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.40]

The liquidator will usually raise with a meeting of creditors whether it wishes to have a committee. In complex liquidations in which there is likely to be controversy, or substantial litigation, the liquidator may request a committee. This will enable prompt advice and support for any action required. In any event, any creditor may ask the liquidator to call a meeting of creditors to consider whether to appoint a committee and, if so, to so resolve and determine who will be its members. The law allows a creditor, or a group of creditors, representing at least 10% in value, to appoint their own member to a committee: IPSC, s 80-20. Employees representing at least 50% of the entitlements owed (see Pt 5.8A) may also do so. It follows that creditors and employees so represented cannot separately appoint anyone to the committee. IPSC, s 80-30 allows a committee of inspection to determine its own procedures although the IPRC also contains rules about resignations, removals of committee members and vacancies: IPRC, s 80-10. Details of what are reasonable requests for information etc are contained in the rules: IPRC, ss 80-10, 80-20, 80-25. There are particular provisions for each company that is a member of a pooled group, with a meeting of creditors convened, on a consolidated basis, of the creditors of all of the companies to decide on the existence and composition of a committee: IPSC, s 80-26. The membership of the committee can be constituted by any of the creditors: IPSC, s 80-15. It acts by majority decision of members present, but must not act unless a majority are present: IPRC, s 80-5(6). ASIC may attend any committee of inspection meeting (IPSC, s 80-65) and the court may inquire into a committee’s conduct and make any orders to “ensure the proper conduct of the committee”: IPSC, s 80-70. Committee members are regarded as occupying fiduciary positions and they must accordingly rather than in their own interest alone. It follows that they must ensure that they do not place themselves in a situation where their personal interests conflict with their duties as committee members; for example, members of the committee are not permitted to derive any advantage from a transaction for or on account of the company, subject to court leave: IPSC, ss 80-55, 80-60. Under the former law, the court has at times permitted committee members to be remunerated, in one case, allowing payment of $5000 each to six committee members who had “labour[ed] long and beyond the call of duty” over a period of six years.4 Any member of the committee, or the liquidator, may call a meeting of the committee (IPRC, s 80-5). A member’s position on the committee becomes vacant on resignation, or if he or she becomes a bankrupt, is absent from five consecutive meetings without leave or 4 Re Security Directors Pty Ltd (1997] VicSC 263; (1997) 24 ACSR 558; see also Re Genoa Resources and Investment Limited (in liq) [2005] NSWSC 1145.

[15.45]

15 Administration of the Winding Up

571

is removed by the resolution of the creditors: IPRC, s 80-10. A meeting of the committee may appoint a person to fill any vacancy: s 80-10(5). While the role of creditors and their committees are significant, the law retains the ultimate decision-making power in the liquidator. The liquidator must have regard to the directions of the creditors or the committee but he or she need not follow them. In that case, the external administrator must record their decision, and their reasons IPSC, s 80-35(3). In any conflict between the creditors and the committee, the creditors may override the committee’s directions: IPSCs 80-35(4).5 If a particular issue is contentious, it may be prudent for the liquidator to seek directions from the court, under IPSC, s 90-15. Creditors and committees have an important role in insolvency administrations which is respected by the courts and regulators. In removing the liquidator in City & Suburban v Smith [1998] FCA 822; (1998) 28 ACSR 328 for reasons that included the inadequacy of his investigations, the court said that the: inadequacy is exacerbated by the fact that the Committee of Inspection had called upon the liquidator ’time and again’ to investigate those transactions and complained on many occasions that he had not done so.6

Informing creditors [15.45]

A liquidator should be assiduous in reporting to creditors generally, and in particular on such matters as the reasons for the liquidation, the likely dividend to be payable, the results of investigations and the realisation of assets. This is required in the statutory report that must be sent to creditors under IPRC, s 70-40 within three months after the liquidator’s appointment, but the liquidator will usually provide supplementary written reports and/or or verbal reports to creditors through meetings and paper and online correspondence during the course of the liquidation. This will however, depend on the costs of communications relative to the assets available and the importance of the issues being communicated. None of this need be seen as onerous, and the liquidator need only report to the appropriate level dependent on the size of the estate and the available information. From a creditor’s viewpoint, it is basic information that they should expect to receive early on in a liquidation. It is now common for liquidators to limit the costs of communications by establishing websites where creditors in a particular liquidation can access information relating to the liquidation. s 600G facilitates electronic notice of certain notices under the Act: see [15.45]. Notice of the lodgement of the annual administration return (required to be lodged with ASIC under IPSC, s 70-5) must also be given by the liquidator to creditors: s 70-5(6). 5 The former law was similar. See Onefone Australia Pty Ltd v One.Tel Ltd [2009] NSWSC 1231; (2009) 74 ACSR 716; Onefone Australia Pty Ltd v One.Tel Ltd [2008] NSWSC 1335; (2008) 69 ACSR 290; Re Imobridge Pty Ltd [2000] 2 Qd R 280. 6 Applied in SingTel Optus Pty Ltd v Weston [2012] NSWSC 674; (2012) 90 ACSR 225.

572

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.50]

Throughout the liquidation, creditors may want further information, and are entitled to expect a reasonable response to any queries they have. There is now an expanded regime with which the liquidator must comply unless specified circumstances exist, including that the request is “unreasonable”” as defined in the Rules. The same regime applies in personal insolvency. IPSC, s 70-40 permits creditors, by resolution, to request the liquidator to give them information, or provide a report or produce a document (“information etc”). There is also a similar right given to individual creditors under IPSC, s 70-45. The liquidator must comply with the request unless (IPSC, ss 70-40(2), 70-45(2)): (a) the information etc is not relevant to the external administration of the company; or (b) the liquidator would breach their duties in relation to the external administration if they complied with the request; or (c) it is otherwise not reasonable for the liquidator to comply with the request. Relevance and breach of duty

[15.50] As to (a) and (b), it is a matter for the liquidator, acting bona fide, to determine whether the request should be complied with. As we explain in relation to bankruptcy trustees, as a matter of practice, creditors’ requests should properly be met, unless there is a valid reason not to. Although creditors are central to any liquidation, it is ultimately a matter for the liquidator’s judgment, on which legal advice or court directions may be required. Relevance can usually be ascertained by the liquidator bearing in mind the wider range of interests in a company external administration. Whether a breach of duties may be involved can be difficult to assess in some cases and legal advice may be required. Simply because the Corporations Act does not prevent disclosure is not enough, but some reason should exist not to disclose. If acting bona fide, and reasonably, a liquidator should properly not be held to account by a court if, on challenge by the creditors, the court reverses the liquidator’s decision. Reasonable or unreasonable

[15.55] The parameters for a request being considered reasonableare the same in personal insolvency: See [6.65]-[6.75]. Pursuant to IPSC, ss 70-40(1)(c), 70-45(1)(c), an unreasonable request need not be complied with. IPRC, ss 70-10(2), 70-15(2) then prescribe circumstances where it is, or is not, reasonable for a liquidator to comply. That is the case if the liquidator, acting in good faith, is of the opinion that: (a) complying with the request would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the request. An example is if the information relates to potential recoveries in the liquidation, or concerns a third-party witness to those proceedings; or (b) the information etc would be subject to legal professional privilege.

[15.65]

15 Administration of the Winding Up

573

This would be the case with legal advice obtained by the liquidator concerning pursuit of a claim, or if the liquidator wishes to protect the privilege held by the company. In either case, the liquidator can decide to waive that privilege; or (c) disclosure of the information etc would found an action by a person for breach of confidence. The tort of breach of confidence is explained in Chapter 6; or (d) there is not sufficient available property to comply with the request. More precisely, the company’s assets are not enough to cover the liquidator’s remuneration and expenses in responding to the request. In that respect Corporations Act, s 545 may be relied upon; or (e) the information etc has already been provided. This has to be read sensibly; for example, the liquidator may have emailed the information, and need not respond to a request that it be delivered in hard copy; or (f) the information etc is required to be provided under the Act or Regulations within 20 business days of the request being made. Again, this needs to be read sensibly. Despite these last three paragraphs – (2)(d), (e) and (f) – it is reasonable for the liquidator to comply if the creditors agree to bear the cost of doing so, and, if required by the liquidator, security is given to the liquidator beforehand. The final criterion to refuse a request is that it is vexatious – (g). A request may be taken to be vexatious if the liquidator receives the request within 20 business days of receiving a similar request from the creditors. As we explain in relation to personal insolvency, there is no further definition of vexatious but the law in respect of vexatious proceedings in courts gives some guidance on whether claims should be assessed as vexatious.7 The decision of the liquidator

[15.60] For the sake of clarity, the section provides that it is reasonable for the liquidator to comply with a request if none of these items apply. On the other hand, it might be assumed that even if the request is “unreasonable” the liquidator may properly choose to respond to the request; for example, to provide information in an assetless liquidation, or where an otherwise vexatious request for information may readily be met. It is anticipated that the courts will interpret these provisions the same way in both personal and corporate insolvency.

Other rights of creditors [15.65] From the creditors’ perspective, although their rights are significantly restricted by liquidation, they nevertheless can, and should, continue to be involved in the liquidation process. The law provides creditors with opportunities for involvement and certain rights and controls over the process. The most important of these opportunities and rights are that creditors may: 7 See Federal Court of Australia Act 1976 (Cth), s 37M.

574

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.70]

• require the liquidator to convene a meeting of creditors IPSC, s 75-15). This is only available for the committee of inspection (if one is appointed), and for creditors with at least 10% of the debts owed by the company or where creditors require a meeting to be convened by passing a resolution. Creditors are, of course, entitled to be given notice of any such meetings (IPRC, s 75-10), and attend and vote (IPRC, s 75-85); • remove the liquidator under IPSC, s 90-35 at a meeting by passing a resolution; • inspect the books and records of the liquidator (IPSC, s 70-10) and also, with court permission, inspect books of the company (s 486); • permit the liquidator both to compromise debts owed to the company which are greater than $100,000 (s 477(2A); reg 5.4.02) and to enter into agreements on the company’s behalf extending more than three months after the agreement is entered into (s 477(2B), subject to s 477(2C)); • resolve at a meeting to give the liquidator lawful (though non-binding) directions (IPSC, s 85-5); • apply to the court to seek orders under IPSC, s 90-15 (see IPSC, s 90-20 and the definition of a person with a financial interest in the external administration in IPSC, s 5-30), including a determination of any question arising in relation to the liquidation, to appeal against a decision of the liquidator or (under IPSC, s 90-10) to seek a court review of the liquidator’s conduct; • appoint a reviewing liquidator to review either or both of the remuneration of the liquidator or a cost or expense incurred by the liquidator (IPSC, s 90-24); • indemnify the liquidator’s remuneration and expenses in relation to litigation pursued or other actions taken by the liquidator, and thereby open up the potential to receive a priority dividend payment over other creditors under s 564; • determine or fix the remuneration of the liquidator (IPSC, s 60-10) and apply to have the court review that remuneration: IPSC, s 60-11). Many of these rights of creditors are discussed in more detail throughout this and other chapters.

Meetings of creditors [15.70] The law of creditors’ meetings has changed significantly under the ILRA, with most meeting rules moved from the substantive provisions of the Act and the Regulations and consolidated into IPSC, Div 75 and IPRC, Div 75. The new provisions remove the need for mandatory meetings in creditors’ voluntary liquidation (including the annual meeting and the final meeting), as well as removing the need for a meeting when the members pass a special resolution appointing a liquidator, but the directors refuse to pass a declaration of solvency. In a creditors’ voluntary liquidation, the liquidator can choose to convene a creditors’ meeting (IPSC, s 75-10) or may be required to convene a creditors’ meeting by creditors holding at least 10% of the debts owed by the company (IPSC, s 75-15), or where ASIC requires that a meeting be held (IPSC, s 75-20). One of the significant changes made by the ILRA is the ability for creditors to pass resolutions without holding a physical meeting (circulating resolutions). This has been a feature of bankruptcy law for some time. It is now permitted under IPSC, s

[15.70]

15 Administration of the Winding Up

575

75-40 (proposals without a meeting), which involves a single proposal for voting being sent to creditors by the liquidator inviting the creditors to vote yes or no within a specific timeframe (at least 15 business days after the notice is given: IPRC, s 75-135(3)). Only a single proposal may be issued in the notice to creditors: IPSC, s 75-40(2). A proposal cannot be used where more than 25% in value of the responding creditors notify the liquidator that they object to the matter being dealt with without a meeting: IPRC, s 75-130. A creditor must have had their debt or claim admitted by the administrator for voting purposes in order to respond to a proposal: IPRC, s 75-130(4). The liquidator must make a written record of the outcome of the proposal in the books of the administration under IPSC, s 70-10 and lodge notice with ASIC within five business days of the outcome being known: IPRC, s 75-130(6); ASIC Form 5022. Another significant change to creditor meetings in liquidation (and also in voluntary administration) is the power given to creditors under IPSC, s 90-35 to remove a liquidator by an ordinary resolution at a meeting (does not apply to a provisional liquidator) and appoint another registered liquidator in their place. Again, this is a long-standing feature of bankruptcy law. The incoming liquidator must provide the outgoing liquidator with a written consent to act and a declaration of any relevant relationships, indemnities or other potential issues that could impact on their independence or that otherwise represents a conflict of interest or duty. At the meeting, both the outgoing and incoming liquidators have a right to speak to the creditors. This assumes that there is an incoming liquidator. If creditors resolve simply to remove a liquidator, the removal doesn’t take effect until a new liquidator is appointed. The former liquidator may apply to the court to be reinstated, although the court may only reinstate them where it is satisfied “that the removal of the former administrator was an improper use of the powers of one or more creditors”: IPSC, s 90-35(6). It may be prudent and proper for a liquidator to report to a meeting concerning aspects of the investigations; the realisation of substantial assets and how the realisation should occur; obtaining of approval for initiating litigation or initiating extensive investigation procedures; and the seeking both of financial indemnification and information concerning the company’s business dealings etc which may facilitate the liquidator’s investigations. Liquidators must also seek approval from the creditors or the committee of inspection for their remuneration determination under IPSC, s 60-10. Meetings must be convened at a date, time and place that the liquidator believes is most convenient for the majority of creditors: IPRC, s 75-30. A failure to comply with the requirements for holding creditors’ meetings will not necessarily invalidate a creditors’ meeting where either the court makes an order under s 1322 (for curing procedural irregularities) or where there has at least been substantial compliance (IPRC, s 75-270).8 8 See the ARITA Code at Chapter 21 for guidance on the conduct of meetings during external administration.

576

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.75]

Notice

[15.75] The liquidator is required to give not less than 10 business days notice of the meeting, except for a meeting of a committee of inspection: IPRC, s 75-10. In addition, the meeting must be advertised on the ASIC Insolvency Notices Website: IPRC, s 75-40. The liquidator must send a proxy form with the notice of the meeting: IPRC, s 75-25. Creditors are entitled to appoint proxies: IPRC, s 75-150. Quorum

[15.80] Unless a quorum is present, a meeting must not act for any purpose except electing a chair, proving a debt or adjourning the meeting: IPRC, s 75-105(1). A quorum is at least two persons present personally or by proxy, where the number of persons entitled to vote is greater than two. If only one person can vote, that person can form the quorum. If two persons can vote, they must form the quorum: IPRC, s 75-105(2). However, IPRC, s 75-105(3) states that a meeting has a quorum if only one person is present and if that person represents personally or by proxy a number of persons sufficient to make a quorum. If there is no quorum within 30 minutes of the appointed time, the meeting will be adjourned: IPRC, s 75-105(4). Chair

[15.85]

At any meeting, the liquidator must be the chair (“must preside at the meeting”), or their nominee: IPRC, s 75-50(2). The chair has a casting vote where a resolution has not achieved the required majority in number and value, although the casting vote cannot be used for remuneration determinations or to oppose a resolution to remove the liquidator: IPRC s 75-115(3). Where the chair has a perceived lack of impartiality they may nominate an independent third party to chair the meeting: Walker; Re One.Tel Ltd [2009] NSWSC 1172; (2009) 74 ACSR 616. In that case, the chair of the meeting was a possible defendant in an action being brought by a special purpose liquidator appointed to the company and an independent chair was nominated. Minutes

[15.90] Within one month of a meeting, the chair must prepare signed minutes and lodge them with ASIC. The minutes must be available for inspection at the liquidator’s office. A record of the persons present at the meeting, in person or by proxy, must also be prepared and kept: IPRC, s 75-145: ASIC Form 5011. Adjournment

[15.95] A meeting may be adjourned from time to time and from place to place either by resolution of the creditors or by the chair presiding over the meeting: IPRC, s 75-140(1). The power to adjourn a meeting must be exercised in good faith and for a proper purpose: McKerlie v Drillsearch Energy Ltd [2009] NSWSC 488; (2009) 74 NSWLR 673. Adjourned meetings are to be held at the place of the original meetings, except in certain circumstances: IPRC, s 75-140(4).

[15.105]

15 Administration of the Winding Up

577

If a meeting is adjourned because of a lack of a quorum, IPRC, s 75-105(4) provides the timing of the next meeting including that it be held between the same day in the next week to no more than 15 business days from the date of the adjourned meeting. Right to vote

[15.100] A creditor has the right to vote at a meeting if its debt9 has been admitted wholly or in part, or if it has lodged with the chair the particulars of the debt or, if required, a formal proof of debt: IPRC, s 75-85(3). In the case of an unliquidated or contingent debt, an estimate of the debt’s value must be made by the creditor: IPRC, s 75-85(4). This process was explained (applying the former regulations) in Selim v McGrath [2003] NSWSC 927; (2003) 47 ACSR 537 at [103], that: “reg 5.6.23, in requiring a just estimate of value to be made, does not contemplate that the chairperson or administrator will undertake any detailed inquiry. He or she will do the best that can be done by reference to the factual material the claimant furnishes, view in the total context with which the decision-maker is dealing.”

Unless a secured creditor surrenders its security, it can only vote in respect of the difference between the estimated value of the security and the amount of its claim: IPRC, s 75-87. If a secured creditor votes on a poll and does not include a valuation of the security on its particulars of debt and indicate what proportion of the debt is being voted, this may mean that it is voting for the entirety of its debt with the result that the secured creditor is waiving its security: Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139; (2005) 52 ACSR 629. The chair can admit or reject a proof of debt for the purposes of voting: IPRC, ss 75-90, 75-100.10 A dissatisfied creditor may appeal to the court within 14 days of the chair’s decision: IPRC, s 75-100(4). It is also possible for the chair to admit the proof for a nominal amount (for example $1) to allow the purported creditor to attend and participate in the meeting. This may be done where insufficient evidence to prove the debt has been provided by the creditor: Selim v McGrath [2003] NSWSC 927; (2003) 47 ACSR 537 at [103]. Liquidators or their partners or employees can exercise a special proxy, but not a general proxy, in relation to resolutions relating to their remuneration: IPRC, s 75-97. A creditor who has advanced money under s 560 of the Corporations Act (see [15.420]) has the same rights as a creditor, including to vote; but that creditor has only one vote no matter on how many occasions it has advanced money: IPRC, ss 75-86. Resolutions

[15.105] Resolutions of creditors are to be decided “on the voices” unless a “poll” is demanded by the chair: IPRC, s 75-110(1). A vote will typically be taken on 9 See the discussion in Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga in Australia Inc [2012] NSWSC 214; (2012) 87 ACSR 658 of what is a debt for this purpose. 10 See further Selim v McGrath [2003] NSWSC 927; (2003) 47 ACSR 537.

578

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.110]

a show of hands. In Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687 the Victorian Supreme Court was required to decide whether a vote by a show of hands had fulfilled the requirement that the vote be “on the voices”. The court was of the view that the intention behind the statement in the regulation was to allow for a less formal vote compared with the situation where there is a poll. It accepted the submission that the requirement of a vote on the voices as opposed to the previously adopted requirement of a show of hands was to accommodate persons attending and voting at meetings by way of teleconferencing facilities.11 If a poll is demanded, and one is held, then a resolution is carried if a majority of the creditors voting are in favour and the value of the debts owed to those voting in favour is more than half the total debts owed to all the creditors voting: IPRC, s 75-115. If no result is reached, the chair presiding at the meeting has a casting vote: IPRC, s 75-115(3). Where the result of the meeting is determined by a casting vote, a person who voted against the resolution may apply to the court to have the vote overturned: IPSC, s 75-42.12 The liquidator must record in the minutes their reasons for exercising or not exercising the casting vote: IPRC, s 75-115(6).

INVESTIGATIONS [15.110]

As with a trustee in bankruptcy, a substantial part of the role of a liquidator will involve investigative work. Although the liquidator must locate and recover assets, and ascertain the circumstances which precipitated the liquidation, the duty had traditionally been said to extend beyond this. In Re Allebart Pty Ltd [1971] 1 NSWLR 24 Street J said (at 26): “… A court winding up involves more than a mere realization of the assets and distribution of proceeds. The ... liquidator is an officer of the Court, and as such he has public responsibilities to investigate past activities connected with the company, and, in appropriate cases, to initiate such further proceedings, civil or criminal, connected therewith as the circumstances may dictate. It is his duty to discover not only breaches of the Companies Act, but also conduct falling short of the requisite standards of commercial morality. …”.

To this end the liquidator will examine the company’s books, records, cash receipts, bank accounts, dealings with others and disposal of assets, as well as interviewing the officers and employees of the company. The extent of the liquidator’s investigations will depend on the size of the company, the nature of the company’s affairs and assets, the attitude of the officers and the circumstances surrounding the liquidation.

11 See also No 5 Lorac Avenue Pty Ltd v Brooke (1995) 16 ACSR 247; Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139; Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 57 ACSR 791. 12 See DCT v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232 at [219]; Promnitz v Indochine Mining Ltd [2015] FCA 857. See also Khong, “The Casting Vote: An Evaluation of the Current Law and Alternatives to the Casting Vote” (2010) 18 Insolv LJ 16.

[15.120]

15 Administration of the Winding Up

579

Such investigations, and their time and cost, have to be measured against the likelihood of recovery of assets for creditors resulting from those investigations.13 In respect of access to legal documents of the company that may be subject to the protection of legal professional privilege, the liquidator takes over the privilege of the company and can assert it or waive it: Re Doran Constructions Pty Ltd [2002] NSWSC 215; (2002) 20 ACLC 909. One issue that can arise is whether the privilege of the company held jointly or in common with the directors of the company passes to the liquidator and is lost if the liquidator waives the privilege to the directors’ prejudice. The directors may be able to nevertheless assert their privilege in such cases: Farrow Mortgage Services Pty Ltd v Webb (1996) 39 NSWLR 601.14 This privilege is examined in more detail in the context of examinations: see [15.195].

Statutory report after three months [15.115]

The investigative and reporting role of the liquidator is recognised by the Corporations Act. A liquidator must prepare a statutory report within 3 months after their appointment under IPRC, s 70-40, which covers: (a) the estimated amounts of assets and liabilities of the company; (b) inquiries relating to the winding up of the company that have been undertaken to date; (c) further inquiries relating to the winding up of the company that may need to be undertaken; (d) what happened to the business of the company; (e) the likelihood of creditors receiving a dividend before the affairs of the company are fully wound up; (f) possible recovery actions. The report replaces the former ‘preliminary report’ which was required 2 months after the RATA under the former s 476 (now repealed). The statutory report must be provided to creditors and lodged with ASIC: ASIC Form 5601.

Further report to ASIC: s 533 [15.120] In addition, in any type of liquidation, a more significant report under s 533(1) of the Corporations Act must be lodged with ASIC if: • offences15 have been committed; • officers or employees, members or contributories, or promoters or managers are guilty of improper behaviour; or 13 As to the responsibility for investigations, see also ASIC v Midland Hwy Pty Ltd [2015] FCA 1360. The question of the extent of investigations expected of a liquidator when there are no or limited funds is discussed in Chapter 10. 14 See also Great Southern Managers Australia Ltd v Clarke [2012] VSCA 207; (2012) 36 VR 308. 15 Broadly defined in s 9 to be offences against Commonwealth, State or Territory laws.

580

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.125]

• the company is unable to pay unsecured creditors more than 50 cents in the dollar.16 This must be lodged as soon as practicable but in any event within six months. The liquidator must also indicate whether there will be public examinations held. A further supplementary report may also be lodged (s 533(2)) – Schedule C to Regulatory Guide 16. The preparation of these reports necessarily requires the liquidator to have conducted investigations into the company’s affairs. Section 545 seems to assume that these investigations must be conducted even though there are no funds for the liquidator’s remuneration in doing so. While ASIC acknowledges that in many cases the liquidator may not have sufficient funds available to prepare a detailed report, or to pursue inquiries based on incomplete information, the expectation is that proper investigations should be made. Funds for investigations are available under ASIC’s Assetless Administration Fund in certain cases.

EXAMINATIONS [15.125] Examinations in corporate insolvency are permitted under either ss 596A or 596B of the Corporations Act. These are the equivalent of examinations under s 81 of the Bankruptcy Act.17

Section 596A [15.130] The court is required under s 596A to summons a person for examination concerning the examinable affairs of the company being wound up if an eligible applicant (defined in s 9 to include a liquidator, administrator, ASIC or a person authorised by ASIC – see further [15.140]) applies for the summons and the prospective examinee was an officer or provisional liquidator of the company, for the most part, during the two years prior to the commencement of the winding up or after the winding up began. “Examinable affairs” is defined in s 9 and is discussed at [15.170]. The examination is held in open court usually before a registrar. Section 596B [15.135]

In addition, the court can, under s 596B of the Corporations Act, make an order that certain persons may be summonsed to an examination. These are persons who: • have taken part in or been concerned in the examinable affairs of the company; • may have been guilty of misconduct in relation to the company; and • may be able to give information about the company’s examinable affairs. 16 See ASIC Form EX01, Schedule B to ASIC Regulatory Guide 16 (RG 16). 17 For more detailed discussion, see Paltridge, “The Scope and Effectiveness of Examinations Pursuant to Division 1 of Part 5.9 of the Corporations Law” (1997) 6 CBLJ 59; and Maiden, “Tensions Between the Public and Private Purposes of Examinations under Pt 5.9 of the Corporations Act 2001 (Cth)” (2004) 12 Insolv LJ 28.

[15.145]

15 Administration of the Winding Up

581

The important distinction between the two types of summonses is that while the court is obliged to summons a person under s 596A, the court has a discretion whether or not to summons a person to whom s 596B refers. This is the same as in bankruptcy where a trustee is able to obtain an examination of a bankrupt automatically. The intention of the legislature is that the issue of a s 596A summons will, as it is with a bankrupt, be a formality18 provided that the court is satisfied that the prospective examinee comes within the necessary definition.

Eligible applicant may apply [15.140] Anyone who is an “eligible applicant” may seek an examination. The expression is defined in s 9 of the Corporations Act and, in addition to the liquidator, includes ASIC, a provisional liquidator, a voluntary administrator or administrator of a deed of company arrangement, or a person authorised in writing by ASIC.19 The appointment by ASIC of an eligible applicant can be challenged under the Administrative Decisions (Judicial Review) Act 1977 (Cth). In Soper v ASIC [2004] FCA 854; (2004) 207 ALR 509, the court dismissed a challenge to the appointment of a director of the company in liquidation to conduct examinations of bank officers; the director wanted the company to pursue a claim against the bank and the liquidator had declined to bring it. ASIC is not required to afford natural justice to the proposed examinee when deciding whether to authorise a person to conduct an examination: Saraceni v ASIC [2013] FCAFC 42; (2013) 211 FCR 298. For present purposes, we are concerned with the most frequent eligible applicant, that is, the liquidator, although voluntary and deed administrators are also able to use the examination process.

Rationale for examinations [15.145] Liquidators will try to obtain all of the information that they need through interviews, especially of company officers. This is done, rather than initiating the examination process, because examinations are costly. Information is usually required by a liquidator because he or she usually comes to the company with little, if any, idea of what has been happening in the life of the company. Invariably, the books and records of the company have been poorly kept and may be incomplete or in some cases wholly inadequate. The officers of the company and others who were involved may prevaricate, or be vague or recalcitrant. So, if company officers or other persons associated with the company are not cooperative, the liquidator may need to resort to the examination process in order to extract information. It has been said that the examination process is there to enable the liquidator to overcome the disability of not knowing as much about the company and its affairs as the directors and others: Adler v Qintex Group Management Services Pty Ltd [1996] QCA 464; (1996) 22 ACSR 446. 18 “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, [1155]. 19 The principles concerning the person who might be authorised by ASIC were discussed in Worthley v England (1994) 52 FCR 69; Evans v Wainter Pty Ltd [2005] FCAFC 114; (2005) 145 FCR 176 and Saraceni v ASIC [2013] FCAFC 42; (2013) 211 FCR 298.

582

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.150]

There are other reasons why a liquidator may seek to examine someone. It may be necessary to obtain answers to questions on oath and also recorded in court transcript which may be used as evidence in further proceedings against the examinee: s 597(14). Often, an examination will be pursued in order to assist the liquidator in pursuing proceedings against, for example, a creditor to whom an alleged preference was given. Many of these reasons are common to bankruptcy, except that under the Bankruptcy Act, the more expeditious and cheaper alternative of an examination under s 77C is available, see [6.215].

Benefits [15.150] The examination process may be used to achieve a number of aims. These include: • obtaining information from those who are uncooperative; • supplementing documentation already held; • unravelling the complex history of the company and its transactions; • exposing breaches of the law; • ascertaining whether there is a cause of action which can be initiated or whether proceedings are worth defending; and • assisting in the gathering of information about assets. The public nature of an examination, in which creditors can participate or observe, serves the collective and open nature of the insolvency process. These are similar to the aims of a bankruptcy examination.

Nature of the power [15.155] As with examinations under s 81 of the Bankruptcy Act, the power to examine is very broad and is inquisitorial in nature: Rees v Kratzmann (1965) 114 CLR 63.20 The examinee is not called by a party to litigious proceedings, as is the usual situation with a witness; rather the examinee is the witness of the court. A court registrar usually presides at the examination to see that it is conducted fairly. The power extends beyond Australia’s borders: Waller v Freehills [2009] FCAFC 89; (2009) 177 FCR 507. The examination section is a far-reaching provision and confers extraordinary powers on the court, and its registrar, and the powers of the liquidator to ask for information. Consequently, the courts have, out of concern for possible abuse, indicated that the power must be exercised carefully in order that the examinee is not unfairly disadvantaged.21 The courts do not wish to have the process impinge unnecessarily or unfairly on the rights of a person to their privacy and to maintain confidentiality. Competing with this concern is the need for the public to be protected from and informed about any improper or criminal activity and for commercial morality to be enforced. In decisions involving a consideration of the 20 See Saraceni v Jones [2012] WASCA 59; (2012) 42 WAR 518 for a discussion of the constitutional basis of the power of examination. 21 Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36.

[15.160]

15 Administration of the Winding Up

583

previous provision, the need for the accountability of directors and others associated with failed companies was emphasised by the courts.22 The courts attempt to strike a balance between protection of the private interest and protection of the public interest.23 In Cunningham, Re Australasian Liquid Storage Pty Ltd (In Liq) [2017] FCA 559 at [18], Derrington J held: the further removed from the operation of the company a person has been, the less likely it is that they might be able to provide information about the examinable affairs. Where, as in this case, the proposed examinee had no direct contact or dealings with the company, the scope of the requirement that the proposed examinee “may” be able to give information requires careful consideration.

In that case the court stated that it was important to determine whether proposed examinee had information that was examinable, which could established by a hypothesis or scenario which raised the likelihood that examinee had the information, which is not as onerous as establishing that examinee does in fact possess the information.

the be the the

Function of examinations [15.160] The broad function of both ss 596A and 596B of the Corporations Act is to enable the liquidator to be better informed about the company’s examinable affairs so that the winding up of the company can be more effectively administered: Re South Pacific Energy Trading Pty Ltd (1996) 21 ACSR 435. The same general rationale applies in bankruptcy. Mason CJ of the High Court in Hamilton v Oades (1989) 166 CLR 486, 496, said: “There are the two important public purposes that the examination is designed to serve. One is to enable the liquidator to gather information which will assist him in the winding up; that involves protecting the interests of creditors. The other is to enable evidence and information to be obtained to support the bringing of criminal charges in connexion with the company’s affairs.”

It is the first purpose, what has been called the “information examination”,24 that is most often pursued, and that is the subject of most litigation. Within the broad function of the sections one can identify three specific functions of examinations: (i) to enable the liquidator to obtain evidence and information to support the initiation of criminal or civil charges;25

22 Spedley Securities Ltd v Bond Corporation Holdings Ltd (1990) 19 NSWLR 729. 23 Grosvenor Hill (Qld) Pty Ltd v Barber [1994] FCA 921; (1994) 48 FCR 301. For a concise summary of the law see Trevor, in the matter of Bell Group NV (in liq) (No 2) [2017] FCA 927. 24 Parker, “Liquidators Examinations” (1993) 10 Aust Bar Rev 25, quoted in Worthley v England (1994) 52 FCR 69, 86. 25 Hamilton v Oades (1989) 166 CLR 486; Douglas-Brown v Furzer (1994) 11 WAR 400.

584

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.165]

(ii) to enable the liquidator to ascertain whether there is a substantive claim or whether there is a defence available against proceedings brought against the company;26 and (iii) to inform the public of the affairs of failed companies.27 That publicity may lead to liquidators being supplied with additional information: Friedrich v Herald & Weekly Times Ltd (1990) 1 ACSR 277. An adjunct to this function is that it may deter fraud because of the possible publicity which results. Similarly, the Full Federal Court in Evans v Wainter Pty Ltd [2005] FCAFC 114; (2005) 145 FCR 176 at [252] listed similar purposes of examinations including28 to identify the company’s assets, both tangible and intangible, and its liabilities, to gather evidence and information to support the bringing of proceedings to recover assets or funds, and to assist in the regulation of companies by providing a public forum for the examination of the company’s officers. The summons may be issued in respect of assets of the company that are located overseas: Re Blue Ridge WA Pty Ltd (in liq) [2015] FCA 567. In assessing an application for a summons under s 596B, a court will only order an examination if it is satisfied that there are facts before it which demonstrate that it is likely that the person who is sought to be examined is able to give the information that the liquidator wants.29 The power contained in ss 596A and 596B is very broad and the courts have demonstrated a willingness to grant the liquidator great latitude and the legislature has indicated that this wide scope is intended.30 Most applications to discharge such summonses by those summonsed, on the grounds of misuse or abuse of process, do not succeed. The view frequently stated by the courts is that as long as the function of the examination appears to be within those broad purposes, the examination should be permitted and it should be left to the registrar presiding at the examination to safeguard the rights of the examinee.31

Abuse of process [15.165] The High Court has confirmed that the power to examine is a valid exercise of judicial power: Palmer v Ayres [2017] HCA 5; 118 ACSR 380.32 At the 26 For example, see Re Hugh J Roberts Pty Ltd (1970) 91 WN (NSW) 537, 540-541; Hamilton v Oades (1989) 166 CLR 486; 63 ALJR 352, 356 (ALJR). 27 Friedrich v Herald & Weekly Times Ltd [1990] VR 995; Re Spedley Securities Ltd; Reed v Harkness (1990) 8 ACLC 499. 28 See also Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36. 29 Ex parte Merrett (1997) 140 FLR 412; Re Bill Express Ltd; Di Donato v Crosbie [2010] VSC 101; (2010) 77 ACSR 556. 30 “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, [1173]. 31 Spedley Securities v Bank of New Zealand (1990) 3 ACSR 366, 374; Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301; Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36. 32 The particular constitutional issue was that s 596A was not invalid as contrary to Chapter III of the Constitution in that it was said to confer non-judicial power on federal courts and on courts exercising federal jurisdiction.

[15.165]

15 Administration of the Winding Up

585

same time, the courts have recognised that if there were no parameters placed on the use of the power to examine, examinees might be unfairly prejudiced. It has been established that an examination cannot be held if it is an abuse of process.33 It is an abuse of process if: • a liquidator seeks to gain a forensic advantage not otherwise available;34 • questions that are asked are not relevant;35 • the applicant for the examination has an improper object;36 or • the examination is vexatious or oppressive.37 Some of these may be determined at the time the registrar is deciding whether to issue the examination summons, if the concern is apparent. Once a summons is issued, and an examination starts to proceed, others concerns will either be addressed by the registrar presiding at the examination or by the court, on an application made to it challenging the summons. In taking action to have a summons set aside on the basis of abuse of process, the applicant has the onus of proving impropriety,38 and there is a high burden of proof: Re VMF Holdings Pty Ltd [1998] FCA 1078; (1998) 16 ACLC 625, 629. Whether there is an abuse of process depends on the purpose of the applicant seeking the order and the factual circumstances of the case. Just because a forensic advantage is obtained that alone is not decisive in determining whether an abuse of process has occurred: Simionato v Macks (1996) 19 ACSR 34. For an abuse it will be necessary that the applicant’s “offensive” purpose is at least the predominant purpose.39 One example is if an examination is being used to obtain evidence for libel proceedings,40 or to assist a third party in other proceedings: Commonwealth v Sheahan [2004] FCA 1301. The sections may not be used to conduct a fishing expedition – that is, beginning an examination without any clear suspicions and conducting an examination to determine if any matters or facts might emerge which may be of interest or assistance.41 Also, except in some limited situations, a liquidator is able to examine someone even where litigation by the liquidator is contemplated or pending against the person to be examined, or alternatively, where the prospective examinee 33 Re Hugh J Roberts Pty Ltd (1970) 91 WN (NSW) 537; Hamilton v Oades (1989) 166 CLR 486; Worthley v England (1994) 52 FCR 69; Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36. 34 Hong Kong Bank of Australia v Murphy (1992) 28 NSWLR 512, 519. See however, Re Mustang Marine Australia Services Pty Ltd [2014] NSWSC 136; (2014) 292 FLR 228 where the court said that a liquidator conducting an examination to determine if an action should be brought was not seeking an unfair forensic advantage, it was entirely appropriate. 35 Re Spedley Securities Ltd; Ex parte Potts & Gardner (1990) 2 ACSR 152. 36 Hamilton v Oades (1989) 166 CLR 486; Re Rothwells Ltd (No 2) (1989) 15 ACLR 168, 180. 37 Evans v Wainter Pty Ltd (2005) 145 FCR 176. 38 Re Southern Equities Corporation Ltd (1997) 15 ACLC 1582. 39 Worthley v England (1994) 52 FCR 69; Evans v Wainter Pty Ltd (2005) 145 FCR 176. 40 Flanders v Beatty (1995) 16 ACSR 324, 335. 41 See Re Rothwells Ltd (No 2) (1989) 15 ACLR 168, 180; Spedley Securities Ltd v Bond Corporation Holdings Ltd (1990) 19 NSWLR 729; Re Southern Equities Corporation Ltd (1997) 15 ACLC 1582.

586

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.170]

is contemplating issuing or has issued legal proceedings against the liquidator. This is despite the fact that the examination would place the liquidator in a better position in that litigation.42 It is a legitimate purpose for a liquidator to examine a defendant to proceedings in order to assess their capacity to meet any judgment obtained: Heard, in the matter of GEBIE Services Pty Ltd (in liq) [2017] FCA 323.43 A liquidator cannot use the examination process: • where there are contemplated or pending proceedings if the process is to be used as a rehearsal of cross-examination44 (however, the liquidator may probe the circumstances surrounding the subject matter of the litigation in the hope that further lines of investigation may become plain);45 • to overcome a failure in litigation;46 or • to destroy the credibility of a witness in other litigation.47 The use of an examination for the benefit of a particular creditor with a claim against the company is not necessarily an abuse of process.48 Where a summons is set aside as an abuse of process, the liquidator may be ordered to pay costs. But where the liquidator’s default was “innocent and inadvertent rather than deliberate”, costs can be ordered to be paid only to the extent that there are assets available in the company to meet them, so that the liquidator will not be personally out of pocket: Re Mendarma Pty Ltd (No 2) [2007] NSWSC 99; (2007) 61 ACSR 601. Similar principles apply in respect of bankruptcy examinations. See Chapter 6.

Examinable affairs [15.170] The examinee may be asked any question about the corporation and its examinable affairs which the court allows: s 597(5B). Examinable affairs are defined in s 9 as: (a) the promotion, formation, management, administration or winding up of the corporation; (b) any other affairs of the corporation; or 42 See Hamilton v Oades (1989) 166 CLR 486; Re Rothwells Ltd (No 2) (1989) 15 ACLR 168, 180; Re Spedley Securities Ltd; Spedley Securities Ltd v Bank of New Zealand (1991) 9 ACLC 124. 43 In Finnigan v Ellis [2017] NZCA 488, the New Zealand Court of Appeal questioned the principles upon which Australian case law relied on this point, in particular in Grosvenor Hill (Qld) Pty Ltd v Barber [1994] FCA 921; (1994) 48 FCR 301. 44 Re Hugh J Roberts Pty Ltd [1970] 2 NSWR 582; Re Moage Ltd (1997) 15 ACLC 1034; Re Southern Equities Corporation Ltd (1997) 15 ACLC 1582. 45 Spedley Securities Ltd v Bond Corporation Holdings Ltd (1990) 19 NSWLR 729; Re Spedley Securities Ltd; Ex parte Potts & Gardner (1990) 2 ACSR 152. 46 Hamilton v Oades (1989) 166 CLR 486; Re Rothwells Ltd (No 2) (1989) 15 ACLR 168, 180; Re Southern Equities Corporation Ltd (1997) 15 ACLC 1582, 1614. 47 Re Hugh J Roberts Pty Ltd [1970] 2 NSWR 582; Re Moage Ltd (1997) 15 ACLC 1034; Re Southern Equities Corporation Ltd (1997) 15 ACLC 1582, 1614. 48 Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519; Evans v Wainter Pty Ltd (2005) 145 FCR 176.

[15.175]

15 Administration of the Winding Up

587

(c) the business affairs of a connected entity of the corporation in so far as they are relevant to the corporation or to anything included in its examinable affairs because of (a) or (b).

The definition of examinable affairs borrows from the meaning given to it in the Bankruptcy Act: see [6.245]. The meaning of the term is obviously very wide, and includes claims against and by the company: Grosvenor Hill (Qld) Pty Ltd v Barber [1994] FCA 921; (1994) 48 FCR 301, 305. In particular an examination may be held of creditors or others who may have benefited from a voidable transaction with the company so as to assess whether such a claim may be brought. Information about whether a judgment resulting from a liquidator’s action has any worth, that is whether damages awarded under the judgment will be met, is about the company’s property and can be the subject of an examination. This is because whether a judgment could be satisfied is a practical and realistic question given the fact that the liquidator would have to expend substantial costs to obtain a judgment.49 Thus in Gerah Imports Pty Ltd v Duke Group Ltd (1994) 12 ACSR 513, examinations were permitted of partners of a national accounting firm that was being sued by the liquidator for negligence, in order to ascertain the extent of the firm’s professional indemnity insurance. The court held that the cost of the litigation commenced would be substantial and that, in establishing whether ultimate recovery of damages was likely, the summonses should stand as being concerned with the “examinable affairs” of the company.50 On the other hand, an insurer’s dealings with third parties, which had no connection with [the company] have been found not to be part of a company’s examinable affairs.51 Connected entity

[15.175] The definition of “examinable affairs” raises the question – what is a “connected entity” in relation to a corporation? The term is defined in Corporations Act, s 9 as: (a) a body corporate that is, or has been, related to the corporation; or (b) an entity that is, or has been, connected (as defined by s 64B) with the corporation.

Section 64B of the Corporations Act sets out in some detail the situations in which entities, namely corporations, natural persons, partnerships and trusts can be regarded as connected with the corporation which is in liquidation.52 The section is obviously modelled on ss 5B – 5E of the Bankruptcy Act.

49 Grosvenor Hill (Qld) Pty Ltd v Barber [1994] FCA 921; (1994) 48 FCR 301, 305; Re Interchase Corporation Ltd (1994) 12 ACSR 405. 50 Leave to appeal to the High Court was refused: Gerah Imports Pty Ltd v Duke Group Ltd (1994) 12 ACLC 220. 51 Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36 at [42]. 52 Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36.

588

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.180]

Application for summonses [15.180] An application for an examination under either s 596A or s 596B must be made in writing.53 If the liquidator wishes to examine under s 596B, the application for the summons must be supported by an affidavit that makes out a case for having the person examined: s 596C(1).54 The affidavit is not generally available for outside inspection. The reason for this is that an examinee should come to court without knowing on what matters he or she will be examined: Re Excel Finance Corp (1993) 41 FCR 346, 355; [1993] FCA 108. The affidavit that the liquidator is required to provide to the court, giving reasons why certain persons should be examined, is therefore kept confidential by the court and is not available to those persons except by court order: s 596C.55 In deciding whether to grant access to the affidavit, the court must be satisfied that the claimant has an arguable case that the examination summons had been issued for an improper purpose or involved an abuse of the court’s processes. Once an arguable case has been raised, there are persuasive grounds for allowing access to the affidavit.56 The court can itself read the affidavit to determine whether it should be made available for inspection. An order for inspection can be limited to the claimants’ legal representatives: Ariff v Fong [2007] NSWCA 183; (2007) 25 ACLC 1079. Given that the liquidator seeks an order for an examination by way of an ex parte application, the liquidator has a duty to disclose all the facts that would have been put by parties who are absent (Re One Twenty Seven Corporation Pty Ltd (1995) 13 ACLC 1600) and other information necessary for the registrar to decide whether to issue the summons: Linker v Nilant [2003] FCA 1576; (2004) 48 ACSR 178. In determining that an examination summons is too wide, the court may set aside the summons. Alternatively, it may order deletion of categories of documents sought in the summons that are so broad in time or description as to be “oppressive”, and to “go far beyond the legitimate interests of [the liquidator]”: Re Bernsteen Pty Ltd (No 2) [2007] FCA 48; (2007) 25 ACLC 129. The remainder of the summons may then stand. The liquidator, or the person who applied for the examination, must give written notice of the examination to as many creditors as reasonably practicable and each eligible applicant in relation to the corporation: s 596E. The summons – Court Form 17 – will require the person to be examined to attend the court on a particular date and time. 53 A review of the authorities with respect to examinations for the production of books is undertaken in Re Bill Express Ltd; Di Donato v Crosbie [2010] VSC 101; (2010) 77 ACSR 556. 54 See the summary of the law in Re Forge Group Construction Pty Ltd; Ex Parte Jones and Johnson [2015] WASC 184 at [5]. 55 Courts’ Corporations Rules, r 11.3. 56 Williams v Spautz (1992) 174 CLR 509; Excel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69; Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36.

[15.190]

15 Administration of the Winding Up

589

Examination procedure: s 597 [15.185] The examination is to be held in public, unless the court considers there are special circumstances why it should be conducted in private: s 597(4).57 This is in accord with the general approach that publicity may lead to further information being provided to the liquidator from sources of which the liquidator is unaware. As well, a creditor, as an eligible applicant, or ASIC, may take part in the examination: s 597(5A). Persons who are not the subject of a summons may be required to produce relevant books and records at the examination (s 597(9)), in order to assist the obtaining of information from a person being examined. While an order for production of documents under s 597(9) can be made before an examination begins, it could not require actual production before an examination commences.58 An order for further production of documents may be made during an examination: Re Sheahan [2015] FCA 567. The examinee is entitled to be legally represented at their own expense (s 597(16)) and any other party may be represented by a lawyer or agent: s 597(5A). Questions will be asked by the liquidator’s legal representative and, from time to time, by the presiding registrar. The role of the presiding registrar is to ensure that there is fair play between the person being examined and those interrogating, and unfair or irrelevant questions may be disallowed. There is a broad discretion vested in the registrar to ensure that any abuse of process is prevented during the examination: Douglas-Brown v Furzer (1994) 11 WAR 400. There is also the power to make directions about how the examination will be conducted: s 597F. This includes the power to allow an interested person to have their legal representative present and to be allowed to object to questions: Re Brentwood Village Ltd [2015] NSWSC 1342. An examinee must not, without reasonable excuse, make a false or misleading statement or refuse or fail to, take an oath or affirmation; answer any question which he or she is directed by the court to answer; or produce books which were required by the summons to produce: s 597(7) Incrimination

[15.190] An examinee is not excused from answering a question on the ground that the answer might tend to incriminate: s 597(12). This provision expressly abrogates the examinee’s common law right to refuse to answer a question on that basis. However, an examinee may, before answering a question, claim that the answer might tend to incriminate and, accordingly, neither the answer nor the information obtained, as a direct or indirect consequence of the answer, is admissible in evidence against the person in criminal proceedings other than proceedings under s 597 or proceedings in respect of the falsity of the answer: s 597(12A).59 57 Friedrich v Herald & Weekly Times Ltd [1990] VR 995; Re Suncoast Tile Merchants Ltd (1986) 4 ACLC 663. 58 Re BPTC Ltd (No 2) (1992) 10 ACLC 1431; Re South Pacific Energy Trading Pty Ltd (1996) 14 ACLC 1594, 1597. 59 See Gemmell v Le Roi Homestyle Cookies Pty Ltd [2014] VSCA 182; (2014) 102 ACSR 367.

590

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.195]

Legal professional privilege

[15.195] Legal professional privilege will often arise when third parties assert their privilege against the liquidator’s pursuit of inquiries as to the reasons for the company’s failure. The most common situation arises in examinations. The Corporations Act does not abrogate this privilege. In Re Compass Airlines Pty Ltd (1992) 109 ALR 119 the Full Federal Court held that legal professional privilege could be claimed by a person called to give evidence in an examination under s 597.60 The power of a liquidator to gain information regarding the affairs of the company “would not be stultified if legal professional privilege could be claimed”. Nor in a “practical sense” is the availability of the privilege in an examination likely to “impair to any serious degree the efficacy of such examination or fulfillment of its legitimate purpose”. Also, the privilege does not protect communications in furtherance of any criminal or fraudulent purpose. Although the privilege against self-incrimination had been expressly abrogated in s 597(12), this did not suggest an implied abrogation of legal professional privilege. Indeed, it suggested the contrary. Directions are usually given by the court for the separate hearing of contested challenges to a claim of privilege: Tolric Pty Ltd v Taylor as Liquidator of Bruck Textile Technologies Pty Ltd (in liq) [2015] FCA 1051. Section 597(14) provides that, subject to s 597(12), any written record of an examination signed by the examinee, or any authenticated transcript, may be used in evidence in any legal proceedings against the examinee. If the court orders that the questions which are put to the examinee and the answers given are to be recorded in writing under s 597(13), the written record is open for inspection: s 597(14A). The right to inspection is not unfettered and can be limited by a court in appropriate circumstances: Re Emanuel Investments Pty Ltd (1996) 14 ACLC 315. If a court is satisfied that a summons under ss 596A or 596B was obtained without reasonable cause the court may order that some or all of the examinee’s costs be paid by the person who applied for the summons or any other person who took part in the examination: s 597B.61 If the examinee is not directly concerned in the management of the company, he or she is entitled to the cost of attendance at the examination and in gathering together the documents, but not costs for their legal representation: McVeigh v Brumley [2009] VSC 668.62

60 See also Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36. 61 It would be only in an exceptional case that a court would order security for costs of an examination summons to be provided by the liquidator: Hodgkinson, in the matter of Kupang Resources Ltd (Subject to Deed of Company Arrangement) [2017] FCA 1342. 62 The principles are discussed in Crosbie v McLachlan [2013] FCA 1101; (2013) 217 FCR 211; and Surpion Pty Ltd v M R Works Pty Ltd (recs and mgrs apptd) [2010] FCA 1262.

[15.205]

15 Administration of the Winding Up

591

Obtaining information by affidavit [15.200] The Corporations Act recognises that, in certain circumstances, the liquidator may not need an examination and that information could as usefully be obtained by affidavit evidence. Hence, s 597A allows a liquidator to apply to the court for it to require examinable officers to supply evidence by affidavit instead of or in addition to attending an examination. The aim of this procedure is to try and reduce costs where possible: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, [1188]. An order under s 597A cannot be set aside on the basis of oppressiveness: Re Modern Woodcraft Pty Ltd [1997] FCA 712; (1997) 75 FCR 454. There is no equivalent to this procedure in bankruptcy although, conversely, there is no equivalent to private s 77C examinations under the Bankruptcy Act (see Chapter 6) in corporate insolvency.

DISCLAIMER OF ASSETS The right of a trustee in bankruptcy to disclaim onerous property63 of the bankrupt also applies in corporate insolvency. Liquidators may decide that they do not wish to retain certain company property because it is too onerous, worth little or is unsaleable.

[15.205]

In the context of liquidation, a liquidator has this power under s 568 of the Corporations Act.64 These rules relating to disclaimer are now similar to those applying in bankruptcy: see [6.280]. In disclaiming, the liquidator gives notice to others of an intention to be rid of any interest in the property. If persons suffer loss as a consequence, those persons to whom notice has been given are required to try to mitigate their loss. They may lodge a proof of debt in the liquidation in respect of the amount of that loss. The liquidator may disclaim property referred to in s 568(1), which is: • land burdened with onerous covenants, for example as to limited use of the land, or imposing some ongoing obligation; • shares; • unsaleable or not readily saleable property; • property which may give rise to a liability to pay or some other onerous obligation; • property where it is reasonable to expect that the costs incurred in selling it would be greater than the sale proceeds; or • contracts. A common example occurs where the company held the leasehold interest in real property. The property may have been used to accommodate some aspect of the 63 Property is defined in Corporations Act, s 9. The forms of property that may be subject to disclaimer are broad: Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51; (2013) 251 CLR 592 (property of the company in bilateral contracts are included within s 568). 64 See Global Television Pty Ltd v Sportsvision Australia Pty Ltd [2000] NSWSC 960; (2000) 35 ACSR 484, 498.

592

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.205]

company’s former business – for example, an office or factory. For the liquidator to retain the lease would lead the company to incur more debts. The lessor can claim for the loss of the tenancy being disclaimed, but it must mitigate its loss, that is, by trying to find another tenant. In Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51; (2013) 251 CLR 592, the High Court held that a company in liquidation may disclaim a lease that it has entered into as lessor, which will terminate the tenant’s rights in the land, namely the right to quiet and exclusive possession. The High Court (by a four to one majority) held that a lease is a contract and hence comes within s 568(1)(f). French CJ, Hayne and Kiefel JJ said at [40]: “The rights and duties which a landlord and tenant have under a lease are bundles of rights and duties which together can be identified as species of property. The origins of those rights and duties lie in the contract which the landlord and tenant or their predecessors in title made. In every case, the rights and duties of the landlord and tenant, whether as an original party to the lease or as a successor in title, stem from the contract of lease and any later contract made in relation to that lease. When a company is the landlord, the rights and duties which that company has in respect of the lease are properly described as ‘property of the company that consists of … a contract’. The landlord’s rights and duties are a form of property; those rights and duties ‘consist of’, in the sense of derive from, the contract of lease.”

Another example, which is becoming more common, is where the company owns land that has been contaminated and cannot be sold without a major clean-up. In Re Linc Energy [2017] QSC 53; (2017) 120 ACSR 86, it was held that the liquidator’s power of disclaimer could not be used to overcome liability to comply with a state environmental protection order. The court held that s 5G of the Corporations Act for the State legislation to prevail over the Corporations Act provision. However, this was overturned on appeal: Longley v Chief Executive, Dept of Environment and Heritage Protection [2018] QCA 32, which recognised the power to disclaim on the basis of there being no inconsistency to trigger s 5G.65 Land burdened with onerous covenants refers not only to covenants the burden of which runs with the land, but also to cases where there are onerous covenants from which may arise financial liabilities that impose a burden on the land, in the sense that they may be enforced against the land, such as a right to sell for unpaid rates, or a mortgage: Re Middle Harbour Investments Ltd [1977] 2 NSWLR 652. A liquidator is entitled to disclaim, except in relation to a contract, even if he or she has tried to sell the property, taken possession of it or exercised an act of ownership in relation to the property: s 568(1)(g). Further, the liquidator is entitled to disclaim a contract if they have tried to assign it or have exercised rights in relation to it: s 568(1)(h). A contract cannot be disclaimed without the leave of the court unless it is an unprofitable one or relating to a lease of land: s 568(1A).66 Whilst the court can 65 At the time of writing (May 2018) this decision was subject to an application for special leave to the High Court of Australia. 66 For consideration of “unprofitable contracts”, see Transmetro Corporation Ltd v Real Investments Pty Ltd (1999) 17 ACLC 1,314; Global Television Pty Ltd v Sportsvision Australia Pty Ltd [2000] NSWSC 960; (2000) 35 ACSR 484.

[15.220]

15 Administration of the Winding Up

593

grant conditional leave, and make necessary orders in relation to the contract, the court is not permitted to vary contractual rights and liabilities of other parties existing before the disclaimer, even where such a variation might contribute to the efficient administration of the liquidation. In that respect, disclaimer does not, except to a very circumscribed degree, enable the liquidator to affect the rights of others with whom the company has dealt: Sims and Singleton as liquidators of Enron Australia Pty Ltd v TXU Electricity Ltd [2005] NSWCA 12; (2005) 53 ACSR 295; Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51; (2013) 251 CLR 592 at [71] per Gageler J. A liquidator may lose the right to disclaim if there is a failure to disclaim within 28 days of receiving a written application from a person interested in property requiring the liquidator to decide whether or not to disclaim: s 568(8). The liquidator is then bound by whatever obligations – under the lease, or contract, or retention of land – that apply.

Section 568A procedure [15.210] The procedure to be followed by a liquidator in disclaiming is set out in Corporations Act, s 568A and Corporations Regulations, reg 1.0.03A. The liquidator must, as soon as practicable after disclaiming, lodge a written notice of the disclaimer with ASIC – ASIC Form 525. Written notice must be given to all parties who appear to the liquidator to have an interest in the property; the liquidator must publish a notice of disclaimer on the ASIC Public Notices website, and give written notice of the disclaimer to the registrar of titles where the transfer of the real property that is disclaimed must be registered.

Section 568B: challenge to proposed disclaimer [15.215] Section 568B permits a person who has an interest in company property which has been disclaimed to apply to the court for an order setting aside the disclaimer before it takes effect. Effect of disclaimer [15.220] A disclaimer takes effect only if there is no application to set aside the disclaimer or, if there is, the application is unsuccessful: s 568C(1). If a disclaimer takes effect, the company’s rights, interests, liabilities and property in or in respect of the property disclaimed is taken to have terminated. No other person’s rights are affected except so far as is necessary in order to release the company and its property from liability: s 568D(1). A disclaimer of a lease will terminate the tenant’s rights under the lease, as well as the landlord’s duties and liabilities (such as the duty to give quiet and exclusive possession): Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51; (2013) 251 CLR 592. In that case, Gageler J explained (at [76]): “The property of the company that consists of a contract able to be disclaimed therefore encompasses the totality of the executory rights and obligations the company has under that contract.”

594

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.225]

A disclaimer operates prospectively, it has no effect on the rights or obligations of any other person except so far as is necessary prospectively to release the company from its rights and obligations in relation to that property: Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51; (2013) 251 CLR 592 at [71] per Gageler J. A person who suffers loss because of the disclaimer can prove as a creditor in the winding up: s 568D(2).

Section 568E: subsequent challenge to disclaimer [15.225] A person who has an interest in the disclaimed property can apply to the court to have the disclaimer set aside after it has taken effect: s 568E(1). The court must be satisfied that it is unreasonable to expect the applicant to have applied for an order before the disclaimer took effect: s 568E(2). The court should consider the fact that the disclaimer is likely to have prejudiced the interests of the counterparty and of the creditors respectively, and the court’s task is to weigh those prejudices to decide whether there is a case for intervention.67 The court has the power to order that disclaimed property vest in or be delivered to a person entitled to the property or to a person to whom the court believes it is appropriate to have the property transferred: s 568F(1). In Re Condobolin Bila CDEP Ltd [2006] FCA 1330; (2006) 59 ACSR 682, the liquidator had disclaimed rural property, and the Commonwealth, which had funded the purchase of the property by the company, successfully claimed the return of the property. Disclaimed real property ultimately “escheats” to, or vests in, the State: Re Tulloch Ltd (No 2) (1978) 3 ACLR 808.68

Not all liabilities are ended [15.230] While the liabilities of a company pursuant to a lease are terminated when a liquidator disclaims, under s 568(3), an interest in the lease does not determine the covenants in the lease for all purposes; a guarantor of the obligations of the company in liquidation remains liable to the lessee under the lease both in respect of unpaid rent that accrues before re-entry and in damages for loss of future rent. Further, the guarantor’s right to indemnity from the company is terminated by the disclaimer, although the guarantor could prove in the winding up under s 568D(2): Sandtara Pty Ltd v Abigroup Ltd (1996) 42 NSWLR 491. CARRYING ON BUSINESS [15.235]

Often, when a company commences liquidation its business has ceased or is close to shutting down. If the company’s business is still operating, the liquidator may decide to carry on that business. Frequently, however, the business will be so disorganised or run-down that it is not practicable to continue it. However, the liquidator may carry on the business in certain circumstances in the 67 See for example, Steinhardt v Trenfield [2015] QSC 237, where an undertaking to give up possession of the leased property upon a sale by the liquidators was sufficient to ensure no prejudice arose as a result of setting aside the disclaimer. 68 See also National Australia Bank v New South Wales [2009] FCA 1066; (2009) 182 FCR 52 referred to in [6.285] as to difficulties for mortgagees of disclaimed property.

[15.240]

15 Administration of the Winding Up

595

short term to assess whether it is profitable for a limited purpose, for example to complete a contract which will benefit the company’s creditors, while a buyer of the business is located, or for a longer term, if the business is profitable. This is subject to the restriction in s 477(1)(a) of the Corporations Act that the liquidator is only able to carry on business so far as is, in the opinion of the liquidator, necessary for its beneficial disposal or winding up, with a similar restriction in respect of voluntary liquidation: s 493(1). These provisions focus on the business of the company at the time of its winding up. They do not permit the liquidator to take on a new aspect of the company’s business in which the liquidator might have gained some expertise.69 It is wise for the liquidator to seek the approval of creditors or the committee of creditors to continue trading. The continuation of the business can entail obligations being assumed by the liquidator. These are in the nature of the typical obligations of any business as an employer, taxpayer and other obligations depending on the nature of the business involved. Thus, a liquidator continuing the employment of staff will have obligations to remit taxes to the Tax Office; failure to do this will be a breach of duty as a liquidator: DCT v Tideturn Pty Ltd [2001] NSWSC 217; (2001) 37 ACSR 152. Tax returns need to be prepared and lodged. As an employer, a liquidator will have an obligation to ensure that occupational health and safety requirements are met, failing which, liability may be imposed.70 Regulatory requirements, for example under the tconsumer law and anti-money laundering legislation, must be complied with. In relation to ongoing debts incurred, the liquidator is trading as agent of the company and the liabilities incurred are generally those of the company. If a business is continued, all business documents of the company must state that the company is in liquidation: s 541.

REALISING THE ASSETS [15.240] Once a liquidator has taken possession or control of the property of the company, the assets must be dealt with in a way that will most benefit the creditors. While given broad powers to deal with the assets in s 477, the liquidator will generally seek to realise the assets as soon as practicable. Once that has been done, dividends can usually be paid to creditors. As with any property, the liquidator must choose the method of sale and price that will give maximum benefit to the creditors. Naturally, the liquidator should seek to obtain as good a price as possible, given the market conditions. That said, the liquidator will not necessarily be in breach of duty simply because a higher price may have been possible: Hausman v Smith [2006] NSWSC 682. Whether the liquidator has acted reasonably in selling the asset will depend on all of the commercial circumstances. As the court said in Perpetual Nominees Ltd v McGoldrick (No 3) [2017] VSC 78; (2017) 120 ACSR 32 at [144]: 69 Re Crouch [2007] NSWSC 1055; (2007) 214 FLR 244. 70 In Benbow v Scales [2002] NSWCIMC 184, a receiver and manager was liable under s 15(1) of the Occupational Health and Safety Act 1983 (NSW) because he had failed to apply due diligence to the performance of his duties in relation to occupational health and safety.

596

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.245]

The duty was to sell or otherwise dispose of the property of the company … acting in good faith and with due care and skill to an extent that was reasonable in all the circumstances. This involved taking reasonable care to secure the best price possible in the commercial context which existed at the time.71

Options for sale will include private contract, public auction, tender and clearance or “liquidation” sale. The means of sale is at the liquidator’s discretion. The court will only interfere with sales if the liquidator fails to act as a reasonable liquidator would act.72 It should be noted that liquidators are officers of the company under s 9 of the Act and therefore are bound by the directors’ and officers’ duties such as the duty to exercise their powers and discharge their duties with due care and diligence (s 180) and to only exercise their powers for a proper purpose: s 181. There is no express equivalent provision for liquidators similar to the duty imposed on receivers exercising the power of sale (s 420A); however, the statutory duty of care imposes a similar requirement to act reasonably – although without the statutory instruction to seek market price under s 420A(1)(a). This passage of the text in the 9th edition was cited with approval in Perpetual Nominees Ltd v McGoldrick (No 3), which held that liquidators owed a duty of care when exercising the power of sale over the company’s assets to the guarantors of the company’s debt, although the court held that the duty was complied with by the liquidators. The court stated (at [112]) that “A liquidator has a duty to exercise reasonable care and diligence in the discharge of his or her functions. It is a duty owed to the creditors and shareholders of the entity the subject of the winding up”. If an asset is the subject of a creditor’s secured interest, the liquidator will have to pay out the creditor from the proceeds of sale. Often a secured creditor will already have exercised their power of sale because of the debtor’s default. In such a case, the secured creditor must pay to the liquidator any money received on the sale which is over and above their debt. That money will then be included in the money available to be distributed to the unsecured creditors. As one would expect, a liquidator is unable to purchase assets, except with the leave of the court. There are also restrictions on members of a committee of inspection from acquiring assets: IPSC, ss 80-55, 80-60.

CLAIMS OF CREDITORS [15.245] Any legislation dealing with the winding up of a company must indicate what claims can be taken into account by the liquidator when determining payment to creditors from company property. Until 1993, the then Corporations Law simply incorporated by reference the provisions of the Bankruptcy Act 1966 (Cth) that dealt with issues such as proofs of debt and claims of creditors in general. Now, creditors’ claims are dealt with in 71 See further, Mills v Sheahan [2007] SASC 365; (2007) 99 SASR 357 where the scope of the duty of care owed by liquidators is discussed in detail (albeit on a strike out application) and Macks v Viscariello [2017] SASCFC 172 (which confirmed that administrator and liquidator duties as officers are owed to the company and not to individual creditors, members or directors). 72 Leon v York-O-Matic [1966] 3 All ER 277; Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207, 230-231; Naumoski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332.

[15.260]

15 Administration of the Winding Up

597

ss 553 – 554J of the Corporations Act. However, these provisions do mirror the corresponding sections in the Bankruptcy Act, and bankruptcy provisions are still relied upon. Section 553E of the Corporations Act provides that subject to the provisions contained in the Act the same rules which apply in bankruptcy (except for those covered by ss 82 – 94 and 96 of the Bankruptcy Act) are to apply in liquidation: see, for example, Re One.Tel Ltd; Walker and Sherman [2002] NSWSC 1081; (2002) 43 ACSR 305; Re Walker; One.Tel Ltd [2007] NSWSC 1478; (2007) 25 ACLC 1652. For the general effect of many of the provisions contained in the Corporations Act, reference can be made Chapter 6, which deals with bankruptcy. It should be noted, however, that bankruptcy law is fundamentally different in one sense, that if claims are not provable debts in a person’s bankruptcy, the consequence is that the bankrupt may remain personally liable for them. In contrast, a company ceases to exist at the finalisation of a winding up, and consequently the law provides far fewer categories of claim that are not provable. For example, unlike in bankruptcy, claims of unliquidated damages in tort are provable in a company liquidation.

Proof of debts and claims [15.250] Section 553 of the Corporations Act states what debts and claims are provable in a winding up. They are all debts payable by, and claims against, the company that are present or future, certain or contingent,73 ascertained or sounding only in damages and which occurred before the relevant date. The “relevant date” is the day on which the winding up is taken to have begun: s 9. If, by legislation or otherwise, a debt that exists at the date of the winding up is discharged by the time of distribution of dividends, the creditor cannot prove.74 Calculation of proofs of future debts

[15.255] Debts need not be presently due and payable for them to be provable. As explained above, claims of unliquidated damages in tort are provable debts. If debts are “future” debts within s 553, in the sense that they are not payable at the relevant date, they are still provable subject to a statutory discount for accelerated “payment” under s 554B of the Act. That section provides that the amount of the proof of debt is the amount payable on the future date, reduced by the amount of an 8% discount: Corporations Regulations, reg 5.6.44. Rule against double proofs

[15.260] The rule against double proofs, which applies in bankruptcy and which was discussed in Chapter 6, that there cannot be two claims in respect of the same debt, is relevant in the liquidation context.75 73 Claims under the Australian Consumer Law were held to be contingent claims in ACCC v Phoenix Institute of Australia Pty Ltd (Subject to DOCA) [2016] FCA 1246; undisturbed on appeal in Phoenix Institute of Australia Pty Ltd (Subject to DOCA) v ACCC [2107] FCAFC 155. 74 AssetInsure Pty Ltd v New Cap Reinsurance Corp Ltd [2004] NSWCA 225; (2004) 61 NSWLR 451 (in the High Court, AssetInsure Pty Ltd v New Cap Reinsurance Corp Ltd [2006] HCA 13; (2006) 225 CLR 331); Wight v Eckhardt Marine GmbH [2004] 1 AC 147. 75 See, for example, Gore v Australian Goldfields NL [2001] WASC 242.

598

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.265]

Superannuation guarantee charge (SGC)

[15.265] The question of double proofs of debt can arise in relation to unpaid superannuation entitlements of an employee, from both the employee and the Tax Office, in relation to the superannuation guarantee charge (SGC). Section 553AB of the Corporations Act requires the liquidator to reject the whole, or a specified part of, a debt by way of a superannuation contribution where an SGC is attributable to the whole or part of that debt. There is a similar requirement for deed administrators: s 444DB. SGC and the Fair Entitlements Guarantee (FEG)

[15.270] Where wages are paid after the commencement date, in relation to employment services provided prior to the commencement date, following an advance provided for that purpose, for example, under the Fair Entitlements Guarantee Act 2012 (Cth) (FEG Act), s 556(1AE) and (1AF) of the Corporations Act clarify that, where the SGC is attributable to wages for pre-insolvency services, the SGC charge falls within s 556(1)(e). Otherwise the SGC is taken to be an expense of the liquidation under s 556(1)(a). A liquidator also has the power under s 553(1A) to reject the whole or part of a proof of debt for superannuation where the amount has already been paid by way of the SGC or there is an admissible proof for the charge. Penalties and fines

[15.275] In line with s 82(3) and (3A) of the Bankruptcy Act, s 553B of the Corporations Act provides that penalties and fines imposed by a court in respect of an offence against a law are not provable in the winding up although an amount payable under a pecuniary penalty order is admissible: s 553B(2). The word “offence” is not limited to criminal offences and includes, for example, pecuniary penalty orders imposed for contraventions of the Competition and Consumer Act 2010 (Cth).76 The policy behind this is that creditors should not have to suffer, in lessening of their dividend, by the illegal actions of the company.77 That does not mean that the court should refrain from imposing a pecuniary penalty on a company that contravenes the law. As Davies J said in Re ASIC; Sino Australia Oil and Gas Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 1488 at [8]: “It is still appropriate for a court to impose a penalty on an insolvent company to serve as a warning and measure of the court’s disapproval of the contravening conduct”.78 76 Mathers v Commonwealth [2004] FCA 217; (2004) 134 FCR 135; cf McLellan v Australian Stock Exchange Ltd [2005] FCA 585; (2005) 144 FCR 327. 77 Australian Law Reform Commission, Principled Regulation: Civil and Administrative Penalties in Australian Federal Regulation, ALRC 95, Ch 32. The history and scope of the provision is discussed in Commonwealth v Leahy Petroleum-Retail Pty Ltd [2005] FCA 1422; (2005) 55 ACSR 353. See also Murray, “Kicking a Company when it’s Down – A Regulatory Approach to Penalising a Company in Liquidation” (2008) 8 Insolv LB 69; Sise, “An Alternative Approach to the Treatment of Penalties and Fines in Bankruptcy” (2016) 16(2) QUT Law Rev 82. 78 At the same time, the court may need to set a penalty and payment regime that does not cause the company, or individual, to become insolvent: ACCC v Morild Pty Ltd [2017] FCA 1308.

[15.285]

15 Administration of the Winding Up

599

Estimate of claims of uncertain value – s 554A

[15.280] Section 554A of the Corporations Act provides a mechanism for the estimation of claims of uncertain value. The section only comes into effect after a liquidator has admitted a debt or claim that does not bear a certain value: Re Glowbind Pty Ltd; Takchi v Parbery [2004] NSWSC 1190; (2004) 22 ACLC 642. The liquidator is obliged to make an estimate of the value of the debt or claim or refer the issue to the court: s 554A(2). If the liquidator makes a determination and the creditor is dissatisfied, the creditor may appeal to the court: s 554A(3). If a liquidator refers a matter to the court, or a person appeals against an estimate of the liquidator, the court must make an estimate or determine that the liquidator should employ a particular method in calculating the value: s 554A(4). Set-off

[15.285] The operation of the law of set-off in insolvency is fundamental – that where there are mutual dealings, and one of the parties becomes insolvent, it would be unjust to require the solvent party to pay 100 cents in the dollar to the liquidator in respect of its debt, but allow it only some lesser percentage dividend of the moneys owed to it. The principle has existed in the law of insolvency for some centuries.79 Section 553C of the Corporations Act effectively sets out s 86 of the Bankruptcy Act which deals with set-off.80 Where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company and a person who wants to have a debt or claim admitted against the company in its winding up, the sum due from the person to the company may be set off against any amount due to that person from the company.81 Where the requirements of the section are satisfied, the section operates automatically.82 The statutory provision operates to the exclusion of contractual or equitable set-off claims: Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] WASC 152; (2017) 320 FLR 259.83 There must also be a debt owed by the company to that person. A contingent liability can be a relevant debt.84 Post-liquidation receipts can form the basis of set-off “provided they existed as contingent claims at the commencement of the 79 The English courts appear to have adopted the principles of set-off from as early as 1612, and equivalent provisions have appeared in English bankruptcy law at least since 1705: In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440. 80 Reference can be made to the explanation of set-off in bankruptcy in Chapter 6. Despite the fact that s 553C of the Corporations Act has different wording from s 86 of the Bankruptcy Act it is to be interpreted in the same way: GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888. 81 See further, Derham on the Law of Set Off (4th ed, OUP, 2010). 82 Gye v McIntyre (1991) 171 CLR 609, 622; GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888. 83 For a discussion of the interaction between building industry security of payment legislation and s 553C see: Facade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247; (2016) 116 ACSR 493. 84 See the detailed discussion of contingent liabilities in Grapecorp Management Pty Ltd v Grape Exchange Management Euston Pty Ltd [2012] VSC 112; (2012) 93 ACSR 1.

600

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.290]

winding-up and are of a kind that ultimately mature into pecuniary demands capable of set-off”: Grapecorp Management Pty Ltd v Grape Exchange Management Euston Pty Ltd [2012] VSC 112; (2012) 93 ACSR 1 at [52]; United Petroleum Pty Ltd v Bonnie View Petroleum Pty Ltd (in liq) [2017] VSC 185 at [384]. The requirement of mutuality was explained by Palmer J in Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 at [422] as requiring “that the claims to be set off are between the same parties, that the parties be indebted in the same interests or capacities, and that both claims ultimately sound in money”. Granting a PPSA security interest in collateral covered by mutual dealings can terminate mutuality: Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] WASC 152; (2017) 320 FLR 259. A person is only able to claim set-off where they had no notice at the time of the giving of credit to the company or at the time of the receiving of credit from the company that the company was insolvent: s 553C(2). See further Facade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247; (2016) 116 ACSR 493. A person has “notice of the fact” that a company is insolvent if the person had actual notice of facts which disclosed that the company lacked the ability to pay its debts when they fell due: Jetaway Logistics Pty Ltd v DCT [2009] VSCA 319; (2009) 26 VR 657. In that case, the company had authorised the Commissioner to withhold amounts due to it under a fuel rebate scheme to reduce an amount of its PAYG and GST liabilities then outstanding. Several payments were subsequently credited against those tax liabilities. When the company went into liquidation the liquidator claimed that these payments were unfair preferences and could not be subject to the right of set-off as the Commissioner had notice of Jetaway’s insolvency when it received the payments. The Victorian Court of Appeal found that the Commissioner knew that Jetaway could not pay its debts as and when they became due and payable, which was why it needed to enter into the payment arrangement with the Commissioner in the first place, and therefore the Commissioner could not claim set-off in the payments. The timing of the notice of insolvency can be important. In the case of a contingent debt, the relevant credit may be given and received at the time of entry into a contract, not at the time the contract is terminated: JLF Bakeries Pty Ltd v Baker’s Delight Holdings Ltd [2007] NSWSC 894; (2007) 25 ACLC 1164. There remains some controversy whether s 553C may be used to set off amounts owed by a creditor or director against whom a voidable transaction or insolvent trading claim is made, assuming that other necessary elements of the section are satisfied.85 Contributories’ claims: s 553A

[15.290] Section 553A of the Corporations Act provides that a member cannot lodge a proof for a debt owed “in the person’s capacity as a member of the company” for “dividends, profits or otherwise” unless his or her contributions as a member are paid. Section 563A requires that payment of any such debt owed to a 85

See the discussion (in obiter) in Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62; Derham, “Set-off Against Statutory Avoidance and Insolvent Trading Claims in Company Liquidation” (2015) 89 ALJ 489; Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No 1) (in liq)) [2015] QCA 235..

[15.295]

15 Administration of the Winding Up

601

member in the capacity as a member be postponed until all other debts are paid. Hence, shareholders of a company in liquidation rank below creditors provided that their claim arises in their capacity as a member and not in some other capacity such as a creditor who has loaned funds to the company or as a tort creditor who has suffered an injury caused by the company’s negligence.86 The High Court in Sons of Gwalia v Margaretic [2007] HCA 1; (2007) 231 CLR 160 decided that members with a claim for damages based on alleged statutory misrepresentation did not have claims in their capacity as members and hence did not come within s 563A. In 2008, the Corporations and Markets Advisory Committee (CAMAC) reviewed the High Court’s decision and did not recommend statutory amendment to overturn the ruling. However, calls for overturning the ruling grew louder during the Global Financial Crisis when Australian companies found it more difficult to raise debt finance in the North American capital markets (where shareholder claims are firmly subordinated) and the Commonwealth government amended the Corporations Act to rewrite s 563A. Following calls from business to change the law to make it easier for companies to raise capital in the United States (where shareholder claims are strictly subordinated in insolvency), s 563A and related provisions were amended in 2010 to reverse the practical effect of the High Court’s decision. The amendment added the new concept of a subordinate claim to s 563A. Subordinate claims include debts owed to members in that capacity and also include “any other claim that arises from buying, holding, selling or otherwise dealing in shares in the company” which catches the Sons of Gwalia type of claims. Payment to persons holding subordinate claims is postponed until all other debts and claims against the company are paid: s 563A(1). The 2010 amendments did not, however, overturn the main point in the Sons of Gwalia litigation, which is that members with misrepresentation claims may be counted as contingent creditors. The amendments do, however, make these claimants absolutely subordinated, as well as reducing their rights to receive information in the insolvency and limiting their rights to vote as creditors in creditor meetings: s 600H.87 Role of the liquidator in deciding upon proofs of debt

[15.295] In making a decision whether to admit or reject a proof of debt, a liquidator is acting: “… in a quasi-judicial capacity … according to standards no less than the standards of a court or judge … This description of the liquidator’s function reflects his duty to distribute the assets in his hands or under his control among the persons truly entitled.”88

Generally, the principles which determine enforceability of the liability to which a proof of debt relates are the same as the principles which would be applied in an action brought directly against the company to enforce that liability; for example, in 86 See Harris and Hargovan, “Sons of Gwalia: Navigating the Line between Membership and Creditor Rights in Corporate Insolvencies” (2007) 25 C&SLJ 7. 87 See also Re TEN Network Holdings Ltd (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247. 88 Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332, 338-340. See also Westpac Banking Corporation v Totterdell (1997) 142 FLR 137.

602

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.300]

respect of time limitations on actions: Motor Terms Co Pty Ltd v Liberty Insurance Ltd (1967) 116 CLR 177. This is qualified by the fact that there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt, for example, if it is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories or is based on fraud or miscarriage of justice: Wren v Mahony (1972) 126 CLR 212, 223. The same applies in bankruptcy: Ayerst v C & K (Constructions) Ltd [1976] AC 167. In dealing with proofs of debt, the duty of a liquidator is “not merely to advertise for creditors, but to write to the creditors of whose existence he knows, and who do not send in claims, and ask them if they have any claim”: Re Jay-O-Bees; Rosseau Pty Ltd v Jay-O-Bees [2004] NSWSC 818; (2004) 50 ACSR 565 at [86]. If the liquidator becomes aware that a creditor may have understated its proof of debt there is a duty to inform the creditor that is implied from the general duty of the liquidator to act impartially and to discover who are the creditors of the company, such a duty being based upon the principle in Ex parte James: Re Autolook Pty Ltd (1983) 1 ACLC 1,211.89 A debt or claim must be proved formally if the liquidator, in accordance with Corporations Regulations, reg 5.6.48, so requires, but if there is no such requirement the liquidator may accept an informal proof provided that the regulations relating to the informal proof of claims are adhered to: s 553D. A formal proof of debt must state, inter alia, whether the creditor is secured or not (reg 5.6.41(a)), as well as be in accordance with the prescribed Form.90 A liquidator is required to deal with a proof within 28 days of receiving a written request from a creditor to do so or such longer period allowed by ASIC: reg 5.6.53(1). If no determination is made by the liquidator within the requisite time frame, the creditor is entitled to apply to the court for it to deal with the proof (reg 5.6.53(2)): Simto Pty Ltd v Court (1997) 15 ACLC 839. Appeal against liquidator’s decision

[15.300] A liquidator who rejects a proof must, within seven days of the rejection, notify the creditor of the ground(s) for the rejection, in accordance with Form 537, and inform the creditor that an appeal may be made to the courts within 14 days of the notice setting out the ground(s) of rejection: reg 5.6.54. A proof of debt may be withdrawn, varied or reduced with the consent of the liquidator: reg 5.6.56. If a creditor’s proof of debt is rejected by the liquidator the creditor may appeal by seeking court orders under IPSC s 90-15 and, other than in exceptional

89 Ex parte James; In re Condon (1874) LR 9 Ch App 609 – see [10.205]. 90 See Form 535, unless the claimant is an employee where the form to be used is Form 536: Corporations Regulations, reg 5.6.49(2).

[15.305]

15 Administration of the Winding Up

603

circumstances, should not institute legal proceedings against the company.91 That is a rehearing de novo and either party is therefore entitled to adduce fresh evidence in support: Westpac Banking Corporation v Totterdell (1998) 20 WAR 150; (1997) 25 ACSR 769, 772. On any appeal hearing, the courts apply the same rules to liquidators who are examining proofs of debt as those applied to trustees of bankrupt estates. In such a proceeding, a liquidator who defends their decision to reject a proof of debt is no longer acting in a quasi-judicial capacity, rather the liquidator takes the role of an adversary in the litigation. In respect of a discretionary decision by a liquidator, or a decision involving matters of business judgment, the court will reverse the liquidator’s decision only when it is satisfied that he or she was acting unreasonably or in bad faith: Re Jay-O-Bees; Rosseau Pty Ltd v Jay-O-Bees [2004] NSWSC 818; (2004) 50 ACSR 565 and cases there cited. A creditor, X, cannot oppose an appeal brought by another creditor, Y, against a rejection by the liquidator of Y’s proof of debt, even though if Y’s appeal were successful X’s dividend out of the company’s property would thereby be reduced: Australian Consolidated Investments Ltd v Woodings (1996) 16 WAR 388.

Secured creditors [15.305] A secured creditor has two rights: a right of action against the property over which they have security and a personal right of action against the company: Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95; (2015) 106 ACSR 79 at [203]. Like bankruptcy, liquidation does not interfere with the rights of a secured creditor: Corporations Act, s 471C. If it did then it would, in many cases, make the taking of security valueless. One of the main purposes of security is to protect the creditor in the event of the company’s insolvency. “Secured creditor” is defined in s 51E to mean “a creditor of the corporation, if the debt owing to the creditor is secured by a security interest.” A security interest is defined as either a PPSA security interest or a charge, lien or pledge: s 51A, referring to a security interest under the Personal Property Securities Act 2009 (Cth). Security is granted by contract, statute or the general law. Most security interests granted by corporations will be covered by the PPSA, but some arrangements will involve property excluded from that law and hence will continue to use traditional documentation involving charges, liens and pledges. As discussed in Chapter 14, one important consequence of the PPSA has been the introduction of “vesting rules” which provide for an unperfected security interest to vest in the debtor company as grantor in certain circumstances such as the appointment of a liquidator: PPSA, s 267.92 The result of this is that the secured 91 Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332. See in relation to the prior provision (former s 1321) In the matter of DH International Pty Ltd (in liq) [2017] NSWSC 870; Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402; (2012) 92 ACSR 88 (discussing the role of appeals to the court from decisions of administrators and liquidators). 92 The security interest may also vest if the secured creditor does not register its interest within a certain time prior to the liquidation: Corporations Act, s 588FL.

604

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.305]

creditor would lose its secured status because its security interest in the property (as collateral for the secured transaction) would have vested in the company in liquidation.93 The introduction of the PPSA has also effected a change to the system for determining priority between competing secured creditors.94 Prior to the PPSA priority contests between secured creditors was determined by the form and timing of the creation and (in some cases only) the registration of the security arrangements. For instance, a registered fixed charge would usually take priority over a registered floating charge. The PPSA introduced a detailed set of rules for determining priority between secured parties, with default priority rules based primarily on the time of registration of the security interest on the PPS Register: PPSA s 55.95 The PPSA is focused on the substance rather than the form of the transaction and these priority rules no longer apply. The PPSA priority rules are not affected by the characterisation or description of a security interest as a fixed or floating charge, mortgage, lien or pledge. However, the Corporations Act still maintains a priority payment distinction when dealing with the PPSA equivalents of fixed and floating charges through the concepts of a non-circulating security interest and a circulating security interest, discussed in Chapter 18. Naturally, a secured creditor is unable to retain security and prove for the full amount of the debt owed.96 It is only entitled to prove in a winding up for the whole of its debt if it surrenders its security to the liquidator: Corporations Act, s 554E(3). If the creditor chooses instead to realise the security, the creditor is able to prove for the balance of the debt owed after deducting what was received from the realisation of the security: s 554E(4). If neither of the above is applicable, the secured creditor may estimate the value of the security and prove for the balance after deducting the estimated value of the security: s 554E(5). If this latter procedure is used, the liquidator may redeem the security if the creditor’s estimate of the security is paid: s 554F(2). Alternatively, if the liquidator is dissatisfied with the estimate given by the creditor, he or she could require the creditor’s security to be offered for sale: s 554F(3). These provisions are designed to prevent the creditor from placing an artificially low value on the security in order to be able to claim for a greater sum in the winding up. There are similar provisions in ss 90 – 94 of the Bankruptcy Act: see [6.505]. A secured creditor which votes at a meeting of creditors in respect of the whole of the debt or claim is taken to have surrendered the security unless the court considers it voted through inadvertence: IPRC, s 75-87.97 Where a secured creditor votes on the voices, this is not regarded as an indication that the creditor wishes to 93 As noted in Chapter 11, property of the company does not vest in the liquidator unless a vesting order is made by the court under s 474(2) of the Corporations Act. 94 This does not affect inter-creditor agreements with voluntary subordination provisions: PPSA, s 61. 95 There are also a range of special priority rules such as for purchase money security interests (PMSI) and for secured parties with control over ADI accounts. 96 Surfers Paradise Investments Pty Ltd v Davoren Nominees Pty Ltd [2003] QCA 458; [2004] 1 Qd R 567. 97 See, for example, In the matter of Glacier Ceiling Battens Pty Ltd (in liq) [2017] NSWSC 1832.

[15.315]

15 Administration of the Winding Up

605

surrender the security.98 The reason is that the creditor cannot be said to have voted in respect of the value of the debt or claim. Even if the creditor was to have voted in respect of the whole of its claim, other than on the voices, it appears that a court can hold that the creditor did not intend to surrender the security if an omission to value the security occurred through inadvertence.

Pooling [15.310] At this point it is relevant to note that a company is a separate legal entity and if it is in liquidation must be treated as such. In some cases, however, the company’s affairs may be inextricably bound up with other companies in liquidation in a group. In such cases, since the Corporations Amendment (Insolvency) Act 2007 (Cth), a statutory pooling regime is available to facilitate the winding up of companies in corporate groups – see Pt 5.6, Div 8 of the Corporations Act.99 There are two separate methods of pooling: voluntary pooling and court-ordered pooling.100 Voluntary pooling

[15.315] In a voluntary pooling, the liquidator of a group of companies may make a determination that the winding up be conducted on a pooled basis. The companies must be related companies, or be jointly liable for one or more debts, or own or operate property that was used in connection with an enterprise carried on jointly by the companies: s 571(1)(b). The liquidator must then submit that determination to separate meetings of the “eligible unsecured creditors” of the group companies: s 571. The concept of an “eligible unsecured creditor”101 is central to the pooling regime. In general terms, it includes all the unsecured creditors of the group but excludes other companies in the pooled group; that is, it excludes intra-group companies from voting on or objecting to the pooling determination.102 Within five business days after a liquidator makes a pooling determination, the liquidator must convene separate meetings of the unsecured creditors of each of the group companies for the purpose of considering and making a decision about the determination: IPRC, s 75-180. The liquidator must give written notice of the proposed determination to each eligible unsecured creditor, together with a statement identifying each of the companies in the group and setting out: • the liquidator’s opinion about particular matters (whether it would be in the interest of creditors for the determination to take effect, the extent to which 98 Health & Life Care Ltd v SA Asset Management Corporation (1995) 65 SASR 48; Provident Capital Ltd v Kelso Builders Supplies Pty Ltd [2008] FCA 868; (2008) 66 ACSR 643. 99 See Harris, “The Revised Statutory Pooling Provisions” (2007) 19(3) A Insol J 28. 100 For a discussion of pooling in voluntary administration and using schemes of arrangement, see Harris, “Corporate Group Insolvencies: Charting the Past, Present and Future of Pooling Arrangements” (2007) 15 Insol LJ 78. 101 Defined in Corporations Act, s 579Q and Corporations Regulations, reg 5.6.73. 102 “Pooled group” and “member of a pooled group” are defined in IPSC, s 5-27.

606

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.315]

particular creditors and particular companies are likely to be disadvantaged by the determination, and the likely return to creditors if the determination takes effect and if it does not); • the reasons why disadvantaged creditors should vote for the determination; and • any other information that will enable creditors to make an informed decision about whether to approve the determination: IPRC, s 75-180(3). The pooling may proceed if 75% of the eligible unsecured creditors by value and 50% by number of each of the companies in the group approve the making of the determination; this is a higher level of vote than that required for a special resolution: s 9. The determination takes effect after the resolutions have been passed. The determination does not take effect if the required majorities are not obtained for any company in the proposed group. If an eligible unsecured creditor objects to the determination, that creditor may apply to the court to have the determination terminated or varied on the grounds (inter alia) that the determination would materially prejudice that creditor, or that the information provided to creditors is false or misleading, material information was omitted or the pooling determination would be oppressive or unfairly prejudicial to, or unfairly discriminate against, creditors: s 579A. The term “pooling” itself is not defined but s 571(2) outlines the consequences of a pooling determination; that is, that each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against each other company in the group, and each debt payable by a company in the group to any other company in the group is extinguished. Under s 571(1)(d) a liquidator has the power to modify the outcome of a pooling determination in certain ways, if he or she considers it is just and equitable to do so: s 571(2) – (7). This power permits the maximum flexibility for the terms of the pooling determination to reflect the specific circumstances of the companies in the group. A pooling determination means that each debt payable by a company in the group to any other company in the group is extinguished once the determination takes effect. Section 571(2) does not apply to a secured debt unless the debt is payable by a company in the group to any other company in the group. External secured creditors are excluded from the scope of a pooling determination to the extent of their security: s 571(9). A pooling determination comes into force immediately after the resolutions approving the making of the determination are passed: s 578. A copy of the determination must be lodged with ASIC within seven days of its taking effect: s 573. The determination does not limit a liquidator’s power under s 477, for example to make any compromise or arrangement with creditors or compromise any debts or claims: s 571(11). A pooling determination in force in relation to a group may also be varied, subject to similar protections for creditors.

[15.325]

15 Administration of the Winding Up

607

In exercising a function or power in connection with a proposed pooling determination with due care and in good faith, a liquidator is not to be taken to be in breach of fiduciary duties owed to a particular company or to its creditors, or duties to a company in a group under ss 180, 181, 182, 183 or 184 of the Corporations Act: see s 579. Court-ordered pooling

[15.320] In the case of court-ordered pooling, under ss 579E and 579G of the Corporations Act, the court may determine, by order, that a group of companies in liquidation is a pooled group if it is satisfied that it is just and equitable to do so.103 The court may not make the order if this would materially disadvantage an eligible unsecured creditor of a company in the group and the eligible unsecured creditor has not consented to the making of the order; this would not be just and equitable.104 A court may not make a pooling order if the order would materially disadvantage an eligible unsecured creditor of a company in the group and that eligible unsecured creditor has not consented to the making of the order: s 579E(10). In Re Walker [2015] FCA 146, the court held that a pooling which took potential returns away from general unsecured creditors did not materially prejudice them given that the potential return was very small (less than 1/4 of 1 cent in the dollar) and while notice had been given to the creditors none had sought to oppose the making of the pooling order. Section 579E(2) provides that the consequences of a pooling order under s 579E are that: • each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against each other company in the group; • each debt payable by a company in the group to any other company in the group is extinguished. An application for a court-ordered pooling may only be made by the liquidator or liquidators of the companies in the group: s 579E(11). Under s 579G the court may make ancillary orders in approving the making of a pooling determination. It may exempt specified debts or claims from the determination, transfer property or liabilities from one company to another, modify the application of the Act in relation to the winding up of the companies in the group, and give such directions in relation to the winding up of the companies in the group as the court thinks fit. The liquidator or a creditor of a company in the group has standing to make an application for an ancillary order: s 579G(2). General

[15.325] Pooling orders had previously been available only in cases where the company was in voluntary winding up, after having been through the Corporations 103 See Allen v Feather Products Pty Ltd [2008] NSWSC 259; (2008) 72 NSWLR 597; . 104 Re Lombe [2011] NSWSC 1536; (2011) 87 ACSR 84; Lofthouse v Environmental Consultants International Pty Ltd [2012] VSC 416.

608

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.330]

Act, Pt 5.3A process, on application by the liquidation under s 447A of the Act. In one case, the court envisaged situations where pooling was “both just and equitable if not essential … for example the case of a group of companies where the assets have been so intermingled that their separation is practically impossible”.105 While pooling is a useful tool, it should be recognised that from a strict insolvency viewpoint it is a compromise of the pari passu principle, in that creditors are often not necessarily sharing equally in the assets of the company. It is for that reason that the regime is set down, and its protections, to allow creditors and the court as necessary to ensure that rights are not unfairly affected.

DISTRIBUTION OF THE COMPANY ASSETS [15.330] Naturally, the distribution of the company’s realised and recovered assets is of crucial concern to the creditors and it also constitutes one of the major tasks of the liquidator. The liquidator will distribute a final dividend to creditors from the realisation of these assets. However, during the course of the administration of the winding up the liquidator will realise assets and sometimes an interim dividend will be paid to creditors, pending further assets being recovered. In fact, according to Corporations Regulations, reg 5.6.67(1), the liquidator must declare and distribute a dividend as soon as practicable. Regulation 5.6.67(2) provides that the liquidator must distribute as a dividend all money in hand except what is needed for administration or to give effect to the legislation. Payment of dividends [15.335]

A dividend is a creditor’s share of the company’s assets, and a final one will be paid once all assets have been realised. Before declaring a dividend, the liquidator must consider the position of the priority creditors. As in bankruptcy these are creditors who are given, by statute (for example Corporations Act, s 556) or court order, some special priority to the repayment of their debts. Such creditors will be considered shortly. Once priority creditors have been satisfied in full, the balance of the estate is distributed to the unsecured creditors. Creditors will only receive dividends if they have had their debts admitted by the liquidator: reg 5.6.63. Before declaring a dividend, a liquidator is required to give notice of this not more than two months before the intended date by publishing a notice on ASIC’s Public Notices website, and in respect of a final dividend, give a written notice (ASIC Form 548) to any person whose debt has not been admitted and: • who is shown as a creditor in the report as to affairs given under s 475 in a compulsory liquidation; • who is shown as a creditor in the list of creditors sent to creditors pursuant to s 497(1)(a)(ii) in a creditors’ voluntary liquidation; or • the liquidator knows that the person claims to be a creditor: reg 5.6.65(1).106 105 Mentha v GE Capital Ltd [1997] FCA 1579; (1998) 16 ACLC 1,032, 1,037. 106 As to debts admitted after the declaration of a dividend, see reg 5.6.68.

[15.350]

15 Administration of the Winding Up

609

Any dividends unclaimed for at least six months after the date of declaration are paid to ASIC which is to deal with them under Pt 9.7 of the Corporations Act: s 544.107

Special priorities [15.340] The rule in liquidations, as with insolvency law in general, is that all company funds should be distributed pari passu among the creditors, namely equally and rateably: Corporations Act, s 555. However, while this rule is regarded as extremely important and at the heart of liquidation and bankruptcy law, it has been eroded by the fact that some creditors who are unsecured are granted the right to be paid in priority to the ordinary unsecured creditors.108 Before the priority creditors who are identified by the Corporations Act are paid, others will be able to have their debts satisfied; these are largely secured creditors, who, if they have a valid and enforceable security, stand in front of all unsecured creditors. Section 555: pari passu

[15.345] Section 555 provides that all debts proved are to rank equally, and if there are insufficient funds the debts are paid proportionately. Courts are not able to vary the rule provided for in s 555,109 although subordination of a debt owed to a creditor is permitted in certain circumstances by s 563C.110 Section 555 does provide that this rule is subject to anything mentioned elsewhere in the Corporations Act. An example is that schemes of arrangement under s 411 may provide for a distribution which is not on a pari passu basis.111 Section 556: special priorities

[15.350] Section 556 of the Corporations Act is an important exception to the rule expressed in s 555. Section 556 sets out a system of priorities. The payments referred to in that section are required to be satisfied before unsecured creditors receive any dividends. That priority structure cannot be varied by a court,112 although other provisions in the Act allow for variations such as s 564 where an indemnifying creditor may receive a higher priority payment over other creditors (see [15.420]). Often the payments dealt with in s 556 exhaust the total funds available and the ordinary unsecured creditors receive nothing. Generally, and especially in such circumstances, the pari passu principle has been severely eroded by the scope of s 556 priority claims, nevertheless for policy reasons in favour of those priority creditors. 107 See Unclaimed money – how to lodge money unclaimed under the Corporations Act at http:// www.asic.gov.au. In bankruptcy, see Chapter 6. 108 For a criticism of the erosion of the pari passu principle, see Finch, “Is Pari Passu Passé?” (2000) 5 Insolvency Lawyer 194. 109 Re National Employers’ Mutual General Insurance Association Ltd (1995) 15 ACSR 624. 110 See Bourke, “The Effectiveness in Australia of Contractual Debt Subordination Where the Debtor Becomes Insolvent” (1996) 7 Journal of Banking and Finance Law & Practice 107. 111 Fowler v Lindholm [2009] FCAFC 125; (2009) 178 FCR 563 at [78] (where a scheme provided an extra payment to litigation creditors compared with those not involved in litigation against the company). 112 Morepine Pty Ltd v Crush Pacific Industries Pty Ltd (1996) 131 FLR 436.

610

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.350]

It should be noted that neither the Commissioner of Taxation nor any Government instrumentality is entitled to a special priority in a liquidation.113 Section 556 provides for a number of priorities, and only the major ones will be mentioned here.114 The matters are referred to and discussed in the order in which they appear in s 556. It must also be emphasised that all of the claimants in each priority group must be satisfied in full before a liquidator is able to move on to consider the next group in the priority list. If there are not sufficient funds to satisfy all claimants in a particular group then the claimants share pari passu in the available fund. The same applies in bankruptcy. Once all priority creditors are paid in full, the balance of any funds is then available for distribution proportionately among the unsecured creditors. One highly contentious issue that has generated a large number of divergent authorities in recent years is whether s 556 priorities must be complied with when the company in liquidation is acting as trustee in the conduct of a business, commonly as a “trading trust”: see [14.15]. Such a company may have creditors in its trustee role, but may have separate creditors as the company itself (ie acting not as a trustee). In Chapter 14 we discussed the issue of the trustee’s right of indemnity and the delineation of the “property of the company”. The issue that has troubled the courts (and liquidators) is whether exercise of the company in liquidation’s right of indemnity against trust assets must result in distribution according to s 556. This has involved a number of conflicting decisions, and unfortunately the law is still unsettled. The Full Court of the Supreme Court of Victoria decision in Re Enhill Pty Ltd [1983] 1 VR 561 held that the trustee company’s right of indemnity was property of the company and, importantly, that the proceeds of sale from the trust assets that were subject to the right of indemnity could be distributed to all of the company’s creditors according to the s 556 priorities, and not only those creditors who dealt with the company acting as trustee. This has proven highly controversial in subsequent decisions,115 although the Victorian Court of Appeal in Commonwealth v Byrnes [2018] VSCA 41 (the Amerind appeal) unanimously held that the decision should be followed until the High Court decides otherwise. Another significant decision was that of the Full Court of the Supreme Court of South Australia in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. It also held that the statutory priorities under s 556 must be complied with, at least where the only role of the company was to act as trustee, but trust property could not be used to pay non-trust liabilities (eg where the company acted in both trustee and 113 Any special priorities for the government (including the Commissioner of Taxation in relation to ordinary tax claims) were abolished by the Crown Debts (Priority) Act 1980 (Cth) and by the Corporate Law Reform Act 1992 (Cth). But note that child support moneys withheld from an employee’s wage by a company that goes into liquidation is a priority debt, prevailing even over secured claims. Those moneys are payable to the Child Support Registrar: Child Support (Registration and Collection) Act 1988 (Cth), s 50. 114 See further Symes, Statutory Priorities in Corporate Insolvency Law (Ashgate, 2008). 115 See further D’Angelo, Commercial Trusts (LexisNexis Butterworths, 2014).

[15.350]

15 Administration of the Winding Up

611

non-trustee capacities). More recently, Brereton J in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222 held that Suco Gold should not be followed on this point, because trust property is not property of the company and therefore is not subject to the s 556 priorities. The finding that s 556 does not apply to the distribution of trust assets claimed under the right of indemnity in Independent Contractor Services was applied in a number of subsequent cases including the trial decision in Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127; (2017) 121 ACSR 206. That was overturned in the Amerind appeal (Commonwealth v Byrnes [2018] VSCA 41), which held that the right of indemnity (specifically the right to use trust property to satisfy trust debts, known as the “right of exoneration”) was property of the trustee company and must therefore be subject to the statutory priorities. The Amerind appeal court did not decide whether trust property could be used to pay non-trust creditors if the trustee acted in both trustee and non-trustee capacities. Part of the difficulty in this area is caused by the decision of the High Court of Australia in Octavo Investments Pty Ltd v Knight [1979] HCA 61; 144 CLR 360, which described the right of indemnity as being a proprietary interest of the company trustee, but also described the right as being a first charge on the trust property. A first principle of security law is that a person cannot take a charge on their property (although a company can grant a charge or other security in its property). If the trustee’s right of indemnity is a proprietary interest how can it also be subject to a charge held by the trustee? The answer is that the charge is an equitable charge in the nature of a lien on the trust property which does not of itself allow for sale of the assets without court approval. The proprietary interest of the trustee company’s right of indemnity is not the same as full beneficial ownership, but when enforcing the right of exoneration is limited to satisfy only trust debts: Jones (Liquidator) v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; Suco Gold. It is important to distinguish between the different elements of the trustee’s right of indemnity, namely the right of exoneration and the right of reimbursement: as to which see the detailed review in Re Lane (Trustee); Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953. For the latter, the trustee has paid out trust debts from personal (ie, non-trust property) and the claim for reimbursement under the right of indemnity makes the funds in the hands of the trustee company the company’s personal property (which, in that state, should be subject to s 556). On the other hand, the right of exoneration is only available where a properly incurred trust debt remains unsatisfied and hence usage of the trust property to pay that debt does not change the character of the property into the company’s full beneficial property free from a prior equitable limitation to use for trust purposes: Killarnee. In that case, the Full Court of the Federal Court sitting as a court of first instance agreed with the Amerind appeal decision that the trustee company’s right of exoneration is “property of the company” for the purposes of the Corporations Act (with both cases applying the High Court’s decision in Octavo Investments), but that this proprietary interest was not part of the trust assets themselves, but rather the trustees right to deal with those assets (usually by seeking a court order to appoint

612

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.350]

a receiver for sale). It is important to note that the right of indemnity (including exoneration) is not absolute and can be lost by the conduct of the trustee (such as by committing a breach of trust that leaves the trustee owing money to compensate the trust fund) even where the incurring of a debt to the trust creditors is wholly appropriate and authorised.116 The majority of the court in Killarnee (Allsop CJ and Farrell J) held that while the statutory priorities will apply to the distribution of the property of the company, each of the categories in s 556 will need to be assessed to ensure that the use of property subject to the right of exoneration are only used to satisfy trust debts. Where the company only acts as trustee (as occurred in Killarnee) this will be easier than if the company acts in both trustee and non-trustee capacities, in which case a method of distribution will need to be applied by the court, which could include any number of equitable distributional principles such as pari passu or hotchpot.117 All members of the court accepted that the court has the power to give directions (including under Trustee Acts and in Equity) as to how the property should be distributed (including directions that the same or similar priority to s 556 be applied). The decision in Killarnee still requires the liquidator to seek a court order to sell the property subject to the right of exoneration, but it is important to note that the company had been removed as trustee under an ejection clause on liquidation. Chief Justice Allsop did suggest (in obiter comments at [90]) that where the trustee had not been removed and the right of exoneration would exhaust the trust property, so that the beneficiaries had no remaining interest, then the court would not need to appoint a receiver for sale. It should be noted that even where s 556 priority is not available for distributing trust property, the court retains jurisdiction to give a measure of priority to the liquidator’s costs and remuneration using equitable principles of priorities and/or the principles in Re Universal Distributing Co (in liq) (1933) 48 CLR 171; Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32; Kite v Mooney (No 2) [2017] FCA 653; Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297. See further the detailed analysis of the law in Re Lane (Trustee); Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953. In Re Mackie Group Pty Ltd (in liq) [2017] VSC 477, distribution of trust assets by liquidators was approved and relief was granted under trustee legislation and Corporations Act, s 1318 to the liquidators on the basis that they acted reasonably. Unfortunately there remains a divergence between the approaches of the full courts in the Amerind appeal and in Killarnee. The former offers insolvency practitioners greater scope to deal with trust property, but the latter is also constrained by the fact that the trustee was acting as a bare trustee due to an ejection clause. Both cases involved companies acting solely as trustee. At the time of writing (May 2018) the Amerind appeal was subject to a special leave application to the High Court. 116 This is known as the “clear accounts rule”. 117 See generally Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426.

[15.360]

15 Administration of the Winding Up

613

Hopefully the High Court will grant special leave and will finally settle issues that have plagued the administration of insolvent trustees for the past 40 years. Costs and expenses relating to company property: s 556(1)(a)

[15.355] This category covers the expenses incurred properly by a liquidator (referred to, with other insolvency administrators as “the relevant authority”) in preserving, realising and getting in company property or carrying on the company’s business. This would, for instance, cover auctioneer’s fees in auctioning company property. Pre-liquidation contracts may give rise to expenses under s 556(1)(a) where the conduct undertaken pursuant to the contract during the liquidation is for the benefit of the liquidation: Grapecorp Management Pty Ltd v Grape Exchange Management Euston Pty Ltd [2012] VSC 112; (2012) 93 ACSR 1. In Lewis v LG Electronics Australia Pty Ltd (No 2) [2016] VSC 63; (2016) 48 VR 450, it was held that settlement of a lawsuit brought by creditors in respect of conduct by the liquidator in refusing to transfer goods back to suppliers (following a court ruling on the application of the PPSA vesting rules) were amounts properly incurred under s 556(1)(a). The category does not encompass certain expenses, known as “deferred expenses”. This term is defined in s 556(2) as including the remuneration of the liquidator and expenses incurred in respect of services supplied by partners and employees of the liquidator. Costs, charges and expenses of a winding up cannot be set-off against any alleged indebtedness to the company: Morepine Pty Ltd v Crush Pacific Industries Pty Ltd (1996) 131 FLR 436. Within this class of expenses are the costs ordered by the company to be paid in unsuccessful litigation. In Lofthouse, in the matter of Riverside Nursing Care Pty Ltd [2004] FCA 93; (2004) 22 ACLC 215 Finkelstein J explained the law this way (at [26]): “The cases established the following rules. If the liquidator commenced an unsuccessful action in the name of the company any costs ordered against the company were not to be proved as a debt in the winding up. This was because the costs were incurred in the winding up and were payable in full out of the company’s assets. The same position held if the liquidator unsuccessfully defended an action brought against the company. It did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator. Nor did it make any difference whether the liquidation was compulsory or voluntary. Moreover, if the company was insolvent the costs were to be paid in priority to the general costs of the liquidation and in priority to the liquidator’s remuneration.”

Taxed costs of applicant for winding up order: s 556(1)(b), (ba)

[15.360] Usually where an application has been made for the compulsory winding up of a company the court orders that the legal costs of the applicant be “taxed” and paid by the liquidator from the property of the company. Such an amount is a second priority for payment under s 556(1)(b). The costs payable in terms of s 466(2), are that the liquidator must, unless the court orders otherwise, reimburse the applicant out of the property of the company their taxed costs. The courts have rules for such amounts. For example, the Federal Court allows on taxation in corporations matters $3,776 as the amount that may be claimed by a

614

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.365]

plaintiff on the making of a winding up order or on the dismissal of such an application; with additional costs allowed for any disbursements and any adjournments: Federal Court Rules 2011 (Cth), reg 40.41, Sch 3. While a court is unable to vary the priority structure of s 556, it can accede to an application from the liquidator under s 466 that the taxed costs of the applicant for the winding up order not be reimbursed from the property of the company, for example, if extraneous matters are raised by the plaintiff in the winding up application. The court does take a wide view, however, of what costs are included.118 If there are no assets from which to pay the costs, and some fraud has been committed within the company, ASIC may pay the taxed costs up to $1,000: s 466(3).119 The legal costs incurred by the liquidator in administering the liquidation will be covered by either s 556(1)(a) or (dd). If during the period of 12 months ending when the winding up commenced, an application to wind up the company was being made under s 459P, and the company then went into administration, the creditor’s costs of that thwarted application are next payable: s 556(1)(ba). Certain debts of an administrator: s 556(1)(c)

[15.365] If an administrator had been appointed before the commencement of the winding up, certain debts for which the administrator is liable and for which he or she is entitled to be indemnified, for example, goods ordered, are to be paid at this point. Expenses covered by s 556(1)(a) and deferred expenses are not encompassed. It is open to administrators to restrict their rights to this priority under contract through a deed of company arrangement: Re Pluton Resources Ltd (rec & mgrs apptd) (in liq) [2017] WASC 142. Company resolves to wind up voluntarily – s 556(1)(daa)

[15.370] If a company in voluntary administration or under a deed of company arrangement resolves by special resolution that it be wound up voluntarily, the liquidator may require an officer of the company to give a report as to the company’s affairs (RATA). Costs and expenses of the person preparing that report are payable under s 446C(8). These are given a priority under s 556(1)(daa). Other liquidation expenses: s 556(1)(dd)

[15.375] This category covers any expenses (besides deferred expenses) incurred in the winding up and not covered by s 556(1)(a). 118 See Morepine Pty Ltd v Crush Pacific Industries Pty Ltd (1996) 131 FLR 436. See also Re Bcode Pty Ltd [2012] NSWSC 1530. 119

See ASIC’s RG 93 Reimbursing Liquidation Costs.

[15.390]

15 Administration of the Winding Up

615

Deferred expenses: s 556(1)(de)

[15.380] This category covers the remuneration of the liquidator in relation to work performed in the liquidation.120 Liquidators’ remuneration is approved under IPSC, Div 60. Expenses of members of committee of inspection: s 556(1)(df)

[15.385] Expenses of committee members can be paid but remuneration for time spent is rarely approved unless the time and effort involved is exceptional.121 Wages, superannuation contributions and the superannuation guarantee charge: s 556(1)(e)

[15.390] Employees122 are entitled to priority for their wages and superannuation contributions and the superannuation guarantee charge (SGC) in respect of services rendered to the company before the date when liquidation is taken to have begun. In Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222 at [22], Brereton J stated: “Section 556 does not capture all superannuation guarantee charge payable by a company in liquidation, but only such as is in respect of employees as defined in s 556: priority is afforded to superannuation guarantee charge only to the extent that it is payable in respect of services rendered to the company by employees as defined in s 556.”

Those employees who are within the classification of excluded employees in s 556(2) of the Corporations Act are limited to claiming the sum of $2,000 each in respect of days which are classified as non-priority days: s 556(1A). An “excluded employee” includes: • an employee who has been a director at any time during the 12 months preceding the relevant date (see s 9, usually the date of the winding up in a compulsory liquidation or the date of the resolution to wind up in a voluntary liquidation); • an employee who is a director after the relevant date; • an employee who is a spouse of a director or former director; and • a relative of a director or former director: s 556(2). The limitation only applies to days which are non-priority days. These, defined in s 556(2), are days when the employee was in the position of being an excluded employee. The consequence of this is that if an employee is owed wages in relation to a period before the position of an excluded employee was assumed, there is no limitation as to what that employee can claim in relation to that period. 120 For a discussion regarding the calculation and justification of remuneration, see Onefone Australia Pty Ltd v One.Tel Ltd [2010] NSWSC 1120; (2010) 80 ACSR 11; Sanderson v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459. 121 See [15.40]. 122 Contractors are not employees for this provision: Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222.

616

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.395]

The limitation placed on excluded employees is intended to act as a disincentive to directors to continue trading when a company is insolvent. Furthermore, directors are typically able to determine their own remuneration. Where SGC amounts are attributable to periods wholly before or wholly after the relevant date or the relevant date divides a quarter, special provisions apply. The term “attributable” relates to the period in which the employment services were provided to the company by the employee. The amount of SGC attributable to the period occurring before the relevant date will be taken for the purposes of s 556 to be an amount referred to in s 556(1)(e). The amount of SGC attributable to the period occurring after the relevant date will be treated as a cost of the winding up under s 556(1)(a). See s 556(1AB) – (1AG).123 Leave entitlements of employees: s 556(1)(g)

[15.395] Employees are to receive all amounts due in respect of leave of absence up to the relevant date. Those who are “excluded employees” are limited to $1,500 in relation to non-priority days (see the discussion at [15.375] in relation to wages): s 556(1B). “Leave of absence” is defined in s 9 to include “long service leave, extended leave, recreation leave, annual leave, sick leave or any other form of leave of absence from employment”. The leave of absence must be a right pursuant to an industrial instrument such as a contract of employment or award: s 556(1)(g)(ii); s 9. Retrenchment payments to employees: s 556(1)(h)

[15.400] To claim a retrenchment payment an employee must have the right to the payment under an industrial instrument (that is, a contract, award or agreement).124 In contrast to wage and leave entitlements, the definition of retrenchment payment in s 556(2) draws no distinction as to whether the payments become payable before, on or after the relevant date: Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2002] VSCA 117; (2002) 176 FLR 576 at [276]. “Excluded employees” are not entitled to any amount in relation to non-priority days: s 556(1C).125 Where a contract of employment existed immediately before the relevant date, the employees are entitled to payment as if their services had been terminated by the company on the relevant date: s 558(1). The purpose of this section is: “to ensure that employees would not in a winding up lose priority for annual and long service leave which was still accruing but had not yet fallen due at the commencement of the winding up … (otherwise) the employees whose employment was about to come to an end as a result of the winding up would be disadvantaged when compared with employees whose rights had accrued as they would miss out on the benefits which they were intended to be given.”126 123 McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690. 124 A claim for lost wages due to early termination of an employment contract is not a retrenchment payment due from the company but a claim for unliquidated damages: Schmitt v Carter [2014] FCA 1370; (2014) 228 FCR 76. 125 See McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690. 126 McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503; 21 ACLC 1,463, 1,473.

[15.415]

15 Administration of the Winding Up

617

Tax obligations

[15.405] Under Div 260, s 260-45, in Sch 1 to the Taxation Administration Act 1953 (Cth), liquidators cannot part with any assets that are available to pay unsecured creditors before receiving a clearance from the Commissioner, regardless of whether the ATO is a creditor. Until notified, the liquidator is to retain sufficient assets to pay all or a proportion of the taxation liability. Once the clearance notice is issued, the trustee is able to make a distribution to unsecured creditors. The Commissioner can require a liquidator to prepare and lodge any overdue documents for a company in liquidation, including documents for periods prior to the liquidator’s date of appointment. Liquidators have PAYG obligations in respect of retained employees of the company. Liquidators must also make tax instalment deductions payable to the Tax Commissioner when paying any dividend to employees: DCT v Applied Design Development Pty Ltd [2002] FCA 205; (2002) 117 FCR 336. These dividends relate to moneys owed to employees by their employer company at the date of the company’s demise and are in the nature of wages. Liquidators have obligations to register and account for GST127 and may be required to lodge company tax returns. Advances to pay employee entitlements: s 560

[15.410] Section 560 of the Corporations Act provides that persons who advanced funds to the debtor company to enable it to pay wages, leave or retrenchment pay are to have priority in respect of the amounts advanced, to the extent to which the employees would have had priority if the payments had not been made. Such a creditor can be paid in priority to priority creditors: Australia and New Zealand Banking Group Ltd v TJF/EBC Pty Ltd [2006] NSWSC 25; (2006) 24 ACLC 327. This may typically be a bank which is thereby entitled to “stand in the shoes” of the employees and assume their priority status. However, the funds must be provided to the company to enable the company paying the employees. The section does not apply where a third party pays the employees directly: Re Dalma No 1 Pty Ltd [2013] NSWSC 1335; (2013) 95 ACSR 641. Fair Entitlements Guarantee Act 2012

[15.415] As another example of the application of s 560 of the Corporations Act, the section allows the Commonwealth Government to assume the priorities that employees of a company in liquidation have under s 556 when the Commonwealth pays those employees moneys from the FEG Act, administered by the Commonwealth Department of Employment. This scheme replaced the General Employee Entitlements and Redundancy Scheme (GEERS) that had operated as an administrative arrangement until 4 December 2012. If a company goes into liquidation leaving employee entitlements unpaid, FEG pays to those employees certain levels of unpaid wage, leave and other 127 A New Tax System (Goods and Services Tax) Act 1999 (Cth), Div 58, Representatives of incapacitated entities.

618

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.420]

entitlements. Having paid those entitlements to the employees, the Commonwealth then becomes a priority creditor to receive dividend payments for those amounts in the liquidation and it may otherwise exercise its rights as a creditor. There are various conditions and monetary limits that apply to FEG payments.128

Indemnifying creditors [15.420] The court has the right, under s 564 of the Corporations Act, in its discretion, on the application of the liquidator, to give an advantage to a creditor or creditors and thereby displace these priorities.129 This is equivalent to s 109(10) of the Bankruptcy Act (see [6.365]). The same considerations that arise in bankruptcy can arise in the administration of a winding up – that a liquidator has insufficient funds to initiate legal proceedings to recover property or set aside a voidable transaction. As an incentive to creditors to indemnify the liquidator in relation to the costs of litigation, s 564 provides that a creditor who indemnifies the liquidator may obtain some priority order from the court for payment of their dividend. The aim is to advance the public interest in encouraging creditors to assist the liquidator in pursuing valid and proper claims in a winding up.130 Implicit in s 564 is a concept of reward to those creditors who are seen to have taken a financial risk with a view to enhancing the fund available for application by the liquidator for the benefit of all creditors. As the court said in State Bank of New South Wales v Brown [2001] NSWCA 223; (2001) 38 ACSR 715, 720 at [35]: “The prospect of reward is, of course, the incentive to give the indemnity which, potentially, will result in benefits to all creditors.”

“Property” in s 564 refers to all property that the liquidator has, or can obtain, for the purposes of the winding up, and includes “both a right of action maintainable by the liquidator under s 588FF or s 588M and money received or receivable by the company by virtue of an order made under either section at the suit of the liquidator”: Tolcher v National Australia Bank [2004] NSWSC 6; (2004) 182 FLR 419.131 For example, a court may order that an indemnifying creditor’s debt be wholly or partly paid out of property recovered by the liquidator, after the creditor has been reimbursed for any funds paid out in respect of legal costs incurred by the liquidator. The court has the power to confer, in its discretion, a priority as to the whole or part only of the property protected, preserved or recovered, and the order must be such

128 See https://extranet.employment.gov.au/feg. 129 See Kee, “Section 564: Creditor Funding and Preferential Distributions” (2006) 14 Insolv LJ 150; Lombe, Re Babcock and Brown Ltd [2012] FCA 107 at [39]. 130 Re Ken Godfrey Pty Ltd (1994) 14 ACSR 610, 612; Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (1998) 16 ACLC 410, 413; Tolcher v National Australia Bank [2004] NSWSC 6; (2004) 182 FLR 419. 131 Lombe, Re Babcock and Brown Ltd [2012] FCA 107 at [40].

[15.420]

15 Administration of the Winding Up

619

as to do justice in the particular circumstances.132 The court said in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294, 296-297:133 The last words of s 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors (cases cited).

In that case, the court awarded all of the money available to unsecured creditors (after successful litigation) to the indemnifying creditor who was the only creditor to respond to the liquidator’s call for assistance.134 A court will consider the risks assumed by the creditor in funding proceedings and in doing this, actual outcomes, assessed with the benefit of hindsight, are relevant to assessing what risk would reasonably have been perceived at the earlier times when payments were actually made or indemnities given: State Bank of New South Wales v Brown [2001] NSWCA 223; (2001) 38 ACSR 715, 729 at [94]. Certain issues that have arisen with s 564 in the case law include that: • sums outlaid by a creditor to enable a Pt 5.3A administrator to carry on the business of the company in administration cannot be subject to an order under s 564 even if the company then goes into liquidation: Fuji Xerox v Tolcher [2004] NSWCA 284; (2004) 60 NSWLR 696; • the court may make an order under s 564 conferring priority on the indemnifying creditor even over the liquidator’s costs and expenses: DCT v Vintage Gold Investments Pty Ltd [2009] FCA 967; and • while the courts generally take a liberal approach in favouring indemnifying creditors, they will only hear s 564 applications after the successful outcome of the funded proceedings.135 A creditor may purchase a company’s right of action through an assignment and through that action may recover more than they are owed as creditors: Re DH International Pty Ltd (in liq) (No 2) [2017] NSWSC 871 at [69].

132 Re Jacka Nominees Pty Ltd (1996) 14 ACLC 633; Re Trollope Property Holdings Pty Ltd; Ex Parte Carson [2009] FCA 118 (the whole amount was given priority). 133 See also Lombe, Re Babcock and Brown Ltd [2012] FCA 107. 134 A similar high level of payment was made to a bank in Re Trollope Property Holdings Pty Ltd; Ex Parte Carson [2009] FCA 118. 135 The Bell Group Ltd v Westpac Banking Corporation (1997) 18 WAR 21; DCT v Currockbilly [2002] NSWSC 1061; cf Re Gleadell Pty Ltd (1991) 9 ACLC 1014.

620

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.425]

Assets overseas and cross-border issues [15.425] As in bankruptcy, the property of a company in liquidation in Australia extends to property situated overseas, although the legal effect of that will depend on the law of the overseas jurisdiction: Callender, Sykes and Co v Lagos Colonial Secretary and Davies [1891] AC 460. Both the Corporations Act and the Cross-Border Insolvency Act 2008 (Cth), and its adoption of the Model Law on cross-border insolvency, can apply in relation to cross-border issues, for example, where assets of an Australian company in liquidation have been transferred overseas; or where assets of a foreign company in liquidation are located in Australia. Section 581 applies to “external administration” matters, defined in s 580 of the Corporations Act to include winding up of a company or a Pt 5.7 body,136 including those outside Australia. The avenues in the Corporations Act have therefore remained as alternative courses of action despite the introduction in 2008 of the Cross-Border Insolvency Act. This table summarises the legal position. Cross-Border Laws137 Available to assist a foreign liquidator in Australia? Cross-Border Yes Insolvency Act 2008 Corporations Act Yes, Australian courts must assist 2001, s 581(2)(a), liquidators of prescribed countries (3) s 581(2)(b), (3) Yes, Australian courts may assist liquidators of other countries.138 s 581(4)

Available to assist an Australian liquidator overseas? Cross-border laws of countries that have adopted the Model Law are available

Yes, an Australian court may request overseas assistance

Overseas assistance to an Australian liquidator

[15.430] Under s 581(4) of the Corporations Act an Australian court may request a foreign court that has jurisdiction in external administration matters to assist an Australian liquidator in the recovery of overseas property of the company.139 The country from which assistance is requested will often itself have reciprocal laws 136 Part 5.7 of the Corporations Act deals with the winding up of bodies other than companies, for example a foreign company registered overseas but also registered in Australia under Pt 5B.2 Div 2 of the Corporations Act: see for example, Titchfield Management Ltd v Vaccinoma Inc [2008] NSWSC 1196; (2008) 68 ACSR 448. 137 For criticism of the regime, see McCormack and Hargovan, “Australia and the International Insolvency Paradigm” (2015) 37 Syd LR 389, who say that the various “procedures overlap in a complex and confusing way, with cases potentially falling through gaps in the law and important provisions being overlooked”. 138 Subject to the Cross-Border Insolvency Act. 139 The authorities are reviewed in Donnelly, Re Advance Finances Pty Ltd [2013] FCA 514.

[15.430]

15 Administration of the Winding Up

621

obliging it to assist a foreign – Australian – court,140 in relation to assets within its jurisdiction, or to obtain information about them and to investigate other issues. A letter of request may be necessary in certain circumstances to ensure the efficacy of an order made by an Australian court under s 597(9) of the Corporations Act for the production of documents by a person overseas: Yeo and Rambaldi (as liquidators), in the matter of Rennie Produce (Aust) Pty Ltd (in liquidation) [2015] FCA 849. In considering whether to authorise a letter of request on behalf of an Australian liquidator, the Australian court must establish that there is utility in the request, that is, that the foreign court is likely to exercise its power to act upon the request: see Re HIH Insurance Ltd [2004] NSWSC 454; New Cap Reinsurance Corporation Ltd v A E Grant, Lloyd’s Syndicate No 991 [2009] NSWSC 662; (2009) 72 ACSR 638. In the latter case, in authorising a request, the court took into account the fact that s 426 of the Insolvency Act 1986 (UK) operates in a similar way to s 581 of the Corporations Act to require the United Kingdom court to assist the foreign court to act on the foreign request, and thus that there was utility in making the order. The court may require the opinion of a lawyer indicating that the foreign court has jurisdiction to receive and act upon the proposed letter of request, and that the foreign court is likely to in fact act upon it: Donnelly (as liquidator), in the matter of Advance Finances Pty Ltd (in liq) [2013] FCA 514. In relation to a liquidation in Australia, a liquidator may alternatively apply for recognition of the Australian liquidation in the country where the assets are located or the persons to be examined are to be found, as a foreign main or foreign non-main proceeding under the Model Law enacted by another jurisdiction, such as the United States, Japan, New Zealand or the United Kingdom. This may allow the Australian liquidator to be able to exercise rights and powers under the overseas insolvency law in order to protect assets in that jurisdiction where recognition is granted.141 This thereby gives the foreign court independent jurisdiction, rather than merely acting in aid of the Australian court. Only a certain number of countries have adopted the Model Law. In respect of those countries that have not, letters of request authorised by the Australian court to a foreign court under s 581 may remain as the only main remedy. In any event, a letter of request may often remain the more convenient approach for a liquidator, in particular if the issue of recovery of property or investigation is confined: Re McGrath [2008] NSWSC 881; (2008) 26 ACLC 921. It should be noted that if a creditor levies execution or otherwise seizes assets located overseas of that Australian company in liquidation, that creditor cannot prove and receive a dividend in the winding up without first bringing into “hotchpot” what has been recovered overseas.142 This long-established rule of hotchpot is found in Art 32 of the Model Law.143 140 For example, Insolvency (Cross-border) Act 2006 (NZ), s 8. 141 See further Wellard and Mason, “Global Rules on Conflict-of-Laws Matters in International Insolvency Cases: An Australian Perspective” (2015) 23 Insolv LJ 5. 142 Re Oriental Inland Steam Co (1874) 30 LT 317; and on appeal Re Oriental Inland Steam Co (1874) LR 9 Ch App 557. 143 Cross-Border Insolvency Act 2008 (Cth), Sch 1.

622

Keay’s Insolvency: Personal and Corporate Law and Practice

[15.435]

In any such matters, Art 25 of the Model Law provides for the various courts to cooperate and communicate with each other and s 581(2) of the Corporations Act requires Australian courts to generally assist foreign courts. In working in foreign countries, Australian practitioners need to be aware of local laws, courts and government, and regulatory arrangements. Certain Australian laws operate extraterritorially, including the Corporations Act where appropriate: s 5. As a relevant example, it is a criminal offence for an Australian to bribe a foreign public official: Criminal Code Act 1995 (Cth), s 70.2. The engagement of local lawyers and advisers will often be necessary. Australian assistance to a foreign liquidator

[15.435] Sections 581(2) and (3) of the Corporations Act generally apply to assist foreign (non-Australian) liquidators in relation to investigations and recovery of assets of the foreign company in Australia. Under s 581(2), an Australian court must assist bankruptcy courts of prescribed countries but it has a discretion to assist courts of other countries. The prescribed countries are Jersey, Canada, Malaysia, Papua New Guinea, New Zealand, Singapore, Switzerland, the United Kingdom and the United States: Corporations Regulations, reg 5.6.74. On receipt of a letter of request from a foreign court to assist it, the Australian court can exercise such powers it has as if the matter had arisen in Australia: Corporations Act, s 581(3). In Re Chow Cho Poon (Private) Ltd [2011] NSWSC 300, the NSW Supreme Court acted under s 581(2)(a) to assist the High Court of the Republic of Singapore in relation to the liquidation of a Singaporean company wound up by order of that court. There is no restriction on the court’s power to wind up a company simply because a request for assistance has been made by a foreign liquidator (or equivalent, such as a debtor in possession under the US Chapter 11 procedure): Legend International Holdings Inc (in liq) v Indian Farmers Fertiliser Co-op Ltd [2016] VSCA 151. Section 581 has therefore remained in the Act despite the introduction of the Cross-Border Insolvency Act in 2008.144 It is the equivalent of s 29 of the Bankruptcy Act – see [6.182].145 Alternatively, under the Cross-Border Insolvency Act 2008 (Cth), a foreign liquidator may apply to an Australian court for recognition of its insolvency proceedings as a

144 According to the “Explanatory Memorandum to the Cross-Border (Insolvency) Bill 2008 (Cth)”, there is the potential for inconsistency between the Model Law and s 581 of the Corporations Act because the Model Law imposes a mandatory obligation on the Australian court to co-operate with courts or representatives of foreign jurisdictions. In so far as s 581(2)(b) imposes only a discretionary obligation to assist non-prescribed foreign courts, s 581 may be inconsistent with the Model Law. Section 21 of the Cross-Border Insolvency Act provides that, in relation to s 581 of the Corporations Act, the Model Law and the Cross-Border Insolvency Act prevail. Such inconsistency was assessed but not found in Re Chow Cho Poon (Private) Ltd [2011] NSWSC 300. 145 As we explained, s 581 applies to “external administration” matters, as defined in s 580 of the Corporations Act.

[15.440]

15 Administration of the Winding Up

623

foreign main proceeding or as a foreign non-main proceeding.146 This will depend on the location of the “centre of main interests” (COMI) of the company, or on the location of its “establishment”. If some recognition is granted, the foreign liquidator will have rights to investigate and recover assets in Australia under the Model Law on Cross-Border Insolvency: see for example, Wild (Foreign Representative) v Coin Co International PLC (Administrators Appointed); In the Matter of Coin Co International PLC (Administrators Appointed) [2015] FCA 354; Akers v DCT [2014] FCAFC 57; (2014) 223 FCR 8. It may be that a local liquidator is appointed to assist in the investigations and recoveries.

Surplus assets [15.440] Given that the test of insolvency is based on cash flow rather than assets compared to liabilities, it is conceivable that the ultimate outcome of an insolvent liquidation will be that, after all the creditors’ claims and other expenses are paid, there will be surplus funds available. Debts due to members of the company are payable before any surplus is calculated and payment made to those members. In a voluntary winding up, this task of determining the rights of members and paying the surplus is performed by the liquidator, under authority of s 501 of the Corporations Act. In compulsory winding up, the court’s “special leave” is required under s 488(2) of the Act to pay out any surplus funds.147 The requirement for “special leave” means no more than that the court’s permission be sought by an application specially made by the liquidators: Re D S Millard & Son Pty Ltd [1997] NSWSC 201; (1997) 24 ACSR 71. The application must be advertised (Courts’ Corporations Rules, r 7.9(2), Form 15), and served on the contributories and the creditors. The court then authorises the liquidator to make the payment to the contributories, subject to payment of the liquidator’s remuneration and expenses: DCT, in the matter of Opalarch Pty Ltd [2010] FCA 607. Chapter 15 – Administration of the Winding Up Part 5.6 – Winding up generally – ss 513 – 581 Part 5.7 – Winding up bodies other than companies – ss 582 – 588Z Part 5.5 – Winding up generally – Corporations Regulations regs 5.6.11 – 5.6.75 Cross-Border Insolvency Act and the – Model Law on Cross-Border Insolvency Divs 7, 10, 11, 11A, 15A Courts’ Corporations Rules and Practice Notes Corporations Act

146 See the Courts’ Corporations Rules, Div 15A. See also, Federal Court of Australia Cross-Border Practice Note, GPN-XBDR – Cooperation with foreign courts or foreign representatives, October 2016; and similar practice notes in the Supreme Courts. 147 See, for example, Otis Elevator Company Pty Ltd v Guide Rails Pty Ltd [2004] NSWSC 383; (2004) 49 ACSR 531; Re FAI Car Owners Mutual Insurance Co Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164; Re Glengrant Civil Pty Ltd (in liq) [2017] NSWSC 843.

624

Keay’s Insolvency: Personal and Corporate Law and Practice

ASIC

ILRA

[15.445]

Chapter 15 – Administration of the Winding Up As to Practice Notes, see, eg, Federal Court of Australia Cross-Border Insolvency Practice Note, GPN – XBRD Cooperation with foreign courts or foreign representatives RG
16
–
External
administrators
–
reporting
and
lodging RG
93
–
Reimbursing
Liquidation
Costs The Act makes several changes that affected the law and practice in this chapter, including changes to reporting obligations, notice obligations and communications between liquidators and creditors.

CONCLUSION [15.445] Before dealing with the formal ending or termination of the liquidation, we now examine issues involving the liability of the company and its officers for criminal offences, and the personal liability of company officers for their part in the company’s insolvency, one common example being that of insolvent trading, and also tax liabilities.

16

Criminal Offences and Civil Actions Against Company Directors [16.10] ACTIONS AGAINST COMPANY DIRECTORS FOR BREACH OF DUTY ETC .. 626

[16.15] Shadow and de facto directors ....................................................................... 627 [16.20] Duties of directors to their company ............................................................ 627 [16.25] Common law duties ......................................................................................... 628 [16.30] Duties of good faith ..................................................................................................... 628 [16.35] Duties of care and skill ............................................................................................... 629

[16.40] Statutory duties ................................................................................................. 629 [16.42] The business judgment rule ....................................................................................... 630 [16.43] Other duties – ss 181 – 183 ........................................................................................ 630

[16.45] Consequences of a breach of duties .............................................................. 630 [16.50] Civil penalties ............................................................................................................... 631

[16.55] Misfeasance: s 598 ............................................................................................. 631 [16.60] Relief from liability: ss 1317S, 1318 ............................................................... 632 [16.65] Criminal liability ............................................................................................... 633 [16.70] Duty of directors to take into account the rights of creditors .................. 633 [16.75] When is the duty to creditors triggered? ................................................................ 634

[16.80] Liabilities to employees ................................................................................... 636 [16.85] INSOLVENT TRADING ................................................................................................... 637

[16.85] Generally ............................................................................................................ 637 [16.90] Conditions for liability ..................................................................................... 638 [16.95] Reasonable grounds to suspect insolvency ............................................................. 639 [16.100] Incurring a debt .......................................................................................................... 640

[16.105] Defences ............................................................................................................ 641 [16.110] Consequences of liability ............................................................................... 643 [16.115] Assignment of insolvent trading claims ................................................................ 644 [16.120] Individual creditor’s claim ....................................................................................... 645 [16.125] Group companies ....................................................................................................... 645

[16.130] Holding company liability for subsidiary .................................................. 646 [16.135] Order of application of compensation moneys ......................................... 646 [16.140] Conclusion ........................................................................................................ 647

626

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.05]

[16.145] DIRECTORS’ LIABILITIES TO THE COMMISSIONER OF TAXATION ............. 648

[16.150] Directors’ indemnification of the Commissioner in relation to voidable transactions ...................................................................................................... 648 [16.150] Income Tax Assessment Act 1936 (Cth) (ITAA 1936) .......................................... 648 [16.155] Defences ....................................................................................................................... 649

[16.160] Penalties for non-payment of unremitted tax deductions and superannuation ................................................................................................ 650 [16.160] Taxation Administration Act 1953 (Cth) (TAA 1953) ......................................... 650 [16.165] Defences ....................................................................................................................... 652 [16.170] CRIMINAL OFFENCES ................................................................................................. 653

[16.175] The process ...................................................................................................... 654 [16.180] Types of offence ............................................................................................... 654 [16.185] Offences related to liquidation ..................................................................... 655 [16.190] CONCLUSION ................................................................................................................. 656

[16.05] This chapter focuses principally on civil actions that may be initiated by liquidators against company officers and, in particular, directors of companies in liquidation. A significant issue in this context is the potential liability of directors for insolvent trading, under s 588G of the Corporations Act, for which there is a defence under s 588H. The new safe harbour provision, s 588GA, is examined in the context of restructuring in Chapter 21. The chapter also deals with offences that may have been committed before or during liquidation by officers and directors. ACTIONS AGAINST COMPANY DIRECTORS FOR BREACH OF DUTY ETC [16.10] When liquidation occurs, the liquidator and the creditors often turn their attention to the company’s officers as persons who may be liable for certain activities during the life of the company. Insolvency law can impose civil liabilities on company officers and this can provide an avenue of financial recovery for the liquidator. Depending on the circumstances of the company’s demise, creditors may harbour feelings of ill-will towards the persons who presided over the company’s insolvency and from which the creditors will suffer. While this may cause the creditors to agree to pursue those directors financially, there may also be funds recovered from the directors for the benefit of those creditors. In this chapter we consider actions that may be taken against officers of an insolvent company. This is to be seen, in many ways, as an addendum to [14.05], because many of the actions are capable of being initiated by the liquidator in order to recover property or funds for the company and ultimately for the creditors. The term “officer” is defined in s 9 of the Corporations Act as including a director, secretary and others in senior management as defined. While we focus on the position of directors, much of what is discussed here also applies to other officers of the company.

[16.20]

16 Criminal Offences and Civil Actions Against Company Directors

627

Shadow and de facto directors [16.15] It should be noted that it is not only those persons who are formally appointed as directors who are within the definition of “director”. The definition of director in s 9 includes persons who are occupying or acting in the position of director even though not appointed as such (a de facto director), and those who have an influence over the board of directors such that the board is accustomed to act in accordance with their wishes or instructions (a shadow director). In DCT v Austin (1998) 28 ACSR 565; [1998] FCA 1034, Madgwick J identified performance of top level management functions, acting as the company in matters of great importance and the reasonable perception by outsiders that a person was a de facto director of the company, as factors in determining whether the person was acting as a director. “Whether a person does so act will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned”, the size of the company being one factor. It is important to identify what role the de facto director was playing and whether that role was as a director, as opposed to other management roles which are not considered within the scope of the role of a director: see Re Akron Roads Pty Ltd (in liq) (No 3) [2016] VSC 657. A person may still be a de facto director, even if their services to the company are provided through an interposed entity such as a service company or consulting firm: Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296. In Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410, the court said that a person may be a shadow director even where their influence does not extend to the entire board of directors, although their influence must be sufficient to exclude any residual discretion in the members of the board. In that case, claims by directors that they felt compelled to accept demands made by Apple Computer as the company’s major supplier and creditor were not sufficient to make Apple a shadow director because the appointed directors always had the option to say no to Apple, even if that would have destroyed the business.1

Duties of directors to their company [16.20]

Directors owe duties to their companies as fiduciaries. This duty is required because the company is in a relatively vulnerable position given that its affairs and assets are often within the almost total control of the directors. The company is necessarily a legal entity separate from its directors, with its own assets and liabilities, rights and responsibilities. The liability of directors has come under increasing focus by the courts. The concept of passive or sleeping directors – who might have once avoided liability by virtue of their limited involvement in the company – has long gone. In 1988, in Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315, 318-319, Kirby P said: 1 The decision was upheld on appeal in Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47. See further, Fitzgerald, “Out of the Shadows? Clarifying the Liability of Secured Creditors in Workouts” (2012) 20 Insolv LJ 179.

628

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.25]

“The time has passed when directors and other officers can simply surrender their duties to the public and those with whom the corporation deals by washing their hands, with impunity, leaving it to one director or a cadre of directors or to a general manager to discharge their responsibilities for them.”

In ASIC v Rich [2003] NSWSC 85; (2003) 21 ACLC 450, 466, Austin J said that it is “now commonplace to observe that the standard of care expected of company directors, both by the common law (including equity …) and under statutory provisions, has been raised over the last century or so”. A liquidator may investigate whether directors breached their duties to the company during its life because if they did so, the liquidator, acting on behalf of the company, could proceed against them for damages. A liquidator might be able to recover assets lost by the company as a consequence of a breach of duty by the directors, or obtain an account of profits received by a director, or obtain compensation for the loss suffered by the company, as a result of the gain made by the director or because of the breach. Any recovery of property or award of damages would increase the pool of assets available to be distributed among the creditors. The following is an outline of the range of duties owed.2

Common law duties [16.25] The common law duties of directors may be divided into two broad categories: duties of good faith and duties of care and skill. Duties of good faith

[16.30] The duties of good faith may be defined more specifically as including the following duties:3 • to act honestly in the best interests of the company; • to exercise powers for a proper purpose; and • to act with an unfettered discretion. Traditionally, another duty has been included in this general category, namely the duty to avoid conflicts between the company’s interests and the directors’ personal interests. This is not so much a duty owed by directors, although it does oblige them to make disclosure if they obtain a benefit arising from a conflicted transaction and they wish to retain that benefit. These are known as fiduciary duties, being duties also owed by liquidators and trustees. Fiduciaries act on behalf of others who are in a position of dependence – in this case, the company – and trust is placed in fiduciaries, hence courts have formulated strict equitable principles regulating how they are required to act. While 2 See further Austin and Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (16th ed, 2014, LexisNexis) Chs 8 and 9; Harris, Hargovan and Adams, Australian Corporate Law (5th ed, LexisNexis, 2017) Chs 15-18. 3 See the detailed review of directors’ duties in The Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1 at Chapter 20. This summary was largely confirmed on appeal (Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 89 ACSR 1).

[16.40]

16 Criminal Offences and Civil Actions Against Company Directors

629

the duties imposed on directors are not as strict as those placed on trustees or liquidators, the duties of directors are stringent, relatively speaking, and quite strictly enforced by the courts. It should be noted that corporate insolvency practitioners stand in a fiduciary position to the company, as well as being officers of the company under s 9 of the Corporations Act. Duties of care and skill

[16.35] Until the past few years it is probably fair to say that the duties of care and skill are not regarded as strictly the duties of good faith. The law has, in the past, granted directors greater flexibility in the manner in which they exercise management functions because, while they are not to take undue risks, carrying on business often involves some risk-taking and some uncertainty. The courts have been reluctant to judge the commercial decisions of directors. The law was based for years on the principles set out in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. It was settled law since that decision that a director need not demonstrate, while performing his or her duties, a greater degree of skill than may be expected of the non-professional reasonable person. Further, it was said that directors were not bound to give continuous attention to the affairs of their companies. This was taken to mean, inter alia, that the director was not bound to attend every board meeting. However, more recent decisions have stated that directors must not give “placid acceptance” and an “unquestioning response” to company issues. At all times, directors must bring an independent mind to bear in exercising their judgment. The courts today do not adhere to the established principles on delegation of tasks and will require greater vigilance and attention to be given by directors.4

Statutory duties [16.40] The Corporations Act provides statutory versions of the fiduciary and common law duties. These are not codifications of the general law duties however; they apply in addition to the general law: s 185. The duty of care, skill and diligence at common law is represented in s 180. It provides that directors must: “exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation’s circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

This provision states that the standard of care must be assessed by reference to the particular circumstances within the company of the director involved, whose conduct is said to be in breach: “Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth)”, at [4.1]. 4 See for example, ASIC v Healey [2011] FCA 717; (2011) 196 FCR 291 (the Centro case); ASIC v Macdonald (No 11) [2009] NSWSC 287; (2009) 230 FLR 1 (the James Hardie case).

630

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.42]

The business judgment rule

[16.42] The duty is qualified by what is known as the business judgment rule, in s 180(2), that a director or other company officer who makes a business judgment is taken to meet the requirements of s 180(1), and their equivalent duties at common law and in equity, in respect of the judgment if they:5 (a) make the judgment in good faith for a proper purpose; and (b) do not have a material personal interest in the subject matter of the judgment; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation.

The business judgment rule in s 180(2) applies to both the statutory duty and the common law duty. It is also important to note that where the alleged negligence is based on a state of knowledge, s 189 allows for reasonable reliance on others. Other duties – ss 181 – 183

[16.43]

The other main statutory duties require directors to:

• act in good faith in the best interests of the corporation and for a proper purpose (s 181); • not make improper use of their position to gain an advantage (s 182); and • not make improper use of inside information to gain an advantage: s 183. These three sections overlap, and in any given case a liquidator may seek to rely on two or more of the statutory duties.

Consequences of a breach of duties [16.45] Breaches of duty by directors might give to a liquidator a number of avenues of financial recovery. The breach of the duty of good faith may enable a liquidator to recover property or give the liquidator a right to an account of profits. A director might have removed or misused company property or obtained benefits from company opportunities or information. The typical remedy for a breach of the duty to exercise care and skill is damages, and the liquidator must be able to show that the company suffered loss because of the alleged breach of duty: Permanent Building Society v Wheeler (1994) 11 WAR 187. A breach of the duty of good faith by a director may render the transaction voidable by the company, through the liquidator, and it may take action against the defaulting director to rescind a contract entered into in breach of the duty, obtain an injunction to prevent further defaults, obtain an account of profits or seek the imposition of a constructive trust on property gained by the director through the breach of the duty. Sometimes when a director misuses information or misapplies property, it is not the director who gains an advantage, but some third party. The 5 See ASIC v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1.

[16.55]

16 Criminal Offences and Civil Actions Against Company Directors

631

liquidator can succeed against the third party if it can be proven that the third party knowingly participated in the breach by the director, or knowingly received the benefit as a result of the breach.6 Civil penalties

[16.50] A person who contravenes ss 180 – 183 of the Corporations Act may be subject to a civil penalty order of up to $200,000 on the application of ASIC, once a declaration of breach has been made under s 1317E: s 1317G. Such a declaration may be made if the contravention: • materially prejudices the interests of the corporation, or its members; or • prejudices the interests of the corporation, or its members; or • materially prejudices the corporation’s ability to pay its creditors; or • is serious: s 1317G(1). Section 1317E also lists insolvent trading under s 588G as a liability for which a civil penalty can be imposed. Applications for civil penalty and disqualification orders may be initiated by ASIC.7 In addition, the director may be ordered to pay compensation to the company if the court, which is hearing an application for a civil penalty order, is satisfied that the corporation has suffered loss as a result of the director’s breach: s 1317H. A liquidator may claim compensation in the name of the company from a director or other person who has contravened the statutory duties of directors and other officers: s 1317J. ASIC may also seek an order that the director be disqualified from being a company director for a set period: s 206C.

Misfeasance: s 598 [16.55] Section 598(2) of the Corporations Act allows an eligible applicant, which includes a liquidator, administrator or receiver, to apply for orders against a person “guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation”, in circumstances where the corporation has suffered, or is likely to suffer, loss or damage as a result. In Schmierer v Taouk [2004] NSWSC 345; (2004) 207 ALR 301, the court found that F, a director of the company, had withdrawn the company’s money after a dispute with T, a fellow director, about payment for work performed by F for T’s other company. White J said (at [84]): “The defendant’s receipt of this sum was a misfeasance in the nature of a breach of trust whereby he acted wrongly by misapplying and retaining in his own hands moneys of the company. It is precisely the kind of conduct to which s 598(2) and its predecessors is directed.” 6 See Barnes v Addy (1874) LR 9 Ch App 244; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 20 CLR 89; 81 ALJR 1107; Kalls Enterprises Pty Ltd v Baloglow (2007) 63 ACSR 557; Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609. 7 An order for disqualification of a person to act as a director is a penalty: Rich v ASIC [2004] HCA 42; (2004) 220 CLR 129. As a consequence of that decision, see the “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)” at [5.38] ff as to removal of penalty privilege in relation to certain proceedings, and s 1349(1) of the Corporations Act. That privilege is removed in respect of disciplinary proceedings against liquidators under IPSC, Div 40: see s 1349 of the Corporations Act, discussed in Chaper 10.

632

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.60]

Relief from liability: ss 1317S, 1318 [16.60] A court may relieve a director from civil liability, in whole or in part, for contravening a civil penalty provision and for liability under s 1317H of the Corporations Act where he or she is judged to have acted honestly and ought fairly to be excused: s 1317S. In making this determination in respect of insolvent trading, s 1317S(3) provides that: … the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and (b) when that action was taken; and (c) the results of that action.

This expresses the general policy of corporate insolvency law that directors should be proactive in the face of their company’s insolvency; that may mean resolving to put the company into administration. Attention to these matters is itself an aspect of the defence to insolvent trading: s 588H(6). The introduction of the new safe harbour protection for directors against insolvent trading liability (s 588GA) also directs attention to what “course of action” the directors took once they had a suspicion of insolvency. If the safe harbour protection applies it means that there is no breach of s 588G(2) and hence no need to seek relief under s 1317S. There is also a similar power to s 1317S provided in s 1318 for a court to relieve a person of liability in respect of any civil proceedings where negligence, default, breach of trust or breach of duty is proved, including those brought for misfeasance under s 598. This section also has application to statutory proceedings under s 588M (compensation for loss from insolvent trading) although it raises the same sort of considerations for the court as s 1317S: Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123. In The Stake Man Pty Ltd v Carroll [2009] FCA 1415; (2009) 76 ACSR 67 the court granted complete relief from liability to a director for insolvent trading.8 However, the section is not available to grant relief to directors from their obligations in respect of a director penalty notice issued by the ATO, under Sch 1, s 269-35(5) of the Taxation Administration Act 1953 (Cth): DCT v Dick [2007] NSWCA 190; (2007) 242 ALR 152. Section 1317S(4) provides that “if a person thinks that eligible proceedings will or may be begun against them, they may apply to the Court for relief”. That subsection has not been the subject of judicial comment but s 1318(2) is a similarly worded provision in relation to a person who “has reason to apprehend” such an action against them. Despite the wording, s 1318(2) applies only to past conduct of directors and possibly also their continuing conduct, even if the legal proceedings against the director have not yet been commenced: Edwards v A-G (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667. It appears therefore that the power of the court under both provisions does not extend to the future acts of directors. For example, a director could not obtain court sanction of a proposed program for the 8 See Harris, “Relief from Insolvent Trading Liability” (2010) 22 A Insol J 14. Relief from liability under s 588G was denied in Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528 (mere reliance on advisors was not enough to justify relief, particularly when the advisors did not tell the director that the company was solvent).

[16.70]

16 Criminal Offences and Civil Actions Against Company Directors

633

restructuring of a possibly insolvent trading company in order to protect the director from liability during the restructure. However, s 588GA now provides reasonable protection in such circumstances. See Chapter 2.

Criminal liability [16.65] Officers who breach any of ss 181 – 183 of the Corporations Act may also be criminally liable if they fall within s 184. Criminal liability only attaches if: • there is recklessness or intentional dishonesty and directors fail to exercise their powers and discharge their duties in good faith in the best interests of the company for a proper purpose; • there is, in the use of directors’ positions, an element of dishonesty and either intention or recklessness in obtaining a gain or causing the company a detriment; or • directors use the information that they receive dishonestly intentionally or recklessly in seeking to gain an advantage or causing the company to suffer a detriment. It is not the responsibility of the liquidator to take criminal action against current or former directors, but liquidators do have a responsibility to report suspected offences under s 533.9

Duty of directors to take into account the rights of creditors [16.70] The traditional view of directors’ duties is, as explained earlier in this chapter, that they are owed to the company – so that directors are under a fiduciary obligation to exercise their powers bona fide in the interests of the company as a whole.10 However, in the last 30 years a substantial body of case law has developed which states that in certain circumstances directors, in discharging their duties to the company, must take into account the interests of its creditors.11 The Bell case suggests that such a duty is fiduciary in nature: Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 44 WAR 1.12 Some earlier decisions had suggested that the duty is one owed directly to creditors but this is not the case.13 In Geneva Finance Ltd v Resource & Industry Ltd (2002) 20 ACLC 1427, 1438, the court said: “The orthodox articulation of the duty is that a director of a company, especially if the company is approaching insolvency, is obliged to consider the interests of creditors as 9 The form used is ASIC Form EX01: Schedule B of Regulatory Guide 16 Report to ASIC under s422, s438D or s533 of the Corporations Act 2001 or for statistical purposes. This duty is equivalent to the duty of a bankruptcy trustee to report offences, under s 19(1)(i) of the Bankruptcy Act. 10 Percival v Wright [1902] 2 Ch 421; Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258; Grove v Flavel (1986) 43 SASR 410; 11 ACLR 161, 166. 11 See Keay, Company Directors’ Responsibilities to Creditors (Routledge, 2007). 12 The case was settled before being determined by the High Court of Australia. For a discussion of the fiduciary duties issue in this case see Langford, “Solving the Fiduciary Puzzle – The Bona Fide and Proper Purposes Duties of Company Directors” (2013) 41 ABLR 127. 13 Spies v The Queen (2000) 201 CLR 603.

634

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.75]

part of the discharge of his duty to the company itself, but that he does not have any direct duty to the creditors and certainly not one enforceable by the creditors themselves.”

This was the approach taken by the trial judge in the Bell case: The Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1. However, the Court of Appeal in Western Australia took a different approach. In particular, Drummond AJA (in the majority) suggested that the duty is to protect creditors once the company is insolvent: Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 44 WAR 1 at [2031]. The other majority judge (Lee AJA) found that acting to benefit one group of creditors over another during the company’s insolvency constituted equitable fraud.14 Unlawful phoenix conduct, whereby a company transfers all its assets to a new business for no consideration, leaving liabilities in the old company, will invariably involve a breach of directors’ duties.15 In ASIC v Somerville [2009] NSWSC 934; (2009) 77 NSWLR 110, directors of several companies transferred all of the assets to new companies set up specifically to avoid paying debts incurred by the old companies. This conduct was found to be in breach of the duty to consider creditors’ interests and the directors were disqualified from managing corporations and fined. Significantly, the lawyer who advised the directors to undertake this conduct was found to have been involved in his clients’ breach of the law, under s 79 of the Corporations Act, and was also disqualified from managing corporations and fined. In October 2017, the federal government announced several measures for consultation regarding illegal phoenix activity, which include Director Identification Numbers and a range of other potential reforms.16 When is the duty to creditors triggered?

[16.75] Clearly, if a company is insolvent, the directors owe a duty to take into account the interests of creditors.17 But the directors must also consider the interests of its creditors where the company is not insolvent but facing insolvency.18 The duty has been expressed to be triggered if the company is near insolvency or of doubtful solvency, or if there is a real risk of insolvency because the company is financially unstable or in financial difficulty.19 The directors must see a real and not merely a remote risk that the creditors will be prejudiced by the dealing in question: Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557. If the company is actually insolvent then conduct that takes away assets from 14 See further Hargovan and Harris, “For Whom the Bell Tolls: Directors’ Duties to Creditors after Bell” (2013) 35 Syd LR 433. 15 See Matthew, “The Conundrum of Phoenix Activity: Is Further Reform Necessary?” (2015) 23 Insolv LJ 116. See further Anderson, Ramsay, Welsh and Hedges, “Phoenix Activity: Recommendations on Detection, Disruption and Enforcement” (University of Melbourne, 2017), available from https://findanexpert.unimelb.edu.au/display/publicationS1215510. 16 Hon Kelly O’Dwyer, Minister for Revenue and Financial Services, “A Comprehensive Package of Reforms to Address Illegal Phoenixing”, MR 090/2017 (21 September 2017). 17 Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. 18 Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. 19 See the review of the authorities in The Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 39 WAR 1 at [20.3.3].

[16.78]

16 Criminal Offences and Civil Actions Against Company Directors

635

the general pool available to creditors in external administration can be said to prejudice creditors: Westpac Banking Corp v The Bell Group Ltd (No 3) [2012] WASCA 157; (2012) 270 FLR 1. An assessment of the value of the duty

[16.78] Views that the duties of directors should be extended in this area have been criticised, primarily because it unreasonably circumscribes directors who need, as part of their job, to take commercial risks with a view to pursuing some entrepreneurial aim. Some believe that directors would be less inclined to take those risks and thereby place themselves in potential danger of a liquidator’s claim if the business fails. It would also raise moral hazard issues for creditors in reducing their incentive to themselves take protective measures by way of ensuring good credit and security arrangements in their business. Creditors might also be encouraged to place pressure on directors personally, which might then diminish the benefits of limited liability and its encouragement of business risk. If directors are required to focus on their own liability, their attention to the company’s strategic and commercial aims might be lessened. The stronger creditors are also more likely to succeed in receiving payment from the directors at the expense of weaker ones, countering the ultimate pari passu aim.20 Countering that however is the balance that insolvency law necessarily has to manage between its various stakeholders – creditors, directors, the company itself, the need for efficient allocation of misused capital, and business integrity and the public interest. That balance is weighted in the creditors’ favour by the voidable transaction provisions (explained in Chapter 14) and insolvent trading liability ([16.85] –[16.140]). It might be said these are sufficient, at least in the retrospective focus of a liquidator, to protect the interests of creditors. However, a liquidator may now more readily find that directors have breached their duties to the company and bring proceedings in those cases where the more traditional voidable transaction provisions cannot be used. Indeed it has been suggested that, given the strict legal criteria for bringing voidable transaction claims, and the defences available, a claim on a director for breach of duty under this head may often be a better alternative; or at least one that should, depending on the facts, be brought against a director in parallel with other voidable transaction claims. 21 In the current local and international context of the encouragement of entrepreneurial business conduct, this duty must come under close scrutiny. The introduction of the safe harbour provision in Australia in 2017 (s 588GA) does not extend to duties owed by the directors to the company, including any obligation to consider duties owed by the company to its creditors. In Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. Street CJ said that “(t)his insolvent company, in a state of imminent and foreseen collapse, entered into a 20 For a detailed discussion of this issue, including from an economic perspective, see Keay, Company Directors’ Responsibilities to Creditors (Routledge, 2007). 21 See Keay, “Another Way of Skinning the Cat: Enforcing Directors’ Duties to Creditors” (2004) 17 Insolvency Intelligence 1.

636

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.80]

transaction which plainly had the effect, and was intended to have the effect, of placing its assets beyond the reach of its creditors … by means of … the terms of a lease [which] were, to say the least, commercially questionable.”

Liabilities to employees [16.80] Part 5.8A of the Corporations Act was introduced in 2002 following the public controversy concerning the Patrick Stevedores dispute with its workers in 1998. It imposes liability on those who enter into a relevant agreement or transaction with the intention of either preventing or significantly reducing the recovery of employee entitlements in the event of the company’s insolvency. The offence under s 596AB attracts a penalty of 1,000 penalty units ($210,000) and/or imprisonment for 10 years. It can be committed by companies but is focused on the activities of directors. Section 596AA(1) provides: “The object of this Part is to protect the entitlements of a company’s employees from agreements and transactions that are entered into with the intention of defeating the recovery of those entitlements.”

In the event of the company’s insolvency, s 596AC allows a liquidator to recover compensation from the directors or others in respect of any loss or damage suffered by the employees. Section 596AF enables an employee to sue for compensation with the liquidator’s consent, or without that consent in certain circumstances: s 596AH. These liabilities can be pursued whether or not the person concerned has been convicted of an offence under s 596AB. Proceedings must be commenced within six years of the date of the winding up: s 596AC(4). The merits of these provisions have been the subject of debate. Indeed Pt 5.8A has been described as “completely ineffective in providing a means of recovery of employee entitlements”, and may even be counterproductive of a beneficial restructuring.22 At the same time, insolvency law traditionally, and for stated policy reasons, has been protective of employees in the context of their employer’s insolvency and these provisions are in accord with that protective emphasis. There is a particular concern about such entitlements in the context of “phoenix” companies, which typically, on their demise, leave employee entitlements unpaid.23 That being said, there has been no case law in which these provisions have been the subject of legal proceedings. That does not necessarily mean that the provisions are not serving some purpose, for example, by way of general deterrence of directors and others from engaging in the proscribed conduct. The 2004 Parliamentary Joint Committee Report recommended (recommendation 43) that a review of these provisions be undertaken to determine their effectiveness “in deterring companies from avoiding their obligations to employees”. That review did not occur. 22 Anderson, The Protection of Employee Entitlements in Insolvency (Melbourne University Press, 2014) p 167. See also Reynolds, “The Corporations Law Amendment (Employee Entitlements) Act 2000 (Cth): To What Extent Will It Save Employee Entitlements?” (2001) QUTLJJ 9; Symes, “Will There Ever be a Prosecution under Part 5.8A?” (2002) 3 INSLB 17. 23 See Anderson, “Directors Liability for Unpaid Employee Entitlements: Suggestions for Reform Based on Their Liability for Unremitted Taxes” (2009) 30 Syd LR 470.

[16.85]

16 Criminal Offences and Civil Actions Against Company Directors

637

Although no formal statutory review has been undertaken, the Department of Employment and the Treasury released a consultation paper in May 2017 “Reforms to Address Corporate Misuse of the Fair Entitlements Guarantee Scheme”, which includes potential changes to Pt 5.8A, including making it easier to impose criminal liability, extending liability to civil penalties for directors, changing the basis of liability to focus on reasonableness and expanding who can bring an action under that Part. At the time of writing the Government had not yet responded to public submissions on the consultation paper.

INSOLVENT TRADING Generally [16.85] The general rule in corporate law is that if a corporation incurs a debt it (and it alone) is liable for the debt. This rule is based on the established principle recognised in Salomon v A Salomon & Co Ltd [1897] AC 22 that a company is a legal entity which is separate from its members and controllers and consequently it (and not its directors) is liable, inter alia, for its contracts and debts generally. This principle is sometimes said to produce a “corporate veil” behind which courts cannot look to see who is in control of the company. However, there are instances where either the courts themselves lift the corporate veil or the legislature provides that the veil must be lifted, and those in control of the company may be held responsible for what are, prima facie, the debts and acts of the company. Section 588G of the Corporations Act is an example of a statutory lifting of the corporate veil. Fundamentally, s 588G is designed to prevent directors from continuing to trade (and incurring debts) when their company is insolvent and likely to be unable to pay the debts that it incurs. The provision does not distinguish between executive and non-executive directors or between those who are active and those who are inactive: Elliott v ASIC [2004] VSCA 54; 10 VR 369. Liability can be imposed even though the director is outside the jurisdiction: James v Andrews [2001] NSWSC 1149; (2001) 166 FLR 11. As we will explain, the focus of the insolvent trading provisions is on compensating the unsecured creditors, who are the ones who primarily suffer in a company’s liquidation. This is evident from the fact that although compensation may be paid by the directors in respect of debts of particular creditors incurred in breach of s 588G, that compensation is available for all unsecured creditors generally. The pari passu basis of distribution of moneys of a successful insolvent trading claim among all creditors prevails. Insolvent trading is a liability of directors that is increasingly under focus, as liquidators, creditors and the public seek to have some explanation, and possible retribution, for the large financial losses to creditors arising out of an insolvency. The courts themselves speak harshly of directors who have allowed their company to trade whilst insolvent and warn others to avoid what can be serious financial consequences for directors personally. Thus, in Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 Austin J opened his judgment with these words:

638

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.90]

“This case is a cautionary tale for company directors, especially in the small business sector. The defendant … joined the board of directors of the plaintiff company less than a year before it went into voluntary administration. He received no remuneration as a director. For at least a substantial part of that period, the company was hopelessly insolvent. For the reasons I shall give, the consequence for the defendant is that he is liable to the company’s liquidator under the insolvent trading provisions of the Corporations Law in a sum in excess of $500,000, plus interest.”

Similar sentiments were expressed by Justice Barrett in Woodgate v Davis [2002] NSWSC 616; 20 ACLC 1,314, the judge referring to the “important social purpose” of insolvent trading laws in engendering in directors of companies experiencing financial stress a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company’s debt burden. “The provisions are based on a concern for the welfare of creditors exposed to the operation of the principle of limited liability at a time when the prospect of that principle resulting in loss to creditors has become real.” ASIC reinforces this responsibility of directors through its regulatory guide – RG 217, Duty to prevent insolvent trading: Guide for directors and at one stage conducted an Insolvent Trading Program under which it investigated insolvent trading and took some action. While that program has ceased, liquidators are required to refer breaches of s 588G to ASIC in their reports under s 533 and other similar sections. Despite that, ASIC refers very few actions for insolvent trading, 24 with liquidators mainly bringing proceedings. One exception has been the significant criminal convictions for offences under s 588G(3) arising out of the conduct of those involved in the failure of Kleenmaid, with one former director being sentenced to nine years imprisonment in respect of insolvent trading of debts exceeding $4 million.25 The insolvent trading provision has been controversial, with numerous insolvency stakeholder groups criticising the effect that potential insolvent trading liability can have on efforts to restructure a business in financial distress. The Productivity Commission in 2015 recommended that a safe harbour be introduced to protect directors who try to restructure a company. The concern expressed was that directors may be reluctant to attempt a restructure for fear of incurring insolvent trading liability. The Government agreed and recommended the safe harbour in its National Innovation and Science Agenda released in December 2015, with draft legislation released in March 2016. After multiple rounds of consultation and review, the legislation finally passed on 12 September 2017, with the safe harbour provision, s 588GA of the Corporations Act, and related changes, commencing on 19 September 2017. The safe harbour provisions will be discussed further in Chapter 21.

Conditions for liability [16.90] Section 588G provides that directors will contravene the section if all of the following criteria apply: 24 The Commonwealth DPP prosecutes such claims. 25 ASIC 16-257MR “Former Kleenmaid Director Sentenced to Nine Years Imprisonment for Fraud and Insolvent Trading” (15 August 2016).

[16.95]

16 Criminal Offences and Civil Actions Against Company Directors

639

• they are directors when the company incurs a debt; • the company was insolvent at the time when the debt was incurred or became insolvent as a result of the incurring of the debt; • there were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of the debt being incurred; and • a reasonable person in a like position in a company in the company’s circumstances would be aware of the company’s insolvency. A director may be liable for insolvent trading even where the director was a non-executive director with no control over the day-to-day incurring of debts. In such a case the director must either find a way to stop debts being incurred, or resign: Elliott v ASIC [2004] VSCA 54; 10 VR 369. In making out a case against a director, a liquidator may need to prepare an insolvency report to show both the fact of the company having been insolvent and the time from which that insolvency commenced. This is the concept of the retrospective assessment of insolvency discussed in Chapter 1. The timing is important given that the liability for debts incurred will only commence from the time the company is proved to have been insolvent. That proof can be offered from the liquidator by way of affidavit, on which the liquidator may well be cross-examined in order to test what is an important evidence threshold in any s 588G claim.26 The liquidator is able to give what is in effect expert opinion evidence.27 As an alternative, or supplementary to an insolvency report, the liquidator may be able to rely on the presumptions of the company’s insolvency contained in s 588E(3) and (4) (s 588E(1)(e)), for example, if the company has failed to keep financial records in terms of the requirements of s 286 of the Corporations Act.28 The civil standard of proof applies, namely on the balance of probabilities, but applied consistently with the stricter “Briginshaw” approach,29 that is, in light of the seriousness of the claim being made: Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724; ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126, 208; affirmed on appeal Plymin v ASIC [2004] VSCA 54. Reasonable grounds to suspect insolvency

[16.95] In deciding whether there are reasonable grounds to suspect insolvency courts will apply an objective approach and judge directors on the basis of the director of ordinary competence: Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699, 703. Courts rely upon the meaning of “suspicion of insolvency” which we examined in the context of bankruptcy preferences at [5.05]. In order for a suspicion to exist there must be more than merely an idle wondering; there must be a positive feeling of actual fear or misgiving amounting to an opinion that is not supported by sufficient evidence. Furthermore, a “reason to suspect” that a fact 26 See MCG Quarries Pty Ltd v Offermans [2015] QCA 103 where the liquidator’s evidence of insolvency, after cross-examination, was not accepted. 27 See the ARITA Code (3rd ed), Ch 26 – Expert Opinions. 28 Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183. The presumptions were discussed at [14.115]. 29 Briginshaw v Briginshaw (1938) 60 CLR 336.

640

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.100]

exists involves more than a reason to consider the possibility of its existence. Rather, the meaning of the phrase envisages the fact that in all the circumstances a reasonable person would, if in the position of the creditor, have a fear that the debtor was unable to pay its debts.30 The factual circumstances that are to be taken into account in assessing whether there were reasonable grounds to suspect insolvency are all those reasonably capable of being known to any of the directors: Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290. This extends to all facts actually known to any director and those facts not actually known, but reasonably capable of being known. That then calls for an examination of what reasonable inquiries would be made, or processes of obtaining information about the company’s affairs would be implemented, by a reasonable director in the circumstances of that company, and what those inquiries or processes would have revealed.31 In ASIC v Plymin [2003] VSC 123; 46 ACSR 126, in the context of a claim for insolvent trading, a checklist of insolvency indicators was put in evidence at the trial. This checklist is shown at [1.60] in our discussion about the assessment of insolvency, and includes liquidity ratios below 1, overdue taxes, suppliers demanding cash on delivery (COD) terms, creditors unpaid outside trading terms, and letters of demand or judgments obtained against the company. In such a scenario, it is hard for a director to claim they were unaware of the company’s insolvency.32 Incurring a debt

[16.100] For liability to be imposed on a director a debt must have been incurred. The term “debt” is interpreted widely although the term does not include a claim for unliquidated damages, although as we explained earlier the law on this is not clear.33 It can be difficult to determine the time at which certain types of debts are incurred. It will necessarily vary from case to case, and will, in relation to commercial debts, depend on what were the express and/or implied terms of the agreement leading to the debt: Credit Corp Pty Ltd v Atkins [1999] FCA 335; 17 ACLC 756. In Hawkins v Bank of China (1992) 26 NSWLR 562, it was held that a debt will be incurred when the company subjects itself to an unavoidable obligation to pay a sum of money at a future time, even when the obligation is contingent (in that case a guarantee that might never fall due if the principal debtor paid the debt). Generally, when a company purchases goods to be delivered, a debt is incurred each time a delivery is 30 As explained in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266. See [5.185]. 31 This issue was discussed in Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 22 ACLC 1,528 in the context of a defence under s 588FG(2): see [14.210]. 32 Applied in International Cat Manufacturing Pty Ltd v Rodrick [2013] QSC 91; affirmed on appeal International Cat Manufacturing (in liq) v Rodrick [2013] QCA 372; (2013) 97 ACSR 200. 33 See [1.62] as to the NSW Court of Appeal decision in Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471; see also New Cap Reinsurance Corp Ltd v Grant [2008] NSWSC 1015; (2008) 68 ACSR 176. For example, see Mosley, “Insolvent Trading: What is a Debt and When is One Incurred?” (1996) 4 Insol LJ 155; Gooley and Gooley, Insolvent Trading and Fraudulent Trading in Australia: Regulation and Context (LexisNexis, 2016).

[16.105]

16 Criminal Offences and Civil Actions Against Company Directors

641

ordered: ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126. Debts involving the sale of goods can depend upon whether the goods are specially manufactured. For example, in the absence of contract provisions to the contrary, ordinary manufactured goods which may be sold to any purchaser will involve a debt being incurred when the purchaser accepts delivery. On the other hand, goods manufactured to the purchaser’s specifications will incur a debt when the goods are produced, because it is at this time that the seller could sue for substantial damages: Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741; Playspace Playground Pty Ltd v Osborn [2009] FCA 1486. A tax debt will generally be incurred when the action is taken by the company in respect of which the obligation to pay tax then arises, even if that is at a future time. Examples of such debts incurred include ongoing and accruing workers’ compensation premiums; and the engaging of employees in respect of their future wages, payroll and other tax liabilities: Fryer v Powell [2001] SASC 59; 159 FLR 433. Where the transaction involves the provision of services based on an agreed rate or price, the debt will arise when the amount owing is ascertainable: Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528 at [35]. Section 588G(1A) also defines when certain debts are incurred, including the paying of a dividend, making a reduction of share capital, and buying back shares in the company. A debt is also deemed to have been incurred when the company enters into an uncommercial transaction as defined in s 588FB.

Defences [16.105] If a director is in a position where all of the above criteria can be proved by the liquidator, that director may be able to rely upon one of four alternative defences contained in s 588H of the Corporations Act. To defend an action successfully a director must prove one of the following: • That when the debt was incurred the director had reasonable grounds to expect that the company was solvent and would remain solvent even if the debt was incurred: s 588H(2). It is apparent that this places the onus on the director to show the higher mental element of “expectation” that the company was solvent – this requires more than a mere hope or possibility: Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201; Commissioner of Taxation v Paditham [2010] FCA 334. The expectation must be that the debts will be paid when due, not that funds will become available at some indefinite time in the future: Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 at [265]. • That when the debt was incurred the director had reasonable grounds to believe, and did believe, that a subordinate person was competent, reliable and responsible for providing adequate information about the company’s solvency and the director expected, on the basis of this information, that the company was solvent and would remain solvent: s 588H(3). In relation to a similarly worded defence in s 588FGB, Davies AJ in Iso Lilodw’ Aliphumeleli Pty Ltd v Commissioner of Taxation (2002) 42 ACSR 561, 579 said that the section is: “… directed primarily to the circumstance where directors must rely primarily upon other persons, particularly accountants and actuaries to prepare accounts which will disclose the financial position of a company. The section does not negate a director’s duty to keep himself informed, and to form his own judgment about the affairs of the company, of which he is a director.”

642

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.105]

In Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330; (2002) 20 ACLC 1,304, Young CJ in Eq referred to a Harmer Committee discussion paper which said:34 “The Commission considers that the defence is clearly necessary in the case of larger companies in which it cannot be expected that directors will have control over every action taken in the conduct of the company’s business. Additionally, a defence of this nature may encourage a proper system of financial management.”

Young CJ continued: “Thus the prime thrust of the defence is to cover the situation where there is a large corporation with bulky accounts and where there is a system in place of competent accountants, credit controllers and financial management and the board has a regime whereby those people, provided they are competent and responsible, will report to the board any problems that the board may pick up.”

Whether the defence is in fact limited to large companies may be a matter of some debate.35 This defence contrasts with the broader scope of one of the safe harbour criteria, that a director was “obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice”: s 588GA(2)(d). • That when the debt was incurred the director, because of illness or for some other good reason, did not at that time take part in the management of the company: s 588H(4).36 Lack of knowledge or skills is not “some other good reason” to fail to take part in management: DCT v Clark [2003] NSWCA 91; 57 NSWLR 113. • That the director took all reasonable steps to stop the company from incurring the debt: s 588H(5).37 It is for the director to prove that the debt was incurred without his or her express or implied authority: Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290. In making a determination whether such reasonable steps were taken, s 588H(6) provides that: … the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company; and (b) when that action was taken; and (c) the results of that action.

These are the same criteria described in s 1317S, (discussed earlier at [16.60]), whereby directors in breach of the other liability provisions may be excused by the court. Merely scaling back costs and monitoring operations is not sufficient to 34 Law Reform Commission’s Discussion Paper No 32 (1987), at [307]. 35 See also Re McLellan; The Stake Man Pty Ltd v Carroll [2009] FCA 1415; (2009) 76 ACSR 67; Trinick v Forgione [2015] FCA 642; (2015) 106 ACSR 600. 36 For a case where the director failed to establish this defence, see Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201. 37 Some of the elements mentioned here are reminiscent of the English wrongful trading provision: Insolvency Act 1986 (UK), s 214. See generally, Keay and Murray, “Making Company Directors Liable: A Comparative Analysis of Wrongful Trading in the United Kingdom and Insolvent Trading in Australia” (2005) 14 International Insolvency Review 27; Harris, “Director Liability for Insolvent Trading: Is the Cure Worse than the Disease?” (2009) 23 AJCL 266.

[16.110]

16 Criminal Offences and Civil Actions Against Company Directors

643

establish reasonable steps to stop the company incurring debts while it was insolvent: Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528. A director who has no knowledge of the company’s financial affairs cannot establish that they took all reasonable steps to prevent the debts being incurred at a time when the company was insolvent: Re Matlic Pty Ltd [2014] NSWSC 1342; (2014) 102 ACSR 602 at [69]. Although the defences appear to be fairly broad, the courts have interpreted them quite restrictively, and this extends to the decisions on the equivalent defences of directors available in respect of certain tax liabilities under the Corporations Act and the Taxation Administration Act 1953 (Cth). As one might expect, the burden of establishing the elements of a defence falls on the director: Byron v Southern Star Pty Ltd (1997) 73 FCR 264.

Consequences of liability [16.110]

Apart from the director being ordered to pay the amount under s 588M, in respect of a breach of s 588G, discussed below, the director could also be the subject of a pecuniary penalty application by ASIC (s 588G(2)) with a penalty imposed of up to $200,000: ss 1317E, 1317G. ASIC may also seek compensation orders on behalf of the creditors: s 1317H. As we commented earlier, such applications are rare. We have also explained that directors may also be subject to criminal prosecution. In addition to the requirements for civil breach, that they be directors at the time when the debt was incurred and that the company was insolvent, the offence also requires proof that: • the directors suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts; and • their failure to prevent the company incurring the debt was dishonest: s 588G(3). The penalty is a fine of up to $420,000 or five years imprisonment or both: Sch 3. The principal liability for breach of s 588G is imposed under s 588M, whereby the director may be ordered to pay an amount of the loss or damage suffered by a creditor in respect of a debt incurred by the company in breach of s 588G which the creditor has not been able to recover by reason of the company’s insolvency. An amount in excess of $650,000 was ordered against the director, plus interest, in Smith v Boné (No 2) [2015] FCA 389. The creditor’s debt incurred must have been unsecured and the creditor must have suffered loss.

Section 588M does not allow for recovery of the general creditors’ debts as such, the loss suffered by the creditors must be established: Edenden v Bignell [2007] NSWSC 1122; Smith v Offermans [2015] QCA 55; (2015) 105 ACSR 230. This may be established by evidence of the amount owed to unsecured creditors in the liquidation and unpaid: Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 at [78]-[79]; Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433 at [88]. The lack of any evidence that outstanding debts incurred had been paid was found to constitute the creditors’ losses in Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528. Any dividends or other payments made to creditors in the liquidation

644

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.115]

will need to be accounted for in determining compensation: Perrine v Carrello [2017] WASCA 151 at [50]; Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72 at [60]; see also Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724. Creditors and liquidators share the same burden of proof of loss under s 588M: Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72 at [56]. In Perrine v Carrello [2017] WASCA 151, the Court explained (at [36]): under s 588M the liquidator of a company is able to recover a loss that has not been suffered by the company, but rather was suffered by a creditor of the company in relation to a debt owed by the company to the creditor. To the extent that that might be thought to produce a somewhat arbitrary result, it nevertheless reflects the plain intention of the statute and is by no means novel in an insolvency context. The recovery of compensation by a liquidator from a director for breach of s 588G is plainly for the benefit of unsecured creditors. That evidently reflects the view of the Harmer Report, that it is unsecured creditors who normally suffer the greatest loss as a result of a company’s insolvent trading. The legislative scheme is designed to promote equal sharing between creditors of all sums recovered.

Assignment of insolvent trading claims

[16.115]

The ILRA has introduced a new power for liquidators (and other external administrators, such as voluntary administrators) to assign rights to sue, that they have conferred in their own name by the Act (rather than actions in the company’s name, such as for breach of directors’ duties), to a third party. This new power is included in IPSC, s 100-5. Liquidators have always had the capacity to assign company rights to sue, or more typically, to assign the fruits of the action (for example, to a litigation funder in exchange for funding) under s 477(2)(c), but this new power applies to rights given specifically to the liquidator, with insolvent trading compensation and voidable transactions being the primary examples. The liquidator cannot assign the right if the action has already begun unless the court approves: IPSC, s 100-5(2). The liquidator must give notice to the creditors of the intention to assign the right: IPSC, s 100-5(3). It would be wise for the liquidator to have raised this with the creditors in advance; creditors may prefer to fund the liquidator to take the action rather than have it assigned. After the assignment, “a reference in the Act to the external administrator in relation to the action is taken to be a reference to the person to whom the right has been assigned”: IPSC, s 100-5(4). The assignment power could provide a useful source of funds for liquidators. However, any thoughts that the liquidator may assign the right to sue and then finalise the liquidation and deregister the company to keep costs down is unlikely. The personal rights of action that are given to a liquidator speak of a company in a winding up (see for example s 588M(1)(d)) which will not be satisfied if the liquidator finalises the liquidation and deregisters the company. It may also be that, despite the absolute terms of the assignment, the records of the liquidator and his or her on-going involvement are required in order to bring and maintain the proceedings.

[16.125]

16 Criminal Offences and Civil Actions Against Company Directors

645

Individual creditor’s claim

[16.120] An individual creditor is not entitled to sue a director unless the consent of the liquidator is obtained (s 588R) or a creditor gives notice to the liquidator after six months from the commencement of the winding up that the creditor intends to begin proceedings against a director and is asking the liquidator to give, within three months, either a consent or a statement of reasons why the liquidator is of the opinion that proceedings should not be initiated under s 588M: s 588S.38 If no consent is given within the three months the creditor may proceed against the director: s 588T(2). If a reason for not proceeding is given by the liquidator, it must be produced to the court in the action in which proceedings have been or are initiated: s 588T(3). In order for proceedings to be brought under s 588M the company must be in the process of “being wound up”, which will not be the case where a liquidator has lodged the final administration return and ASIC has proceeded to have the company deregistered: International Greetings UK Ltd v Stansfield [2010] NSWSC 1357; 79 NSWLR 464 (decided under the former law). By then it is too late. A creditor is prevented from proceeding against a director where the company’s liquidator: • has already commenced proceedings under s 588M; or • has commenced proceedings claiming a voidable transaction in relation to the relevant debt of the creditor; or • has intervened in an application for a civil penalty order against the director: s 588U. If ASIC either applies for a civil penalty order against a director or seeks to prosecute a director for a breach of s 588G(3), the court may order compensation in favour of an unsecured creditor who suffered loss: ss 588J, 588K. The liquidator may intervene in an application for a civil penalty order and seek compensation for creditors: s 588J(2). It is made clear in s 588P that proceedings initiated for a breach of s 588G do not prevent other proceedings being commenced, in relation to the action which precipitated the s 588G proceedings, and alleging a breach of duties under other sections of the Corporations Act or the common law. Group companies

[16.125] The various provisions discussed relate to an individual company to which a director is appointed. It is to that single entity company which directors owe their duties, ensuring that its interests are not sacrificed to those related companies who may be part of a larger enterprise group. That can be a difficult issue for directors who may work within different companies in a group and may generally work in favour of the interests of the group as a whole. Some concession is made by s 187 which can allow a director of a subsidiary company to act in the interests of the holding company, but not if the subsidiary is insolvent. 38 For a case under s 588G where proceedings were initiated by a creditor, see Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699. Actions by creditors are rare.

646

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.130]

Holding company liability for subsidiary [16.130] In relation to corporate groups, Div 5 of Pt 5.7B of the Corporations Act allows an insolvent trading claim to be brought by the liquidator of a subsidiary company against the holding company. Section 588V establishes a contravention by a holding company of a company which incurs debts when insolvent, where there are reasonable grounds for suspecting such insolvency and the holding company or one or more of its directors is or are aware of such grounds or ought to have been so aware (having regard to the nature and extent of the holding company’s control over the insolvent company’s affairs). Section 588V(2) provides that a breach of the section is not an offence. In the case of such a contravention, the liquidator of the insolvent company may recover from the holding company the amount of loss and damage suffered by the persons in relation to the debts so incurred by them: s 588W. Defences are contained in s 588X that are similar to those in s 588H with allowances made for the corporate nature of the defendant. When a subsidiary company is in liquidation, claims brought under Div 5 may often be more worthwhile for a liquidator than pursuing the directors of the subsidiary if the holding company is one of financial substance. However, it appears that claims under s 588V are rare. The new safe harbour protection for directors also applies to s 588V: see s 588WA.

Order of application of compensation moneys [16.135] The outcome of a successful insolvent trading claim by a liquidator will generally be that compensation is paid to the company for the benefit of its creditors. Indeed, the focus of the insolvent trading provisions is as much on compensating creditors for their losses as it is on deterring generally the breach by directors of s 588G of the Corporations Act. The particular focus is on compensating only the unsecured creditors of the company who are the ones who primarily suffer in a company’s liquidation. Section 588Y(1) confirms this by providing that moneys recovered by a liquidator under the relevant sections “is not available to pay a secured debt of the company unless all of the company’s unsecured debts have been paid in full”. However, if a secured creditor has waived its security it could participate as an unsecured creditor: Re Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 at [133]. Further, although that compensation may be paid by the directors in respect of debts of particular creditors that were incurred in breach of s 588G, the compensation recovered by the liquidator, or by a creditor, is available for creditors generally on the pari passu basis. An exception applies in the case of a creditor who knew of the company’s insolvency. Section 588Y(2) provides that if the creditor who claims to have suffered loss as a result of the insolvent trading in fact knew that the company was insolvent or would become insolvent by incurring the debt owed to that creditor, then the court may order that all other unsecured creditors be paid in full before that

[16.140]

16 Criminal Offences and Civil Actions Against Company Directors

647

creditor receives any dividend. This exception does not apply if the application was brought by a creditor (s 588Y(3)), nor if the debt in question was a tax liability defined within s 588F: s 588Y(4).

Conclusion [16.140] It has been some decades since directors were able to rely on passivity as the basis of a defence to an action under the predecessor of s 588G (s 592) – that is, they did not authorise or consent to the debt being incurred or they could not anticipate insolvency because of a lack of knowledge. More recent decisions have stated that while directors may delegate certain responsibilities to officers of the company, they must keep abreast of the company’s affairs and cannot rely on passivity; and non-executive directors can no longer leave, without question, the affairs of the company in the hands of the full-time executive directors. These decisions indicate that a director cannot claim that a debt has been incurred by a company without their authority if the director, either explicitly or implicitly, participates in the decision of the board to grant authority to a person to incur a debt on behalf of the company. Consequently, directors cannot hide behind their ignorance of the affairs of the company, whether the ignorance was caused by their own inaction or deliberate refusal to become apprised of the facts. Given the high level of attention expected of a director, one might think that there would be a large number of cases involving insolvent trading. However, for two possible reasons there have in fact been, relatively speaking, few s 588G cases reported. First, proceedings are often initiated but are settled; that in itself indicates that the section is a useful recovery device for liquidators. Secondly, the use of voluntary administrations under Pt 5.3A of the Corporations Act has meant that a significant number of insolvent companies do not go into liquidation and claims against directors are not able to be pursued, or that putting the company into administration has been the proper response by the directors to their company’s insolvency. Significantly, however, even if a company does enter a deed of company arrangement, ASIC may itself take insolvent trading proceedings against the directors: Elliott v ASIC [2004] VSCA 54; 10 VR 369. Finally, the point might be made that given the warnings about insolvent trading, from ASIC and the courts and in the business community, directors may in fact be taking heed and addressing the financial problems of their company early to avoid trading whilst insolvent. Section 588G has roles in both deterring insolvent trading and encouraging directors to act responsibly. However, despite these words, the reality is that insolvent trading by directors must occur regularly, and any real deterrence from a threat of the section being used against the director is minimal. This is certainly the case in small to medium size companies although it is fairly said that directors of larger corporates generally take the threat seriously and react to it.39

39 Murray, “The Empty Threat of Insolvent Trading” (2009) 9 INSLB 126.

648

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.145]

DIRECTORS’ LIABILITIES TO THE COMMISSIONER OF TAXATION [16.145] Directors of insolvent companies also have potential liabilities to the Commissioner of Taxation. These liabilities were introduced in 1993, at the time that the priority given to the Commissioner over other creditors in insolvencies was removed by the Insolvency Tax Priorities (Legislation) Amendment Act 1993 (Cth). In place of that priority there were imposed certain direct liabilities upon the directors of companies for their tax liabilities.40 These liabilities arise under the Corporations Act and the Taxation Administration Act 1953 (Cth).41 The recently enacted safe harbour protection for directors (Corporations Act, s 588GA) does not extend to tax liabilities imposed on company directors. Directors’ indemnification of the Commissioner in relation to voidable transactions Income Tax Assessment Act 1936 (Cth) (ITAA 1936)

[16.150] Section 588FGA of the Corporations Act provides, inter alia, that if a court makes an order under s 588FF42 against the Commissioner of Taxation because the Commissioner received the benefit of a voidable transaction, all of the persons who were directors at the time of the payment are liable to indemnify the Commissioner for any loss or damage suffered because of the order. This only applies where the voidable transaction was entered into in order to satisfy certain liabilities of the company to the Commissioner under the ITAA 1936 (Cth). This is obviously not a right of claim available to an ordinary creditor who has had to repay preference or other moneys to a liquidator. The “Explanatory Memorandum to the Insolvency Tax Priorities (Legislation) Amendment Bill 1993 (Cth)” explained a reason for the indemnity being that by virtue of the “Commissioner’s possible possession of financial details of the company’s health (through the receipt of tax information etc)” the Commissioner may not be able to show that he or she was unaware of the insolvency of the taxpayer so that a defence to a voidable transaction claim would not be available. The Memorandum says, in respect of s 588FGA, that “[w]here the liability of a director is avoided through a preference payment by the company, the position of the Commissioner will be made equivalent to a guaranteed creditor”. Typically such a claim involves payment by the company to the Commissioner of moneys that are later adjudged to have been a preference, under s 588FA, and repayable by the Commissioner to the liquidator. In Browne v DCT (1998) 82 FCR 1, the Full Federal Court in effect said that even though non-payment of the tax may amount to a criminal offence the directors had other options available to them, including to put the company into liquidation or administration. If the directors had adopted that course, they would not have incurred a liability under s 588FGA. The obligation to indemnify the Commissioner includes the costs liabilities payable by the Commissioner to the liquidators resulting from an order under s 588FF: 40 See Browne v DCT [1998] FCA 187; (1998) 82 FCR 1. 41 See further Sommer, Gates and Schofield, Tax and Insolvency (3rd ed, Thomson Reuters, 2013). 42 As to the relationship between ss 588FF and 588FGA see: Fletcher v Anderson [2014] NSWCA 450; (2014) 103 ACSR 236; FCT v Moodie [2014] NSWCA 59; (2014) 98 ACSR 274.

[16.155]

16 Criminal Offences and Civil Actions Against Company Directors

649

Commissioner of Taxation v Sims [2008] NSWCA 298; 72 NSWLR 716. Directors who indemnify the Commissioner are entitled to claim against the company (s 588FGA(5)(b)) and/or claim contribution from directors who did not pay towards the indemnification of the Commissioner. The Commissioner may decide not to defend a claim by a liquidator under s 588FF; in such a case the court may accept consent orders in favour of the liquidator for the amount of the claim. Where this occurs, the directors should be joined to the proceedings and be given an opportunity to respond, for example, to challenge the finding of insolvency. This is particularly necessary if the Commissioner’s decision not to defend the liquidator’s claim is based upon the right of indemnity against the directors: Fletcher v Anderson [2014] NSWCA 450. Section 588FGA operates if the s 588FF order made against the Commissioner is made by “the court”, that is, in terms of s 58AA(1), any lower court.43 Defences

[16.155] Directors have a number of defences that are potentially available to them: s 588FGB. These are: • at the time of payment they had reasonable grounds to expect the company was and would remain solvent, even after payment (s 588FGB(3)); • they had reasonable grounds to believe and did believe that a competent and reliable person was providing them with information about the solvency of the company and they expected, on the basis of the information that the company was, and would remain solvent (s 588FGB(4)); • they did not take part in the management of the company because of illness or for some other good reason (s 588FGB(5)); or • either they took all reasonable steps to prevent the payment or there were no such steps available to them: s 588FGB(6). Section 588FGB(7) provides that in determining whether a defence under subs (6) has been proved, regard may be had to whether any action was taken by the directors to appoint an administrator of the company, when that action was taken and what were the results of that action. These defences are very similar to those available to a claim of insolvent trading. Decisions in relation to s 588FGB raise similar issues concerning the responsibility of company directors in the face of their companies’ insolvency: DCT v Clark [2003] NSWCA 91. A number of defences have been raised by directors relying upon a claim that they did not, for good reason, take part in the management of the company. In DCT v Clark, Spigelman CJ noted that, as we have explained earlier, the expectation that directors will participate in management has intensified over time. One aspect of the directors’ duty of care and diligence is a “core, irreducible requirement of participation in the management of the company”. Such a requirement is one of the factors underlying the scheme for insolvent trading under s 588G of which 43 A typographical error in referring to “Court”, identified in Scott v Commissioner of Taxation [2003] VSC 50, was finally remedied in the ILRA.

650

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.160]

s 588FGB is a part. The Chief Justice said that such participation is a “basal structural feature of Australian corporations law”. Thus, a total failure to participate in a company’s management, for whatever reason, as had occurred in the case before the court, should not be regarded as a “good reason” within s 588FGB(5); nor, for that matter, in s 588H. A director cannot be excused from liability under s 588FGA by seeking a court order under s 1318 (discussed at [16.60]) because the liability to indemnify the Tax Commissioner is not a liability in respect of “negligence, default, breach of trust or breach of duty”: Commissioner of Taxation v Paditham [2010] FCA 334.

Penalties for non-payment of unremitted tax deductions and superannuation Taxation Administration Act 1953 (Cth) (TAA 1953)

[16.160] Directors may also be subject to penalties where their company has failed to remit withholding tax instalments to the Commissioner of Taxation and where the director fails to cause the company to respond to a directors’ penalty notice under s 269-15 of the TAA 1953 (Cth).44 These penalties are imposed in the scheme contained in Sch 1 to the TAA 1953: Div 269 – Penalties for directors of non-complying companies. The stated duties of a director (s 269-1) are to ensure that a company meets its obligations to remit tax amounts withheld from employees’ wages to the Commissioner and to pay superannuation guarantee charge, or, if it is unable to, for the company to go promptly into voluntary administration or into liquidation. The objects of the Division (s 269-5) are expressed in like terms. These duties are then enforced by penalties imposed personally on the directors; any penalty paid is applied towards meeting the company’s tax obligation. The regime therefore serves to focus directors on their company’s solvency and if the company is unable to pay the tax because it is insolvent, to address that situation. This power of the Commissioner is significant in insolvency because non-payment of tax liabilities is often an early sign of a company’s impending financial demise. A company in difficulty may try to use its limited funds, including taxes withheld from employees’ wages, to pay suppliers and contractors who are essential for the company’s ongoing trading, rather than to pay the Commissioner. Under s 269-15, there is imposed on the directors the obligation to cause the company to comply with its own obligation to pay withheld amounts to the Commissioner by the “due day”: s 269-10. The obligation of the company arises on the “initial day”, being generally the day that an amount is withheld from an employee’s wage: s 269-10. The directors remain under their own parallel obligation until they cause their company to adopt one of three courses of action: • remit the amounts due (s 269-15(2)(a)); • put the company into voluntary administration, s 269-15(2)(b)); or 44 The Tax Laws Amendment (Transfer of Provisions) Act 2010 (Cth) transferred the director penalty notice regime from the ITAA 1936 to the TAA 1953. The director’s obligation was previously imposed under s 222AOB(1) of the ITAA 1936.

[16.160]

16 Criminal Offences and Civil Actions Against Company Directors

651

• put the company into liquidation: s 269-15(2)(c). The directors become liable to a penalty if none of these three actions is taken: s 269-20. The penalty is the amount of tax that the company has failed to pay. Significantly, the entry by the company into an arrangement with the Commissioner for the payment of the relevant liability (for example, by instalments) does not remit the director’s obligations or penalty. Instead, such an arrangement merely precludes the Commissioner from commencing proceedings to enforce the obligation or the director’s penalty: s 269-15(3). The focus of the regime is then that the Commissioner must serve a written notice on the director – a director’s penalty notice – before proceeding to recover the penalty from the director.45 The liability arises under s 269-20 not because of the service of the notice under s 269-25: Power v DCT [2013] NSWCA 428. That notice gives the director 21 days to have the company comply with its obligations: s 269-25. If the director causes the company to make payment or enter administration or liquidation within the 21 days, the penalty is remitted. If not, the Commissioner may recover the penalty from the director. The director cannot avoid the personal liability if the taxes remain unpaid for a period of longer than three months: s 269-30. This change was introduced in July 2012 to ensure that liquidation and voluntary administration could not be used to avoid long standing tax debts. It was also a measure that was introduced to combat phoenix company activity. It addressed the problem for the ATO that companies often would not report their PAYG obligations, such that the ATO would not be aware of the debt. The law allowing the directors to simply put their company into administration or liquidation was seen in fact to facilitate unlawful phoenix activity. There are particular provisions concerning service of a director penalty notice. They provide that a notice is taken to be given to the director at the time the Commissioner “leaves or posts it”: s 269-25(4).46 This date should be shown on the notice itself. The Commissioner may also send a copy of a director penalty notice to a director’s registered tax agent; this provides the Commissioner with an additional means of bringing the penalty to the director’s attention: Sch 1, item 3, subs 269-52 of the TAA 1953. These options of putting the company into voluntary administration or liquidation must be strictly followed. For example, the appointment of a provisional liquidator did not satisfy the requirements of the similarly worded former ITAA 1936, s 222AOB(2): Re Scobie (1995) 59 FCR 177. Directors who pay a penalty have a right of indemnity as against the company itself, together with the right to seek contributions from other directors as if they were jointly and severally liable: TAA 1953, s 269-45.

45 See further Redmond v DCT [2015] QCA 172, which discusses the requirements for a valid notice. 46 This enacts the law found under the previous regime in DCT v Meredith [2007] NSWCA 354; (2007) 229 FLR 243.

652

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.165]

Defences

[16.165] Directors who are liable for penalties may seek to invoke one of the following defences: • that because of illness or for some other good reason, it would have been unreasonable to expect the director to take part, and the director did not take part, in the management of the company (TAA 1953, s 269-35(1)); or • the directors took all reasonable steps to ensure that they complied with their relevant obligations under s 269-15: s 269-35(2). In determining what were reasonable steps, it is relevant when and for how long the person was a director and took part in the company’s management, and “all other relevant circumstances”: s 269-35(3).47 In Roche v DCT [2015] WASCA 196 at [35], the Court explained: “the taking by the director of ‘all reasonable steps to ensure’, within s 269-35(2)(a), requires that each of the alternative events be addressed, either on the basis of taking reasonable steps to ensure the event happened or declining to do anything about that particular event on the basis that there were no reasonable steps that the director could have taken to ensure that the event happened.”

A particular defence applies under s 269-35(3A) in relation to unpaid employee superannuation. 48 Again, as with s 588FGB of the Corporations Act, these defences have some comparison with those available against a claim for insolvent trading, although, since the 2010 amendments, there are some significant differences. In finding that defences under former s 222AOJ(3) were not made out, the court in DCT v Solomon [2003] NSWCA 62; (2003) 52 ATR 729 said that the “directors have an obligation to ensure that moneys deducted from the salaries or wages of employees are remitted to the Commissioner and not misused as part of the floating capital of a corporation”. Where the director attempted to seek funds to pay the debt but took none of the steps capable of ensuring compliance by the company with one of the four requirements mandated by the section, the defence under former s 222AOJ(3) was struck out and liability confirmed: DCT v Pejkovic [2000] NSWSC 1176. These responsibilities under the Taxation Administration Act can interact with liabilities imposed under s 588FGA of the Corporations Act. A director who responds to a penalty notice by causing the company to pay the tax liability will be relieved of personal liability under the TAA 1953, but that director may then be found liable under s 588FGA if the payment under the notice was a voidable preference.49 Similarly, in Gould v FCT (1998) 40 ATR 245, a director who put his company into administration within the 14 days as required by the former s 222AOE notice, and who thereby avoided the penalty, was still convicted of taxation offences and ordered to make reparation of the unremitted penalties. 47 There is also a specific defence against liability for the SGC under s 269-35(3A). 48 A defence is available if the non-payment “resulted from the company treating the [superannuation liability] as applying to a matter or identical matters in a particular way that was reasonably arguable, if the company took reasonable care in connection with applying that Act …”. See the relevant Explanatory Memorandum at [1.54]. 49 See [16.150] and Browne v DCT (1998) 82 FCR 1.

[16.170]

16 Criminal Offences and Civil Actions Against Company Directors

653

The obligations in respect of the moneys withheld by an employer from an employee’s wages on account of tax or superannuation have been likened to those of a trustee.50 As with insolvent trading, courts regard seriously the misconduct of directors who fail to remit their employees’ tax deductions in particular because it is usually for the reason that the retention of these moneys provides floating capital for the business, and often with a view to forestall the collapse of what is a failing enterprise. The difference in impact on a director between the insolvent trading regime and the director penalty notice regime is that while liability for insolvent trading is quite a distant threat for any director at the time, the penalty imposed on directors under Div 269 of the TAA 1953 is one that should cause directors to focus immediately on their company’s financial position, knowing that personal liability may be imposed. The Commissioner’s powers under this regime are therefore significant in the regulation of insolvent companies.51 Nevertheless, the government is considering, in the context of illegal phoenix activity, an extension of the DPN regime to GST liabilities and removing the 21 day period for compliance, among other reforms.52 Also, a “single touch payroll” system will commence on 1 July 2018, by which a company must report on its employee taxes directly to the ATO from its electronic payroll system, rather than relying on the directors to ensure appropriate reporting.53

CRIMINAL OFFENCES [16.170] One of the purposes of liquidation is to allow for an investigation of the affairs of the company, with particular emphasis on the circumstances that precipitated the winding up. Such an investigation might reveal, inter alia, improper or dishonest conduct on the part of company officers or others associated with the company, which should be the subject of criminal or civil prosecution. We have seen the extent to which the liquidators and creditors, including the Tax Commissioner, may pursue compensation from the directors and senior management, and to which ASIC and also the Commissioner may pursue civil penalties as well as compensation. There is a range of both civil and criminal offences that can be committed during the formation, life and winding up of a company, apart from those already discussed, such as insolvent trading. This section considers the procedure that is specified by the Corporations Act for the prosecution of offences, and identifies and briefly discusses some of the offences against the Corporations Act that are related to, and may be the subject of, prosecution. It needs to be said at the outset that there will always be many offences in the context of a company’s insolvency which will be committed and which will not be prosecuted. In view of the number of companies in Australia, and those going into insolvency, and the need for the regulatory authorities to prioritise their resources, this is not so unusual. Yet, it is undoubtedly the function of winding up that the 50 Cullen v CAC (NSW) (1988) 14 ACLR 789; DCT v Portinex (No 1) (2000) 34 ACSR 391. 51 See Murray, “The ATO as an Insolvency Regulator?” (2007) 19 A Insol J 24. 52 Treasury Consultation Paper, “Combatting Illegal Phoenixing” (September 2017). 53 Schedule 1, Div 389 of the TAA 1953.

654

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.175]

affairs of a company be examined carefully and if anything has been done in the nature of an offence then the public interest dictates that the offender be called to account.54 That is one of the purposes of the reports that the liquidator is required to give to ASIC in the event that a breach of the law is detected. The Assetless Administration Fund maintained by ASIC, does address criminal conduct with its focus on banning of directors and pursuing breaches of the Corporations Act.

The process [16.175] As we explained in discussing the responsibilities of a liquidator at [10.280], a liquidator is required by s 533 of the Corporations Act to report to ASIC if it appears there have been offences or misapplication of company money or property. ASIC may then investigate the matters raised by the liquidator: Australian Securities and Investments Commission Act 2001 (Cth), s 15. By arrangement with the Commonwealth Director of Public Prosecutions (CDPP), ASIC is permitted to conduct its own prosecutions of minor regulatory offences against the Corporations Act. ASIC mainly pursues offences concerning directors’ failure to assist the external administrator, for example in preparing a report as to affairs (Corporations Act, s 475) and in providing company records etc (s 530A).55 If ASIC believes that an offence has been committed, it may prosecute (s 1315), and advise the liquidator of its decision. If ASIC declines to prosecute, it will also inform the liquidator, and the liquidator is then permitted to launch a prosecution: s 534(1). Such action by liquidators is rare, because prosecutions rarely benefit the creditors and the costs of the prosecution are payable out of the assets of the company: see ASIC v Neolido Holdings Pty Ltd [2006] QCA 266. However, s 534(2) provides that ASIC may direct that all or part of the costs of the prosecution be paid by ASIC. Prosecutions may be brought within five years of the commission of the act alleged to constitute the offence, or at any later time, where the Minister consents: s 1316.

Types of offence [16.180] There are many offences in the Corporations Act that are included simply to encourage the proper functioning of the legislative scheme. They do not involve dishonesty, and if no other penalty is provided they attract a fine of five penalty units: s 1311(5). A penalty unit is $210 (indexed): Crimes Act 1914 (Cth), s 4AA. Breaches that are minor may be dealt with by way of a penalty notice under s 1313 of the Corporations Act rather than by a hearing in court. In such cases, ASIC may serve a penalty notice on a person alleging the commission of an offence and giving details of the alleged offence: s 1313(1)(a). The notice will specify the penalty: s 1313(1)(b). 54 Spedley Securities Ltd v Bond Corporation Holdings Ltd (1990) 1 ACSR 726; Re Spedley Securities Ltd; Reed v Harkness (1990) 8 ACLC 499. 55 See Keenan, Convictions for Summary Insolvency Offences Committed by Company Directors, Research in Practice Paper No 30 (Australian Institute of Criminology, 2013).

[16.185]

16 Criminal Offences and Civil Actions Against Company Directors

655

If payment of the penalty is made, the alleged offender is not regarded as admitting guilt (s 1313(6)), and no proceedings may be instituted against that person: s 1313(5)(a). If no payment is made by the time prescribed in the notice, proceedings may be instituted: s 1313(5)(b). Some offences attract a fine or a term of imprisonment and others, which are indictable, are punishable with a term of imprisonment of more than six months. Offences of the latter type are, naturally, the most serious. The legislation also provides penalties for continuing offences; that is, where the obligation continues and the offender is liable for separate offences for each passing day: s 1314. If a person is convicted of a substantive offence in relation to the failure to do something and that person continues to fail to do so, they are liable for a penalty of half a penalty unit per day: s 1314(3), (5). Apart from prosecutions for breaching the Corporations Act, prosecutions may also be brought for breaches of State and Commonwealth crimes legislation. External administrators may also be subject to criminal sanction. A registered liquidator was convicted of criminal breaches of both the Corporations Act (in relation to making false statements in documents lodged with ASIC recording receipts and payments of a company in liquidation (s 1308(2)) and of State criminal laws (transfer of funds with intent to defraud).56

Offences related to liquidation [16.185] Apart from the two main offences involving a director’s failure to assist the insolvency administrator under ss 475 and 530A, the following are other offences that may have been committed in the context of a company’s liquidation. The maximum penalty for all of the offences is the same, $21,000 or imprisonment for two years, or both: see Corporations Act, Sch 3. • Failure to disclose company property, or explain how it was disposed of – s 590(1)(a). • Concealing company property and debts due to the company – s 590(1)(c)(i), (ii). • Fraudulently dealing with the company’s books – s 590(1)(c)(iii). • Fraudulently obtaining property for the company on credit – s 590(1)(c)(iv). • Fraudulently disposing of company property obtained on credit, where the disposal is other than in the ordinary course of business – s 590(1)(c)(v). • Fraudulently making a material omission in a report relating to the company’s affairs – s 590(1)(d). • Preventing the production of company books to the liquidator – s 590(1)(f). • Falsely dealing with the company’s books, in the ten years preceding the commencement of the liquidation – s 590(1)(g). • Fraudulently obtaining the consent of creditors within the ten years before the commencement of the liquidation, the fraud relating to an agreement that relates to the affairs of the company – s 590(1)(h). 56 ASIC, Media Release 11-211AD, “Stuart Ariff Found Guilty on Criminal Charges” available from http://www.asic.gov.au.

656

Keay’s Insolvency: Personal and Corporate Law and Practice

[16.190]

These offences relate to past or present officers or employees of the company. Thus, an officer of FAI Insurances was convicted of the offence of being privy to the fraudulent altering of the books of the company in 1998, contrary to s 590(1)(c)(iii), for which a sentence of imprisonment was imposed: R v Boulden [2006] NSWSC 1274. Many of these offences are similar to those under Pt XIV of the Bankruptcy Act: see Chapter 4.

CONCLUSION [16.190] We now turn to the ending of a liquidation by way of its formal termination. This occurs after the liquidator has taken all action necessary to recover and realise assets and pay out moneys to creditors. This process can, depending on the nature of the company, take many years, or only a few months. The company then enters a termination phase resulting in its deregistration as a company and, in effect, its ceasing to exist. However, the law does allow a company to be brought back to life – to be reinstated as a company in liquidation – if matters involving its winding up again arise. Chapter 16 – Criminal Offences and Civil Actions Against Company Directors Pt 5.6 Div 3 – Liquidators – ss 530 – 540 Corporations Act Pt 5.7B Divs 3 – 7 – ss 588G – 588Z Pt 5.8 – Offences – ss 589 – 596 Pt 9.4 Div 2 – Offences generally – ss 1311 – 1317 Income Tax Assessment – Act 1936 (Cth) Taxation Administration Sch 1 Div 269 – Penalties for directors of non-complying companies Act 1953 (Cth) Superannuation Guarantee – (Administration) Act 1992 (Cth) Corporations Regula– tions ASIC RG 109 – Assetless administration fund RG 16 – External administrators – Reporting and lodging EX01 Schedule B of Regulatory Guide 16 Courts’ Corporations – Rules

17

Termination of the Winding Up: Deregistration and Reinstatement [17.10] STAYING OR TERMINATING THE WINDING UP .................................................. 658

[17.10] Stay or termination by the court of a compulsory liquidation ................ 658 [17.15] Service on creditors and ASIC ................................................................................... 660 [17.20] Stays during pending appeal from winding up order ......................................... 660 [17.25] Stay pending a scheme or administration ............................................................... 661

[17.30] Voluntary liquidation ....................................................................................... 662 [17.35] DEREGISTRATION ........................................................................................................... 662

[17.40] Compulsory winding up ................................................................................. 662 [17.40] Court ordered deregistration ..................................................................................... 662 [17.45] ASIC initiated deregistration: s 601AB(2) ................................................................ 663

[17.50] Voluntary winding up ...................................................................................... 663 [17.55] Effects and consequences of deregistration .................................................. 664 [17.60] Property vesting in ASIC ............................................................................................ 665 [17.65] Destruction of records ................................................................................................. 665 [17.70] REINSTATEMENT ............................................................................................................ 666

[17.75] The process ........................................................................................................ 666 [17.75] ASIC reinstatement: s 601AH(1) ................................................................................ 666 [17.80] Court reinstatement: s 601AH(2) ............................................................................... 666 [17.95] Solvency as an issue .................................................................................................... 669 [17.100] Reinstating in order to wind up ............................................................................. 669 [17.105] Validation of prior acts ............................................................................................. 670

[17.110] Effect of reinstatement .................................................................................... 671 [17.115] DEREGISTRATION IN CASES OTHER THAN WHERE THERE IS A WINDING UP ....................................................................................................................................... 672

[17.120] ASIC initiated deregistration of any company: s 601AB(1) .................... 672 [17.125] CONCLUSION ................................................................................................................. 673

658

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.05]

[17.05] The winding up of a company may be brought to an end in two circumstances: one, where the court orders the termination of the winding up, because, for example, a solvent company was allowed to go into liquidation through the inadvertence of the directors; and two, through the ending of the winding up process and the deregistration of the company. Once the company is deregistered, it then ceases to exist, but that process can be reversed and the company can be reinstated. STAYING OR TERMINATING THE WINDING UP Stay or termination by the court of a compulsory liquidation [17.10]

The court has the power, under s 482 of the Corporations Act, to stay the winding up (either indefinitely or for a limited time) or to terminate the winding up. There is no real difference between an indefinite stay and a termination and in practice termination orders are usually made; we use that term unless otherwise stated.

Stays for a limited period are not generally given, for example, pending the outcome of a Pt 5.3A proposal. The courts address the question of termination of the winding up only when it is possible to see whether the deed proposal proceeds: Sutherland v Rahme Enterprises Pty Ltd (2003) 21 ACLC 1,385; Re JKB Constructions Pty Ltd [2006] NSWSC 1040. An order for termination can be sought by the liquidator, a deed administrator, a creditor or a contributory: s 482(1A).1 In the case of a company registered under the Life Insurance Act 1995 (Cth), the application can also be made by the Australian Prudential Regulation Authority (APRA): Corporations Act, s 482(1A)(b). The effect of an order under s 482 is to reverse the process of winding up and permit the company to resume its business as if no winding up had occurred: Krextile Holdings Pty Ltd v Widdows [1974] VR 689. This includes, naturally, the resumption of control of the company by the directors: s 482(3). There are no criteria specified in the legislation by which to assess applications for termination but the decisions of the courts have provided a range of factors that will be taken into account.2 Thus in El-Fahkri, in the matter of Elfah Pty Ltd [2002] FCA 1469, Finkelstein J said that, on an application under s 482, the interests of three classes of persons are to be taken into account:3 (a) the creditors; 1 Section 482(1A), which otherwise requires creditors and contributories to obtain court leave to bring proceedings against an insolvent company, does not apply in the case of a s 482 application: Re Maryvell Investments Pty Ltd [2009] VSC 61. 2 See van Zwieten and Austin, “Termination and Setting Aside of Winding-Up Orders” (2007) 81 ALJ 932. 3 See generally Re Warbler Pty Ltd (1982) 6 ACLR 526; Re Modena Imports Pty Ltd (in liq) [2010] NSWSC 739; Re Glass Recycling Pty Ltd [2014] NSWSC 489.

[17.10]

17 Termination of the Winding Up: Deregistration and Reinstatement

659

(b) the liquidator, who has a statutory priority for his or her remuneration and expenses. Usually the court would not stay or terminate a liquidation unless the liquidator’s position is protected;4 (c) the members of the company. It is generally accepted that a stay or termination should not be granted unless each member consents (or perhaps does not object) to giving up his or her right to take the surplus assets on the completion of the liquidation. Often this is not an issue as the members are often the applicants for the termination order; (d) in addition, there is the public interest; that is, whether a termination is conducive or detrimental to commercial morality and to the interests of the public at large: see Re Telescriptor Syndicate Ltd [1903] 2 Ch 174, 180. In that matter, a termination was granted in circumstances where a solvent company had been ordered to be wound up due to the inattention of the directors who had not responded to the winding up proceedings. The power to make an order under s 482(1) is discretionary and the onus is on the applicant to make out a positive case for termination: Re Calgary & Edmonton Land Co Ltd [1975] 1 WLR 355, 358-359.5 The court does not have to find special reasons for a stay or termination. But there must be some valid reason why it is appropriate to make the order rather than let the liquidation take its normal course. If there has been non-compliance by directors with their statutory duties in giving information or furnishing a report as to the affairs of the company to the liquidator, a full explanation of the reasons and circumstances should be given: Re Telescriptor Syndicate Ltd [1903] 2 Ch 174. Where the company has been in voluntary administration, the opinion of the administrators, as expressed in the s 439A report as to possible contraventions of the law, will be relevant in determining whether to terminate the winding up: DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 99 ACSR 121. The general background and circumstances which led to the winding up order should be explained; and the nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to commercial morality or the public interest: Krextile Holdings Pty Ltd v Widdows [1974] VR 689.6 Failure to keep proper books and records, an inability of the directors to distinguish their own interests from those of the company in the conduct of the company’s operations, and non-compliance with the company’s tax obligations will militate against the discretion under s 482 being exercised: Metledge v Bambakit Pty Ltd [2005] NSWSC 160. In Prendergast v Rolcross [2008] NSWSC 146, an undertaking to the court to have accountants lodge outstanding tax returns and prepare the company accounts was a factor in favour of the termination not order being made. 4 There is less attention given to the question whether the liquidator should have fully attended to the administration of the winding up of the company pending that resolution. In bankruptcy, when there is a pending challenge to a sequestration order, a trustee is required to exercise caution when incurring expenses in administering the estate; otherwise, the trustee’s remuneration may not be protected: see Chapter 7 5 See further the detailed review of the authorities by the Victorian Court of Appeal in Von Risefer v Mainfreight International Pty Ltd [2009] VSCA 179; 25 VR 366. 6 See also Re Kitchen Dimensions Pty Ltd [2012] VSC 280.

660

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.15]

Invariably the discretionary issues will include the current trading position and general solvency of the company. Where the ground for winding up was insolvency, this is often the most important consideration and a necessary part of the applicant’s task is to prove the company’s solvency to the court: Re SNL Group Pty Ltd (in liq); Su v SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24]. As a matter of public policy or commercial morality, the court will not countenance the return of an insolvent company to the mainstream of commercial life: Re Mascot Home Furnishers Pty Ltd [1970] VR 593; Re Data Homes Pty Ltd [1971] 1 NSWLR 338. However, the mere threat of future litigation is not enough to establish that the company may become insolvent and hence to deny a s 482 application: Re Lorie Najjar and Sons Pty Ltd [2013] NSWSC 798 at [70]. In an application to terminate a winding up where the presumption of insolvency operates but the company is claimed to be solvent, the party bearing the onus of proof must lead the “fullest and best” evidence of its financial position: Commonwealth Bank of Australia v Begonia [1993] VicSC 516; (1993) 11 ACLC 1075; Gematech Pty Ltd v Bardi Investments Pty Ltd [2008] NSWSC 196. Mere assertions by a company’s controller as to its solvency and the state of its assets and liabilities are of no real value to the court – “proper verification of assets and liabilities is critical to rebut the presumption of insolvency”: Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711, 718; Re Lorie Najjar and Sons Pty Ltd [2013] NSWSC 798. Applications which rely only on evidence deposed by a single director-shareholder should be supported and confirmed by evidence from an external accountant: DCT v Sydney Concrete Steel Fixing Pty Ltd (1999) 17 ACLC 972; Re 311 Hume Highway Liverpool Fund Pty Ltd [2013] NSWSC 465. As to the company’s future creditors, an important consideration arises if the termination proposal preserves existing debt. If that is so, it is necessary to ascertain what arrangements exist to deal with that debt, for example by way of subordination of claimants of such debt to newly incurred debts or by way of a proposal to capitalise debts: see Re Data Homes Pty Ltd [1972] 2 NSWLR 22, 27; Re Nardell Coal Corp Pty Ltd [2004] NSWSC 281; 182 FLR 290. The court is concerned to ensure that any such proposals provide a sufficient and safe mechanism for the protection of future creditors of a presently insolvent company so as to justify termination of its winding up: Re Nature Springs Pty Ltd (1994) 13 ACSR 50. In Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673; (2003) 21 ACLC 1,385, the contractual subordination of related party creditors was held not sufficient to protect future creditors and to justify the termination of the winding up. Service on creditors and ASIC

[17.15] There must be service of a notice of the application for a termination on all creditors and contributories, and proof of this must be available. Also, the nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged: Re Data Homes Pty Ltd [1972] 2 NSWLR 22. ASIC must be served with the application: Courts’ Corporations Rules, r 2.8. Stays during pending appeal from winding up order

[17.20]

Given that directors have no standing to apply under s 482, a stay pending an appeal from a winding up order should be made under the relevant

[17.25]

17 Termination of the Winding Up: Deregistration and Reinstatement

661

court rules: Masri Apartments Pty Ltd v Perpetual Nominees Ltd [2004] NSWSC 255; 22 ACLC 1,411; HVAC Construction (Qld) v Energy Equipment (2003) 21 ACLC 163.7 Such stays are not given as of right: Arafura Finance Corporation Pty Ltd v Kooba Pty Ltd (No 2) [1987] NTSC 64; 12 ACLR 331. An appeal from a winding up order is appropriate where the merits of the order are in question or some point of law is in issue; if, however, there were claimed irregularities in the winding up process, for example, non-service of the winding up application, an application to set aside the winding up order is more appropriate. In either case, a stay under the rules of court may be granted. In the absence of a stay, the liquidation continues and the liquidator continues to control the company. Stay pending a scheme or administration

[17.25] Sometimes a company in liquidation may come to some agreement with its creditors to implement, subject to the approval of the court, a scheme of arrangement under Pt 5.1 of the Corporations Act. Naturally a stay of winding up is a prerequisite to the approval of the court for the arrangement to take effect. The court may ultimately refuse an application for a termination of the winding up even where the creditors have approved a scheme of arrangement, in which case the application for approval of the scheme must be dismissed: Re Robana Properties Pty Ltd (1987) 5 ACLC 127. A liquidator or provisional liquidator can appoint an administrator where it appears that voluntary administration is the appropriate procedure for the company. If the company then executes a deed, an application must be made to the court for a stay or termination of the winding up. Under s 482(1A), the deed administrator, along with a liquidator, a creditor or a contributory, have standing to make such an application and the onus is on that applicant to establish that the winding up should terminate.8 As we have seen, rather than granting a stay for a period of time, the courts address the question of termination of the winding up only when it is possible to see whether the deed proposal proceeds: Sutherland v Rahme Enterprises Pty Ltd (2003) 21 ACLC 1,385; Re JKB Constructions Pty Ltd [2006] NSWSC 1040. When considering an application to terminate the winding up of a company subject to a deed, the court has regard to factors such as any misconduct by the company’s officers, the commercial decision of creditors accepting the deed, and the company’s solvency.9 This reflects the general position of the courts in relation to not permitting insolvent companies to return to commercial life. The court may order termination of a winding up upon an undertaking being given by an associated or external party to take some action in the short term, for 7 See van Zwieten and Austin, “Termination and Setting Aside of Winding-Up Orders” (2007) 81 ALJ 932, Part C. 8 Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70. In that case, a termination application following the execution of a deed of company arrangement was unsuccessful. 9 See, for example, Re Modena Imports Pty Ltd [2010] NSWSC 739 where the directors engaged in transactions designed to misappropriate assets for the benefit of a third party, who took proxies from creditors to vote in favour of the deed of company arrangement.

662

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.30]

example, an undertaking to cause tax returns to be lodged, or to procure the making of a payment to a certain person by a certain date. Where some action of the company itself is necessary to put it into a state where termination may safely be ordered, it is preferable for the court to grant leave under s 471A(1A) for the directors to take the necessary action while the winding up subsists, so that the s 482 order can be made after that action is complete: Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646. Otherwise there is no means of monitoring or ensuring the necessary action by the company. The court may not agree to termination of the winding up in circumstances where there is simple contractual subordination between the company and certain deferred or subordinated creditors; this will not provide a sufficient or safe mechanism for the protection of future creditors of a presently insolvent company so as to justify termination of its winding up: Re Nature Springs Pty Ltd (1994) 13 ACSR 50; Sutherland v Rahme Enterprises Pty Ltd (2003) 21 ACLC 1,385.

Voluntary liquidation [17.30] A stay of proceedings must also be obtained in voluntary liquidation, whether it is a members’10 or a creditors’ winding up.11 This may necessitate an application by the liquidator under IPSC, s 90-15(which replaced the former s 511(1)(b)) for the exercise by the court of its powers in compulsory winding up. In the case of a voluntary liquidation arising out of a Pt 5.3A administration, under s 446A of the Act, s 446A(6) – (7) specifically makes s 482 applicable, including on the application of the company. DEREGISTRATION [17.35] The final step in a winding up is usually deregistration of the company. The procedure varies according to whether the company has been wound up compulsorily or voluntarily.12 Compulsory winding up Court ordered deregistration

[17.40] Winding up is complete when the liquidator has realised all the property of the company or as much as can, in the liquidator’s opinion, be realised without needlessly protracting the liquidation, has distributed a final dividend to the creditors, adjusted the mutual rights of the contributories, and has made a final return (now referred to as the “End of Administration Return” under IPSC, s 70-6), if any, to the contributories: Corporations Act, s 480(a). In such a case, it is open to the liquidator to apply for an order of release from liability in respect of the administration of the winding up (s 481(3)) and for an order that ASIC deregister 10 McKern v Pacific Edge Corp Pty Ltd [2004] NSWSC 1150; (2004) 51 ACSR 602. 11 See McPherson’s Law of Company Liquidation (Thomson Reuters, Legal Online), at 16.250 – “Judicial stay of voluntary winding up”. 12 See generally, Tarrant, Deregistration and Reinstatement of Companies and Schemes (LexisNexis Butterworths, 2013).

[17.50]

17 Termination of the Winding Up: Deregistration and Reinstatement

663

the company: s 480(d).13 ASIC must then deregister the company: s 601AC(1)(b). A creditor may object to the liquidator’s application.14 Such applications are, however, not common and would only be made if particular issues have arisen in the conduct of the liquidation. ASIC initiated deregistration: s 601AB(2)

[17.45] More commonly, ASIC initiates the deregistration. Under s 601AB(2) of the Corporations Act ASIC may decide to deregister a company if it is being wound up and ASIC has reason to believe one of the following: • the liquidator is no longer acting; • the affairs of the company have been fully wound up and a return which the liquidator should have lodged is six months or more late; or • the affairs of the company have been wound up fully pursuant to Pt 5.4 of the Act and the company has no, or insufficient, property to cover the costs of obtaining a court order for the company’s deregistration. All of the above can be applied to any compulsory winding up, but the third case is, however, relevant to insolvent companies undergoing compulsory liquidation which have been fully wound up but which possess no assets at all or whose assets are insufficient to pay the cost of obtaining an order for deregistration.15 ASIC may refuse to deregister the company if it decides to exercise its own powers to have the company wound up under s 489EA: s 601AB(6). If ASIC initiates deregistration, then it must give notice of the proposed deregistration (s 601AB(3)) to the company, to the liquidator (if any) of the company, and to the directors of the company and record details on the ASIC database and publish a notice on its Public Notices website.16 ASIC is then permitted to deregister the company after the elapse of two months following the publication of the notice of proposed deregistration: s 601AB(3A). ASIC is excused from giving notice to anyone mentioned above if it does not have the necessary information concerning the person’s identity or address: s 601AB(4). Notice of deregistration must be given to the company’s directors and the company’s liquidator, if there is one: s 601AB(5).

Voluntary winding up [17.50] Unlike compulsory winding up, deregistration of the company in voluntary winding up is an automatic consequence of completion of the liquidation. Section 509 of the Corporations Act prescribes the procedure in such cases, which takes effect only when the affairs of the company are “fully wound up” and the “End of Administration Return” is lodged with ASIC (as required by IPSC, s 70-6). 13 See Courts’ Corporations Rules r 7.5; Re RR Impex Pty Ltd [2013] NSWSC 1667; DCT v Tideturn Pty Ltd [2001] NSWSC 217; (2001) 37 ACSR 152. 14 Courts’ Corporations Rules r 7.6; Court Form 13. 15 See ASIC Form 578, Deregistration request (liquidator not acting or affairs fully wound up). 16 https://www.insolvencynotices.asic.gov.au/.

664

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.55]

The concept of the affairs of a company being “fully wound up” was explained in Re London and Caledonian Marine Insurance Co (1879) 11 Ch D 140, 144 as meaning: “when the liquidator has done all that he can to wind up the company, when he has disposed of the assets as far as he can realise them, got in the calls as far as he can enforce them, and paid the debts as far as he is aware of them, and has done all that he can do in winding up the affairs, so that he has completed his business so far as he can … .”

See further Arnold World Trading Pty Ltd v ACN 133 427 335 Pty Ltd [2010] NSWSC 1369; (2010) 80 ACSR 670 at [36]-[38]. The company must be deregistered by ASIC on the expiration of three months after the lodging of the return: ss 509(1), 601AC(1)(c). After the return is lodged with ASIC under s 509, the company is no longer “being wound up”, rather it has been “fully wound up”: International Greetings UK Ltd v Stansfield [2010] NSWSC 1357; 79 NSWLR 464 (interpreting the former s 509 which also required a final creditors’ meeting to be held). Under s 509(2), the court may order that ASIC deregister the company on a specified day. That day must be fixed with certainty and an order can only be made within the specified period of three months. Once that period of three months has expired, deregistration must be effected on the day which has, by then, been made certain: Re Rosaub Pty Ltd [2005] NSWSC 689; (2005) 192 FLR 395; Re ACN 002 408 040 Pty Ltd [2013] NSWSC 470; (2013) 94 ACSR 485.

Effects and consequences of deregistration [17.55] Deregistration has far-reaching consequences. Its principal effect, from which all other consequences flow, is to destroy the corporate existence of the company (Corporations Act, s 601AD(1)), though, as the note to s 601AD makes plain, company officers may still be liable for anything done prior to the deregistration of their company. On deregistration the company’s status on ASIC’s register of companies will change from external administration to deregistered. Documents lodged with ASIC prior to the deregistration will be searchable and copies can be purchased from ASIC or through an information broker. After deregistration no one can act on behalf of the company17 and its debts and obligations are totally extinguished,18 and it is unable to commence proceedings.19 Therefore, a company that has had its registration cancelled is not able to be a party to any litigation, as it has no capacity to sue or defend proceedings, although ASIC is able to act on its behalf. But a deregistered company has sufficient existence for the purpose of making an application under s 601AH(2) as a “person aggrieved” to apply for its own reinstatement notwithstanding that under s 601AD(1) the company has “cease[d] to exist” upon deregistration: Re Piccoli Tesori Pty Ltd (Deregistered); Ex parte Bertuol [2006] FCA 462; (2006) 151 FCR 109. A litigation action involving a company that has since been deregistered cannot continue: United Service Insurance Co Ltd v Lang (1935) 35 SR (NSW) 487 (applied in Video Excellence Pty Ltd v Cincotta (1998) 44 NSWLR 742). 17 Salton v New Beeston Cycle Co [1900] 1 Ch 43. 18 Taylor v Sanders [1937] VLR 62; Re Austral Family Homes Pty Ltd (1992) 28 NSWLR 247. 19 However, this must be read subject to Corporations Act, ss 601AD – 601AF.

[17.65]

17 Termination of the Winding Up: Deregistration and Reinstatement

665

Property vesting in ASIC

[17.60] Section 601AD(2) of the Corporations Act provides that the property held by the company at the time of deregistration, including property located outside Australia, vests in ASIC, as does any property that was vested in the liquidator at the time of deregistration. The rights that ASIC takes in the property are the same as those the company held. So that if the company held property subject to a security or other interest or claim the property is taken by ASIC subject to the interest or claim: s 601AD(3). Where the company was acting as a trustee prior to deregistration, the statutory vesting of property is defeasible where there is a relevant exercise of powers under the trust deed or an application under trusts legislation: Thorne Developments Pty Ltd v Thorne [2017] 1 Qd R 156; [2016] QCA 63. In addition, if the property was subject to liabilities imposed by any law, the property remains so subject and it cannot have the benefit of any exemption that it might otherwise have from being vested in ASIC. ASIC has all the powers of an owner over the property that is vested in it (s 601AD(4)), including sale: s 601AE.20 In this regard ASIC is able to act on behalf of the company or its liquidator if it is satisfied that the company or liquidator would have been bound to do the act if the company still existed: s 601AF. For example, if land is subject to a caveat lodged by a company that is now deregistered, and no caveatable interest remains, ASIC may withdraw the caveat on behalf of the deregistered company. As regards trust property, s 601AE(1) enables ASIC to continue to act as trustee or apply to the court for the appointment of a new trustee: see further Re Cooper Street Property Trust [2016] VSC 756. In relation to property which is vested in it, ASIC is required by s 601AE to keep records of any such property, of its dealings with that property, of accounts of all moneys arising from those dealings and financial records of any such dealings. Destruction of records

[17.65] A final consequence of the deregistration of a company following its winding up is that its books may be destroyed by the liquidator:. Normally, the company’s books must be retained for a period of five years after the deregistration prior to their destruction by the liquidator (IPSC, s 70-35), but they may be destroyed within that period if the liquidator has a reasonable excuse (IPSC, s 70-35(2)) or where the members direct (in a members’ voluntary winding up) or where the committee of inspection direct or the creditors direct in a creditors’ voluntary winding up and where ASIC approves: IPSC, s 70-35(3). A failure by ASIC to object to proposed destruction is not consent: Re RH Trevan Pty Ltd [2013] NSWSC 1445. ASIC’s Regulatory Guide 81 deals with the destruction of such records. No responsibility attaches for failure to produce any books that have been destroyed in the authorised manner. The need for court approval under the previous law was removed by the ILRA. However, in the event of any dispute about the need to retain books, directions from the court can be sought under IPSC, s 90-15. 20 Also see the note to Corporations Act, s 601AF.

666

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.70]

REINSTATEMENT [17.70] While deregistration is seen as the “death” of a company, it may be restored to life and those wishing to see this occur must apply under s 601AH of the Corporations Act for reinstatement of the company. The primary function of this provision is to provide a means of reviving the company for the purpose of completing the winding up of its affairs by getting in outstanding assets, and distributing among the members any surplus remaining after dissolution of the company. While a corporation is defined in s 9 as one that is “registered under [the] Act”, this is only unless the contrary intention appears. That contrary intention appears from s 601AH itself, which empowers the court to make an order reinstating “the registration of a company” as well as making other references to a company that is not presently registered: ACN 078 272 867 Pty Ltd v DCT; Binetter v DCT [2011] HCA 46; (2011) 282 ALR 607. The process ASIC reinstatement: s 601AH(1)

[17.75] Depending on the circumstances a company may, following deregistration, be reinstated by ASIC or by order of the court. The former is able to reinstate a company if it is satisfied that the company should not have been deregistered: s 601AH(1).21 Court reinstatement: s 601AH(2)

[17.80] The court may order reinstatement under s 601AH(2) if an application is made to it by either a “person aggrieved by the deregistration” or by a former liquidator of the company and if the court is satisfied that it is “just that the company’s registration be reinstated”. There is no time limit set for the filing of an application for reinstatement. Circumstances can arise that the need for reinstatement may not arise until some long time later. For a discussion of the reinstatement of companies registered under company law statutes before the Corporations Act see: Re Rocha Pty Ltd (Deregistered) [2016] NSWSC 899 (company deregistered under the former NSW Companies Act 1961). Person aggrieved

[17.85] Applications may be made by any person who is aggrieved by the company having been deregistered. The words “person aggrieved” are interpreted widely;22 they include persons with a genuine grievance because deregistration had prejudicially affected their interests23 such that they had a real and direct interest in the deregistration decision with which they are dissatisfied.24 It is not enough to establish that a person is a shareholder or a director but even if they were the one 21 See ASIC’s RG 83, Reinstatement of companies, March 2006. 22 Pacanowski v ASC [1995] FCA 336; (1995) 57 FCR 173; Yeo v ASIC, in the matter of Ji Woo International Education Centre Pty Ltd (dereg’d) [2017] FCA 1480. 23 DCT v Lanstel Pty Ltd [1996] NSWSC 572; (1997) 15 ACLC 25. 24 Dennis v McMartin (1989) 7 ACLC 283; Re KP Wee Investments Pty Ltd (1994) 12 ACLC 157.

[17.85]

17 Termination of the Winding Up: Deregistration and Reinstatement

667

who by their own inaction caused deregistration of the company, they can be a “person aggrieved”: Callegher v ASIC [2007] FCA 482; 25 ACLC 438. However, they may be held to be a person aggrieved if the deregistration adversely affects their rights, or the value of their rights: Arnold World Trading Pty Ltd v ACN 133 427 335 Pty Ltd [2010] NSWSC 1369; (2010) 80 ACSR 670 at [43] (in this case the company had been fully wound up with all property determined and the member’s shares were of no value). A beneficiary of a trust, where the trustee company has been deregistered, can be a person aggrieved even where the beneficiary could appoint another trustee: Elsworthy v ASIC [2016] VSC 14. Reinstatement for the purpose of enabling the company to be subjected to legal processes that it would otherwise escape is an established aspect of the jurisdiction under s 601AH. In ACCC v ASIC [2000] NSWSC 316; (2000) 34 ACSR 232, the court reinstated a deregistered company so that proceedings under the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) could be brought against it in respect of its alleged past misconduct. The court said that the enforcement of Pt IV of the Trade Practices Act is an important responsibility of the ACCC to be exercised in the public interest and such public interest factors were to be taken into account in making a decision under s 601AH of the Corporations Act to reinstate the company in question.25 The liability of the company is properly to be determined separately rather than in the reinstatement proceeding: ACCC v ASIC, in the matter of SensaSlim Australia Pty Ltd (in liq) [2015] FCA 258. There may be other circumstances where the public interest may require a company to be reinstated in order to visit responsibility on it for its past conduct,26 for example, in respect of environmental damage not evident at the time of the company’s deregistration.27 A company may be reinstated so as to allow a criminal prosecution to be pursued against it (Filipowski v ASIC [2004] FCA 1129); or to allow recovery by a WorkCover authority of moneys paid to an injured employee of an uninsured company employer (WorkCover v Picton Truck & Trailer [2004] NSWCA 371; 51 ACSR 102); or to allow proceedings to be brought against the directors of the company for personal liability under tax legislation: DCT v Action Workwear Pty Ltd (1996) 33 ATR 61. However, an application for reinstatement to allow an inquiry into and review of the liquidator’s fees and disbursements was not granted when the particular creditor could not show that any benefit would flow from such a review: GIS Electrical Pty Ltd v Melsom (2002) 21 ACLR 26. A person aggrieved may be a creditor, or one who has a bona fide claim as a creditor. In Donmastry Pty Ltd v Albarran [2004] NSWSC 632; (2004) 49 ACSR 745, the applicant was a plaintiff in an action being brought against a company prior to its deregistration. A person aggrieved includes the liquidator. In ACCC v ASIC, in the matter of SensaSlim Australia Pty Ltd (in liq) [2015] FCA 258, the company was 25 Judgment was ultimately given against the reinstated company, and others: see ACCC v ABB Power Transmission Pty Ltd [2004] FCA 819; [2004] ATPR 42-011. 26 See Symes, “Top 7 Reasons for Reinstatement – Exhuming the Corporate Body” (2007) 7 INSLB 114. 27 Joyce Rural Pty Ltd v Harris [2000] WASC 14. See Murray, “Latent Environmental Damage and a Deregistered Company” (2001) 1 INSLB 117.

668

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.90]

deregistered in error on the application of its then liquidator, even though the company remained a party to court proceedings: s 601AA(2)(f); see [17.115]. The company was reinstated.28 Directors generally do not have standing to apply for reinstatement as they would have ceased to exercise their functions as directors on liquidation.29 Also shareholders do not have standing where the company was insolvent when it was deregistered.30 However, shareholders and directors may be able to bring applications if they can demonstrate that they are only able to maintain a right if the company is reinstated: Re Waldcourt Investment Co Pty Ltd (1986) 4 ACLC 589. For example, a shareholder may be able to show some particular prejudice if there may be a surplus of assets if the company were reinstated: Casali v Crisp [2001] NSWSC 860; (2001) 165 FLR 79. If the shareholders are bankrupt, their trustee in bankruptcy can be a “person aggrieved” by the deregistration of the company, the shares having vested in the trustee: Melluish v Underwood Development Pty Ltd [2004] NSWSC 429. In Williams v Arnold [2010] FCA 732, the Federal Court of Australia acted under s 601AH on an application by a UK bankruptcy trustee to reinstate a company in Australia in which the former UK bankrupt owned shares.31 Persons whose rights enable them to bring an application are not stopped from doing so merely because their rights came into existence after deregistration: Re Proserpine Pty Ltd [1980] NSWLR 745; 5 ACLR 603. Nor is there anything to prevent a person who was the applicant for deregistration of the company applying for reinstatement, if that person is able to demonstrate that they are a person aggrieved: Re JJ Weeks Construction Pty Ltd (1982) 1 ACLC 425; Re Llenruk Pty Ltd [2013] NSWSC 1430. Just

[17.90] The court “may” make the order if “satisfied that it is just that the company’s registration be reinstated”: s 601AH(2)(b). The court is not constrained by any particular criterion in deciding whether it is just to reinstate but there are a number of matters which are taken into account, including the circumstances in which the company came to be deregistered, the proposed future activities of the company and whether any particular person is likely to be prejudiced by the reinstatement. Public interest considerations are relevant: ACCC v ASIC [2000] NSWSC 316; (2000) 34 ACSR 232; 174 ALR 688; ACCC v ASIC, in the matter of SensaSlim Australia Pty Ltd (in liq) [2015] FCA 258. The solvency of the company, except for a company that has been through a winding up, will usually be relevant. The court will be less inclined to restore a company that has been through a winding up than it would be to reinstate a 28 See ACCC v ASIC, in the matter of SensaSlim Australia Pty Ltd (in liq) [2015] FCA 258. 29 Re Peter Conyers Pty Ltd [1996] VicSC 515; (1996) 14 ACLC 1835; Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277. 30 Casali v Crisp [2001] NSWSC 860; (2001) 165 FLR 79; Euphron Pty Ltd v Hunter Valley Piggery Pty Ltd [2003] NSWSC 543. 31 The Federal Court acted under a letter of request from an English court under s 29(2) of the Bankruptcy Act in favour of the UK trustee. See [6.182].

[17.100]

17 Termination of the Winding Up: Deregistration and Reinstatement

669

company removed from the register by ASIC as a purely administrative measure. However, in Donmastry Pty Ltd v Albarran [2004] NSWSC 632; (2004) 49 ACSR 745, the evidence was that certain creditors, including the plaintiff, received no notice of the meeting under s 509, after which the company was deregistered. There were also investigations into uncommercial transactions and misuse of company funds being pursued by the liquidator, where creditors were not informed of the outcome. The plaintiff was prepared to pay the costs of the reinstatement and to contribute $16,000 to fund a further investigation by a new liquidator. The court ordered the company be reinstated. If an application is brought to allow the company to commence or continue litigation proceedings, although the defendant to those proceedings will suffer the prejudice of having to continue to defend the claim, this does not constitute prejudice of the kind which would make it unjust to order the reinstatement of the company: Callegher v ASIC [2007] FCA 482; (2007) 218 FCR 81. In some cases a company will be reinstated so that ancillary proceedings against company officers as accessories to the company’s misconduct can be pursued: ACCC v ASIC [2000] NSWSC 316; (2000) 34 ACSR 232. In Yeo v ASIC, in the matter of Ji Woo International Education Centre Pty Ltd (dereg’d) [2017] FCA 1480, a former shareholder and employee of a deregistered company successfully obtained an order for reinstatement for the purpose of seeking an immediate winding up of the company and the appointment of liquidator to explore and pursue claims against the company’s former directors. An issue can arise where the court determines that the applicant should be required to exhaust other remedies before seeking reinstatement: Holli v ASC [1998] FCA 1657. Solvency as an issue

[17.95] The solvency of the company, except where one is concerned with a company that had been wound up, may be a material consideration for a court when exercising its discretion,32 because courts are apprehensive about reinstating companies that are insolvent given that they can return to carrying on business.33 Although an application for reinstatement may be denied because the company is hopelessly insolvent, the fact of insolvency is not necessarily fatal to an application for reinstatement.34 Reinstating in order to wind up

[17.100] Courts will reinstate a deregistered company where insolvency exists if the aim is to wind up the company (Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277); it is preferable that before it is wound up it is first reinstated, as the assets of the deregistered company have to be removed from ASIC and placed in the hands of a liquidator: Scott v Janniki Pty Ltd (1994) 14 ACSR 334, 335. However, 32 Re Tamsin Pty Ltd (1994) 13 ACSR 136; Re Immunosearch Pty Ltd (1990) 2 ACSR 455. 33 Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277, 285; ACCC v ASIC [2000] NSWSC 316; (2000) 34 ACSR 232. 34 Re Immunosearch Pty Ltd (1990) 2 ACSR 455, 460.

670

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.105]

a deregistered company may be wound up, with the winding up order coming into effect on its reinstatement: ACN 078 272 867 Pty Ltd v DCT; Binetter v DCT [2011] HCA 46; (2011) 85 ACSR 247. In any event, provided that proper arrangements are put in place for the payment of necessary fees and administration costs, a deregistered company may not in fact be insolvent: ACCC v ASIC [2000] NSWSC 316; (2000) 34 ACSR 232. Further, the reinstatement of an insolvent company may otherwise be appropriate in special circumstances: Re Great Eastern Cleaning Services Pty Ltd (1978) 3 ACLR 886, 887. Courts are willing, in the appropriate circumstances, such as where the company is insolvent, to order reinstatement and winding up in the same order.35 The usual advertising and notification processes may be dispensed with.36 In Yeo v ASIC, in the matter of Ji Woo International Education Centre Pty Ltd (dereg’d) [2017] FCA 1480, referred to earlier, the court ordered that the company be wound up on the just and equitable ground under s 461(1)(k) of the Corporations Act. The reinstatement does not automatically reappoint the liquidator, but the court may make an order appointing them or another. The authorities are discussed in Re Greenzan Pty Ltd (in liq) (dereg’d) [2017] NSWSC 489. Although it would always be the case that an application for reinstatement is sought in order to pursue a particular course of action, reinstatement cannot be effected under s 601AH(2) for a particular purpose. Reinstatement and the existence of the company it recreates are “an all or nothing affair”: Anglo Coal (Drayton Management) Pty Ltd [2004] NSWSC 604; (2005) 23 ACLC 82.37 Validation of prior acts

[17.105] If ASIC reinstates the company under s 601AH(1), or if a court makes a reinstatement order under s 601AH(2), the court may validate anything done between the time of deregistration and reinstatement as well as making any other order it deems appropriate: s 601AH(3). This does not include the power to make orders determining substantive legal issues that were in dispute when the company was deregistered: Randall v City of Canada Bay Council (No 4) [2015] NSWSC 1759 at [200]. In a case where a plaintiff failed to confirm the corporate existence of the defendant before commencing proceedings, a validation order was made under s 601AH(3); although the court considered that s 601AH(5) may have cured the problem without court intervention: Eyles v Curved Plywood [2004] NSWSC 257. In CGU Workers Compensation (NSW) v Rockwall Interiors Pty Ltd (2006) 201 FLR 296, the court could not validate the service of a statutory demand that had been purportedly served on the company and not complied with while the company was deregistered. The jurisdiction under the section is available mainly to remove anomalies or impediments; for example, to ensure that the period of the company’s 35 Re Williams United Mines Pty Ltd (1992) 29 NSWLR 88. 36 See s 467(3)(b) of the Corporations Act and Scott v Janniki Pty Ltd (1994) 14 ACSR 334; Legrande Enterprises Pty Limited v ASIC [2009] FCA 718. 37 See Harris, “How Can a Reinstatement under Section 601AH be Limited?” (2004) 22 C&SLJ 531.

[17.110]

17 Termination of the Winding Up: Deregistration and Reinstatement

671

non-existence does not count for the purposes of limitation of actions: see Pagnon v WorkCover Queensland [2001] 2 Qd R 492 (distinguished in FF (R & D) Pty Ltd v ASIC [2017] VSC 482). But an order under s 610AH(3) is not, in general, appropriate where the order would visit adverse effects upon the company by reason of some inactivity necessarily stemming from its non-existence. In Vukasin v ASIC [2007] NSWSC 1341; 25 ACLC 1554, the court was prepared to validate a lease entered into by the company during its deregistration.

Effect of reinstatement [17.110]

Reinstatement means that the company is treated as having continued to exist during the period of its deregistration; it is regarded as never having been deregistered: Corporations Act, s 601AH(5). For a summary of the effect of this provision, see: Elsworthy v ASIC [2016] VSC 14 at [42]. Any third party rights that accrued during the period of deregistration will be enforceable (Explanatory Memorandum to the Company Law Review Bill 1997 (Cth), at [15.29]) but a company could not be deemed to have had the opportunity to be involved in litigation that concluded before the company was re-registered: Diamond Hill International Pty Ltd v Xu (2001) 19 ACLC 1139. This does not mean that the company necessarily comes back into existence in the same form; its new form may be as a company in liquidation: ACN 078 272 867 Pty Ltd v DCT; Binetter v DCT [2011] HCA 46; (2011) 85 ACSR 247.

Section 601AH(5) states that a person who was a director of a company that has been reinstated immediately before deregistration becomes a director again as from the time of reinstatement.38 However, as the terms of office of directors would continue to run during the time between deregistration and reinstatement one could have the possible result that by the time the company is reinstated the terms of the directors may have expired; a reinstatement order does not retrospectively empower directors whose terms have expired.39 An examination summons can issue against directors of a company even though the summonses are in respect of a period when the company was deregistered: Foxman v Credex [2007] NSWSC 1422; 26 ACLC 167. In any event, the court needs to be satisfied that the company to be reinstated has the necessary officers and registered office. A court can order reinstatement conditional upon the company holding a meeting to fulfil the necessary statutory requirements: URS Australia Pty Ltd v ASIC [2007] FCA 1939; (2007) 25 ACLC 1648. The question arises whether reinstatement of the registration of a company that was in liquidation at the time of deregistration causes the liquidator to go back into office. The fact that s 601AH serves to reinstate a director, and there is no comparable section that provides for the continuation of the liquidator, suggests that it is not sufficient to cause a liquidator in office, at the time of deregistration, to go back into office automatically on reinstatement of the registration: Donmastry Pty Ltd v Albarran [2004] NSWSC 632; (2004) 49 ACSR 745; Re Erb International Pty Ltd (Deregistered) [2014] NSWSC 200; (2014) 98 ACSR 124. In such cases the court 38 Coshott v Coshott (No 2) [2010] FCA 819. 39 McAusland v DCT (1994) 12 ACLC 78; Re Pollnow (1994) 12 ACLC 88.

672

Keay’s Insolvency: Personal and Corporate Law and Practice

[17.115]

should make an order under s 601AH(3)(b) to put beyond doubt the ongoing tenure of the original liquidator: JP Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu [2008] FCA 433; (2008) 167 FCR 212. A liquidator may need to be appointed to assess a claim of the applicant for reinstatement to unclaimed moneys vested in ASIC under s 601AD: In the matter of Bele & Company Pty Ltd [2017] NSWSC 1824. The consent of the liquidator is required, and adequate arrangement needs to be made about payment of remuneration and expenses: Halstead v CTS Quality Building Products Pty Ltd [2006] NSWSC 1022.

DEREGISTRATION IN CASES OTHER THAN WHERE THERE IS A WINDING UP [17.115] Companies may be deregistered in situations other than where they are being wound up. Under s 601AA of the Corporations Act the company, a director or member, or the liquidator, may lodge an application with ASIC for the company’s deregistration: s 601AA(1). Deregistration may be sought under s 601AA where all of the following factors exist (s 601AA(2)): • all the members of the company agree to the deregistration; • the company is not carrying on business; • the company’s assets are valued at less than $1,000; • the company has paid all fees and penalties payable under the Corporations Act; • the company has no outstanding liabilities; and • the company is not a party to any legal proceedings. ASIC then publishes a notice on its Public Notices website and on the ASIC database of the proposed deregistration of the company and when two months have elapsed ASIC may deregister the company: s 601AA(4). ASIC must give notice of the deregistration to the applicant for deregistration and the person nominated as the one to be informed of the deregistration: s 601AA(5). However, the “voluntary” deregistration process under s 601AA is one that is “properly resorted to only in clear and uncontentious cases where a company has come to the end of its useful life and has been reduced to a mere worthless shell without any continuing legacy”: Vero Insurance Ltd v Nicejade Pty Ltd [2010] NSWSC 556. The court in that case warned against the section being used as a means of circumventing winding up where assets of the company remain to be administered or where claims from creditors may emerge.

ASIC initiated deregistration of any company: s 601AB(1) [17.120] Besides deregistration of insolvent companies under s 601AB(2) (see [17.45]), ASIC has a process which is “an administrative measure in the nature of a cleansing of the register to remove apparently superfluous entries”, where insolvency is not a relevant factor.40 Under this process, ASIC may deregister where (s 601AB(1)): 40 Donmastry Pty Ltd v Albarran [2004] NSWSC 632; (2004) 49 ACSR 745, 746.

[17.125]

17 Termination of the Winding Up: Deregistration and Reinstatement

673

• a company’s annual return (ie, the return of particulars under Pt 2N.4) is at least six months late; • the company has not lodged any other document under the Corporations Act in the past 18 months; and • ASIC has no reason to believe that the company is carrying on business. ASIC may also deregister a company if the company’s review fee is not fully paid within 12 months after the due date or where the company has not paid within 12 months any liability under the ASIC Supervisory Cost Recovery Levy Act 2017:41 s 601AB(1A), (1B). The same process then applies as with a deregistration under s 601AB(2) (see [17.45]) that ASIC must give notice of proposed deregistration (s 601AB(3)) to the company and its directors, and to the liquidator (if any) of the company and arrange entries on the ASIC database and publication on the Public Notices website.42 ASIC is then permitted to deregister the company two months after the publication of the notice: s 601AB(3A). Notice of deregistration must be given to the company’s directors and the company’s liquidator, if there is one: s 601AB(5).

CONCLUSION [17.125] Deregistration, being the final step in the winding up of a company, is of course an appropriate point on which to conclude this part of the book. We will now leave liquidation itself as the formal and original process of dealing with an insolvent company, and examine arrangements that do not involve formal winding up. These are Corporations Act, Pt 5.3A administrations and deeds of company arrangement. As well, although not necessarily confined to situations of insolvency, receiverships, based in contract, and under Pt 5.2 and other legislation, will be examined as being means by which secured creditors will seek to protect their interests in the event of their borrower’s insolvency. Chapter 17 – Termination of the Winding Up: Deregistration and Reinstatement Corporations Act Pt 5A.1 – Deregistration – ss 601 – 601AH ASIC RG 83 – Reinstatement of companies RG 81 – Destruction of books RG 16 – External administrators – reporting and lodging

41 This Act provides for an industry funding model for ASIC’s regulatory activities, in conjunction with enhanced accountability arrangements. 42 Payable under s 5 of the Corporations (Review Fees) Act 2003 (Cth) in respect of its review date – see Corporations Act, s 345A.

PartV:CorporateInsolvency– Non-liquidation Arrangements Chapter18:Receiver.................................................................................................  Chapter19:VoluntaryAdministration...................................................................  Chapter20:DeedsofCompanyArrangement.....................................................  Chapter21:RestructuringandWorkouts................................................................



This Part considers the alternatives to liquidation: receivership, voluntary administration and deeds of company arrangement, and schemes of arrangement. Unlike alternatives to bankruptcy, these forms of corporate insolvency can and often do overlap with liquidation. Their purpose is, however, distinct from liquidation. Receivership is aimed at the protection of the company’s assets, either for the benefit of the secured creditor who appointed the receiver, or in a court-ordered receivership for the benefit of the creditors generally. The voluntary administration regime is aimed at providing the insolvent company with an opportunity to either restructure its affairs (using a deed of company arrangement) or to order its affairs for a more efficient liquidation which produces better outcomes for creditors. Non-liquidation arrangements are also associated with workouts and restructuring. Often a formal insolvency appointment may be impractical given the adverse effect of formal insolvency on goodwill and existing contracts, which leads key stakeholders (typically the major lenders and the debtor company) to seek to implement a restructuring proposal to turn the business around. This may be done on a confidential basis without the need for any formal appointment to be made, which is known as an informal “workout”. On the other hand, formal appointments can assist to implement a turnaround strategy by binding dissenting creditors to the bargain and addressing problematic debts (such as tax liabilities) and uncommercial contracts (such as unprofitable leases). Thus, a company may move from an informal workout to a formal appointment, usually voluntary administration followed by a deed of company arrangement and possibly with a receiver appointed to protect the major secured lender. The parties may alternatively use a scheme of arrangement as an alternative to a deed of company arrangement. Schemes better facilitate complex corporate capital and debt restructuring than deeds. This Part examines these issues in detail. We conclude in Chapter 21 with an overview of legal and commercial issues involved in restructuring and turnaround.

18

Receivership [18.05] INTRODUCTION .............................................................................................................. 680

[18.10] Pt 5.2 of the Corporations Act ........................................................................ 682 [18.15] TYPES OF RECEIVERS .................................................................................................... 682

[18.20] Receivers – privately appointed or court-appointed .................................. 683 [18.22] Receivers – court-appointed ....................................................................................... 684

[18.25] Receivers and receivers and managers ......................................................... 685 [18.30] Advantages in appointing a receiver ....................................................................... 686 [18.35] PRIVATE APPOINTMENT OF A RECEIVER .............................................................. 687

[18.40] Privately appointed receivers appointed under debentures ..................... 687 [18.45] The debenture ............................................................................................................... 688 [18.50] The security interest .................................................................................................... 689 [18.70] Appointment under the debenture ........................................................................... 690 [18.75] Joint appointments ....................................................................................................... 690 [18.80] Manner of appointment .............................................................................................. 691 [18.85] Demand deeds – how much time should be given .............................................. 692 [18.90] Qualifications for appointment as receiver ............................................................. 693 [18.95] Formalities of an appointment .................................................................................. 693 [18.100] Validity of appointment ............................................................................................ 694 [18.105] Remedying an invalid appointment ....................................................................... 695 [18.110] Indemnities .................................................................................................................. 695 [18.115] Verifying the appointment – s 418A ....................................................................... 696 [18.120] A RECEIVER APPOINTED BY THE COURT ............................................................ 696

[18.120] Introduction ..................................................................................................... 696 [18.125] Jurisdiction ....................................................................................................... 696 [18.130] ASIC .............................................................................................................................. 697

[18.135] When can a receiver be appointed? ............................................................ 697 [18.140] Examples of court appointments ............................................................................ 698

[18.145] The appointee .................................................................................................. 699 [18.150] Type of appointment ...................................................................................... 699 [18.155] ROLE AND POSITION OF A PRIVATELY APPOINTED RECEIVER ................... 700

[18.160] Agent of the company ................................................................................... 700 [18.165] Effect of liquidation on receiver’s agency .............................................................. 701 [18.190] Receivership and voluntary administration .......................................................... 704

[18.195] Property does not vest in the receiver ........................................................ 704

678

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.200] Powers of management ................................................................................. 705 [18.205] ROLE AND POSITION OF A COURT-APPOINTED RECEIVER .......................... 705 [18.210] POWERS AND DUTIES OF A PRIVATELY APPOINTED RECEIVER .................. 706

[18.210] Powers ............................................................................................................... 706 [18.210] General ......................................................................................................................... 706 [18.215] Extension of powers under s 420 ............................................................................ 706 [18.220] Express powers ........................................................................................................... 707 [18.225] Statutory powers of inquiry ..................................................................................... 707 [18.230] Examinations ............................................................................................................... 708

[18.235] Directions from the court .............................................................................. 708 [18.240] Power to claim remuneration .................................................................................. 709

[18.245] Duties ................................................................................................................ 710 [18.245] General ......................................................................................................................... 710 [18.250] Under the general law .............................................................................................. 710 [18.255] Extent of the receiver’s duty .................................................................................... 711

[18.260] Duties under s 420A ....................................................................................... 712 [18.265] Market value ............................................................................................................... 713 [18.270] What is reasonable care ............................................................................................ 715 [18.275] Assets with no market value ................................................................................... 716 [18.280] Rights of third parties ............................................................................................... 716

[18.285] General duties of receivers: ss 180 – 184 .................................................... 717 [18.290] Specific statutory duties of receivers: Reporting and notifications ....... 717 [18.295] Receiving reports from officers ................................................................................ 718

[18.315] The obligation to deal with the assets – collection, possession and control ............................................................................................................... 719 [18.320] Officers and employees – obligations to assist under s 590 ............................... 720

[18.325] Dealing with the assets – retention of title and the PPSA ...................... 720 [18.330] Selling goods subject to a valid retention of title clause .................................... 722

[18.340] Section 420B: prior security ........................................................................... 723 [18.345] Carrying on business ..................................................................................... 724 [18.350] Payment of creditors ................................................................................................. 725

[18.355] Distribution – priorities and prior securities ............................................. 725 [18.360] Distribution – the claimed priority of the Commissioner for unpaid income tax ........................................................................................................ 725 [18.365] Distribution – general priorities ................................................................... 726 [18.365] Non-circulating security interests ........................................................................... 726 [18.370] Circulating security interests: s 433 ........................................................................ 726 [18.375] Insurance in respect of liabilities to third parties ................................................ 728 [18.380] Auditor’s fees – refusal of resignation ................................................................... 728 [18.385] Employment contracts ............................................................................................... 728

18 Receivership

679

[18.390] Employee’s wages including superannuation ...................................................... 729 [18.395] Excluded employees .................................................................................................. 729 [18.400] Employees’ leave entitlements ................................................................................. 729 [18.405] Retrenchment pay ...................................................................................................... 729 [18.410] Advances to pay employee entitlements ............................................................... 729 [18.415] Receiver must ensure all priority claims are paid ............................................... 730 [18.420] CHALLENGING THE RECEIVER ............................................................................... 730

[18.422] Section 599 ........................................................................................................ 730 [18.423] Section 423 ........................................................................................................ 730 [18.425] ADMINISTRATION OF A RECEIVERSHIP – COURT-APPOINTED RECEIVERS ...................................................................................................................... 731 [18.430] LIABILITIES ..................................................................................................................... 732

[18.430] Under the general law ................................................................................... 732 [18.435] Under the Corporations Act ......................................................................... 733 [18.440] Section 419 ................................................................................................................... 733 [18.445] Section 423 ................................................................................................................... 734 [18.450] Section 588G ................................................................................................................ 734 [18.455] Section 598 ................................................................................................................... 735 [18.460] Section 419A ................................................................................................................ 735 [18.465] Section 433 ................................................................................................................... 735

[18.470] Relief from liability ......................................................................................... 736 [18.470] Indemnities .................................................................................................................. 736 [18.475] Section 419(3) .............................................................................................................. 736 [18.480] Section 1318 ................................................................................................................. 737 [18.485] POWERS, DUTIES AND LIABILITIES OF A COURT-APPOINTED RECEIVER ........................................................................................................................ 737

[18.490] Powers ............................................................................................................... 737 [18.495] Remuneration .................................................................................................. 737 [18.500] Duties ................................................................................................................ 739 [18.505] Directions .......................................................................................................... 739 [18.510] Liabilities .......................................................................................................... 739 [18.510] Tortious ........................................................................................................................ 739 [18.515] Contractual .................................................................................................................. 739 [18.520] Statutory ....................................................................................................................... 740

[18.525] Relief from liability ......................................................................................... 740 [18.530] EFFECT OF THE APPOINTMENT OF A PRIVATELY APPOINTED RECEIVER ........................................................................................................................ 740

[18.535] Effects on company officers ........................................................................... 740 [18.540] Effects on company property ........................................................................ 742 [18.545] Effect on creditors ........................................................................................... 742 [18.550] Effects on pre-existing contracts ................................................................... 742

680

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.05]

[18.555] Effects on employees ...................................................................................... 744 [18.560] Effects on the company .................................................................................. 745 [18.565] EFFECT OF THE APPOINTMENT OF A COURT-APPOINTED RECEIVER ...... 745 [18.570] TERMINATION OF THE RECEIVERSHIP – PRIVATELY APPOINTED RECEIVERS ...................................................................................................................... 746

[18.570] Reasons for termination ................................................................................. 746 [18.575] Administration completed ............................................................................ 746 [18.580] Misconduct ....................................................................................................... 746 [18.590] Resignation ....................................................................................................... 747 [18.595] Removal by the debenture holder ............................................................... 747 [18.600] Removal of redundant receiver: s 434B ...................................................... 747 [18.605] Procedure on termination .............................................................................. 748 [18.610] Effect of the termination ................................................................................ 748 [18.615] TERMINATION OF THE RECEIVERSHIP – COURT-APPOINTED RECEIVERS ...................................................................................................................... 748

[18.615] Reasons for termination ................................................................................. 748 [18.620] Administration completed ........................................................................................ 748 [18.625] Improper or defective appointment ....................................................................... 748 [18.630] Misconduct .................................................................................................................. 749 [18.635] Procedure on termination ......................................................................................... 749 [18.640] Effect of the termination ........................................................................................... 749 [18.645] CONCLUSION ................................................................................................................. 749

INTRODUCTION [18.05] Receivership is a form of external administration which may apply to corporations, partnerships and individuals. Corporate receiverships are the most common and they are commonly associated with insolvency, in circumstances where a secured creditor appoints a receiver to a company which has defaulted under a loan contract, to recoup its loan through sale of its security. They will be the subject of this chapter. The most frequent use of receivership in the non-corporate area occurs when there is a partnership dispute. The receiver is an independent person who collects and safeguards income and assets with the aim of protecting a certain party. Occasionally, receivers are appointed to businesses conducted by sole proprietors. Receivers are also appointed by the court to take control of and sell property, for example, to enforce the rights of the holder of an equitable charge such as a former trustee who has been removed and wishes to enforce their right of indemnity against the trust assets. Receivership is now largely a creature of statute. Originally, receivership was an equitable remedy. Since the 15th century, receivers have been appointed by the English Courts of Chancery to provide for the enforcement of a judgment by

[18.05]

18 Receivership

681

equitable execution,1 or to protect property pending resolution of a dispute, or to deal with the dissolution of partnerships. The Supreme Courts in the various jurisdictions in Australia had the inherent power to appoint receivers and this power has now been codified.2 The power also resides, under statute, in the superior courts, the High Court, the Federal Court and the Family Court, and the Federal Circuit Court.3 Other legislation, for example with respect to real property,4 allows receivers to be appointed in certain cases. The Corporations Act also provides for the appointment of a receiver for an ASIC investigation, or a criminal or civil action.5 It should be noted that privately appointed receivers do not have the benefit of acting in foreign countries that is given to other insolvency administrators under the Cross-Border Insolvency Act 2008 (Cth): see s 8. This is because private receiverships and controllerships relate only to a debt owed to the appointer, and as such cannot be said to be collective proceedings in terms of the application of the Model Law.6 The introduction of the Personal Property Securities Act 2009 (Cth) on 30 January 2012 also introduced several important changes to the Corporations Act.7 One of the most important changes was to expand the concept of a secured creditor to include secured parties under the PPSA. A new definition of secured creditor was inserted in s 51E of the Act, which is defined as a creditor whose debt is secured by a security interest. Security interest is in turn defined in s 51A as either a PPSA security interest or a charge, lien or pledge. A charge for the purposes of the Corporations Act is defined in s 9 to mean a charge created any way and includes a mortgage. While PPSA secured parties are classified as secured parties for the purposes of the Corporations Act, they must still be creditors to be secured parties8 in order to then be secured creditors. Furthermore, merely being a PPSA secured party will not of itself confer the power to appoint a receiver to enforce the party’s 1 Legal execution against an equitable interest, for example, against a mortgagor’s equity of redemption, was not available. 2 Supreme Court Act 1933 (ACT), s 26; Supreme Court Act 1970 (NSW), s 67; Supreme Court Act 1979 (NT), s 69; Uniform Civil Procedure Rules 1999 (Qld), s 274; Supreme Court Act 1935 (SA), s 29(1); Supreme Court Civil Procedure Act 1932 (Tas), s 11(12); Supreme Court Act 1986 (Vic), s 37; Supreme Court Act 1935 (WA), s 25(9). 3 Judiciary Act 1903 (Cth), ss 31, 32; Federal Court of Australia Act 1976 (Cth), s 57; Family Law Act 1975 (Cth), s 109A; Federal Circuit Court Act 1999 (Cth), s 114. 4 See for example, Conveyancing Act 1919 (NSW), s 109(1)(c); Property Law Act 1958 (Vic), s 101(1)(c) and similar legislation in other States. 5 Corporations Act, s 1323(1)(h). In Kijurina and Albarran in their capacity as liquidators of ET Family Pty Ltd (in liq) v Taouk; in the matter of ET Family Pty Ltd (in liq) [2014] FCA 542, the Federal Court appointed a receiver under s 1323(1)(h) of the Corporations Act or in the alternative s 57(1) of the Federal Court of Australia Act 1976. 6 Of course it is possible that a foreign “receiver” may still be found to be part of a collective process under the foreign law: see for example, Hur v Samsun Logix Corp [2009] FCA 372. 7 See Harris, “Assessing the Effect of the PPSA on the Corporations Act and Corporate Law Teaching” (2012) 27 AJCL 72. 8 The PPSA is not limited to secured debts but rather covers security interests that secure the payment or performance of an obligation.

682

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.10]

security interest – this power will usually derive from the security agreement. It should be noted, however, that Pt 5.2 of the Act covers both receivers and other controllers of property of a corporation. Receivers are not “external administrators” for the purposes of the IPSC and IPRC (see the definition of external administrator in IPSC, s 5-20). This means that provisions in Pt 3 of the IPSC and IPRC that apply to external administrators don’t apply to receivers (such as court orders under IPSC, Div 90 and remuneration rules under IPSC, Div 60). However, receivership is a form of external administration under the Corporations Act more generally, as Pt 5.2 appears in Ch 5 of the Corporations Act, which is called External Administration, and receivers are external to the management of the company in receivership. Receivers must be registered liquidators (s 418(1)(d)) and so the IPSC and IPRC will apply where the provision deals with “registered liquidators”, such as in the registration and discipline of liquidators under IPSC and IPRC, Pt 2.

Pt 5.2 of the Corporations Act [18.10] The Corporations Act regulates receivership through the provisions of Pt 5.2, although this is not a complete code and does not cover every aspect of receivership.9 It regulates corporate receiverships only, not a receiver appointed over the assets of an individual. So, where a receiver is appointed over real property of an individual, state property law applies and regulates the duties of sale of that receiver. Part 5.2 also deals with mortgagees and their agents who enter into possession of the secured property owned by a company or who assume control of the property. Part 5.2 actually covers persons who are referred to as “controllers”. This term is defined in s 9 and means:10 (a) a receiver, or receiver and manager, of that property; or (b) anyone else who (whether or not as an agent for the corporation) is in possession, or has control,11 of that property for the purpose of enforcing a security interest.

The definition includes two or more persons appointed as controllers: see s 434F. This text will generally use the commonly accepted word “receiver”. In 2016-2017 there were 39 companies placed into receivership, 213 companies placed into the hands of receivers and managers and 262 companies placed into the hands of controllers (not otherwise being receivers). This represents an almost 30% decrease from the previous financial year and a 60% decrese from three years ago (2013-2014).12

TYPES OF RECEIVERS [18.15]

A receiver is appointed in respect of a corporation to take control of property, or to get it in, in order to protect the rights of a party entitled to the 9 For example, Pt 5.2 does not specify how a receiver is to be appointed, that is left to the instrument of appointment. 10 See Mijac Investments Pty Ltd v Graham (No 2) [2009] FCA 773; (2009) 72 ACSR 684. 11 See Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Philips [2011] SASC 139. 12 ASIC statistics on the numbers of companies entering external administration (Series 1) are available from the ASIC website (http://www.asic.gov.au).

[18.20]

18 Receivership

683

property. This form of external administration may encompass all of the property of the corporation or be circumscribed to one or a number of items of property.

Receivers – privately appointed or court-appointed [18.20] Receivers are usually appointed by a secured creditor when the assets of a company are under threat because of the company’s insolvency or financial instability. The terms of the security instrument (such as a general security agreement or a debenture trust deed) will set out various events of default that allow (but do not require) the secured creditor to take action. Common events of default are outlined below. It is common for security documents to allow the secured creditor to require the debtor company to appoint an investigating accountant (sometimes referred to as an IA) to undertake an independent business review (often referred to as an IBR) of the company’s financial position. If the investigating accountant’s report demonstrates that the debtor company’s financial position is positive it may be possible to undertake a workout to restructure the debtor’s affairs to ensure continuing compliance with the terms of the loan (although these may be amended as part of the restructuring process).13 A receiver is usually appointed where a workout is not feasible. This may occur because the debtor’s business is unsound or because the value of the secured assets will be maximised by a receiver’s sale rather than trading on the business during a workout. If a secured creditor believes that the debtor’s existing management is inadequate, or that they are concealing relevant information or engaging in fraud, it is highly likely that a receiver will be appointed to take over the management of the debtor so as to preserve the secured collateral. Another option would be for the secured creditor to put the company into voluntary administration (see s 436C, which is only available for major secured creditors), as a voluntary administrator may remove and replace directors under s 442A. While this is a power that receivers do not have, the administrator has a duty to act for all creditors whereas a privately appointed receiver has a paramount duty to the appointing secured creditor.14 It is common for both receivers and administrators to be appointed to a company, often at around the same time. One purpose of this is that the secured creditor through the receiver may provide financial support for the conduct of the voluntary administration. It is not uncommon that a company entering administration has few unsecured assets, from which the administrator may continue to operate the company and be remunerated. A major purpose of such an arrangement is that it gives the receiver (who maintains management control of the company despite the administration) the protection of the broad moratorium for the company and property it controls, available under Pt 5.3A, while allowing the receiver to manage the business, typically pending a sale of the secured assets. 13 See also ARITA, Code of Professional Practice, 3rd ed, at [6.8.1C], which discusses when investigating accountants take on formal appointments. 14 The law is different in England, with what are called “administrative receiverships” largely removed as an option for the secured creditor.

684

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.22]

The receiver is appointed in those cases to preserve the assets for the creditor. Such private appointments by a secured creditor are under an instrument of appointment pursuant to a loan contract between the company and the creditor, often referred to as a “debenture”. A debenture is a term commonly referred to and is defined, in s 9 as, broadly, an undertaking to repay money lent, which may (but need not) involve a security interest over the relevant property of the borrower: see [18.45]. Private appointments can also be made pursuant to statutory powers, such as under real property legislation. These are generally referred to as privately appointed receivers. Another option for secured creditors is to take possession of the collateral themselves (as “mortgagee in possession”) or through an agent (“agent for the mortgagee in possession”).15 Such action will constitute the mortgage (or their agent, who is not a receiver) as a “controller” for the purposes of Pt 5.2 of the Corporations Act, which imposes certain reporting obligations and specific duties and liabilities. However, taking possession either as mortgagee in possession or through an agent carries significant liability risks for the secured creditor. A receiver is generally the agent of the borrower, and hence liabilities the receiver incurs will generally be liabilities of the borrower, subject to any statutory liability imposed personally on the receiver under ss 419, 419A. In contrast, a mortgagee in possession (or through an agent) will incur these liabilities personally. Such liabilities might not be covered by related guarantees which may crystallise on taking possession of the property, although an indemnity given by a surety may also be obtained either as part of, or as collateral to, the guarantee. For major financial institutions there is also a reputational risk involved in taking possession personally rather than appointing an independent receiver (albeit one whose paramount duty is to protect the collateral). It is of course possible for a mortgagee in possession to give up lawful possession and then appoint a receiver, or for a receiver to resign to enable the mortgagee to take possession. Receivers – court-appointed

[18.22] A court may also appoint a receiver on an application being made by a party who seeks to protect its interests, or on application of ASIC, in order to pursue its regulatory role. These are court-appointed receivers. Courts appoint receivers pursuant to their inherent power or under some statutory provisions; in the case of ASIC, it has rights to seek the appointment of receivers under the Corporations Act. Apart from ASIC’s proceedings, these types of appointment are far less common than private appointments. The role of a court-appointed receiver will end when the purposes of the appointment have been achieved, for example to sell property, or to resolve a partnership or other dispute, or to achieve ASIC’s regulatory aims. 15 See further O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) App 3 – Mortgagees in possession: commercial and legal consideration. There may also be tax implications for the appointee and the secured creditor depending on the type of appointment: see Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48; (2015) 257 CLR 544.

[18.25]

18 Receivership

685

The predominant mode of private appointment occurs where a secured creditor maintains a registered or perfected security over the assets of a company pursuant to a debenture deed and then appoints a receiver under the deed on a nominated default occurring. The usual scenario is that a company borrows money from a lender and in consideration of the loan the company grants the lender a security interest over some or all of its assets. The charge is contained in a debenture deed which provides that a receiver may, inter alia, be appointed by the lender if the moneys secured by the charge become payable. The debenture will state what circumstances may cause the moneys to become payable or at least payable on demand. These commonly include: • the failure to pay the principal or an interest instalment; • cross default clauses which may be triggered when the debtor defaults on other loans; • a sale of secured collateral other than in the ordinary course of business; • the filing of an application for a winding up order against the company; • the convening of a meeting to consider a resolution for the voluntary winding up of the company; • the issue of execution process against the assets subject to the security interest; • any attempt by the company to create a further security interest to rank prior to or equally with the security interest; • a failure by the company to carry out any of the covenants contained in the debenture, including complying with financial ratios (such as the debt service cover ratio). The circumstances which may cause the moneys to become payable and which are listed in the deed, will demonstrate the concern of the lender to protect and enforce its security if the security is in peril. The appointment of a receiver over a company will result in the enforcement rules operating under Ch 4 of the PPSA to be excluded as the provisions of Pt 5.2 of the Corporations Act and the general law of receivership applies: PPSA s 116(1). A non-receiver controller is not excluded from the Ch 4 PPSA rules (PPSA, s 116(2)), although a number of the rules in that chapter may be excluded by agreement in commercial contracts: PPSA, s 115. Once appointed, a receiver will administer the property subject to the security interest and if empowered to do so will manage the company. The receivership will continue until the purpose of the receivership is fulfilled. This often occurs when the assets subject to the security interest have been realised and the lender who holds security has been paid out. Sometimes the receivership will have involved management of the company’s business and the receivership will end when the receiver has helped to restore the business of the company to good health. This is beneficial to the appointor of the receiver as it will enable the appointor to maximise its benefits from its secured position.

Receivers and receivers and managers [18.25]

A person may be appointed as a receiver or receiver and manager. This was a distinction made at common law: for example, see Re Manchester & Milford Rly Co; Ex parte Cambria Rly Co (1880) 14 Ch D 645, 653. Strictly as a matter of

686

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.30]

history a receiver simply received the income of the secured property over which he or she was appointed and paid certain outgoings. Over time the function of the receiver broadened. Debenture deeds specifically empowered receivers to get in the assets which were secured, realise them and then distribute the proceeds in conformity with the debenture and the law. A receiver and manager, on the other hand, was entitled to carry on the company’s business as a going concern and in so doing had the right to buy and sell. The standard debenture has always determined whether a receiver or a receiver and manager can be appointed. More often than not the debenture will empower the lender to appoint either and the lender will usually appoint a receiver and manager. In practice, it was difficult to distinguish between a receiver and a receiver and manager because their respective functions were not clearly delineated: Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382, 383. The distinction between the two offices is now somewhat academic given that s 420 of the Corporations Act gives receivers, subject to the terms of the debenture, wide powers. For example, one effect of the section is that a receiver can carry on the business of the company (s 420(2)(h)) and engage or discharge employees: s 420(2)(o). The traditional distinction between receivers and receivers and managers is further rendered otiose by the fact that s 90 states that a receiver who manages is also a manager, hence if a receiver exercises the powers of management pursuant to s 420, he or she is a receiver and manager. For these reasons, this chapter will concentrate only on receivers and managers although the term “receiver” will generally be used. Advantages in appointing a receiver

[18.30] The major advantages for a lender who privately appoints a receiver is that the administration can be initiated speedily with insubstantial cost and, provided the receiver’s deed of appointment is well drafted, the receiver may have flexibility in carrying out the administration. The speed of the appointment is crucial because it might be imperative for the lender to put in an independent person to safeguard the assets which are subject to the security. Of course, the ability to appoint a receiver quickly will depend on the terms of the instrument and whether any preconditions to appointment, such as the requirement to serve notice of default on the debtor or the obligation of a debenture trustee to call a meeting of debenture or note holders to seek approval to appoint a receiver, have been complied with. A secured creditor may also be prevented from appointing a receiver because another secured creditor has a higher priority security either because of the operation of the priority rules of the PPSA, or because of the nature of the security involved (particularly for competitions between multiple interests that are not covered by the PPSA). Another advantage for the secured creditor is that if it took possession of the company’s assets as mortgagee its potential liabilities under the general law in the event of its actions being unlawful were regarded as “almost penal”: James v Commonwealth Bank of Australia [1992] FCA 420, (1992) 37 FCR 445. If the creditor appointed a receiver it was not exposed to the same liability. The receiver could realise the assets subject to the security without the assumption of responsibility for

[18.40]

18 Receivership

687

its liabilities. This freedom has, over the years, been circumscribed by the Corporations Act but the form of administration remains attractive in most of the circumstances which confront a secured creditor. A general benefit, which may also be advantageous to the lender, is that if the company is not hopelessly insolvent there is the possibility that the company can, in due course, be restored to financial health. This is beneficial for the company and its members but it is also beneficial for both the company’s normal trade creditors who can continue to supply the company with goods and services, and the general body of unsecured creditors who are more likely to be paid what they are owed, even if only in due course. In that respect, much will depend on the skills of the receiver, and the willingness of the secured creditor to allow some latitude in how the indebtedness is handled, and in some cases their willingness to provide further financing to maximise returns on managing (and usually selling) the business. For example, a receiver appointed over a partially constructed building project may need further funding to complete the project and realise the full value of the security. Similarly, a receiver appointed over a business or residential property in need of major capital works may need further funding to do this. The senior lender will either need to consent to allow further secured funding to be obtained or provide the funding itself. In some cases this may require creative fundraising options, such as appointing a voluntary administrator to propose a deed of company arrangement that will involve a debt for equity swap and a further financing facility with existing and/or new lenders. If the receiver can negotiate the sale of some or all of the business as a going concern this may protect the position of the secured creditor (as it is the duty of the receiver to do) but it may also help to preserve jobs and commercial relationships with third party suppliers and customers. The notion of controller includes not only receivers but other persons in possession or control of property for the purpose of enforcing a security interest. For example, a bank, or its agent, which enforces a security over a single piece of real estate of the company, is the controller. Some of the duties and liabilities of receivers and managers thus extend to mortgagees in possession and their agents. The term “managing controller” refers to a receiver and manager and any other controller with management powers and functions: Corporations Act, s 9. A controller of a company who is not a receiver will come within the enforcement rules of Ch 4 of the PPSA: PPSA, s 116(2).

PRIVATE APPOINTMENT OF A RECEIVER [18.35] This section of the chapter considers both the appointment of a receiver pursuant to a private appointment under a debenture and the appointment of a receiver by a court. For ease of explanation the two different types of appointments are discussed separately. Privately appointed receivers appointed under debentures [18.40]

A privately made appointment under a debenture is by far the most common form of appointment. It is less costly, less formal and usually much quicker than seeking an appointment by a court.

688

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.45]

A debenture holder who holds security over a company’s property is entitled to appoint a receiver if the terms of the debenture and the circumstances allow it. It is not under an obligation to refrain from appointing a receiver merely because this might cause the company or unsecured creditors to suffer loss: Shamji v Johnson Matthey Bankers Ltd [1986] BCLC 278.16 Nevertheless, the company may be able to challenge the appointment of the receiver and seek an injunction to prevent or stay the appointment pending the challenge being heard: Ernst & Young (Reg) v Tynski Pty Ltd [2003] FCAFC 233; (2003) 47 ACSR 433. In that case, the Full Federal Court stated (at [24]) that: “It is not … open to dispute that directors of a company have the capacity, notwithstanding the ‘apparently all-embracing terms’ of a debenture and the appointment of a receiver and manager to instruct solicitors to institute proceedings in the name of the company to challenge the debenture”.

The debenture

[18.45]

As initially explained, a debenture is, in broad terms, merely an undertaking to repay money lent, often with a security interest taken over the borrower’s property in order to secure repayment. A debenture deed (commonly just called a debenture) is the contract that constitutes an acknowledgment that a sum of money is owed to the lender.17 A debenture may be issued by a company on a secured or unsecured basis. Section 283BH of the Corporations Act requires that unsecured debentures be called “unsecured notes” or “unsecured deposit notes” rather than debentures. Unsecured debentures may of course be protected by a range of quasi-security techniques such as personal guarantees from the debtor company’s directors or from related companies. A secured debenture will include a security interest (such as a mortgage or charge) over the real or personal property of the company or a related entity.18 It will allow the lender to appoint a receiver over the assets of the borrower if certain loan terms are breached. The power exercised under the debenture to appoint a receiver to deal with those assets is ancillary to the secured creditor’s proprietary interests in the assets: Re Geneva Finance Ltd (1992) 7 WAR 496; 10 ACLC 668. The debenture document will also provide for a range of enforcement powers. For security interests over personal property these powers may operate in conjunction with the enforcement powers under Ch 4 of the PPSA, although Ch 4 provisions are excluded if the debtor is a company under receivership: PPSA, s 116(1).19 As already indicated, a debenture may grant a security interest over assets of the borrowing company. A debenture at common law was merely a written 16 See also Commonwealth Bank of Australia v Oswal [2012] WASC 128 (discussion of appointments and the “fraud on a power” doctrine). Appeal dismissed: Oswal v Commonwealth Bank of Australia [2013] WASCA 58. 17 See Corporations Act, s 9; ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1. 18 See Corporations Act, s 51A. 19 See further Bull, “Receivership and the Personal Property Securities Act 2009 (Cth): Why Distinctions Remain Relevant” (2013) 21 Insolv LJ 5.

[18.50]

18 Receivership

689

acknowledgment of a debt, whether secured or not. However, the definition in s 9 is more specific It is this meaning of debenture that is relevant in discussing the law of receivership; however, that broader definition of the term must be kept in mind. Indeed the Corporations Act definition of a debenture is not confined to a security. Section 9 defines a “debenture” as a: “chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money.”

The definition goes on to say that the word debenture does not include certain moneys lent in the ordinary course of business, an undertaking to pay under a cheque or bill of exchange, and other defined transactions. The security interest

[18.50] Naturally, it is important for a lender to have a security interest over assets because it makes it a secured creditor and therefore more likely to recover the money loaned. Without some form of security the lender would have only a bare contractual right against the company for the repayment of the debt and in the event of the company’s insolvency it would rank only as an unsecured creditor. Prior to the introduction of the PPSA on 30 January 2012 security interests were characterised as charges. Charges are defined broadly in s 9 of the Corporations Act and include a mortgage. Charges under the Corporations Act are referred to as legal charges, and are broader than the traditional concept of a charge in equity.20 A company may grant a charge which is fixed, floating or a combination of the two. Following the introduction of the PPSA the distinction between fixed and floating charges for most types of personal property became irrelevant. This is because most charges will be covered by the priority rules in Pt 2.6 of the PPSA, and these rules (unlike the former rules in the now repealed Ch 2K of the Corporations Act) make no distinction between the two forms of security. A priority contest between two security interests is not determined according to which of the security interests is fixed or floating, but rather by the PPSA priority rules. The PPSA adopts a substantive approach to security interests which does not depend on the form of the transaction, but rather on whether the interest in personal property provided by the transaction secures the payment or performance of an obligation: PPSA, s 12. Part 9.5 of the PPSA provides that references to fixed charges are to be read as references to security interests in non-circulating assets, while references to floating charges are to be read as references to security interests in circulating assets. The PPSA equivalent of a fixed and floating charge is the general security agreement over “all present and after-acquired property” (known as an ALLPAP). However, Pt 9.5 of the PPSA does not apply to security agreements that were enforceable prior to 30 January 2012 (the PPSA commencement date): PPSA, s 318. These are known as “transitional security agreements”, which gave rise to transitional security interests even if the security interest only attached to particular 20 For a discussion of equitable charges, see LexisNexis Butterworths, Halsbury’s Laws of Australia, Mortgages and Securities, at [295-2065] which gives a detailed summary of the law.

690

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.70]

property after the commencement date. For example, a debenture held by a bank on 1 January 2012 which provided for a fixed and floating charge over a debtor company’s assets would be a transitional security interest. The transitional period of the PPSA ended on 31 January 2014. It should be noted that the distinction between security interests in circulating and non-circulating assets has no effect on the operation of the PPSA itself. The distinction is, however, relevant for the operation of priority rules dealing with employee entitlements in corporate insolvency (including both receivership and liquidation, under s 433 of the Corporations Act), discussed at [18.370]. It is likely that the terms fixed and floating charges will continue to be used for some time both for reasons of commercial familiarity and also because the PPSA has a number of exceptions set out in PPSA, s 8. Indeed, the concept of a security interest under s 51A includes both a PPSA security interest and a charge (and a pledge or lien). It is useful therefore to review briefly the law of fixed and floating charges.21 Appointment under the debenture

[18.70] The debenture deed must be followed strictly. A debenture holder does not possess an implied right to appoint a receiver, even if the assets subject to the security interest are in danger, if the debenture does not permit it: Cryne v Barclays Bank plc [1987] BCLC 548. The right to appoint is therefore limited to the terms of the debenture deed (Canberra Advance Bank Ltd v Benny [1992] FCA 530; (1992) 38 FCR 427) but a secured creditor can, in certain circumstances, sustain the appointment of a receiver by having regard to information discovered subsequent to the appointment. Joint appointments

[18.75] Some deeds will allow for the appointment of more than one receiver. If this occurs, the persons appointed must act jointly. The appointment of joint receivers has a long history. Such an appointment means that all of the appointees will have to act on all occasions. It is more convenient for receivers to be appointed jointly and severally because in such a situation they could act separately. The Corporations Act explicitly provides for joint and several appointments of receivers or receivers and managers except where the instrument of appointment provides otherwise: s 434D. The section allows a function or power of one receiver to be performed or exercised by any other receiver appointed. The section provides that a reference in the Act to a receiver is a reference to any one or other appointed. Sections 434E, 434F and 434G include similar provisions with respect to multiple receivers and managers, controllers and managing controllers respectively.22 21 For a detailed examination of the former law of company charges, see Gough, Company Charges, (2nd ed, Butterworths, 1996). 22 The definitions of “controller”, “managing controller”, and “receiver” in s 9 also recognise that there may be more than one appointee.

[18.80]

18 Receivership

691

The “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, at [4.220] says that these provisions are not intended to apply where two or more receivers are appointed over different property, by different secured creditors or under different instruments. Manner of appointment

[18.80] Often the event which sparks off an appointment under a debenture is a default on the part of the company in paying principal and/or interest on the loan granted to the company. A single default is sufficient to permit the appointment of a receiver: Pan Foods Company Importers & Distributors Pty Ltd v ANZ Banking Group Ltd [2000] HCA 20; (2000) 74 ALJR 791. Defaults are usually followed by the giving of a notice of demand (see [18.85]). How a receiver comes to be appointed will depend on the terms of the debenture deed.23 There is no specific or statutory form for the appointment; the rule is to adhere strictly to the deed as it is the source of the power of the appointment. While not always obligatory it is desirable for a demand for payment to be made before the appointment takes place. Generally, deeds require appointments to be made in writing and signed by the lender. The appointment document will usually include the name and address of both the appointor and the debtor company, the grounds for the appointment, reference to the clause of the deed giving rise to the appointment, a statement that the receiver will have the powers listed in the debenture, and a declaration that all funds received are to be dealt with according to the terms of the debenture. No appointment is effective until the document of appointment is delivered to the receiver by the appointor or the appointor’s authorised agent: NZI Securities Australia Ltd v Poignand [1994] FCA 1219; (1994) 51 FCR 584 (where the board of the secured creditor invalidly used the company’s seal to appoint a receiver and later ratified the prior appointment – the receiver was appointed when he signed the appointment instrument). The appointment commences when the receiver assents to the appointment. This assent need not necessarily be express. It has been held that if it can be deduced from the circumstances that the delivery of the document of appointment is intended to be an appointment, and is accordingly accepted by the receiver, then the appointment commences at that point: Cripps (Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944. A receiver may refuse to accept an appointment, but once accepted, he or she is regarded as the receiver and all requirements of the legislation must be followed. A secured creditor is entitled to enforce its contractual rights in the appointment of a receiver in a manner which may be regarded as unreasonable and where reliance is placed on technical breaches of the debenture by the debtor company: Canberra Advance Bank Ltd v Benny (1992) 38 FCR 427. 23 See further O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) Ch 3 – “In what circumstances can receivers and managers be appointed out of court?”).

692

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.85]

Demand deeds – how much time should be given

[18.85] Some debenture deeds require a lender to make a demand on the borrower if principal or interest is owing, before a receiver can be appointed. The difficulty for a lender is to know how much time must be allowed after delivering a demand and before making an appointment. Companies must be given a reasonable time to meet any demand. The actual time allowed will depend on the circumstances. These circumstances include the amount of the loan, the risk, the length of the relationship between the debtor and the creditor, the character and reputation of the debtor, the debtor’s ability to raise the amount demanded and the circumstances surrounding the demand. For example, in Jenner v Selmoore Pty Ltd (1997) 74 FCR 526 a demand that payment be made outside banking hours – after 5pm - was considered to be unreasonable. Decisions in England have been based on the premise that there is a convenient and ready location where the money is sitting, which has resulted in time periods of an hour or less being held as reasonable: Bank of Baroda Ltd v Panessar [1987] Ch 335; Cripps (Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944. In Bond v Hong Kong Bank of Australia Ltd (1991) 25 NSWLR 286, where the payment demand was in the millions of dollars, and would have taken time to arrange, five days was held to be reasonable. If the debtor has made it clear it cannot pay, the time given may not be relevant at all. That was the outcome in Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491. While the High Court suggested that 3 days’ notice was not sufficient, the appointment was upheld because the company had made it clear it could not pay.24 A broad approach can be taken in relation to the form of demands, with the substance of any notice of demand rather than its form being of critical importance: Pan Foods Company Importers & Distributors Pty Ltd v ANZ Banking Group Ltd [2000] HCA 20; (2000) 74 ALJR 791. As to one point of form, if a creditor is relying on more than one default in a notice of demand, it is permissible for the defaults to be relied on in the alternative: Pan Foods. Whether or not a demand is technically required by the debenture, demands are generally made.

24 See further O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) Ch 6.

[18.95]

18 Receivership

693

Qualifications for appointment as receiver In effect, no one can be a receiver25 unless he or she is a registered liquidator: Corporations Act, s 418(1)(d).26 It is possible for a person to be a registered liquidator who is only registered to accept receivership appointments: see IPRC, s 20-1(2)(d), (4); ASIC RG 258. The process of applying for registration as a liquidator is explained in Chapter 10.

[18.90]

Certain persons are disqualified by s 418(1) from acting as receivers. They are: • a secured party in relation to property of the debtor company;27 • an auditor28 or a director, secretary, senior manager29 or employee30 of the debtor company; • a director, secretary, senior manager or employee of a body corporate that is a secured party in relation to property of the debtor company; • a director, secretary, senior manager or employee of a body corporate related to the debtor company; • someone who has at any time within the previous 12 months been a director, secretary, senior manager, employee or promoter of the debtor company or of a related body corporate, unless ASIC gives an exemption. Formalities of an appointment

[18.95] The appointor must file notice of the appointment of the receiver with ASIC within seven days (Corporations Act, s 427(1)) and the appointee must do so within 14 days: s 427(2). The appointee must also serve notice of the appointment on the company as soon as practicable: s 429(2)(a). The receiver should also notify the directors and the secretary, when serving the notice of appointment on the company, that they are required to submit to the receiver a report regarding the affairs of the company as at the date of appointment. This report is to be submitted within 10 business days after the company receives the notice of appointment: s 429(2)(b). 25 A person cannot avoid this provision by merely claiming that they are controllers and not receivers if the substance of the appointment under the debenture is that of a receiver: Yarrawonga Earthmoving & Garden Supplies Pty Ltd v Clem Court Pty Ltd [2014] VSC 439 (receiver removed as not a registered liquidator). 26 The qualifications are set out in IPRC, s 20-1. 27 This includes PPSA retention of title property: see Corporations Act, ss 418(1)(a), 51F. See further Bull, “Receivership and the Personal Property Securities Act 2009 (Cth): Why Distinctions Remain Relevant” (2013) 21 Insolv LJ 5. 28 A person is not prevented from acting as receiver if one of his or her partners is the auditor: Charleville Aboriginal Housing Co Ltd v Mercantile Credits Ltd (1989) 7 ACLC 355. See however, ARITA Code (3rd ed) at [6.9]. 29 See Re Banksia Securities Ltd (No 2) [2015] NSWSC 1449 (comments on whether a liquidator is a “senior manager”, albeit in obiter). A “senior manager” does not include a person acting as a receiver and manager: s s 418(4). 30 A private accountant acting in the capacity of a professional advisor is not an officer or employee: Re Merchant Nurseries Pty Ltd (1985) 3 ACLR 840.

694

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.100]

A receiver must advise the Commissioner of Taxation within 14 days of taking possession of assets under the appointment.31 At the same time the receiver will often seek to ascertain whether the company owes any tax. The receiver is not obliged to inform creditors of the appointment, but often this is done and it is prudent to do so. In a situation where a person, otherwise than as receiver, is appointed to enter into possession, or take control, of property of a company (whether or not as agent for the company) for the purpose of enforcing a charge, that person must lodge notice of their appointment with ASIC within seven days: s 427(1A). Then, within seven days of entering into possession or taking control, that person must lodge notice with ASIC of that fact, unless the appointor does so: s 427(1B); ASIC Form 504. Validity of appointment

[18.100] To ensure that their position is secure, a receiver must be satisfied that the appointment is valid. It is common for a secured creditor to undertake a security review (usually in consultation with its lawyers) in order to ensure that the appointment of a receiver is permissible, but there may be insufficient time for this to be done (for example, where the assets are at an imminent risk of destruction or removal). The receiver’s appointment may be challenged by the company, its liquidator, a debenture holder other than the appointed one, a judgment creditor or even the shareholders of the debtor company where the board of directors is deadlocked and cannot authorise action on behalf of the company. An appointment can be rendered invalid as a result of a number of factors.32 Only the most common invalidating factors are mentioned here and many of these matters have been discussed in Chapter 14, in the context of invalidation of security interests and voidable transactions in a liquidation. Initially, a receiver should be satisfied that an event has occurred which permits the appointment of a receiver. The receiver should also ensure that all those pre-conditions of an appointment have been adhered to. The failure to adhere to these will usually invalidate the appointment. An appointment may be invalid or ineffective in the following situations: • the debenture did not include a power to appoint; • the debenture was illegal; • the security interest on which the appointment is based ranks behind prior charges; • the security interest has vested in the debtor company as grantor because the secured party has not properly perfected it under the terms of the PPSA: see PPSA, ss 267, 267A; Corporations Act, s 588FL; • the security interest is void because it is in favour of a “relevant person” (an officer of the company or an associate of an officer) and it was created less than six months previously (Corporations Act, s 588FP); 31 Taxation Administration Act 1953 (Cth), Sch 1, s 260-75. 32 See further O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) Ch 7 –“Validity of the appointment”.

[18.110]

18 Receivership

695

• the charge is void as against a liquidator because it was a circulating security interest and because, inter alia, it was created without fresh consideration being advanced to the company, and within six months of the relation-back day, and after the creation of the security interest the company was insolvent (s 588FJ); • the security interest is invalid against a liquidator because when it was created it gave the debenture holder an unfair preference under s 588FA which the court has set aside under s 588FF; • the appointee is disqualified from being appointed. Nevertheless, it is to be noted that the appointment of a liquidator does not of itself invalidate the appointment of a receiver. As we have explained, if the appointment of a receiver is invalid, both the receiver and the appointor (through an indemnity that they may have given to the receiver, or where the receiver was acting as the agent of the appointor) may be held liable to the company in trespass. This is regardless of the fact that the receiver acted in good faith. In that circumstance, the company is entitled to regard the receiver as its agent and the receiver must account for any profits received: Re Simms [1934] Ch 1. But if the company does benefit from the acts of the receiver, the receiver has the right to claim remuneration.33 Remedying an invalid appointment

[18.105] If there has been an invalid appointment of a receiver under a debenture and the receiver has wrongly taken possession of the property secured, the situation cannot be cured by the secured creditor making a fresh and purportedly valid appointment of the receiver over the asset or assets in question unless and until control of the property has been returned to the debtor and a fresh demand made.34 A fresh demand would be necessary where the original demand was not properly served on the company. For example, in Jenner v Selmoore Pty Ltd (1997) 74 FCR 526 the original demand was posted in an unstamped letter which was not delivered. Indemnities

[18.110]

Invariably receivers will obtain an indemnity from their appointors before accepting an appointment; this indemnity may cover not only the actions of the receiver during the receivership but also any liabilities arising, should the debenture or the appointment prove to be defective. Even if the receiver has no indemnity available the receiver may be relieved, in whole or in part, of any liability arising out of an invalid appointment in certain circumstances: s 419(3).

33 Monks v Poynice (1987) 8 NSWLR 662; Young v ACN 081 162 512 [2005] NSWSC 139; (2005) 52 ACSR 629. 34 Melsom v Velcrete Pty Ltd (1996) 17 WAR 316; Jenner v Selmoore Pty Ltd (1997) 74 FCR 526; Pan Foods Company Importers & Distributors Pty Ltd v ANZ Banking Group Ltd [2000] HCA 20; (2000) 74 ALJR 791.

696

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.115]

Verifying the appointment – s 418A

[18.115]

While it is up to the receiver to be satisfied that their position as receiver is secure,35 a receiver may not always be able to verify every aspect of the appointment. Section 418A of the Corporations Act permits an application to the court to determine whether an appointment was valid. An application must specify a particular ground of doubt with respect to the validity of the appointment: see, for example, Jenner v Selmoore Pty Ltd (1997) 74 FCR 526. However, the court is not limited to only considering the validity in light of the ground specified in the application. The court may make a declaration concerning the validity on the ground specified or some other ground. Unsecured creditors and the company itself, including through its liquidator, may also apply under s 418A. A person who is not validly appointed as a receiver is not to be regarded as occupying the position of a shadow director of the company within s 9: Jenner v Selmoore Pty Ltd.

A RECEIVER APPOINTED BY THE COURT Introduction [18.120] The Federal and Supreme Courts, and the High Court of Australia and other superior courts have jurisdiction to appoint receivers, a jurisdiction which, as explained at [18.05] originated in the Courts of Chancery in the 15th century. As this jurisdiction is open to lenders, it is necessary to devote some space to this type of appointment. As stated earlier, court-appointed receivers are not common when compared with the number of private appointments and in a book devoted to the whole field of insolvency, court appointments do not warrant substantial consideration. Jurisdiction [18.125] The jurisdiction of the courts to appoint a receiver is derived from two sources. First, all of the courts are empowered by specific court legislation to make an appointment.36 Each piece of legislation empowers the respective court to appoint a receiver “in all cases in which it appears to the court to be just or convenient that such order be made”. Secondly, there are certain other statutory provisions which provide the same power, for example under property and conveyancing legislation in relation to property sale disputes, under partnership legislation, and in regulatory legislation.37 35 Harris & Lewin Pty Ltd v Harris & Lewin Agents Pty Ltd (1975-76) CLC 40-216. 36 See [18.05] fnn 2, 3. 37 For example, Conveyancing Act 1919 (NSW), s 115A; Property Law Act 1974 (Qld), s 89(1); Law of Property 1936 (SA), s 51(1); Partnership Act 1892 (NSW), s 23; Partnership Act 1958 (Vic), s 27; Competition and Consumer Act 2010 (Cth), s 137F.

[18.135]

18 Receivership

697

ASIC

[18.130] ASIC has the power to preserve assets pending investigation or proceedings. An example of this is s 1323 of the Corporations Act. This section gives ASIC the power to seek orders for the appointment of a receiver to freeze the activities of a company in order to preserve the status quo while claims are determined. There are two preconditions to the exercise of the power under s 1323. First, that an investigation is being carried out under the Corporations Act or the Australian Securities and Investments Commission Act 2001 (Cth) in relation to an act or omission by the respondent to the application; being an act or omission that may constitute a breach of the Corporations Act. Secondly, that it is “necessary or desirable” to make the order for the purpose of protecting an “aggrieved person” to whom the “relevant person” may become liable in debt damages or for compensation or otherwise. If these are satisfied, the court has a discretion which is to be exercised according to the evidence. The fact that the aggrieved person could also take action against the relevant person does not mean that an asset protection order under s 1323 should not be made: ASIC v Sigalla [2009] NSWSC 1205; (2009) 74 ACSR 710. If an order is made, it will be limited in time: ASIC v Lee [2007] FCA 918. In view of the drastic nature of the appointment of a receiver, the applicant must establish that a lesser remedy is not appropriate: Beach Petroleum NL v Johnson (1992) 9 ACSR 404, 406. A provisional liquidator may also be appointed, under s 472(2) of the Corporations Act: ASIC v Oceanic Asset Management Pty Ltd, in the matter of Oceanic Asset Management Pty Ltd [2015] FCA 966; (2015) 108 ACSR 367. The public interest role of ASIC may warrant an order in circumstances where it might be denied to a private litigant. In that respect it is significant that ASIC is exempted from the requirement to give an undertaking as to damages: ASIC v Burnard [2007] NSWSC 1217; (2007) 25 ACLC 1505. Nevertheless, in proceedings by ASIC under s 1323, ASIC may suffer a costs order against it as an unsuccessful party to the litigation. That ASIC is a public authority performing statutory functions for public purposes is not, of itself, sufficient to warrant departure from the rule that costs should follow the event: ASIC v Krecichwost [2007] NSWSC 1458.

When can a receiver be appointed? [18.135] It has been recognised that the power to appoint a receiver is a drastic and harsh remedy and one which should only be used in pressing circumstances, exercised with great caution, and where the court is sure that there is an imminent danger of loss if the power is not exercised. The reason for the caution is that the appointment of a receiver robs the company of the control of its own assets and business.38 A court receiver is regarded as a company undertaker rather than a company doctor and the appointment gives the impression that the company’s life is limited. Furthermore, courts have demonstrated a marked reluctance to become embroiled in the internal affairs of companies unless they cannot avoid it as a 38 National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386; ASC v Cooke (1997) 15 ACLC 435.

698

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.140]

matter of equity. Appointments will only be made where the court is satisfied that it is necessary to safeguard the interests of all persons who may be interested in the assets placed under receivership.39 A judicially appointed receiver may be justified where there are concerns about the management of the company and an independent person is needed to manage and investigate the conduct of prior management: Woods v Harrison, Re Telco Service Holdings Pty Ltd (in liq) [2017] FCA 732. The person who seeks the appointment will usually be someone who holds a debenture that is invalid, or gives no right to appoint a receiver privately, or in which the power to appoint is flawed; or it may be an unsecured creditor, as was the case in National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386. In that case, the Appeal Division of the Supreme Court of Victoria heard an appeal from orders made appointing receivers to the Bond Brewing group, part of the Bond Corporation group. The orders had been made ex parte on an application made after 4 pm on Friday 29 December 1989 by a syndicate of 16 banks who were owed about $800 million. The order appointing the receiver was described by the court as: “perhaps the most momentous ex parte orders ever made by an Australian court, resulting as it did in the immediate loss to the companies of their powers to manage and control their own businesses and affairs. [The control of assets] worth, it may be, billions rather than millions of dollars changed hands.”

In allowing Bond’s appeal, the court said that it is not necessary for an applicant for an appointment to have a proprietary interest in the property concerned. But the applicant must show some legal or equitable right to be protected or enforced by the appointment and that no other remedy, such as a Mareva injunction,40 is available. The court should not appoint a receiver as a means of establishing a regime for the administration of a financially troubled company where the company resists the appointment. The court said that ex parte orders were only to be made in extreme circumstances, and that an undertaking as to damages, not sought or offered before the trial judge, should be required. Beyond that caution, there are, strictly, no limits on the situations where an appointment can be made. The only criterion is that the appointment must be “just or convenient”. These words have been interpreted to mean “where it is practicable and the interests of justice require it”: Edwards & Co v Picard [1909] 2 KB 903, 907. Examples of court appointments

[18.140] Courts have shown a willingness to exercise their jurisdiction and appoint a receiver in the following broad situations: • where the security is in jeopardy and needs to be preserved but the mortgage is not yet enforceable; 39 Beach Petroleum NL v Johnson (1992) 9 ACSR 404. 40 That is, a court order restraining the disposal of assets by a person pending the outcome of proceedings against that person; also termed “asset preservation orders”: see the Federal Court of Australia’s Freezing Orders Practice Note (GPN-FRZG), September 2016.

[18.150]

18 Receivership

699

• where assets other than those that constitute a lender’s security are in peril and need to be safeguarded; • where a receiver is sought by way of equitable execution; • where assets of a company in liquidation are in danger of dissipation; • where the management of the company requires an independent investigation. While the appeal court in National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386 said that there was no principle which required an applicant for the appointment of a receiver to have a proprietary interest in the company’s property, a court usually seeks something in the nature of a proprietary interest before making an appointment.41 A court may not appoint a receiver if another more appropriate equitable remedy is available, for example an injunction, or the giving of an undertaking, and the court will not appoint a receiver where it is more appropriate that the company be placed in liquidation. However, even in liquidation, a receiver may be appointed to secure assets pending the liquidator bringing voidable transaction proceedings in respect of those assets. In Kijurina v Taouk; ET Family Pty Ltd (in liq) [2014] FCA 54242, on the application of the liquidators, the court appointed a receiver with powers to manage and collect rent from certain properties said to have been transferred from the company, granting additional powers under nominated paragraphs of s 420 of the Corporations Act. In subsequent proceedings, the liquidators succeeded in challenging those transfers as voidable transactions.43

The appointee [18.145] The appointee must be a registered liquidator. There may be an order for security to be provided given the broad scope of liability that may be incurred by the receiver.44 Security is intended to ensure that the receiver accounts for what he or she receives and makes payment for, pursuant to the direction of the court. In urgent situations an interim receiver may be appointed where security is to be realised within a specified period. The court may also order that the receiver’s appointment is effective but that the receiver is not to receive any property until security has been provided. The appointee must give notice of their appointment to ASIC within 14 days of the date of the appointment: Corporations Act, s 427(2); Form 504.

Type of appointment [18.150] The court has a discretion to appoint a receiver or a receiver and manager. Naturally, if an appointment is over a business the receiver may well need the power to manage. Some authorities suggest that the court would not give 41 See further Richstar Enterprises Pty Ltd v Carey (No 6) [2006] FCA 814; (2006) 153 FCR 509. 42 Kijurina and Albarran in their capacity as liquidators of ET Family Pty Ltd (in liq) v Taouk; in the matter of ET Family Pty Ltd (in liq) [2014] FCA 542. 43 Kijurina v Taouk; ET Family Pty Ltd (in liq) [2015] FCA 424. 44 See further O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [20.176].

700

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.155]

powers of management except where there is a need to sell: Re Newdigate Colliery Ltd [1912] 1 Ch 468, 472. All receivers, including those appointed by the court, have powers under s 420 of the Corporations Act, although the court’s order appointing the receiver may confine the extent of the appointee’s powers in terms of the purpose of the appointment: ASIC v Australian Investors Forum Pty Ltd (2003) 44 ACSR 503; Kijurina and Albarran in their capacity as liquidators of ET Family Pty Ltd (in liq) v Taouk; in the matter of ET Family Pty Ltd (in liq) [2014] FCA 542.

ROLE AND POSITION OF A PRIVATELY APPOINTED RECEIVER [18.155] A privately appointed receiver is appointed to take possession, get in, or recover, property for the benefit of the persons who are ultimately entitled to it. This will usually be whoever made the appointment. Receivers are normally appointed pursuant to the terms of a debenture so that the debenture can be enforced and a secured creditor’s interest can be safeguarded. There have been a number of parliamentary inquiries that have touched on the role that receivers play in enforcing security for loans, particularly in relation to SMEs and farmers.45 The Australian Small Business and Family Enterprise Ombudsman has also been critical of the conduct of banks in enforcing loans against SMEs. The Productivity Commission’s report, Business Set-Up, Transfer and Closure also recommended a broad review of receivership market practices. Receivers are not bound by the same independence requirements as liquidators and trustees because they act only for their appointor, even if the law imposes obligations to have regard to the interests of unsecured creditors. Despite that, one particular issue of apparent concern is the appointment of a bank’s investigating accountant as the subsequent receiver appointed over the comany, based on the investigating accountant’s recommendation to do so.46 The Ombudsman and others have recommended that there be a separation of those roles.47 The 2017 Royal Commission into the banking sector may raise questions about the operation of private receivership.

Agent of the company [18.160] The debenture deed, which is the ultimate source of the receiver’s appointment, will usually state that the receiver is to be the agent of the company. Unless the deed expressly states this, the receiver will be taken to be the agent of the debenture holder: Re Vimbos Ltd [1900] 1 Ch 470, 473. Debenture holders will wish to avoid this result because if the receiver was the agent of the debenture holder the latter could be liable as the receiver’s principal for the actions and defaults of the receiver and liable as mortgagee in possession: see Gaskell v Gosling [1896] 1 QB 669, 692. Nevertheless, if the mortgagee chooses to instruct or direct the receiver on particular issues, the receiver may become the agent of the mortgagee 45 See, for example, Senate Select Committee, Lending to Primary Production Customers (December 2017), ch 5; Parliamentary Joint Committee on Corporations and Financial Services, The impairment of customer loans (May 2016). 46 This is accepted by the ARITA Code: see [6.1]. 47 See Impairment of Customer Loans, recommendation 9.

[18.165]

18 Receivership

701

in respect of those issues: James v Bank of WA [2004] WASCA 234; (2004) 51 ACSR 325, 327.48 A mortgagee will not be held to be interfering in the affairs of the receivership merely because the receiver keeps the mortgagee informed of the process and the mortgagee indicates what its preferred course of action is.49 If appointed as the agent of the company, the receiver will remain until the termination of the receivership. The company is unable to revoke the authority provided to the receiver because the appointor’s right to appoint a receiver is an adjunct to the rights of the secured party over the company’s property created by the security interest: Re Leslie Homes (Aust) Pty Ltd (1984) 8 ACLR 1020. The debenture holder itself is only able to interfere in the receivership by revoking the appointment,50 unless the receiver acts contrary to the terms of the appointment. The agency of the receiver is, admittedly, an unusual one: Visbord v FCT (1943) 68 CLR 354, 382. The receiver is appointed by the debenture holder and carries out his or her duties with the agreement of the appointor and primarily for the appointor’s benefit. As we have just noted, the company cannot dismiss the receiver. The privately appointed receiver is not in a general fiduciary relationship with the company in receivership (although statutory duties as an officer will apply): State Bank of NSW Ltd v Chia [2000] NSWSC 552; (2000) 50 NSWLR 587 at [869]-[870]. In a sense the receiver is responsible to two parties, with their primary responsibility being to the debenture holder. The agency is a limited one and is: “designed to protect the mortgagee from liability for the acts and the defaults of the receiver and to facilitate dealings between the receiver and third parties rather than to define the rights and duties of the receiver (as agent) to the company (as principal)”: Re Geneva Finance Ltd (1992) 7 WAR 496, (1992) 10 ACLC 668, 677.

The receiver must be careful to ensure that he or she discharges the duties owed both to the appointor and to the company. The receiver is an officer of the company under s 9 of the Corporations Act and hence owes the statutory duties under ss 180 – 184. A somewhat peculiar consequence of the appointment of receiver as agent of the company is that it is the company and not the debenture holder that is responsible for the receiver’s actions, at least while the company is not in liquidation.51 Effect of liquidation on receiver’s agency

[18.165] The appointment of a liquidator will change the nature of the agency capacity: Visbord v FCT (1943) 68 CLR 354, 382. The receiver will generally not be able to continue running the business so as to incur debts on behalf of the company, unless with the approval of the court or the liquidator: Corporations Act, s 420C. 48 See also State Bank of NSW Ltd v Chia [2000] NSWSC 552; (2000) 50 NSWLR 587. 49 Bank of Western Australia Ltd v Abdul [2012] VSC 222 at [41]. 50 Gaskell v Gosling [1896] 1 QB 669. 51 See Dixon and Duncan, “Reconsidering the Agency of a Privately Appointed Receiver and Manager in Three Specific Circumstances” (2013) 21 Insolv LJ 263. The three instances are in relation to the rights of the ATO to recover tax under its garnishee powers, to the mortgagee’s consent to leases, and to the company’s liability for capital gains tax. As to the latter, see Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48; (2015) 257 CLR 544.

702

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.170]

However, a receiver appointed as agent of the company can continue to act even after a liquidation commences where the actions needed to enforce the security are not referable to carrying on the company’s business: Re Leslie Homes (Aust) Pty Ltd (1984) 8 ACLR 1020. The receiver can continue running litigation: Land Enviro Corp Pty Ltd (in liq) v HTT Huntley Heritage Pty Ltd [2017] NSWCA 207. As Brereton J said in St George Bank Ltd v JB (Northbridge) Pty Ltd [2009] NSWSC 1347; (2009) 262 ALR 538 at [24]: “while a winding-up order incapacitates a company from carrying on business, and deprives the receiver of power to bind the company personally by acting as its agent, it does not affect the rights of a receiver given under a security that pre-dated the liquidation, although the company is no longer liable for any debts which the receiver may incur in exercising those rights.”

Section 420C – power to carry on business after liquidation

[18.170] Under the general law, if a receiver continued to trade after the advent of liquidation the receiver would be exposed to personal liability because, as earlier explained, their agency has ended and the receiver could not be indemnified from the company’s assets. The receiver’s appointor may be willing to indemnify the receiver, but if not, the receiver decides that it is prudent to halt trading. This could, according to the Harmer Report at [221]: “reduce or eliminate the opportunity of eventually disposing of the company’s business as a going concern and its property may have to be disposed of in a fragmented fashion and at significantly lower prices.”

Such a result may not only prejudice the security holder, it may also adversely affect the general body of creditors. Section 420C of the Corporations Act adopts the recommendation of the Harmer Report (at [222]) that a receiver be entitled to continue to carry on business as agent for the company once the winding up has commenced provided that the written consent of the liquidator or the approval of the court is obtained. The liquidator or the court is permitted by s 420C(1)(a) to put parameters on any approval granted. If the receiver carries on business pursuant to the necessary approval they act as agent of the company (s 420C(3)(a)) and therefore the receiver can obtain indemnity from the assets of the company for concomitant expenses and liabilities: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [418]. Section 420C(4) makes it clear, in para (a), that the receiver is personally liable for those debts for which receivers are personally liable pursuant to s 419(1). In Re Rico Pty Ltd (1999) 17 ACLC 16, where approval was given to the receiver to carry on the company’s business, the court said that an element of the process pursuant to s 420C is to consider the position of the unsecured creditors, but the aim of the provision is not solely to benefit those creditors. While s 420C tries to ensure that a business of a company which should continue will not be terminated prematurely, the section may cause liquidators, in some cases, difficulties in those cases where it is not clear whether a business is worth continuing. The liquidator may abdicate responsibility by refusing approval and thereby forcing the receiver to obtain the approval of the court.

[18.185]

18 Receivership

703

If a liquidation is in progress when a receiver is appointed, the liquidator is responsible for paying preferential debts (for example, employees’ wages). A liquidator who has insufficient funds can use assets subject to a security interest over circulating assets (ie the PPSA version of a floating charge) to pay those employee priorities referred to in s 433: see s 561.52 This does not take anything away from the responsibility of the receiver to pay preferential debts: Lumsden v Long (1998) 16 ACLC 1743. If the receiver makes a payment to employees under s 433 and thereby diminishes the return to the secured creditor, the secured creditor may exercise rights of subrogation and submit a proof of debt in the liquidation for the amount paid to the employees. Such a claim (once the proof is accepted by the liquidator) will have the same priority under s 556 as the employees would have had had they not been paid by the receiver: see Divitkos, in the matter of ExDVD Pty Ltd [2014] FCA 696; Weston; Re 7 Steel Distribution Pty Ltd (in liq) [2015] FCA 742. Payments to employees in receivership are discussed further from [18.365]. Claims against receivers by liquidators

[18.175] Unlike a receiver, a liquidator is able to use the avoidance provisions in the Corporations Act, Pt 5.7B, Div 2 in order to recover property. Transactions of the receiver or other controllers are subject to voidable transaction claims brought by a liquidator if the company subsequently goes into liquidation.53 However, any payment by a receiver or controller in their own right, for example to satisfy a personal liability, could not be challenged by a liquidator even when the funds come from the sale of company assets; the payments are made by the receiver and not by the company.54 Surplus funds should be paid to the liquidator

[18.180] If a receiver repays the appointor in full, the receiver is required to pay any surplus to the liquidator. Note that controllers who are not receivers are required to comply with the payment priorities under the PPSA: see PPSA, s 140. Receivers are not bound by this rule by reason of PPSA, s 116(1). Other powers of a liquidator over a receiver

[18.185] The liquidator has the opportunity to supervise the performance of the receiver’s duties. Further, the liquidator may apply to the court for it to fix the remuneration of a receiver: s 425, for example where the liquidator wishes to challenge the amount charged.55 52 See further Wangmann, “The Free Assets of the Company and When They are Free to Take: Equitable Subrogation and the Secured Creditor” (2015) 39 Melbourne University Law Review 230. 53 See CAMAC’s report, Issues in External Administration (November 2008) which recommended that the law remain that receivers not be exempted from the voidable transaction provisions: Recommendation 13, p 75. 54 Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407. 55 Courts’ Corporations Rules, r 9.1.

704

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.190]

It should be noted that the process for seeking approval of “remuneration determinations” under IPSC, Div 60 does not apply to receivers because they are not “external administrators” under the IPSC: ss 5-15, 5-20. The liquidator can demand a report as to the affairs (RATA) of the company or other specified information from officers or former officers: s 475. A receiver and manager could be subject to a demand for such a report as an officer of the company. A receiver concerning any event, knowledge

can be examined under s 596A at the request of the liquidator the examinable affairs of the company.56 The provision is broad and in “examinable affairs”, defined in s 9, would include the receiver’s of the management and administration of the company.

Receivership and voluntary administration

[18.190] It is important to explain how a receivership and a voluntary administration relate to each other. If a company is placed in administration a creditor is unable to enforce a security interest by appointing a receiver or at all without either the administrator’s written consent or the leave of the court (s 440B), unless the security interest can be described as one which covers the whole, or substantially the whole, of the company’s property. In this latter instance the creditor is able to appoint a receiver during “the decision period”: s 441A. This period runs from the day on which notice of the appointment of an administrator must be given to the secured creditor under s 450A(3) or, otherwise, the date of the commencement of the administration and ending 13 business days later: s 9. If a secured creditor holding a substantial security interest appoints a receiver, the receiver may exercise all of the powers in the debenture and any acts of the administrator are subject to the functions and powers of the secured creditor or receiver: s 442D(1). If a receiver was appointed before the commencement of the Pt 5.3A administration then the receivership may continue, but on application from the administrator, the court may order the secured creditor or the receiver not to perform specified functions or exercise specified powers: s 441D(2). A court would only make such an order if it is satisfied that the secured creditor’s interests are protected: s 441D(3). An administrator is not permitted to dispose of property that is subject to a security interest except where such disposal is in the ordinary course of the company’s business, the written consent of the secured creditor is obtained or the court gives leave: s 442C(1), (2). The court may only give leave if satisfied that arrangements have been made to protect adequately the creditor’s interests: s 442C(3). The role of secured creditors in administration is discussed more fully in Chapter 19 from [19.110] to [19.126].

Property does not vest in the receiver [18.195] The receiver is not a manager of the company itself but rather a manager of the company’s property: Re B Johnson & Co (Builders) Ltd [1955] Ch 634, 56 Courts’ Corporations Rules, r 11.3

[18.205]

18 Receivership

705

646.57 The property does not vest in the receiver on appointment – it remains the property of the company until it is realised. The company also theoretically retains possession and the receiver acts as the possessor’s agent. Accordingly, a receiver is not permitted to request that company property be vested in his or her name and the receiver is not allowed to initiate legal proceedings on the company’s behalf in the name of the receiver. Proceedings must be commenced in the name of the company, as the agent of the company. Likewise, the receiver must also make contracts in the name of the company, although in certain cases the receiver will be held liable personally for such contracts: see for example, the contracts referred to in the Corporations Act, s 419(1), discussed below.

Powers of management [18.200] In situations where a receiver is appointed to the whole of the company’s property, with wide powers of management, the receiver will have few parameters on the exercise of their powers. The company’s officers, while they officially remain in their respective positions, effectively relinquish to the receiver their powers to manage the company during the receivership. As Street J said in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 2 NSWR 782 at 790:58 “Receivership and management may well dominate exclusively a company’s affairs in its dealings and relations with the outside world. But it does not permeate the company’s internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company’s own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management.”

ROLE AND POSITION OF A COURT-APPOINTED RECEIVER [18.205] The role of a court-appointed receiver depends on the order made by the court. The order may specify the assets to be realised. The appointment could also involve the requirement that the receiver take control of the company’s business activities in a manner similar to a receiver appointed under a debenture deed. As one might expect, the position of a court-appointed receiver differs from that of one appointed privately. He or she is not the agent of any party: State Bank of NSW Ltd v Chia [2000] NSWSC 552; (2000) 50 NSWLR 587; Co-operative Farmers’ & Graziers’ Direct Meat Supply Ltd v Smart [1977] VR 386, 391. The receiver is the officer of the court and acts as a principal, so that if the receiver is empowered to manage the company and is able to make contracts the receiver makes them as principal and is personally liable for them: Batrouney v Forster [2015] VSC 541 at [41]-[42]. However, the receiver has the right to be indemnified out of the company’s assets 57 See further Fraser v ASIC [2007] FCAFC 85; (2007) 159 FCR 424; Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325. 58 See the review of authorities in Great Australian Operations Pty Ltd v Washington H Soul Pattinson & Co Ltd [2012] NSWSC 1134.

706

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.210]

as far as liabilities properly incurred are concerned: 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (1999) 17 ACLC 500. Further, a receiver has an equitable lien over company assets for remuneration and expenses.59 A court-appointed receiver does not have the right to have title to assets and is not permitted to initiate legal proceedings in his or her own name in respect of the assets or any rights owed to the company: Bolton & Downs Building Co Ltd v Darling Downs Building Society [1935] St R Qd 237; Batrouney v Forster [2015] VSC 541 at [48]. The receiver may be empowered by the court to take action in the company’s name. Court-appointed receivers also have access to the express statutory power of litigation under s 420 of the Corporations Act, unless the court limits these powers in the appointing instrument. The decisions of a receiver, made from time to time, are made under the authority of the court and are, naturally, subject to review and control by the court: Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382. The courts are reluctant to interfere in the receivership and to substitute their discretion for that of the receiver. The way that the business is operated and the manner of its sale are for the receiver to decide.

POWERS AND DUTIES OF A PRIVATELY APPOINTED RECEIVER Powers General

[18.210] A receiver’s powers are primarily found in the debenture deed under which they are appointed. Such powers are subject to any provisions contained in the Corporations Act or other legislation. The debenture, ordinarily, will give very extensive powers to the receiver to enable the discharge of their duties. Most of the powers will relate to the realisation of the property subject to the charge. The instrument of appointment may qualify the powers contained in the debenture. Extension of powers under s 420

[18.215] Besides the express powers contained in the debenture, the receiver can obtain an extension to their power base from s 420 of the Corporations Act. Section 420(1) permits a receiver to do those things which are incidental to the exercise of the express powers. The subsection states: “Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed.”

In addition, s 420(2) confers a wide range of specific extra powers. These are subject to any restrictions imposed by the debenture and they must be exercised for the purpose of attaining the objectives for which the receiver was appointed. For 59 Hewitt v Court (1983) 149 CLR 639. See also the discussion in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd [1999] FCA 144; (1999) 17 ACLC 500.

[18.225]

18 Receivership

707

example, a receiver is empowered to lease property (s 420(2)(b)), carry on the company’s business (s 420(2)(h)) and to use the company seal: s 420(2)(n). Also, receivers are permitted to make or defend an application for the winding up of the company: s 420(2)(u).60 The Federal Court in Re Daniel Efrat Consulting Services Pty Ltd (1999) 91 FCR 154 held that a receiver is able, pursuant to s 420(2), to dispose of causes of action pursuant to a litigation funding agreement. The court saw no discernible difference between the powers of a liquidator to dispose of assets under s 477(2)(c) and those given to receivers. In Benton, in the matter of Mackay Rural Pty Ltd [2014] FCA 1285, the court held that receivers who were appointed over a company that had served as a debenture trustee were able to use, inter alia, s 420 to sell trust assets in order to enforce the trustee company’s right of indemnity. In Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (in liq) (rec & mgrs apptd) [2017] FCA 866 at [142] it was explained that: “upon appointment, a receiver is invested with the rights, powers and discretions associated with the control of the property that is the subject of the appointment. That includes the ability, subject to the terms of the security agreement pursuant to which he or she is appointed, to exercise rights in relation to the property as if the receiver is the absolute beneficial legal owner to the exclusion of all others.”

Express powers

[18.220] The express powers in the debenture, together with the powers in s 420 of the Corporations Act, permit a receiver, in effect, to do all that the directors could have done. Statutory powers of inquiry

[18.225] A receiver, like any insolvency administrator, will carry out an investigative role. This role will entail investigating the location of the assets subject to the charge under which they are appointed. These investigations may lead to legal action to recover property the receiver is not able to control, or property which is wrongfully retained by a third party. In addition, the receiver will, if permitted to carry on the business, ascertain the circumstances which led to the appointment of a receiver in order that steps may be taken, if possible, to correct the situation for the future. In order to assist with the completion of these tasks the receiver is given a range of statutory powers, in addition to the powers that are conferred pursuant to the debenture instrument. One important power which a receiver has is found in s 430 of the Corporations Act. That section permits a receiver to give notice to any one or more of certain persons that a report is required, which is to contain such information relating to the company’s affairs as is specified in the receiver’s notice. The persons who can be required to comply are: • present or former officers of the company; • those involved in the formation of the company, where the company has been incorporated for less than one year; 60 This will be done in the name of the company: Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86, 88. This power does not exclude any residual power that the company’s directors may have: Re V & M Davidovic Pty Ltd [2012] NSWSC 1598.

708

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.230]

• existing employees or employees during the previous year; • present officers or employees, or officers or employees within the previous year of a company that was within the previous year an officer of the debtor company. In addition, the receiver is empowered to inspect the books of the debtor company which relate to the security: s 431. The receiver’s right to inspection is paramount over the right of an accountant or auditor to the documents, even despite the existence of their lien: Re Jet Corp of Australia Pty Ltd [1985] VR 716 (where auditors retained copies of the company’s books to secure the repayment of their fees but this right was overcome by the receiver’s right to the books). But the receiver has no legal title to such items – only a possessory interest to enable the receiver to carry out the function for which they were appointed: Home v Walsh [1978] VR 688. Examinations

[18.230] In certain cases a receiver may need to supplement their investigations by seeking, under ss 596A or 596B of the Corporations Act, the examination of a company officer or someone associated with the company. As we have seen, such examinations are employed principally by liquidators, but a person who is authorised by ASIC may obtain an order for the holding of an examination. A receiver could request ASIC to authorise an examination.61 Examinations pursuant to both ss 596A and 596B are discussed in detail in Chapter 15: see [15.125] – [15.200]. Directions from the court [18.235] Under s 424 of the Corporations Act, a receiver can apply to the court for directions in relation to any matter arising in connection with the performance of their duties.62 Thus a receiver can seek directions as to whether they are legally obliged to take a course of action which is required by a third party (Re Geneva Finance Ltd (1992) 7 WAR 496; (1992) 10 ACLC 668); or whether a particular transaction is not unlawful solely because the counter-party to the transaction is a company associated with the entity which appointed the receivers and managers: White v Huxtable [2006] FCA 559; (2006) 24 ACLC 639. The courts may give directions that the receiver is justified in taking a particular course of action, particularly where there is some doubt about the legality of the proposed conduct. If the court’s directions are followed by the receiver they may provide some measure of comfort in an application for relief under s 1318 if the receiver is sued in respect of that conduct: Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83. Generally, the court will not go so far as to give any direction that approves the undertaking of a commercial transaction by a receiver, or a direction that a receiver has acted reasonably in the performance of their duties pursuant to s 420A because this might give a false public perception that the court is placing its imprimatur upon a particular transaction: Franbridge Pty Ltd v Société & Générale Finance Corporation Pty Ltd (1994) 14 ACSR 304. The power of the court 61 See Re Southland Coal Pty Ltd [2006] NSWSC 184; (2006) 58 ACSR 113. 62 See the summary of the law in Korda v Silkchime Pty Ltd [2010] WASC 155; (2010) 78 ACSR 675 at [30]ff. See also, Anderson and Morrison, “Applications for Advice from Courts by Insolvency Practitioners” (2007) 25 C&SLJ 406.

[18.240]

18 Receivership

709

to make orders (including to give directions) under IPSC, s 90-15 does not apply to receivership as receivership is not a form of “external administration” for the purposes of the IPSC: s 5-15. Power to claim remuneration

[18.240] A receiver has the power to claim remuneration for professional services rendered. It is customary for the debenture to provide that the receiver is the agent of the company, and as a consequence the company is liable for the remuneration of the receiver. The debenture holder will only be liable where the receiver is regarded as the debenture holder’s agent or where there is an express or implied contract which establishes that the debenture holder is to be responsible for remuneration: Re Vimbos Ltd [1900] 1 Ch 470, 474. It is usual for there to be an express clause in the debenture which states that the company will be liable for the remuneration of the receiver. It is possible for the receiver’s remuneration to be limited to an overall amount, or to particular amounts for certain work, under the terms of the debenture: see, for example, Gippsreal Ltd v Ross [2017] VSCA 257. The receiver will seek to draw remuneration from the charged property, and the receiver has an equitable lien in respect of fees, costs and expenses which provides a priority over other creditors. This continues even after the termination of the receivership. The lien, however, does not cover contingent, as distinct from actual, liabilities. The validity of the lien is to be assessed at the termination of the receivership: Flexible Manufacturing Systems v Fernandez [2003] FCA 1491; (2004) 22 ACLC 47. However, other claims may take priority over the receiver’s claim for remuneration. These claims will be considered later. The court has the power to fix the remuneration of a receiver on the application of the company’s liquidator, the company’s administrator, the administrator under a deed of company arrangement or ASIC: s 425(5).63 It is probably unlikely that a court would interfere and fix remuneration where the debenture specified it, except in extenuating circumstances, as the debenture represents the contract made between the parties and it should be upheld. In exercising its powers, the court must have regard to whether the remuneration of the receiver is reasonable, taking into account the range of matters: s 425(8).64 A receiver may lose the right to remuneration if he or she is guilty of misconduct, gross neglect, dishonesty or breach of duty.65

63 Courts’ Corporations Rules, r 9.1, Form 16. See Re Dominion Insurance Company of Australia Ltd [2013] NSWSC 898; Re Banksia Securities Ltd (in liq) (rec and mgrs apptd) [2017] NSWSC 540. 64 See further Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459. 65 O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [12.490].

710

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.245]

Duties General

[18.245] The receiver’s primary function is to take possession of the assets, subject to the debenture, and to manage and realise them in order to benefit the appointor. The duties of a receiver are, generally: “by realisation or profitable management of the assets of the debtor company to produce cash and to apply it in and towards payment of the preferential creditors, meeting his own expenses and remuneration, paying off any security ranking ahead of the debenture and repaying the amount owing under the debenture. Thereafter he must account to the company for any surplus funds.66”

In doing this, the receiver is subject to a range of duties. These stem from the debenture, the document of appointment, the Corporations Act and the general law. Some of a receiver’s duties only apply in limited situations while others pervade the receivership. While a receiver must comply with some fiduciary obligations, a receiver cannot be classified as a fiduciary: Expo International Pty Ltd v Chant [1979] 2 NSWLR 820; State Bank of NSW Ltd v Chia [2000] NSWSC 552; (2000) 50 NSWLR 587. It is not possible to deal with all of the duties which may be included in a debenture; rather, this section will consider the general law and statutory duties imposed upon receivers. However, it can be said that the receiver owes duties to all those who are interested in the equity of redemption relating to company assets: Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 311. Under the general law

[18.250] The fundamental duty of receivers is to exercise their powers bona fide to serve the purposes for which they were appointed: Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295. Duties are owed to the debenture holder under the appointment contract; the main responsibility is to realise the assets of the company subject of the security interest for the benefit of the debenture holder: Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. Receivers are bound to comply strictly with the terms of their appointment and must not act beyond their powers: Expo International Pty Ltd v Chant. They also owe duties to the debtor company, namely not to unduly sacrifice the mortgagor’s equity (if any) in the secured collateral and to account for the surplus (if any) after a sale of that collateral: Expo International Pty Ltd v Chant. As the court summarised in Wise Energy Group Co Ltd v Rocke [2014] WASC 505 at [123]: “…the position is that while the primary duty of a receiver is to realise the security provided by the mortgagor, an exercise of the receiver’s powers which wilfully sacrifices the interests of the mortgagor or subsequent creditors, will be viewed as an exercise of those powers in bad faith. Examples include where a receiver fails to pursue bids in excess of what is necessary to satisfy the debt of the mortgagor, or where the receiver’s powers have been exercised in such a deficient fashion as to impugn the sincerity of his or her desire to obtain the proper price for the assets of the mortgagor.” 66 Blanchard, The Law of Company Receiverships in Australia and New Zealand (Butterworths, 1982) at [1101] and quoted with approval in James v Commonwealth Bank of Australia (1992) 37 FCR 445.

[18.255]

18 Receivership

711

A duty in exercising the power of sale continues even though the mortgagor has been deregistered: Golden Mile Property Investments Pty Ltd v Cudgegong Australia Pty Ltd [2015] NSWCA 100; (2015) 105 ACSR 605 at [88]. As discussed in Chapter 17, it is possible to have a deregistered company’s registration reinstated. Extent of the receiver’s duty

[18.255] There have been differences between the law of England and Australia in relation to the extent of a receiver’s duty, that is, whether a receiver owes any duty to the company (and others, such as guarantors of the company’s debt and unsecured creditors) over and above a duty to act bona fide. This issue has arisen mostly in relation to the receiver’s use of the power of sale. Given the receiver’s paramount duty to the appointing secured creditor, in the absence of legal and equitable duties, there is a danger that the receiver may needlessly sacrifice any surplus equity value held by the borrower in the secured assets by simply trying to recover the value of the security. In regulating the use of the power of sale of a receiver under the general law, the courts have traditionally applied the analogy of the mortgagee exercising the same power. Hence, in the leading case of Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 Needham J identified three major duties that a receiver owes. It was said that the duties of a receiver in selling property are similar to the duties of a mortgagee exercising a power of sale. • To exercise his or her powers in good faith. This involves the receiver acting honestly, fairly and without fraud or collusion. • To act strictly within the conditions of the appointment. The company has a right to ensure that the receiver complies with the terms of his or her appointment. If the receiver acts outside these powers then the receiver may be liable. • To account to the debtor company for any surplus after discharging the chargee’s security. This duty requires the receiver to deliver to the company any surplus as soon as the interests of the debenture holder have been satisfied. These duties fall well short of the duty to take reasonable care that applies in the law of negligence. In fact, the view expressed by the Australian courts had been that negligent acts performed bona fide will not impose personal liability on a receiver.67 Following the early High Court decision in Pendlebury v Colonial Mutual Life Assurance Society (1912) 13 CLR 676 the court in Expo International [1979] 2 NSWLR 820, held that a receiver owes no such duty and that as a consequence a receiver owed no duty of care in selling the secured collateral. A receiver who acted bona fide and took precautions to obtain a proper price was not liable if the price was below market value. Even where the receiver failed to act bona fide in exercising the power of sale the remedies available may fall well short of compensatory damages available in negligence. In equity, the remedies could include an order setting aside the sale (for example where the receiver sold to a related entity) or an order that the plaintiff receive a sum equal to the difference between the amount that would have been produced if the sale had been conducted without wilful default and the price actually obtained: Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646. 67 This was acknowledged by the Harmer Report at [231].

712

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.260]

A stricter view was adopted in England. In Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, the English Court of Appeal held that in addition to acting in good faith, a mortgagee, in exercising the power of sale, must also take reasonable care to obtain the true market value of the property and must exercise due care and diligence to avoid selling at an undervalue. In Australia, the view enunciated in Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 evoked criticism and the Harmer Report recommended that it be overcome by legislative change: at [164]. That recommendation has been implemented through the enactment of s 420A of the Corporations Act (introduced by the Corporate Law Reform Act 1992 (Cth)). It has been said (Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54 at [357]) that the enactment of s 420A of the Corporations Act: “…further diminished the practical consequences of any difference between the Cuckmere test and the general law duty of good faith in the case of sale by the receiver of the property of a corporation. Section 420A introduced a statutory duty imposed upon controllers (including both receivers and mortgagees in possession) which echoes the Cuckmere test. Section 420A is neither a codification of pre-existing law nor designed to displace it. The requirements of good faith as construed in Pendlebury and like authority co-exist with both the general of duty in ss 180 – 184 of the Corporations Act 2001 and the more rigorous statutory duty imposed by s 420A in relation to the power of sale.”

Section 420A will now be considered.

Duties under s 420A [18.260] Section 420A of the Corporations Act is a particularly important statutory duty for receivers as it deals with the fundamental role of the receiver to protect the secured creditor’s interests, in this case by selling some or all of the secured assets. Section 420A requires receivers to take reasonable care in selling company property at market value or, if there is no market value, the best price reasonably obtainable.68 The section provides: Controller’s duty of care in exercising power of sale (1) In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for: (a) if, when it is sold, it has a market value – not less than that market value; or (b) otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold. (2) Nothing in subsection (1) limits the generality of anything in section 180, 181, 182, 183 or 184.

This clearly places a higher standard of duty on receivers and other controllers when selling company property69 than was the case under the general law: Boz One 68 See Fisher, “What is a Receiver’s Duty When Selling Assets” (2009) 23 CLQ 15. 69 For a discussion of the nature of possession held by a controller for the purposes of s 420A, see Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Philips [2011] SASC 139.

[18.265]

18 Receivership

713

Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325.70 This does not suggest that it was intended that the introduction of the statutory duty would change the paramount duty of a receiver to their appointing creditor: Boz One Pty Ltd v McLellan at [157]. The section is expressed to not limit the general application of the general duties imposed on a receiver as an “officer” of the company under ss 180 – 184 of the Corporations Act. Section 420A does not provide a separate cause of action but rather imposes a stricter standard on the general equitable principles than would otherwise apply: GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 at [55]. An inquiry into the conduct of a receiver under s 423 may involve a review of their conduct in exercising the power of sale: Enviro Systems Renewable Resources Ltd v Westpac Banking Corp [2015] SASC 59 at [35]. The onus of proof is on the applicant alleging a breach of s 420A: Boz One Pty Ltd v McLellan at [159]. The assessment of whether the receiver has complied with s 420A is focussed on the process adopted by the receiver to sell the asset: Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16. Market value

[18.265] The Harmer Report had recommended that receivers should be required to take reasonable care to sell property for the best price reasonably obtainable (at [234]), but the legislature saw fit to insert the concept of “market value” in s 420A; the “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)” did not explain why this term was included. The Harmer Report had refrained from recommending any reference to “market value” because “obtaining a true market value is costly and difficult for partly manufactured goods or products with a limited market”: at [235]. The language found in s 420A requires objective standards to be employed to determine the extent of the receiver’s duty when selling property. Thus: “a breach of s 420A is not established merely because market value (where it exists) or the best price reasonably obtainable is not achieved. Rather, a breach of s 420A requires, in terms, a failure by the receiver to take all reasonable care to sell the property for not less than market value or the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold.”71

While it has been customary to obtain valuations of assets of substantial value, it is arguable that s 420A requires a receiver to obtain valuations for any property, even if it is worth very little. Although there may be circumstances where the receivers have the sufficient market knowledge and expertise that will render an independent valuation unnecessary: Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325 (sale of shares and debts in a private company). In that case the court held (at [174]):72 “Although it may be prudent for a receiver to obtain independent valuations of the property and advice as to the appropriate method of sale, that is not a rule of law and a receiver is not bound to adopt any particular mode of sale.” 70 The statutory duty is one of reasonable care, not one of exercising the power in good faith: ACES Sogutlu Holdings Pty Ltd (in liq) v Commonwealth Bank of Australia [2014] NSWCA 402. 71 Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54 at [410]. 72 See also Re Australasian Barrister Chambers Pty Ltd (in liq) [2017] NSWSC 597.

714

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.265]

The obligation under s 420A(1)(a) is not qualified by reference to the costs associated with, or risks involved in, obtaining “not less than market value”. In contrast, s 420A(1)(b) imposes an obligation to sell for “the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold”. The reference to the “circumstances” permits or invites consideration of associated costs and risks. However, the obligation to sell for market value is prefaced by the general requirement to take “all reasonable care” which appears to permit such matters to be taken into account: Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54. In any event, it is necessary for the court to determine whether the property has a market value in order to determine which limb of s 420A(1) to apply. In Fortson Pty Ltd v Commonwealth Bank of Australia [2008] SASC 49; (2008) 100 SASR 162 at [29] the court defined market value as follows: “Market Value is the estimated amount for which an asset should be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgably, prudently and without compulsion.”

Market value was also considered in Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325 at [165]: “The sale price of a property may be the best evidence of the market value of the property if the court is satisfied that the mortgagee has taken proper steps in advertising and selling the property. If the process of advertising, marketing and sale of the property is shown to be unsatisfactory or inadequate, valuation evidence may be important to establish whether the price realised was an undervalue.”

In Re Australasian Barrister Chambers Pty Ltd (in liq) [2017] NSWSC 597, Black J considered circumstances where a strata unit was valued, and then sold privately for more than the valuation, without the property being put on the open market. The Judge queried whether the above statement from Fortson required an open market sale, and stated (at [50]): “It seems to me that there are significant difficulties with any proposition that a sale, made at or above an apparently reliable valuation although without advertising and by private treaty, necessarily contravenes s 420A of the Corporations Act… If a receiver obtains a reliable valuation of the property … and then receives a plainly above market offer for the property, before he or she was about to initiate a marketing campaign or sale process, it is difficult to see why reasonable care to sell the property for not less than market value requires anything more than acceptance of the offer that will bring about that result. It can be accepted that that course may not maximise the sale price of the property, since a higher sale price may or may not have been obtained by incurring additional marketing and sale expenses and the additional delay of a sale process. However, s 420A of the Corporations Act does not impose an obligation to obtain the maximum possible sale price for a property with a definite or determinable value, but only to take reasonable steps to sell the property for not less than its market value.”

That case concerned an application to conduct a court inquiry into the conduct of a court appointed receiver under s 423. While Black J held that it was at least arguable (based on Fortson) that a failure to conduct a market sale of the property could breach s 420A, on the facts he was not satisfied that in that case any loss was established.

[18.270]

18 Receivership

715

The court noted that while comparable sales after the specific sale may be useful, it is important to note that market conditions change over time which may make subsequent sales of little or no use: at [166]. The court also held that it is not necessary for the court to determine what the market value was in order to find a breach of s 420A(1)(a), if the process does not demonstrate that the receivers took all reasonable care to obtain market value: at [167]. Indeed, a sale that reaches market value may still result from an unreasonable process that will breach s 420A(1)(a): at [169]. The elements of s 420A(1)(a) and (b) have been held to be mutually exclusive, so that if the property does not have market value, para (b) must apply: Skinner v Jeogla Pty Ltd [2001] NSWCA 15; (2001) 19 ACLC 1163; Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325. What is reasonable care

[18.270] The crux of s 420A is the valuation and sales process undertaken by the receiver in order to effect the sale of the secured assets. Section 420A does not trigger liability merely because a hypothetical market valuation was not achieved through sale. Rather, s 420A imposes an obligation to take reasonable care in either trying to obtain the market value or, for property without a market value, the best price obtainable. What is expected of a receiver is a process of evaluating and balancing the competing costs and benefits and the associated risks of various methods of sale. This does not call for, in every case, formal comparative analysis or documented calculations. The actual process of sale may need to be considered and whether, in that process, all reasonable care had been taken.73 All will depend on the circumstances of the individual case, including the scale of the receivership, the value and nature of the property involved, the receiver’s expertise in relation to the type of property, relevant expert advice, the advice or input of proprietors and staff, the trading history and marketing of the company, including during the receivership, and other relevant variables in a realistic commercial context: Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54 at [443]. Whether reasonable care has been exercised may need to be assessed in light of the fact that the appointor will typically be a lender rather than a developer or entrepreneur. What is reasonable from the point of view of a developer experienced in selling property may not be reasonable in assessing the conduct under s 420A of a selling financier that has come into possession of the property to sell as mortgagee, and where experience in property sales is not within its core expertise. Nevertheless, any mortgagee should consider engaging agents experienced in the type of property being sold and in methods of sale: Investec Bank (Australia) Ltd v Globdale Pty Ltd [2009] VSCA 97; (2009) 71 ACSR 615 (where, in northern Queensland, a Cairns agent was used to sell a Port Douglas property). Section 420A does not mandate that independent sales agents are commissioned by the receiver: Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325. 73 See Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54.

716

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.275]

The Investec Bank (Australia) Ltd case is an example of the receivers marketing the properties in the wrong market, that is, using a Cairns agent to sell Port Douglas properties. Similarly, the receivers in Skinner v Jeogla [1999] NSWSC 563; (1999) 150 FLR 359 sold valuable and rare breeding stock in a general market where they were valued on a slaughter (per kilo) basis. Ultimately, each case will depend on its own facts and market circumstances. Section 420A is concerned with assessing what a reasonable process is, based on specific circumstances. It does not prescribe a specific set of steps that must invariably be taken: see Boz One Pty Ltd at [371]. This is demonstrated by Boz One Pty Ltd where receivers sold shares in a private company and assigned a debt owed to another related company in a private sale without conducting a public sale process and without obtaining independent valuations or engaging a sales agent. A receiver is not bound to wait for market conditions to improve and will not be in breach of the duty under s 420A merely because they could have obtained a better price had they waited for market conditions to improve. However, given the paramount duty to the secured creditor a receiver must act with caution before selling property that would not at least achieve the amount needed to repay the secured loan: Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. Assets with no market value

[18.275] Section 420A recognises that assets may not have a market value. That was the case in Florgale Uniforms, where the assets comprised industry and sporting apparel, and corporate uniforms. The court found it did not have a definite value “clearly and obviously established as a market price” or a sufficiently certain “determinable value” by reference to closely comparable sales or market experience.74 The stock was specialised and had a narrow or “niche” market. Rights of third parties

[18.280] Section 420A does not appear to provide a cause of action to those, apart from the company, affected by its breach. These include guarantors and third party mortgagors. Their potential loss is that, but for a breach of duty by the receiver in realising the company’s assets, sufficient funds would have been realised from that realisation to satisfy the liabilities to the secured creditor, without recourse to the guarantees and third party mortgages. Also, unsecured creditors have no direct right of claim; they will suffer if the price obtained for the assets is at a level that does not allow any surplus funds to be paid to them. However, the section has been held to reinforce existing rights. The Victorian Supreme Court in Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54 said at [388]: “The section does not vest an independent cause of action, but extends the duty owed by a controller, with the effect that all existing entitlements (including those of guarantors 74 Florgale Uniforms Pty Ltd v NAB [2004] VSC 65; (2004) 11 VR 54, citing Skinner v Jeogla Pty Ltd [2001] NSWCA 15; (2001) 19 ACLC 1163; GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250.

[18.290]

18 Receivership

717

and collateral mortgagors) to equitable remedies in respect of a faulty or deficient exercise of the power of sale are enhanced and strengthened, by reference to the higher duty established by s 420A.”

As the duty is imposed onto the general law causes of action, a third party would need to have an equitable interest in the debtor’s (ie, the mortgagor or chargor’s) equity of redemption. In Jovanovic v Commonwealth Bank of Australia,75 the court noted that a guarantor would have an equitable set-off against a mortgagee which breached its equitable duties (as interpreted by the standard imposed by s 420A) and could raise this against a claim by a mortgagee under the guarantee.

General duties of receivers: ss 180 – 184 [18.285] Section 420A(2) provides that the section is not intended to limit the duties imposed on receivers pursuant to the general duties imposed on officers and others in ss 180 – 184 of the Act. Section 180 requires receivers (and other officers) to exercise their powers and discharge their duties with a reasonable degree of care and diligence. A receiver is also subject to the duties imposed on company officers pursuant to ss 181 – 184. Accordingly, in exercising powers and duties in the context of a sale of a company’s property, the receiver must act in good faith in the best interests of the corporation and for a proper purpose (s 181); not make improper use of his or her position to gain an advantage (s 182); and not make improper use of inside information to gain an advantage: s 183. A sale of company property to an entity in which the receiver had an interest would potentially breach these provisions. A receiver who contravenes ss 180 – 183 may be subject to a civil penalty order: see ss 206C, 1317E, 1317G, 1317H. Receivers as officers who breach any of ss 181 – 183 may be criminally liable if they fall within s 184. Criminal liability only attaches if there is an element of dishonesty and either intention or recklessness in obtaining a gain or causing the company a detriment.

Specific statutory duties of receivers: Reporting and notifications [18.290] There are a number of specific statutory duties imposed upon receivers and receivers and managers that relate to notification requirements and ongoing reporting obligations. These include the obligation to lodge a notice of appointment with ASIC, and to lodge annual returns and accounts with ASIC and when the receivership ends: ss 422A, 422B. There are particular obligations for example to ensure all company documents include a reference to the fact that the company is in receivership (s 428); to obtain reports from the directors (s 429(2)(b)); to attend to tax notifications and obligations (Taxation Administration Act 1953 (Cth), Sch 1, s 260-75), and to become registered as the representative of the company for purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), Div 58. There are more significant obligations to report to ASIC concerning any commission of offences by a company’s personnel (Corporations Act, s 422): see [18.305]. 75 [2004] SASC 61; (2004) 87 SASR 570 at [114].

718

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.295]

Receiving reports from officers

[18.295] Within 10 days of the notice of appointment being served on the company, the receiver must obtain a report as to the affairs (RATA) of the company from the directors and secretary: s 429(2)(b). Within one month of receiving the RATA, the receiver must comment on it, or state that there is no need for a comment and prepare a report. The receiver must then lodge the report including any comments with ASIC, send the report and the comments to the company, and if appointed by or on behalf of debenture holders, also send the report and the comments to the trustee for debenture holders: s 429(2)(c). Failure by the receiver to comply with these requirements is an offence. The RATA must be made in accordance with ASIC Form 507. The report will, inter alia, summarise the assets of the company, state the company’s indebtedness, the capital of the company, the amounts owed to partly secured creditors and the assets available to meet the debt of the secured creditor who appointed the receiver. ASIC’s RG 16 – External Administrations: Reporting and Lodging deals with reporting and lodging such reports. Section 430 reports

[18.300] In addition, a receiver may serve a notice requiring one or more of the classes of persons mentioned in s 430 to provide a report which specifically addresses the information relating to the affairs of the company which is sought by the receiver in the notice. The classes of persons referred to in s 430 are listed as present or former company officers, those involved in the formation of the company, where the company was incorporated for less than one year; existing employees or employees during that previous year; and “present officers or employees, or officers or employees within the previous year, of a company that was, within the previous year, an officer of the debtor company”. Report to ASIC: s 422

[18.305] The receiver or managing controller is required to report to ASIC as soon as practicable if it appears that: • a past or present officer or employee, or a member, of the company may have been guilty of an offence in relation to the company; or • someone who was involved in the formation, promotion, administration, management or winding up of the company may have misapplied or retained money or property of the company or may be guilty of negligence, default, breach of duty or breach of trust in relation to the company: s 422(1). A receiver or managing controller can deliver further reports to ASIC about any matter that should come to ASIC’s attention: s 422(2). The court can also direct that a report be lodged: s 422(4). Any reports made pursuant to s 422 are not available for public inspection: s 1274(2)(a)(iv).

[18.315]

18 Receivership

719

This section is equivalent to s 533 in relation to liquidators. The s 421A report

[18.310] In the past, the law has not required receivers to disclose any information to shareholders and creditors concerning the financial affairs of a company to which a receiver is appointed and its future prospects. The Harmer Report observed that one of the major complaints of unsecured creditors and shareholders is that they receive little information about progress of the receivership. To rectify this the Report made a number of recommendations (Harmer Report, at [209]) which resulted in the enactment of s 421A in 1992. The major elements of the section are: • the receiver must prepare a report of the corporation’s affairs made up to a day and not later than 30 days before the date of preparation; and • the report must be lodged within two months of the date of the appointment (referred to as “the control day”). This obligation is only imposed on a receiver who has a general management role. The section applies to a “managing controller” and this term is defined in s 9 as: (a) a receiver and manager of the [corporation’s] property; or (b) any other controller of that [corporation’s] property who has functions or powers in connection with managing a corporation.

Paragraph (b) covers an agent for the mortgagee in possession, even if only in respect of a single piece of real property. The receiver is not required to include anything in the report that would seriously prejudice either the corporation’s interests or the achievement of the receiver’s objectives: s 421A(4). However, the receiver must indicate, in such a case, that information has been omitted and the information not disclosed must be summarised: s 421A(5). There is no obligation imposed on the receiver to file any other reports during the course of the receivership though it is often during that time that dissatisfaction sets in and creditors and shareholders want further information.

The obligation to deal with the assets – collection, possession and control [18.315] A receiver must collect the assets covered by the appointor’s charge as soon as possible after the appointment. Usually, the debenture will provide the receiver with power to do this immediately upon appointment, and in any event s 420(2)(a) grants to the receiver the power to take possession and control in accordance with the debenture’s terms. The receiver’s prompt action is designed to protect the assets, assert the appointor’s rights and ensure that assets are not removed or concealed. The receiver will move to take possession of the property subject to the debenture, whether it be a factory, or commercial premises at which the company has been conducting its business. The receiver will need to take charge of the title deeds or other evidence of title in respect of the property subject to the charge under which the receiver is appointed.

720

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.320]

If the appointment is as a receiver and manager, they will take control of bank accounts and advise the bank of the appointment. The receiver will arrange for an inventory of company assets and may also arrange for their valuation. A receiver may take control of any disputed property and in due course an application may have to be made by the receiver to the court seeking a declaration as to ownership. A receiver is entitled to inspect any books of the company relating to the security: s 431. A person who fails to allow inspection is guilty of an offence. To obtain possession of assets, or books, the receiver may have to resort to initiating legal proceedings which are brought in the name of the company. A receiver is unable to challenge any transactions which are voidable under Pt 5.7B Div 2 of the Corporations Act, for example, unfair preferences. Such challenges must be left to any liquidator who may be appointed: see ss 588FE and 588FF. If a liquidator is appointed and succeeds in recovering assets, those assets will not be available to a secured debenture-holder – they are only available to discharge the debts owed to unsecured creditors.76 Officers and employees – obligations to assist under s 590

[18.320] Receivers can require the co-operation of the officers and employees in taking possession. Under s 590(1), officers and former officers and employees have obligations in relation to the company’s property and its records, including to disclose all that property to the receiver; to deliver up all the books and property of the company in their possession. They must not fraudulently conceal or dispose of company property, nor fraudulently make any material omission in any report relating to the affairs of the company, nor prevent the production of any books relating to the company’s affairs. If officers fail to comply with s 590(1) they commit an offence.

Dealing with the assets – retention of title and the PPSA [18.325]

The assets to which a receiver is entitled, on behalf of the debenture holder, are limited to those in respect of which the company is the beneficial owner when the enforcement of the security interest occurred. Naturally, any assets to which the company does not have title are not available to the receiver. It should be noted that traditionally retention of title (ROT) arrangements and leasing and consignment arrangements have been used by owners of goods supplied to companies as devices to protect the owners of the goods rather than using an outright sale on credit terms. However, the introduction of the PPSA on 30 January 2012 has changed the legal relationship between suppliers and their customers by expanding the concept of security to include many arrangements that had previously not been classified as secured transactions. ROT supply arrangements, finance leases, commercial consignments, certain trust arrangements and certain transfers of book debts are treated by the PPSA as “security interests”, which makes the suppliers of goods under these arrangements secured parties (and secured creditors if they are owed money under the arrangements). 76 N A Katzmann Pty Ltd v Tucker (No 2) (1968) 123 CLR 295, 300-301; White Constructions (ACT) Pty Ltd v White [2005] NSWCA 173.

[18.325]

18 Receivership

721

Classification as a security interest under the PPSA does not mean that the company in receivership is deemed to have title, or that the rights and powers that the receiver has over the secured collateral will necessarily be different to the position prior to the PPSA. A receiver appointed under a properly perfected “all present and after acquired property” (known as an ALLPAP or APAP) security interest with management powers will still be able to control the secured collateral and manage the business in order to protect the position of the secured party. A receiver who expends time and resources ascertaining and organising the property held by the company (including property owned by another, or property subject to PPSA security interests) is entitled to be paid for such work and may seek court directions as to whether it is appropriate to levy a charge on the return of such property: Re Arcabi Pty Ltd; Ex parte Theobald [2014] WASC 310; (2014) 288 FLR 236; Re Wine National Pty Ltd [2014] NSWSC 1516. See however, Re White; Mossgreen Pty Ltd (Admins Apptd) v Robertson [2018] FCAFC 63, where an equitable lien in favour of voluntary administrators over an auction house business was not found to be justified. Treating suppliers of goods as secured creditors because they have a ROT arrangement or a finance lease does change the dynamics of the receivership. There is a risk to suppliers of goods that are operating under a security arrangement that they will not recognise this and fail to properly perfect their security interest under the PPSA. This will have the result that they will lose priority to perfected secured parties with a security interest in the same collateral: PPSA, s 55(3). This may be particularly important for a supplier with a retention of title arrangement as some of the goods supplied under the arrangement may have been sold, which generates proceeds. A supplier with a perfected security interest would be likely to have a “purchase money security interest” (“PMSI”) which ordinarily has higher priority than a general all assets security interest: PPSA s 62.77 There is also a risk for the supplier that the debtor company will enter liquidation or voluntary administration, which may result in their unperfected security interest in the supplied goods “vesting” in the debtor company as grantor of the security interest: PPSA, s 267. This occurred in the first major decision on the Australian PPSA, Re Maiden Civil (P&E) Pty Ltd; Albarran and Pleash v Queensland Excavation Services Pty Ltd [2013] NSWSC 852. In that case the lessor of large commercial excavation equipment that was supplied to Maiden Civil under an informal hire purchase arrangement lost its rights in the equipment because it had failed to perfect its security interest at the time that Maiden Civil went into voluntary administration. Under s 267 of the PPSA, the lessor’s rights as owner of the equipment vested in Maiden because the lessor’s security interest was unperfected when Maiden entered voluntary administration. Ownership was not relevant because the PPSA treated the finance leasing arrangement as a security interest that needed to be perfected. The receivers appointed over Maiden Civil took priority over the equipment for the perfected finance company which had financed their lease. 77 It should be noted that proceeds paid into an ADI account, that is itself covered by the ADI’s perfected security interest, will have a higher priority than the PMSI holder: PPSA, ss 57, 75.

722

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.330]

Another significant finding was that the receiver had power over the items of equipment because they were included in the schedule to the debenture deed as forming part of the collateral of the loan. In summary, suppliers of goods and other tangibles (such as motor vehicles) must ensure that they perfect their security interests under the PPSA as early as practicable. Title to property will not be sufficient protection if the PPSA deems their arrangement to involve a security interest.78 Selling goods subject to a valid retention of title clause

[18.330] If a receiver knowingly sells goods that the company has no right to sell, they may be liable for the tort of conversion. The decision in THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] NSWSC 1136; (2014) 101 ACSR 202 is instructive for receivers even though it involved voluntary administration. In that case the administrators were liable for damages for selling a business with goods owned by THC on the basis that the administrators (erroneously) believed that THC held an unperfected security interest which had vested in CMA on its entry into voluntary administration. However, the court held that there was no PPSA security interest and THC was simply the owner of the goods. The administrators were held liable for damages for breach of duties under both the Corporations Act and under the law of bailment. Hence, before selling, a receiver should be satisfied either that there is no retention of title (ROT) claim or, if there is, that it is not effective or otherwise unperfected under the PPSA, in which case the appointor’s perfected interest will take priority.79 As a practical matter, if there is a dispute about the effect of a clause, it is wise for the supplier and the receiver to agree that the goods be sold and the proceeds placed in a separate bank account. This ensures that the goods do not become less valuable because they become dated while being stored during the course of negotiations and/or legal proceedings, and the balance of the account can be distributed to the appropriate person(s), which will depend on the outcome of negotiations or legal proceedings. All moneys clause

[18.335] A varied form of retention of title clause is one which seeks to reserve title in all of the goods supplied pursuant to a particular delivery until all outstanding invoiced amounts owed by the buyer to the supplier on any account have been satisfied (an “all moneys” clause). This strategy has been sanctioned by courts in both Australia and England. A supplier who has supplied goods under a contract containing a general retention of title (ROT) clause may wish to argue that if the goods are sold by the buyer company to a bona fide purchaser for value without notice then that supplier can “trace” the proceeds of sale and be paid in 78 See also White v Spiers Earthworks Pty Ltd [2014] WASC 139; (2014) 99 ACSR 214; Re OneSteel Manufacturing Pty Ltd (Admin Apptd) [2017] NSWSC 21; (2017) 93 NSWLR 611. 79 It is also possible that the supplier’s security interest (ie rights in the goods) will vest in the company if the company is in liquidation or voluntary administration: PPSA, s 267.

[18.340]

18 Receivership

723

priority to the other creditors. But the right of tracing for a supplier is limited, and is available only in special circumstances: see Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd (1992) 28 NSWLR 338. The PPSA makes this situation easier for the supplier who properly perfects its purchase money security interest (PMSI) as it may automatically include proceeds of sale under its security agreement without the need to establish an equitable right of tracing: PPSA, ss 18(4), 31 – 34.

Section 420B: prior security [18.340] A problem which could have confronted a receiver before the enactment of the Corporate Law Reform Act 1992 (Cth) was that they might be appointed pursuant to a charge over nearly all of the debtor company’s assets but a secured creditor, other than the receiver’s appointor, may have held a prior security in relation to part of the property. This prevented the receiver from disposing of all of the company’s business as a going concern, at the most favourable price, and could have hampered or even thwarted the most profitable realisation of the company’s property for all interested parties. As a consequence, the Harmer Report recommended that a receiver should, where there is a prior security, have the right to sell the property provided that the secured creditor’s interests are adequately protected: Harmer Report, at [210]-[214]. This recommendation has now been implemented in the Corporations Act, s 420B. In order to sell the property the receiver is required to apply to the court for an order permitting the sale. The court is only entitled to make the order for sale if it is satisfied that (s 420B(2)): • apart from the existence of the prior security interest, the receiver would have the power to sell; • the receiver has taken all reasonable steps to obtain the prior secured party’s consent, but has failed to obtain it; • the sale will not unreasonably prejudice the interests of the prior secured party. Section 420B(3) expressly provides that “the court is to have regard to the need to protect adequately the rights and interests of the secured party in relation to the prior security interest”. In making its decision the court is permitted, under s 420B(4), to consider the likely effect on the proceeds from a sale of the property controlled by the receiver if the property subject to the prior security interest is not included in the sale: s 420B(6). An example could be the sale of equipment in a factory and the sale of the factory itself. If they were sold separately a lower return would be produced than if they were sold together. The court can control the sale and protect the prior secured party by attaching conditions to the sale of the property by the receiver, for example that all or part of the sale proceeds be available for the prior secured creditor. The benefit of the section appears to be that rigid adherence to the normal rules and right of priorities will not be allowed to impede what the receiver considers is the most effective realisation of the company’s assets.

724

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.345]

Carrying on business [18.345] Where a security interest is granted over the whole undertaking of a company, the standard debenture will empower a receiver and manager to carry on the business of the company and to do those things which are incidental to the carrying on of business. If a receiver is not given the power in the debenture, reliance may be placed on s 420(2)(h), which enables a receiver to carry on the company’s business for the purpose of attaining the objectives for which the appointment was made. The power to carry on business must therefore be used only to fulfill the purposes for which the receiver was appointed. When appointed, the receiver may be confronted with what is often a difficult decision. It is probably only where the business shows great prospects on the one hand, or is in a very poor state on the other, that the decision is easy. A receiver may carry on business for a number of reasons,80 including: to assess profitability and the available options; for the completion of a beneficial contract; to keep the business going with the hope of securing a buyer for the business as a whole (it being generally far better to sell a business as a whole rather than in parts); or, to provide for the repayment of the appointor from profits, the sale of unnecessary assets or through a refinancing arrangement. As noted previously, in carrying on the business, while a receiver owes duties to the company, the receiver’s primary duty is to the appointor, and the receiver is under no obligation to carry on the company’s business at the appointor’s expense, even in the case of a high profile Australian company.81 The continuation of the business can entail obligations being assumed by the receiver. The receiver is liable for all debts incurred during the course of the receivership, under s 419 Corporations Act: see [18.440]. This ensures that any suppliers to the company’s ongoing business are paid, even if they may be unpaid by the company in the period before the receiver is appointed. The receiver needs to ensure that a clear process for ordering and authorising payments is put in place. Other obligations assumed by a receiver are in the nature of those typical of any business operating as an employer and taxpayer, and other obligations will apply depending on the nature of the business involved; for example as a transport company, builder or retail shop. A receiver will be obliged to remit employee taxes to the Tax Office in respect of the staff employed.82 Tax returns need to be prepared and lodged. As an employer, a receiver will have an obligation to ensure that worker health and safety requirements are met. In Benbow v Scales [2002] NSWCIMC 184, a receiver and manager was liable because he had failed to apply due diligence to the performance of his duties in relation to the relevant health and

80 Adapted from Australian Insolvency Management Practice, Murray Taylor, (CCH). 81 Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. 82 See DCT v Tideturn Pty Ltd [2001] NSWSC 217, (2001) 37 ACSR 152, in relation to the failure of a liquidator to remit taxes in a trade-on of the business.

[18.360]

18 Receivership

725

safety laws.83 Regulatory requirements, for example under the competition and consumer legislation and anti-money laundering legislation, must be complied with. Payment of creditors

[18.350] A receiver may decide to pay certain pre-receivership creditors in order to ensure ongoing services or supplies, such as a landlord who is threatening to evict the company if outstanding rent is not paid. If a receiver were to pay out, from company funds, any such pre-receivership creditor, the payment could be attacked as an unfair preference84 by a liquidator if one were appointed within the relevant six-month period. However, this consequence can be avoided if payments are made from the receiver’s bank account established under Corporations Act, s 421.85 Consequently, it is prudent for a creditor to require payment from either the funds of the receiver or from the appointor of the receiver out of the appointor’s own funds. The appointor would usually be permitted, under the terms of the security document, to recoup the cost from the proceeds of the sale of assets subject to the charge. Distribution – priorities and prior securities [18.355] The primary objective of a receiver is to provide for the repayment of the debenture holder who initiated the appointment. Prima facie, the receiver may pay out the debenture holder in priority to any other claim holders and remit any surplus to the company or to its liquidator, if one has been appointed. However, that position is affected by statutory provisions which give certain claims priority over the debenture holder. Besides the statutory provisions, the terms of the debenture will determine the order in which a receiver will distribute the proceeds of any sale or the income obtained from the charged assets. If a secured creditor, other than the appointor, claims priority in an asset covered by a security interest in favour of the appointor, the receiver will need to verify that claim, and if the secured creditor realises the asset the receiver will be entitled to any surplus. This issue is examined by reference to the particular priority that can be claimed by the Commissioner of Taxation.

Distribution – the claimed priority of the Commissioner for unpaid income tax [18.360]

While Commonwealth tax owed by a debtor company does not constitute a priority debt in a receivership, the Commissioner of Taxation may gain priority by making use of its garnishee power under s 260-5 of the Taxation Administration Act 1953 (Cth). As explained in Chapter 16, this section empowers the Commissioner to obtain payment of a tax debt by giving notice to, for example, 83 See also O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [11.1450]. 84 Telecom Australia v Russell Kumar & Sons Pty Ltd (1993) 11 ACLC 281. 85 Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407.

726

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.365]

the taxpayer’s bank, requiring it pay the funds to the ATO. It is important to note that the Commissioner’s right to claim the funds arises under statute and only arises after service of the notice. This is important for assessing the effect of the notice on security interests under the PPSA. Ordinarily, a competition between multiple secured parties would be determined according to the priority rules of the PPSA, which are found in Pt 2.6 of that Act. However, the PPSA does not generally apply to security interests that arise under statute, hence the Commissioner’s right to the funds once a notice has been served under s 260-5 is a security interest that is excluded from the operation of the PPSA. This is confirmed by the Personal Property Securities Regulations 2011 (Cth), reg 1.4 which specifically excludes s 260-5 notices from the PPSA. There is therefore no need for the Commissioner to register his interest in money proceeds. This results in the competition between a security interest and an ATO garnishee notice being determined according to which is the first in time to arise. As a PPSA security agreement can include “proceeds” (PPSA, s 31), a security interest will arise automatically when those proceeds are generated by the conduct of the debtor company, that is, when it sells goods: PPSA, s 32. The priority time of the security interest in proceeds is the same as the priority time for the original collateral that generated the proceeds. Thus, the ATO’s garnishee notice will come after the PPSA security interest has already attached to the proceeds of sale and the ATO will lose out in a priority contest.86

Distribution – general priorities Non-circulating security interests

[18.365] A receiver will be required to make payments in the order prescribed by the debenture. The order of payments which is often inserted in debentures is: • rents, taxes, rates and other outgoings which relate to the secured property; • costs, charges and expenses incurred by the receiver in discharging the powers and duties provided in the debenture; • the remuneration of the receiver. After the payment of these items the receiver who is appointed under a security interest may then repay the moneys owing to the debenture holder at least to the extent that the security interest covers non-circulating assets. Circulating security interests: s 433

[18.370] When the receiver is appointed pursuant to debenture holders, after discharging those items just mentioned, a receiver is to apply moneys in the order prescribed by s 433 of the Corporations Act to the extent that assets in the receiver’s hands or under their control have been secured by a circulating security interest. This is to be done before the receiver can pay the debenture holder. In Re CMI 86 See further Stumbles, “PPSA Aus: Security Interests and Notices under s 260-5 of the Taxation Administration Act 1953 (Cth)” in Griffiths, McCracken and Wardrop, Exploring Tensions in Finance Law: Trans-Tasman Insights (Thomson Reuters NZ, 2014) Ch 9.

[18.370]

18 Receivership

727

Industrial Pty Ltd; Byrnes v CMI Ltd [2015] QSC 96; (2015) 105 ACSR 635 at [45], the court explained the rationale of s 433, that it is: “… a remedial provision that favours the specified priority creditors giving them a statutory entitlement to be paid from assets that would have otherwise not been available, because those assets would have become the subject of a fixed charge, when the floating charge crystallised on the appointment of the receivers.”

A “circulating security interest” is defined in s 51C as meaning a security interest that is either a PPSA security interest that has attached to circulating assets (and the grantor has title to the assets) or a floating charge: see generally Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246. An asset is only circulating while it circulates in the ordinary course of business: Langdon, Re Forge Group Ltd (rec and man apptd) (in liq) [2017] FCA 170; (2017) 118 ACSR 434. As noted above, the PPSA does not cover all forms of personal property and some security arrangements are excluded by PPSA, s 8, so the floating charge will continue to be used for certain arrangements: Langdon, Re Forge Group Ltd (rec and man apptd) (in liq) at [40]. That said, the concept of circulating assets substantially overlaps with the class of property that has traditionally been covered by a floating charge. Circulating assets are defined in PPSA, s 340. An asset is not a circulating asset if the secured party has control over it, unless the secured party has given permission for the grantor to deal with the property: Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246 (known as the Amerind appeal). In that case it was held that “cash at bank; stock on hand” at the date of appointment were circulating assets. The time for determining whether property of which a receiver has taken possession are circulating assets is not the time when the security interest is created but rather when the receiver takes possession of the property: Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246. Section 433 operates over assets covered by the circulating security interest at the date of the commencement of the receivership: Re CMI Industrial Pty Ltd; Byrnes v CMI Ltd [2015] QSC 96; (2015) 105 ACSR 635; Langdon, Re Forge Group Ltd (rec and man apptd) (in liq) [2017] FCA 170; (2017) 118 ACSR 434. This means that if the receiver trades the business on and thereby generates trading profits, these profits are not covered by s 433 and can be paid in full to the secured creditor: at [47]. In Langdon, a tax refund that arose because of the closing down of a business and paid after the receiver was appointed was held not to be covered by s 433. A tax refund that was identifiable before the appointment of receivers was covered by s 433 in Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246. Where the company in receivership has (or is) acting as a trustee, its right of indemnity (if available) is not the property of the company for the purposes of s 433: Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246.87 If a receiver makes a payment to employees under s 433 from assets at the date of the receivership, and thereby reduces the funds available for the secured creditor, the secured creditor may prove for that amount in a liquidation of the company 87 See, however, the contrary view expressed in Jones v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 (which considered a company acting as trustee in liquidation).

728

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.375]

and stand in the priority position that the employees would have had for those amounts: Divitkos, Re ExDVD Pty Ltd [2014] FCA 696; (2014) 223 FCR 409; Weston; Re Matter of 7 Steel Distribution Pty Ltd [2015] FCA 742.88 The effect of s 433 continues if the company remains in receivership and enters liquidation: Divitkos, Re ExDVD. Insurance in respect of liabilities to third parties

[18.375] Section 433(3)(a) specifies that the first debt to be paid in priority to any claim for principal and interest under the debenture is to be any amount that in a winding up is payable to unsecured debts pursuant to s 562. That section is an exception to the pari passu principle in that amounts received by the company or the liquidator under a contract of insurance (and not being a contract of reinsurance) against liability to a third party must be paid to that third party to whom such liability is incurred. There is a similar provision in the Bankruptcy Act: s 117. The company’s liability may be incurred before or after the date of the winding up. The priority applies only so far as it is necessary to discharge the company’s insured liability to the third party. If the receivership begins before liquidation, any proceeds of insurance received by the receiver must be paid to the third party. Auditor’s fees – refusal of resignation

[18.380] The next priority is the payment of the reasonable fees and expenses of an auditor where he or she applied to ASIC for consent to the auditor’s resignation (s 433(3)(b), (6), (7)) and ASIC refused consent. Employment contracts

[18.385] Contracts of employment are not necessarily terminated by the private appointment of a receiver. In that regard, when a company goes into liquidation, s 558 of the Corporations Act gives an entitlement to the employees to payment as if their services had been terminated by the company on that date. In McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503, it was argued that s 558 applied to receiverships so that employees would be paid their accrued entitlements as if on a liquidation. The court disagreed, saying that while a liquidation will usually mean the end of the company’s business, a receivership does not affect the existence of the company and it is often in the chargee’s interests that the business continue. If the employees were to be paid their accrued entitlements as if on a liquidation, they “will both keep their jobs and be paid out as if they had lost them”: at [25].89 As noted earlier [18.370], the operation of s 433 88 See also Wangmann, “The Free Assets of the Company and When They are Free to Take: Equitable Subrogation and the Secured Creditor” (2015) 39 Melbourne University Law Review 230; Hamilton, “Equitable Subrogation of Banks and Other Secured Creditors for the Recovery of Statutory Employee Entitlements: A New Class of Case or Simply a Different Perspective?” (2016) 34 CSLJ 121. 89 See also Re Vickers; Challenge Australian Dairy Pty Ltd [2011] FCA 10; (2011) 190 FCR 569; White v Norman [2012] FCA 33; (2012) 199 FCR 488. See also, Gentry, “Still a Priority? Employee Entitlements in Insolvency” (2013) 25 A Insol J 8.

[18.410]

18 Receivership

729

continues while the company remains in receivership, even if the company is also in liquidation at the same time: Re Great Southern Ltd; Ex parte Thackray [2012] WASC 59; (2012) 260 FLR 362. Employee’s wages including superannuation

[18.390] In respect of employees who are in fact terminated by the receiver, a priority exists under s 433(3)(c) of the Corporations Act for the wages, superannuation contributions and the superannuation guarantee charge payable to employees up to the date of the appointment of the receiver. There is a limit of $2,000 in respect of the days, for a person defined as an “excluded employee”, that are classified as “non-priority days”: ss 556(1)(e), 556(2), 433(3)(c). Excluded employees

[18.395] The expression “excluded employees” in s 556 of the Corporations Act includes employees who have been directors at any time during the 12 months preceding the appointment, employees who are directors after the appointment, employees who are spouses of directors and former directors and relatives of directors and former directors. The term “non-priority days” is defined in s 556(2) to mean days on which an excluded employee was a director of the company, a spouse or other relative of a director. The result of this definition, together with the limits imposed by s 556(1A) – (1C), is that if a person is an excluded employee at the time of the distribution, but is owed wages for the period of time before they became, say a director, they can claim the full amount of their unpaid wages: McGrath v Sturesteps [2011] NSWCA 315. Employees’ leave entitlements

[18.400] The next priority is specified in s 556(1)(g) and made applicable to receiverships by s 433(3)(c). It provides that employees are to receive all amounts due in respect of leave of absence up to the date of the appointment of the receiver. The amount payable is not limited, except in the case of “excluded employees” who are entitled to be paid only up to $1,500 in relation to “non-priority days”: s 556(1B). “Leave of absence” is defined in s 9 to include “long service leave, extended leave, recreation leave, annual leave, sick leave or any other form of leave of absence from employment”. The leave of absence must be a right pursuant to an industrial instrument such as a contract of employment or award: s 9. Retrenchment pay

[18.405] This is provided for in s 556(1)(h) made applicable by s 433(3)(c). To claim a retrenchment payment an employee must have the right pursuant to either an award or legislation. “Excluded employees” are not entitled to any amount which is attributable to “non-priority days”: s 556(1C). Advances to pay employee entitlements

[18.410] The final priority in s 433(3)(c) is that given by s 560. It provides that persons who advanced funds to the debtor company to enable it to pay wages, leave or retrenchment pay are to have priority in respect of the amounts advanced

730

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.415]

to the same extent as the employees. For example, a bank or other financier might agree to pay staff wages during the period of the carrying on of a business in receivership. The effect of this section is to give that financier to obtain a priority by standing in the priority position of the employees. This section is also relied upon by the Commonwealth in respect of moneys paid to employees for their unpaid entitlements under the Fair Entitlements Guarantee Act 2012 (Cth) (ss 29, 31).90 Receiver must ensure all priority claims are paid

[18.415] It is critical that a receiver ensures that all employees’ priority claims are paid before the receiver pays out their appointor because if there are any priority claims outstanding then the receiver is personally liable to them. This is the case even if there is a subsequent winding up of the company. CHALLENGING THE RECEIVER [18.420] In the course of the administration of a receivership a person may be dissatisfied with the receiver’s actions or omissions and take court action under the Corporations Act. There are two avenues.

Section 599 [18.422] Section 599 (the successor to the former 1321) permits a person aggrieved by an act, omission or decision of a receiver to appeal to the court. The application involves a hearing de novo, so the court will make a fresh decision rather than exercising its appellate jurisdiction: Promoseven Pty Ltd v Markey [2013] FCA 1281. There are three broad categories of decision-making that can be challenged under this section, “managerial” or discretionary decisions; a refusal by the receiver to act in a way that is required; and acting in a way that the receiver should not act. A person bringing a s 599 appeal must demonstrate that the receiver’s decision is informed by some error of law or significant factual error or is otherwise so unreasonable that it should not be allowed to stand: ASIC v Forestview Nominees Pty Ltd [2006] FCA 1530; (2006) 24 ACLC 1567. In that case, directors unsuccessfully challenged the decision of receivers not to release company funds to allow them to challenge ASIC’s claim to wind up the company. There was limited cash available to the company and there were significant liabilities to the mortgagee and potential liabilities to other creditors. Needless to say the courts have found that the former s 1321 (now s 599) cannot be used by the court to order a receiver to do something that is prohibited by statute or not authorised under the debenture: Fraser v ASIC [2007] FCAFC 85; (2007) 159 FCR 424.

Section 423 [18.423] Under the second avenue of review, a person can complain to the court or to ASIC about the conduct of a receiver in performing their duties, and either 90 See Gentry, “Still a Priority? Employee Entitlements in Insolvency” (2013) 25 A Insol J 8.

[18.425]

18 Receivership

731

body may inquire into the receiver’s activities: s 423(1)(a) – (b).91 This section deals with issues of concern about the misconduct of the receiver; it is not to be used to review a commercial decision of the receiver with which the applicant is dissatisfied; s 599 should be used: ASIC v Forestview Nominees Pty Ltd [2006] FCA 1530; (2006) 24 ACLC 1567. Also, ASIC, of its own initiative, may report to the court any matter that in its opinion is a “misfeasance, neglect or omission” by a receiver and the court may make orders that any loss to the company be paid: s 423(2).

ADMINISTRATION OF A RECEIVERSHIP – COURT-APPOINTED RECEIVERS [18.425] Court-appointed receivers are considered only briefly because they are not common and much of what has already been discussed applies to these receivers. When the court appoints a receiver the court itself in effect assumes control of the assets over which the receiver is appointed. Those assets will be specified in the court’s order. Sometimes the receiver will be appointed merely to preserve the assets and hence to act as a caretaker, and in such a situation will be appointed to specified items. In other cases the court may appoint the receiver over all of the property of the company. It is rare for a court to give a receiver an unrestricted power to manage the affairs of the company. The court may give the receiver the power to manage the company as far as it is necessary to safeguard the property. A court-appointed receiver has an implied power of sale but may only sell permanent assets with leave of the court: AIDC v Co-operative Farmers & Graziers Direct Meat Supply Ltd [1978] VR 633. It appears that leave will only be granted where the sale is necessary to preserve some legal right. When a receiver realises assets, he or she must act in the interests of all parties. Like a privately appointed receiver, while the receiver must ensure that a sale is effected at the earliest possible time, the interests of the company must not be sacrificed merely to obtain an expeditious sale. Once the receiver has realised assets, the realised funds must be paid strictly pursuant to the directions of the court. It is not clear if the appointment of a receiver by the court serves to terminate contracts of employment. In McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503,92 Finkelstein J acknowledged (at [6]) that the: “law is still in a state of uncertainty. It is generally accepted that the appointment of a receiver by the court terminates the contract: Reid v Explosives Co Ltd (1887) 19 QBD 264; James Miller Holdings Ltd v Graham (1978) 3 ACLR 604. This view is not, however, universally accepted: eg International Harvester Export Co v International Harvester Australia Ltd [1983] 1 VR 539; Sipad Holdings DDPO v Popovic (1995) 14 ACLC 307. The rationale for the predominant view is that a court appointed receiver does not operate the concern on 91 For a review of the authorities see Re Oswal; Burrup Fertilisers Pty Ltd v Carson (No 3) [2013] FCA 357; (2013) 93 ACSR 645. See the Courts’ Corporations Rules, r 4.1. 92 See also White v Norman [2012] FCA 33; (2012) 199 FCR 488.

732

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.430]

behalf of the company, but adverse to it. Speaking generally, the opposite is true in the case of a privately appointed receiver who is the company’s agent.”

The receiver should seek the directions of the court if uncertain about exercising powers in administering the receivership. Directions may be sought under s 424, discussed at [18.235]. In performing his or her tasks a receiver is only required to comply with the directions of the court and not those of the company or other interested parties: Burt, Boulton & Hayward v Ball [1895] 1 QB 276, 279. Directions will not be given in relation to decisions that should be matters for the receiver’s commercial judgment: Re Actwane Pty Ltd [2002] NSWSC 572; (2002) 42 ACSR 307 (directions refused where they related to commercial value of offer of compromise by a secured creditor that also owed money to the company in receivership). If a liquidator is subsequently appointed by the court, a court receiver will not automatically be displaced but the receiver may be discharged if there is no reason why two officers should act: Campbell v Compagnie Générale de Bellegarde (1876) 2 Ch 181. It is also possible for a receiver appointed previously by the court to be appointed as the company’s liquidator in subsequent proceedings: Re Southern Cross Airlines Holdings Ltd (1993) 10 ACSR 466 (convenience favoured the dual appointment). In many ways the appointment of a liquidator subsequent to the appointment of a court-appointed receiver does not have such a great effect on the receiver’s position and powers as is the case with a privately appointed receiver. A court receiver retains the power to collect and realise the property referred to in the appointment unless otherwise ordered by the court.

LIABILITIES Under the general law [18.430] A receiver may incur liability under the general law or under statute. General law liabilities include the following: Invalid appointment – If a receiver has been appointed invalidly the intended receiver may be liable for trespass; it makes no difference that they acted in good faith: Re Goldburg (No 2) [1912] 1 KB 606. The debenture holder who purported to appoint the receiver may also be liable if the receiver is acting as their agent: Re Goldburg (No 2). The trespass is a tortious act and a receiver and the debenture holder may be required to account to the debtor company for damages arising from the trespass. Negligence – As discussed in the section “Duties” under the general law, at [18.285], a receiver at present appears not to be liable for mere negligence in the honest performance of their duties. Wilful default – A mortgagee has been held to be liable for wilful default,93 (that is, gross negligence) and by analogy, this reasoning can be applied to the position of a receiver. 93 Midland Credit Ltd v Hallad Pty Ltd (1977) 1 BPR 9570.

[18.440]

18 Receivership

733

Abuse of power – A receiver who exercises a power conferred by the debenture to achieve an object foreign to that power may be liable: Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. Breach of contract – A receiver is not liable personally, or as an agent, in respect of contracts made before the receivership commenced, provided that the receiver has not accepted liability: Re British Investments & Development Co Pty Ltd (1979) ACLC 32,100 (40-522).94 For instance, a receiver is not liable for rental arrears incurred before he or she was appointed. In fact, a receiver is entitled to perform a pre-receivership contract made by the company and there is no liability unless something extra is done to demonstrate that the receiver assumes personal responsibility: Re British Investments; Consolidated Entertainments Ltd v Taylor [1937] 4 All ER 432; Re Nardell Coal Corporation (In Liq) v Hunter Valley Coal Processing [2003] NSWSC 642. Under the general law a receiver will not be liable personally for post-receivership contracts provided that they acted on behalf of the company and disclosed the agency when contracting. But a receiver who breaches the terms of the agency may be liable. If liquidation occurs subsequent to receivership, it will usually end the receiver’s position as agent of the company. In such a case a receiver will be liable personally for contracts which are made subsequent to the commencement of the winding up: Thomas v Todd [1926] 2 KB 511.

Under the Corporations Act [18.435] In taking an appointment and managing a company, a receiver becomes potentially liable under a number of provisions in the Corporations Act. Some of those, namely ss 180 – 184, were discussed earlier in the context of sale of company property. The duties stated in those sections apply equally to the general duties of a receiver. It must be said, however, that in what circumstances receivers will be held liable is not the subject of case law, and the precursors of these sections have been used sparingly. Section 419

[18.440] As discussed earlier, [18.345], a receiver is not liable under the general law in respect of certain contracts made during the receivership if they were made within the scope of the agency of the receiver. However, if a receiver were unable to be held liable for all debts which they incurred, they could order large quantities of goods, or extensive services, to supplement or improve the property, subject to the charge, and then refuse to pay. The supplier would have a remedy against the company but an action might be useless as the company might have insufficient resources to pay. Consequently, the legislature has included in s 419 a provision that a receiver is liable personally for debts incurred in the course of the receivership in respect of 94 See also ASIC v Letten (No 13) [2011] FCA 1151; (2011) 86 ACSR 174 at [34] and cases there cited.

734

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.445]

services rendered, goods purchased or property hired, leased, used or occupied.95 Notwithstanding s 419, a receiver will only be liable personally if he or she incurred the debts either expressly or by necessary implication: Re British Investments & Development Co Pty Ltd (1979) ACLC 32,100 (40-522); Nardell Coal Corp v Hunter Valley Coal Processing Pty Ltd [2003] NSWSC 642; (2003) 46 ACSR 467 at [69]. A receiver will put processes in place with suppliers to ensure that any debts incurred are authorised. Similarly, a receiver is not liable for employee entitlements that accrue under a contract of employment that was entered prior to the receiver’s appointment: Sipad Holding ddpo v Popovic (1995) 19 ACSR 108; McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503.96 Section 419 also operates only where the debt is one arising from a transaction of a kind specified in the subsection; for other transactions the common law rule apply: AGL Victoria Pty Ltd v Lockwood [2003] VSC 453; (2003) 10 VR 596. At general law, a court-appointed receiver contracts with third parties as principal and incurs personal liability, subject to their right of indemnity out of the company assets. This is similar to a privately-appointed receiver under s 419 but whereas s 419(1) of the Act applies “notwithstanding any agreement to the contrary”, a court-appointed receiver can contract out of their personal liability: ASIC v Letten (No 13) [2011] FCA 1151. Section 423

[18.445] Receivers may be responsible to make good any losses to the company occasioned by their misfeasance, neglect or omission. A complaint to the court under s 423(1)(b), discussed at [18.423], may be made about an act or omission of a receiver, or a controller appointed by the court. Section 588G

[18.450] Section 588G imposes a liability on directors for insolvent trading. A receiver could only be held liable on this ground if he or she could be regarded as a director pursuant to s 9, that is, as a “shadow director”. It is unlikely, save in extraordinary circumstances, that a receiver would be deemed to be a director. While it may be thought that a receiver was, in some situations, acting in the position of a director, it was held by the court in Re North City Development Pty Ltd (1990) 20 NSWLR 286, when dealing with the position of a receiver in relation to the precursor of s 588G, that a receiver and manager should be regarded as dealing with the assets of the company subject to the charge and not taking part in the company’s management as a director.

95 See further Wellard, “Debts ‘Incurred’ by Receivers, Administrators and Liquidators: The Case for a Harmonised Construction of ss 419, 443A and 556(1)(a) of the Corporations Act” (2013) 21 Insolv LJ 60. 96 A contrary view is cogently argued in Wellard, above.

[18.465]

18 Receivership

735

Section 598

[18.455] Receivers may be held liable under s 598, which provides that if a person is guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a company and the company suffers loss as a result, orders may be made against that person by the court. Section 419A

[18.460] A receiver is not liable personally or as an agent, under the general law, in respect of contracts made before the receivership commenced, provided that he or she has not adopted the contracts: Re British Investments & Development Co Pty Ltd (1979) ACLC 32,100 (40-522). Consequently, under the general law, a receiver is not liable with respect to pre-receivership contracts for the lease or hire of property; the receiver is deemed not to have adopted the lease even though the company remains in occupation or retained possession of the property after the advent of receivership.97 The Harmer Report was of the view that this was inequitable as the receiver could continue to obtain the benefit of the occupation of the premises without attracting any liability; the lessor’s only right was against the company in the capacity of an unsecured creditor. While a lessor might initiate eviction proceedings, a substantial amount of time could elapse before an order was obtained: Harmer Report, at [218]. It was recommended that a receiver should be liable for the rent payable pursuant to a pre-receivership lease or agreement: Harmer Report, at [220]. This was adopted by the legislature in s 419A which provides that a receiver is only liable for rent or other amounts payable by the company98 under a pre-receivership agreement after seven days from the time of the appointment: s 419A(2). Subsections (3) and (4) require the receiver within those seven days to give the owner of the property notice that the receiver does not propose to occupy the property and if the receiver does this they will be relieved of liability under the agreement. A court may excuse a receiver from liability if action is not taken within the seven days: s 419A(7). An example may be where the receiver “could not have been expected to have been aware of the existence of a relevant lease or agreement until after the seven day period had expired”: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [404]. In Nardell Coal Corp Pty Ltd v Hunter Valley Coal Processing [2003] NSWSC 642; (2003) 178 FLR 400, the court made orders under s 419A(7) taking into account the fact that the receiver had forgotten to give notice under s 419A(3) to the lessor. Section 433

[18.465] Section 433 of the Corporations Act has been explained in detail [18.370], the section imposing an obligation on a receiver to pay certain employee benefits if 97 See however, Wellard, “Debts ‘Incurred’ by Receivers, Administrators and Liquidators: The Case for a Harmonised Construction of ss 419, 443A and 556(1)(a) of the Corporations Act” (2013) 21 Insolv LJ 60. 98 These words are to be interpreted broadly: Rapid Metal Developments (Aust) Pty Ltd v Ridean Pty Ltd (No 3) [2010] NSWSC 7.

736

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.470]

the receiver is acting under a circulating security interest.99 If the receiver fails to adhere to this priority regime then he or she is personally liable to the employees.100 This is the case even if there is a subsequent winding up of the company and a liquidator is appointed.101 If the receiver is required to pay the moneys owed to the employees, the receiver is entitled to be indemnified from company property.

Relief from liability Indemnities

[18.470] A receiver who is appointed as the agent of the company can seek indemnity, in respect of any civil liability, from the assets of the company which are subject to the charge, where the liability stemmed from his or her actions as an agent and within the scope of the agency. The receiver’s right against the company’s property takes the form of an equitable lien to the extent that the liabilities were properly incurred by the receiver.102 Action by a receiver to care for and preserve property may be sufficient to give rise to a right of reimbursement or recovery secured by an equitable lien.103 Such equitable liens can arise whether there is a court-appointed or a privately appointed receiver. Prudent receivers usually require an indemnity from appointors before taking up their appointment. Some debenture holders may be reluctant to grant such an indemnity on the basis that they could be opening themselves up to substantial liability and that an indemnity may mean that the receiver is not so judicious in exercising their duties as would be the case where no indemnity had been given. Customarily any indemnity will provide that the appointor is not liable in respect of any costs, charges or expenses which arise out of, inter alia, the negligence of the receiver in the exercise of his or her duties or powers as receiver: James v Commonwealth Bank of Australia (1992) 37 FCR 445. Section 419(3)

[18.475] Besides the indemnities which may be obtained from the appointor, there are a number of provisions which allow receivers to seek relief from liability from the court. Section 419(3) of the Corporations Act permits a court in any civil 99 See further Re CMI Industrial Pty Ltd; Byrnes v CMI Ltd [2015] QSC 96; (2015) 105 ACSR 635. 100 Sipad Holding ddpo v Popovic [1995] FCA 1737, (1995) 19 ACSR 108; Lumsden v Long [1998] FCA 1304, (1998) 16 ACLC 1743. 101 Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407; Divitkos; Re ExDVD Pty Ltd [2014] FCA 696; (2014) 223 FCR 409. 102 Hill v Venning (1979) 4 ACLR 555, 556; James v Commonwealth Bank of Australia (1992) 37 FCR 445; ASIC v Lawrenson Light Metal Die Casting Pty Ltd (1999) 158 FLR 307. 103 The lien may be subject to a prior registered mortgage to a third party: Dean-Willcocks v Nothintoohard Pty Ltd [2006] NSWCA 311; (2007) 25 ACLC 109, even where the mortgage was registered after the receiver’s appointment: Jefferson v Shirlaw [2006] QSC 153; [2007] 1 Qd R 162. This can be subject to the receiver’s right of salvage. See further Strahorn, “The Nature of Corporate Insolvency Practitioner Liens” (2013) 21 Insolv LJ 37.

[18.495]

18 Receivership

737

proceedings brought against a receiver, who has been invalidly appointed, to grant relief if it is satisfied that the receiver believed on reasonable grounds that he or she had been properly appointed. The court may in fact hold the appointor liable instead of the receiver. This section could be used by a receiver to obtain relief from liability, for example, for trespass. Section 1318

[18.480] Another section which may relieve a receiver from liability is s 1318 of the Corporations Act. It authorises a court to relieve certain persons, including a receiver and a receiver and manager (s 1318(4)(d)), from liability which the receiver would or might incur for negligence, default, breach of duty or breach of trust if he or she acted honestly and having regard to all the circumstances of the case. Unlike s 419(3), s 1318 does not require the offender to have acted “reasonably”, only “honestly” – which may mean s 1318 has a wider application than s 419(3).104 As discussed in the previous section of this chapter, a receiver may be relieved from liability under a pre-receivership lease: s 419A(7).

POWERS, DUTIES AND LIABILITIES OF A COURT-APPOINTED RECEIVER [18.485] Much of what has been discussed with respect to privately appointed receivers applies with respect to court-appointed receivers. Powers [18.490] The nature of the powers endowed on a receiver is determined by the order of the court which makes the appointment. Such powers are expanded or defined in the Corporations Act, as with a privately appointed receiver. The powers referred to in s 420 will be available to a court-appointed receiver, unless excluded or varied by the court order. The powers granted to a receiver by a court will be determined by the circumstances and by the objective of the appointment. A receiver is always permitted to go to the court and seek extra powers if it is believed that they are necessary.

Remuneration [18.495] Court-appointed receivers, being officers of the court, are required to have their remuneration approved by the court before they are permitted to draw payment;105 this is not the case with disbursements as they can be deducted from receivership funds as they are paid.106 Court approval entails the receiver presenting his or her accounts and the court determining what is, and what is not, to be allowed. In appropriate cases there is a discretion in the court not to require 104 See Harris, “Relief from Liability for Company Directors” (2008) 12 UWS Law Rev 152. 105 Corporations Act, s 425, and Courts’ Corporations Rules, r 9.1, apply only to private appointments. 106 In the matter of Banksia Securities Limited (in liq) (rec and man apptd) [2016] NSWSC 357; In the matter of Cannuli Holdings Pty Ltd (in liq) (Court-appt’d receiver acting) [2017] NSWSC 1562.

738

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.495]

accounts to be taken, a procedure which can be time-consuming and costly. Instead orders can be made under the relevant provisions of each court’s legislation: Ide v Ide [2004] NSWSC 751; (2004) 50 ACSR 324. There is no set basis for determining the receiver’s remuneration. Courts have generally approved reasonable market rates based on time properly spent, taking into account the complexity of the tasks and the efficient use of appropriate staff: Re Anglican Development Fund Diocese of Bathurst Board (rec and man Apptd) [2017] NSWSC 967 (and the cases cited therein); Sanderson v Sakr [2017] NSWCA 38; (2017) 118 ACSR 333; Re Wine National Pty Ltd [2016] NSWSC 4. Remuneration based on the principles and reporting requirements of the ARITA Code has been approved.107 The proportionality of the amount of a court appointed receiver’s remuneration to the amount of money or assets recovered is a relevant factor in the court determining remuneration: Templeton v ASIC [2015] FCAFC 137; Sanderson v Sakr [2017] NSWCA 38; (2017) 118 ACSR 333. The application of the principles for determining court appointed receivership post-Sakr was summarised in Re Banksia Securities Ltd (in liq) (rec and man apptd) [2017] NSWSC 540. One of the more significant points to come from Sakr, and applied in Banksia, is a confirmation that fees are not to be denied or reduced simply because the work conducted by the receiver did not lead to an increase in funds available for distribution. It is normal for remuneration to be sought and ordered at the time of the appointment of the receiver. The customary rule is that a receiver would not be entitled to any payment until a full accounting for the property over which the receiver has had control and a discharge of the funds for which he or she was accountable pursuant to the security.108 A receiver is entitled to an indemnity from, and a lien over, the property of the company to pay for his or her proper remuneration as well as for costs and expenses, and this survives the end of the appointment.109 In the recent decision in Re Say Enterprises Pty Ltd [2018] NSWSC 396, the court held that some remuneration claimed by receivers appointed by the court (on an interim basis) to secure assets and manage a business relating to investigation of the company’s affairs and various transactions, and involvement in a dispute between stakeholders in the company, was unreasonable because it was beyond the scope of work required to be undertaken by an interim receiver and manager. The court applied the principle expressed in Windschuegl v Irish Polishes Ltd [1914] 1 IR 33, which prohibits receivers from claiming remuneration for work they undertake if they become involved in internal disputes and seek court orders in their own right. Rather, the receivers should seek assistance from the party having carriage of the matter to make the application.

107 Re Banksia Securities Ltd (in liq) (rec and man apptd) [2017] NSWSC 540. 108 See O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [25.110]. 109 Re Central Commodities Services Pty Ltd [1984] 1 NSWLR 25; In the matter of Wine National Pty Ltd James Estate Wines Pty Ltd and Liquor National Pty Ltd [2014] NSWSC 1516.

[18.515]

18 Receivership

739

Duties [18.500] It is not the fundamental function of a court-appointed receiver, unlike a receiver appointed by a debenture holder, to see that the debenture holder is repaid. As an officer of the court, the appointment is for the benefit of all those interested in the relevant assets: Cape v Redarb Pty Ltd [1992] FCA 31; (1992) 107 FLR 362; Viola v Anglo-American Cold Storage Co [1912] 2 Ch 305, 311. The duties of a court-appointed receiver will flow from the order of the court, the Corporations Act and the fact that it is an appointment of a fiduciary nature: see Batrouney v Forster [2015] VSC 541. The receiver is defined as an “officer” under s 9 of the Corporations Act, and therefore the receiver owes the duties of an officer. Some of these duties are: • to comply with the terms of the order of the court; • to collect the property subject to the appointment; • to account for any receipts; • to exercise reasonable care and skill to preserve the assets of the company; • not to abuse his or her fiduciary obligations; and • to obtain the maximum benefit from the property of the company for all interested parties.

Directions [18.505] As a court-appointed receiver is an officer of the court there is an implied power to give directions with respect to the discharge of the functions for which the appointment is made, including where directions are necessary to enable the receiver to carry out those functions without becoming exposed to a real risk of litigation. Directions may provide guidance to the receiver, not only on matters of law but also on the propriety or reasonableness of the contemplated exercise of the receiver’s discretion: Mariconte v Batiste [2000] NSWSC 288; (2000) 48 NSWLR 724. Liabilities Tortious

[18.510] As the receiver is not the agent of the company but a principal, the receiver is liable personally to other parties for any torts which he or she commits during the receivership. Subject to the appointment, the receiver may seek an indemnity from the property of the company. A receiver can be liable for trespass or conversion if, for example, he or she takes possession of property which is not within the appointment: Re Goldburg (No 2) [1912] 1 KB 606. Any action against the receiver can only be commenced with leave of the court. Contractual

[18.515] The general principles discussed with respect to privately appointed receivers are applicable.

740

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.520]

Statutory

[18.520] The sections which apply to privately appointed receivers are relevant. Relief from liability [18.525] A court-appointed receiver can claim the same rights to relief and indemnity as a privately appointed receiver, except that he or she cannot, naturally, seek indemnity from an appointor. EFFECT OF THE APPOINTMENT OF A PRIVATELY APPOINTED RECEIVER [18.530] The appointment of a receiver can have a major impact on the company and those associated with it. It needs to be stated that the company continues to exist as a separate and distinct legal entity with all of the powers it had before receivership. Many of the effects of the appointment are discussed elsewhere; this section only deals with the fundamental effects. The overall effect on the company of the appointment of a receiver is well summarised by the court in George Barker (Transport) Ltd v Eynon [1973] 1 WLR 1461, 1469: “The appointment of a receiver by the debenture holder does not end the life of the company. The company is, so to speak anaesthetised but the receiver may carry on business on its behalf. The legal persona of the company will continue to subsist until liquidation, and the company in the case of the most successful receiverships may be restored in full conscious activity when the anaesthetic is no longer applied after the debts owing to the debenture holders have been paid.”

Effects on company officers [18.535] It is perhaps the officers of the company who are most affected. The officers are not displaced by the appointment, as indicated above, but the valid appointment of a receiver and manager will ordinarily supersede the authority and management powers of those officers: Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 2 NSWR 782; (1970) 92 WN (NSW) 199, 209 (WN (NSW)). The receiver cannot dismiss the directors. If a receiver is appointed with restricted powers there will be a greater residue of powers remaining and these will, ordinarily, continue with the directors. However, where the receiver is granted wide powers of management he or she will hold those powers to the exclusion of the directors and will not need to seek their approval to act in relation to a matter within the scope of the appointment. While the powers of officers are limited by an receiver’s appointment, the directors do have authority in two situations: see generally Oswal v Burrup Fertilizers Pty Ltd (rec and man apptd) [2013] FCAFC 9; (2013) 295 ALR 708. First, they have a continuing obligation to carry out their statutory directed duties, such as the filing of accounts and returns. Thus, the directors and the secretary are required to submit a report as to affairs (a RATA) within 10 days of being served with notice of appointment: s 429(2)(b). A receiver can require an officer to report on any aspect of the affairs of the company: s 430. As well, directors continue to owe duties to their company in a receivership but their fiduciary duties are not so

[18.535]

18 Receivership

741

strictly applied when a company ceases to trade: Rosetex Co Pty Ltd v Licata (1994) 12 ACLC 269. During the receivership, the directors are entitled to inspect the books and records of the company if they are in the possession of the receiver, provided the directors do not seek to impinge upon the functions of the receiver or cause prejudice to the secured creditor’s interests: Re Geneva Finance Ltd (1992) 7 WAR 496; 10 ACLC 668. If directors or other officers attempt to hinder the work of a receiver, the latter may seek an injunction from a court to stop such interference: Re Geneva Finance Ltd. The second area where directors can retain some residual authority is over assets of the company, if any, falling outside the charge under which the receiver is appointed. One significant asset can be a litigation action available to the company against a third party. On appointment, the power to initiate or continue legal proceedings on behalf of the company is transferred to the receiver in so far as the proceedings concern charged property, or if the debenture itself charges all property of the company which necessarily includes its litigation claims. That does not necessarily mean that the directors lose their residual power to themselves institute proceedings, as long as in ding this they would not prejudicially impacts upon the debenture holder’s interests by threatening or imperilling the assets subject to the charge.110 There need not be a conflict between what the directors regard as being in the best interests of the company and what the receiver regards as being in the best interests of the secured creditor. In such a case, the relationship between the directors and the receiver is to be determined between themselves and, in the event of a dispute, the court can resolve the matter on application under ss 423 or 599. However, the receivers or the debenture holder could require an appropriate indemnity from the directors to ensure that the interests of the debenture holder in that capacity are not prejudiced: Gartner v Ernst & Young [2003] FCA 152; (2003) 21 ACLC 560. Nevertheless in many cases, in the event of dispute, a court is unlikely to sanction proceedings being brought by directors, for a receiver will usually be able to point to the need to retain company assets and not to dissipate them in what may be costly proceedings. In other respects, the directors are at liberty to challenge the validity of an appointment of a reciver, provided that this does not put the assets subject to the charge in peril. Likewise the directors may take legal proceedings on behalf of the company, and in its name, against the secured creditor, assuming that the receiver declines to do so, provided that an indemnity for costs is given by the directors. After the appointment of a receiver and manager pursuant to a charge over the whole of the assets and undertaking of the company, the directors can still use the company seal for the purpose of taking steps relating to the internal affairs of the company, such as appointing a voluntary administrator: Re Genasys II Pty Ltd (1996) 14 ACLC 729. 110 The power to bring proceedings against the debenture holder includes to consent to judgment in favour of that debenture holder: Re Anglican Development Fund Diocese of Bathurst Board [2015] NSWSC 6 at [32].

742

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.540]

Effects on company property [18.540] As we have explained, property does not vest in a receiver, but the receiver is usually given control over the property. The result is that the company remains the legal owner of the property and any sale must be effected on its behalf and in its name. Effect on creditors [18.545] Unlike liquidation, receivership does not cause an automatic stay on the initiation or continuation of legal proceedings. Consequently, unsecured creditors may commence recovery of their debts through normal court proceedings or seek to begin winding up action. However, proceedings against the assets which are subject to the security interest under which the receiver is appointed are limited. Only creditors with a priority over the relevant assets can take any proceedings. A receiver takes possession of the property covered by the security interest subject to all prior interests of other secured creditors. A debenture holder with a security interest which takes priority to the one under which the receiver has been appointed can appoint a receiver over the assets in order to enforce his or her security. Those secured creditors with interests subject to the security interests under which the appointment is made must wait until the debenture holder is satisfied, unless they can attack the validity of the security interest or the appointment.

Effects on pre-existing contracts [18.550] Potentially this issue can cause the most problems for a receiver. This is due, in part, to the fact that the state of the law is not settled satisfactorily and receivers will, in many cases, have to decide what to do about pre-existing contracts. The appointment of a receiver does not automatically terminate pre-receivership contracts: Parsons v Sovereign Bank of Canada [1913] AC 160. Some contracts may provide that on the appointment of a receiver over the property of one of the parties to the contract the other party is entitled to cancel the contract (so called ipso facto termination clauses). Amendments brought in by the Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) will provide protection for companies in receivership from the exercise of ipso facto clauses by inserting a new s 434J into the Corporations Act. That provision provides that a right can’t be enforced against a corporation for: (a) the reason of the appointment or existence of a managing controller of the whole or substantially the whole of the corporation’s property; or (b) the corporation’s financial circumstances (where a managing controller is appointed over the whole or substantially the whole of the corporation’s property); or (c) a prescribed reason; or (d) a reason that is in substance contrary to the provision. if the right arises for that reason by express provision of a contract, agreement or arrangement.

[18.550]

18 Receivership

743

The stay against the ipso facto clause lasts until the managing controller’s appointment ends or until the court makes an order under s 434J(3): s 434J(2).111 The right remains unenforceable even after the stay in respect of conduct during the stay period: s 434J(4)). This means that if an ipso facto clause would otherwise be triggered by the appointment of a receiver but is stayed by s 434J, the right to terminate or vary the contract based on the appointment of a managing controller or any other of the reasons above in (a)-(d) (based on s 434J(1)), it will not be re-engaged once the managing controllership ends. The court is given the power to order that rights are only enforceable with leave and with any conditions the court may see fit to impose, if the rights are enforceable because of a reason in s 434J(1): s 434L. Orders can be made even if the rights are likely to be exercised or are threatened to be exercised: s 434L(2). Interim orders can also be given (and an undertaking as to damages must not be required by the court): s 434L(5), (6). The stay does not apply to rights under contracts, agreements or arrangements entered into after the managing controllership commences: s 434J(5). The stay also does not apply where the managing controller consents to the exercise of the right. There is power to include further exceptions by declaration or under the regulations: s 434J(6). The court has the power to lift the stay under s 434K.112 The corporation in receivership cannot require further credit or advances of money to be provided by a party whose rights are stayed under s 434J: s 434J(8). These provisions also apply to self-executing clauses which can start to apply automatically: s 434LA. It has been announced that these changes will commence by 1 July 2018. Significantly, the new law will not apply to pre-existing contracts, only to new contracts entered into on or after that date. This means that for some time, external administrators and receivers will need to review the company’s contracts to determine their commencement. For example, many supply agreements are governed by master framework agreements, with each new order simply a continuation of the existing contract rather than the entry into a new contract. These framework agreements may last for many years and will result in many contracts used by companies not coming within the ipso facto protections because they are pursuant to a pre-commencement contract. If there is a ipso facto clause in the contract, and unless the contract which the debtor company had is repudiated by the receiver, it remains on foot. It may be beneficial for the receivership that a contract be performed and if this is the case, and the receiver does not demonstrate that they accept personal liability or

111 If the managing controller is replaced then the replacement is treated as having commenced when the original managing controller was appointed for the purposes of this section: s 434J(9). 112 For policy reasons, if there is any inconsistency between the stay provisions and the Payment Systems and Netting Act 1998 (Cth) or the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) then those Acts prevail to the extent of the inconsistency.

744

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.555]

something extra is agreed upon, the contract subsists but the receiver is not liable, for they have not adopted it: Re British Investments & Development Co Pty Ltd (1979) ACLC 32,100 (40-522). If the company in receivership continues to perform a pre-existing contract, any right of set-off between the parties is retained, even if some debts were incurred before, and some after, the receivership: Parsons v Sovereign Bank of Canada [1913] AC 160. In some cases where receivers are appointed, the company’s financial prospects are poor and the receiver may make a commercial judgment that the continued performance of the existing contract is of no advantage to the company and may decide to repudiate the contract. The receiver’s judgment will be based on whether this will affect the company’s goodwill, the sale of the company’s assets or will impair the company’s trading prospects: Airlines Airspares Ltd v Handly Page Ltd [1970] 1 Ch 193, 198-199. It is frequently the case that the company’s trading prospects are negligible which may encourage receivers to disregard prereceivership contracts without fear of damaging goodwill. If the receiver, as agent of the company, repudiates a contract the company will be liable for damages: George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462, 471. The primary exception to this rule, of which receivers must be wary, is if a receiver seeks to ignore a prior equity under a pre-existing contract of the company with a third party, under which, for example, that party may have a lien over the company’s goods. In that regard, the receiver is in no better position than the company itself and if that prior equity is ignored to the detriment of the third party, the court may award damages against the receiver, or grant the third party an injunction or an order for specific performance: Re Diesels & Components Pty Ltd [1985] 2 Qd R 456.

Effects on employees [18.555] Employment contracts are not automatically terminated by the appointment as the receiver merely becomes the agent of the company: Re Mack Trucks (Britain) Ltd [1967] 1 WLR 780.113 Such contracts are terminated, however, if the appointment is accompanied by the sale of the business or the company, if the receiver enters into a new contract with the employee that is inconsistent with the existence of the former contract or where the role of the receiver is inconsistent with the continuation of the services of the employee: Griffiths v Secretary of State for Social Services [1974] QB 468. The last category appears to be very limited. A receiver has power under s 420(2)(o) to engage or discharge employees on behalf of the company. Whether or not an employee’s contract is terminated needs to be considered on a case-by-case basis, that is, looking at each matter separately in light of the facts applicable: International Harvester Export Co v International Harvester Australia Ltd [1983] 1 VR 539. If a receiver wishes to end a contract of employment, this decision must be communicated to the employee concerned: James Miller Holdings Ltd v Graham (1978) 3 ACLR 604. If an employee’s contract is terminated and the termination 113 See also McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503.

[18.565]

18 Receivership

745

constitutes a breach of contract, they have a right to sue the company for damages. A receiver who makes a new contract with an employee will be liable under the new contract: s 419. In many cases, the receiver will want to continue to retain employees to allow the continued trading of the business. In such cases, if the receiver retains an employee pursuant to the existing contract of employment, the receiver is not liable personally for that employee’s wages. Liability under s 419 only accrues if the receiver adopts the contract of employment, or, of course, if the receiver hires fresh employees. This was discussed earlier. It should be noted that employees whose employment is terminated consequent upon a receivership, are not eligible for financial assistance under the Fair Entitlements Guarantee Act 2012 (FEG) until and unless the company enters liquidation: s 5 “insolvency event”. See also ASIC’s INFO 55: Receivership: A guide for employees (1 September 2017).

Effects on the company [18.560] The company is required to indicate in every public document that a receiver has been appointed. This is to be done by inserting a statement after the name of the company: s 428. A letterhead of the company will then look like this: ABC Ltd (Receiver and Manager Appointed). Section 161A requires a company under a managing controller or receiver, if it has changed its name within the six months before the appointment, to set out its former name on all public documents. Contravention of the section is an offence. Section 157A allows a managing controller to lodge an application with ASIC to change a company’s name without the need for a special resolution of members, where it is in the interests of creditors as a whole to do so.

EFFECT OF THE APPOINTMENT OF A COURT-APPOINTED RECEIVER [18.565] Much of what has been discussed above also applies to court-appointed receivers. However, there are some aspects of the appointment of court-appointed receivers which warrant consideration. Anyone who interferes with the court-appointed receiver or their possession of assets referred to in the order may be liable for contempt of court: Ames v Birkenhead Docks Trustees.114 Court approval should be obtained before interfering with assets in a receiver’s possession: 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd [1999] FCA 144; (1999) 17 ACLC 500. If a receiver had been previously appointed by a debenture holder, he or she is displaced by the court-appointed receiver,115 but it must be added that generally a court receiver takes property subject to any prior securities. 114 [1855] Eng R 373, referred to in Penning v Steel Tube Supplies [1988] FCA 200. See further O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [22.360]. 115 Re Slogger Automatic Feeder Co Ltd [1915] 1 Ch 478.

746

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.570]

The appointment of a court receiver will cause the powers of the directors to administer the property covered by the appointment to be suspended and the directors are, for the most part, excluded from the management of the company’s business in relation to that property.116 Any pre-receivership contract imposing active obligations upon the company – such as the production of goods – is terminated where a receiver is appointed: Re Newdigate Colliery Ltd [1912] 1 Ch 468, 473. However, if a receiver and manager is appointed, such contracts are not terminated: Re Newdigate Colliery Ltd at 474-475, 478. If a receiver repudiates a contract, the company can be sued, but only with the leave of the court.117 The appointment of a receiver does not automatically terminate contracts of employment; indeed, the retention of employees by the company for the business will be necessary, subject to the receiver’s decision as to their retention.118 The stay against ipso facto clauses can also apply to court appointed receivers, provided they are classified as managing controllers: see s 434J.

TERMINATION OF THE RECEIVERSHIP – PRIVATELY APPOINTED RECEIVERS Reasons for termination [18.570] Technically, a receivership is terminated if the receiver’s appointment is invalid for some reason. This has been discussed earlier. This section of the chapter focuses on how a valid receivership is terminated and the effect of the termination. Administration completed [18.575]

As the principal aim of a receivership is to liquidate the debt which the company owes to the debenture holder who appoints the receiver, once the receiver has paid the priority creditors and the appointor, the receiver’s administration will have been completed and the appointment will terminate. The same applies if the receiver exhausts all of the charged assets and can only partially satisfy the debenture holder.

Misconduct [18.580] The debenture will usually empower the appointor to dismiss the receiver (see [18.595]) and misconduct would probably precipitate such action by the debenture holder. If the debenture did not permis this, an application could be made to the court. The court has an inherent jurisdiction to remove a privately appointed receiver in certain instances. 116 Australian Industry Development Corp v Co-op Farmers & Graziers Direct Meat Supply Ltd [1978] VR 633, 643 (applying Moss Steamship Co v Whinney [1912] AC 254, 263). 117 O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [22.610]. 118 McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503.

[18.600]

18 Receivership

747

It was arguable under the general law whether a court could remove a receiver for misconduct on the application of the debtor company itself.119 In any event, on the recommendation of the Harmer Report [227], s 434A gives a discretion to the court to remove a receiver if it is satisfied that the receiver has been guilty of “misconduct in connection with performing or exercising any of [his or her] functions and powers”. Beyond that, the company may dispute what is claims is the receiver’s unnecessary continuation of the receivership: Goldana Investments Pty Ltd (recs & mgrs apptd) v National Mutual Life Nominees [2011] NSWSC 1134. A company could also rely on s 599 to mount an application to have the decisions of a receiver reversed or modified but this might not be adequate in certain circumstances. A receiver is a registered liquidator, and so the disciplinary rules and procedures in IPSC, Div 40 also apply though these remedies are limited to ASIC and provide no remedy for a creditor.

Resignation [18.590] If the receiver resigns he or she may be in breach of contract to the appointor, but most debentures contemplate the possibility of resignation. Removal by the debenture holder [18.595] The standard debenture will permit the appointor to discharge a receiver without cause. This allows the secured creditor to remove a receiver if it is considered that the receiver might not be acting as the appointor would like, or if the receiver fails to report sufficiently to the creditor. Removal of redundant receiver: s 434B [18.600] The Harmer Report (at [228]) observed that there was “no convenient device under either statute or the general law” to bring prolonged receiverships to an end. In some cases the continuation of a receivership may impede the conduct of a winding up and increase its costs. Hence, the Report recommended that the liquidator should be permitted to apply to the court for an order that a receiver cease to act as a receiver or retain control of all or part of the company’s property: at [229]-[230]. Section 434B implements the Harmer recommendation. The court is given, by s 434B(2), a discretion to make the order, but it can only do so if satisfied that the objectives of the receivership have been achieved, so far as is reasonably practicable. Section 434B(3) lays down four elements to which the court must have regard in determining whether to make the order: the company’s interests; the appointing secured party’s interests; the interests of the company’s other creditors; 119 The Harmer Report cited the old decision in Re Neon Signs (A/Asia) Ltd [1965] VR 125 which suggests that a court will accord a receiver a wide discretion and not remove a receiver on the application of the company except where the receiver’s misconduct is reckless or dishonest.

748

Keay’s Insolvency: Personal and Corporate Law and Practice

[18.605]

and any relevant matter. In accordance with the recommendation of the Harmer Report only applications by liquidators can be entertained: s 434B(4). In addition the court may also order that the secured party be prohibited from appointing a receiver under a security agreement, entering into possession or taking control of property to enforce a security interest, or appointing an agent to enter into possession or take control without the leave of the court: s 434B(5).

Procedure on termination [18.605] Within seven days after the end of their appointment the receiver must lodge a notice with ASIC advising this: s 427(4), ASIC Form 505. A receiver must also lodge an end of administration return (ASIC Form 5603) notify the Australian Taxation Office within 21 days: A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 58 – 30.

Effect of the termination [18.610] As one would expect, on the termination of the receivership, the company continues to exist and control of all of its property is returned to the directors. It is otherwise if a liquidator has been appointed, or another receiver is appointed, or some other insolvency administrator takes office. If the receiver dies or has resigned, the receivership will continue if a replacement is installed within a reasonable time. Continuity can be advantageous, as tax losses of the company can be carried forward and a new receiver may be able to receive the charged assets without breaching that receiver’s duty to pay the preferential debts.120

TERMINATION OF THE RECEIVERSHIP – COURT-APPOINTED RECEIVERS Reasons for termination [18.615] The reasons for termination of a court-appointed receiver and the situation that exists in each case is as set out below. Administration completed

[18.620] Once a receiver’s appointment has been completed, application to the court for a discharge order must be made: Campbell v Compagnie Générale de Bellegarde (1876) 2 Ch 181. Improper or defective appointment

[18.625] If the receiver should not have been appointed originally, he or she will be discharged: Graham v Graham (1871) 2 AJR 104. Thus, if it appears during the receivership that the receiver is biased or that there is a breakdown in their relationship with the interested parties, the court may review the receiver’s 120 See O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [15.170].

[18.645]

18 Receivership

749

appointment. Similarly, they may be removed where they are unable to function effectively because one of the parties is obstructive or uncooperative.121 Misconduct

[18.630] A court may discharge a receiver for allowing a conflict of interest to arise, where the receiver has been guilty of mismanagement or dishonesty, or the receiver has impeded the course of justice. There appears to be no reason why a corporation cannot rely on s 434A to apply for removal of a court receiver. The scope of that section has been considered at [18.585] in relation to a private receiver. The general supervisory power of the court, and ASIC, under s 423, should also be available. Procedure on termination

[18.635] The court receiver must comply with the same procedures as a privately appointed receiver once an order of discharge has been made. Also, the court receiver must adhere to any directions in the discharge order. Effect of the termination

[18.640] The effect of termination is the same as for a privately appointed receiver.

CONCLUSION [18.645] Having considered receivership, which often spells the death knell for the company, we now consider voluntary administration with its goal of saving some or all of the company’s business.

Corporations Act Corporations Regulations ASIC

Courts’ Corporations Rules

Chapter 18 – Receivership Part 5.2 – Receivers and other controllers of property of corporations – ss 416 – 434G, 434J Reg 5.2.01 RG 106 – Controller duties and bank accounts RG 16 – External administrators – reporting and lodging RG 14 – Receivers – Retention of company records Rules 4.1, 9.1, 11.2

121 See O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [16.610].

19

Voluntary Administration [19.05] INTRODUCTION .............................................................................................................. 753

[19.10] Objects of Pt 5.3A ............................................................................................. 756 [19.15] Advantages and disadvantages ...................................................................... 757 [19.20] OVERVIEW OF VOLUNTARY ADMINISTRATION .................................................. 758 [19.25] COMMENCEMENT AND TERMINATION OF THE ADMINISTRATION ........... 759

[19.30] Secured party creditor may appoint ............................................................. 760 [19.35] Liquidator may appoint ................................................................................... 761 [19.40] Company’s decision to appoint ..................................................................... 762 [19.45] An immediate effect ......................................................................................... 765 [19.50] When an administration ends ........................................................................ 766 [19.55] The deed of company arrangement .............................................................. 766 [19.60] EFFECT OF THE ADMINISTRATION .......................................................................... 766

[19.60] On the company and its members ................................................................ 766 [19.65] Shares ............................................................................................................................. 767

[19.70] On general dealings with company’s property – s 437D .......................... 768 [19.75] On transactions of the company .................................................................... 769 [19.80] On the company officers .................................................................................. 769 [19.85] Directors’ personal guarantees – s 440J ................................................................... 770

[19.90] On the company’s employees ........................................................................ 771 [19.95] On company contracts ..................................................................................... 773 [19.100] On the company’s creditors .......................................................................... 774 [19.105] On secured parties and other owners and lessors of property .............. 775 [19.105] Position prior to PPSA .............................................................................................. 775 [19.110] The current position ................................................................................................... 776 [19.120] Limitations on enforcement ..................................................................................... 778 [19.125] Rights of secured parties .......................................................................................... 779 [19.126] Vulnerabilities of secured parties ............................................................................ 780 [19.130] Non-secured owners and lessors ............................................................................ 780 [19.135] THE ADMINISTRATOR ................................................................................................. 781

[19.140] Independence ................................................................................................... 781 [19.145] Declaration of relevant relationships and indemnities: s 436DA ...................... 785 [19.150] Receivers becoming administrators ........................................................................ 786

[19.155] Removal of administrator .............................................................................. 786

752

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.160] Declaration by replacement administrator: s 449CA ........................................... 787

[19.165] [19.170] [19.175] [19.180] [19.185]

Section 447C: validity of appointment ........................................................ Court directions ............................................................................................... Supervision of administrators ...................................................................... Role and position of an administrator ........................................................ Powers and duties of administrators ..........................................................

787 788 790 791 793

[19.185] Section 437A ................................................................................................................ 793 [19.190] Sections 442A – 442F ................................................................................................. 794 [19.195] Privilege: s 442E ......................................................................................................... 796

[19.200] Administrator may agree to powers being restricted .............................. 796 [19.205] Investigations ................................................................................................... 796 [19.210] Offences ........................................................................................................................ 797

[19.215] Duty to report to creditors ............................................................................ 797 [19.220] Administrator’s opinion ............................................................................................ 799

[19.225] Liability of an administrator ......................................................................... 800 [19.230] Administrator’s lien ........................................................................................ 802 [19.235] Remuneration and expenses ......................................................................... 803 [19.240] Lodgement of accounts with ASIC ......................................................................... 803 [19.245] STATUTORY MORATORIUM AND PROTECTION OF THE COMPANY .......... 804

[19.250] Section 440D: stay of proceedings ............................................................... 804 [19.255] Winding up action .......................................................................................... 807 [19.260] Criminal or prescribed proceedings ............................................................ 809 [19.265] Sections 440F, 440G: suspension of enforcement and execution action . 809 [19.270] Exceptions to the moratorium ...................................................................... 810 [19.270] Secured parties ........................................................................................................... 810 [19.275] Perishable property: s 441G ..................................................................................... 811 [19.280] Owners and lessors who act before the administration commences ............... 811 [19.285] CREDITORS’ MEETINGS .............................................................................................. 812

[19.290] The first meeting – options to have a committee of creditors and to replace the administrator ............................................................................... 812 [19.295] Declaration by administrator: s 436DA ................................................................. 813 [19.300] Meeting requirements ................................................................................................ 813

[19.305] The second meeting – to decide on liquidation, a deed or return to the directors ............................................................................................................ 814 [19.310] Timing and extension of time .................................................................................. 815 [19.312] How long an extension of time ............................................................................... 817

[19.315] Report to creditors: s 75-225 ......................................................................... 817 [19.325] Details of the proposed deed ........................................................................ 818 [19.330] The meeting ..................................................................................................... 818 [19.335] The 45 business day limit ......................................................................................... 818

[19.05]

19 Voluntary Administration

753

[19.340] Voting ........................................................................................................................... 818 [19.345] Court’s power to review the voting ....................................................................... 819 [19.350] Secured, admitted and unliquidated claims ......................................................... 821 [19.370] Recording the votes ................................................................................................... 822 [19.375] ROLE AND POWERS OF THE COURT ..................................................................... 822

[19.380] Particular powers ............................................................................................ 823 [19.385] Section 447A .................................................................................................... 823 [19.390] The breadth of the use of s 447A ................................................................. 824 [19.395] Limits on the use of s 447A .......................................................................... 827 [19.400] Other powers of the court: ss 447B–447E ................................................... 829 [19.410] LIQUIDATION AND ADMINISTRATION ................................................................ 829

[19.415] Progress from liquidation to administration by decision of the liquidator .......................................................................................................... 829 [19.420] Progress from administration to liquidation by a vote of creditors ...... 831 [19.425] Progress from administration to liquidation by court order .................. 832 [19.430] CONCLUSION ................................................................................................................. 832

INTRODUCTION [19.05] The previous chapter examined receivership, a form of external administration which, although occurring most often when a company is insolvent, is usually based on a failure to comply with the terms of a loan instrument rather than insolvency. The next two chapters discuss voluntary administration, which is a form of external administration involving a debtor company that is insolvent or likely to become insolvent. While the usual initiator of receivership is a secured creditor, voluntary administration is typically commenced by the company itself. Voluntary administration has become a popular form of external administration since its introduction in 1993 with more than 1,000 companies entering this form of external administration each year, although the numbers of voluntary administrations have dropped considerably since their high in the financial year 2005-2006. At the same time the numbers of creditors’ voluntary liquidations have almost tripled. The overall number of companies entering external administration in the financial year 2016-2017 was 8031, with 15% of that number involving companies entering voluntary administration.1 In contrast to receivership (which is based on the underlying secured loan document), voluntary administration is a totally legislative invention. Its procedure, practice and purpose is defined in and regulated by Pt 5.3A of the Corporations Act (including the Insolvency Practice Schedule (Corporations) 2016 (Cth)) and supported by the Corporations Regulations 2001 (Cth) and the Insolvency Practice Rules (Corporations) 2016 (Cth). In enacting Pt 5.3A, the legislature adopted the recommendation of the Harmer Report, at [56], that a new voluntary procedure for companies be introduced which 1 ASIC statistics on the numbers of companies entering external administration are available from the ASIC website (http://www.asic.gov.au).

754

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.05]

would give the company and its creditors flexible alternatives to deal with the company’s financial affairs. The regime was designed to be capable of swift implementation and would be as uncomplicated and inexpensive as possible: at [54]. Traditionally, insolvent companies had two options if they wished to continue in business and not go into liquidation. They could either enter into Official Management (under the former Pt 5.3 of the Corporations Law) or a Scheme of Arrangement (under s 411 of the Corporations Law). Official Management was repealed by the Corporate Law Reform Act 1992 (Cth). It was a form of administration which allowed for a meeting of creditors of a company to appoint an official manager who would manage the company until it was restored to financial health and was able, ultimately, to repay its debts in full. While schemes of arrangement are still available under s 411 of the Corporations Act, they are mostly used for mergers and acquisitions or for complex group insolvencies (discussed further in Chapter 20). Both official management and schemes of arrangement were, and in the latter case are, costly and formal. They were and are inappropriate for many companies, and the cost and formality caused, and causes, directors of insolvent companies some apprehension in invoking them. The Harmer Committee found the use of schemes in insolvency contexts to be “cumbersome, slow and costly”, requiring at least two court attendances and also involving creditors voting in separate classes; in contrast to the prompt and expedient decision making processes under Pt 5.3A: Harmer Report, at [46]. Receivership is a flexible form of external administration, but only secured creditors or the court may initiate receivership, and this form of external administration does not inspire confidence in, or provide many benefits for, the unsecured creditors. Also, receivership is often seen in the community as the precursor to liquidation. The voluntary administration procedure’s aim is to allow companies in financial distress time to develop and implement a restructuring plan with its creditors or at least to allow time to plan for an orderly sale of the assets through liquidation. This focus on corporate reorganisation (or “corporate rescue” as it is often called) is no doubt influenced by other corporate rescue procedures such as the well-known Chapter 11 procedure contained in the Bankruptcy Reform Act 1978 (US),2 and the United Kingdom’s administration order and creditors voluntary arrangement under the Insolvency Act 1986 (UK). The 2015 Productivity Commission Report, Business Set-up, Transfer and Closure, has criticised the effectiveness of voluntary administration as a restructuring tool, stating (in Finding 13.1): “The current culture, incentives and legal framework around voluntary administration inhibit its effectiveness as a genuine restructuring mechanism.”

It recommended that voluntary administration be changed so that the administrator would be required to certify within one month that the company has reasonable prospects of being a viable business and if the administrator cannot do so, they would be under obligation to place the company into liquidation (Recommendation 13.1). This was rejected by the government, one reason given that voluntary administration was likely to operate much more effectively once safe harbour 2 See A Terzic, “Turning to Chapter 11 to Foster Corporate Rescue in Australia” (2016) 24 Insolv LJ 5.

[19.05]

19 Voluntary Administration

755

reforms were introduced, these providing “a viable alternative to formal administration in many circumstances where, under the current regime, administration is the only option”.3 Voluntary administration now has to be seen and assessed in the context of the safe harbour regime under s 588GA. A purpose of that regime is to try to allow the company to avoid administration if an informal restructuring may produce a better outcome. The “Explanatory Memorandum to the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Bill 2017” says that the threat of insolvent trading liability, combined with uncertainty as to when insolvency arises may prompt directors “to seek voluntary administration even in circumstances where the company may be viable in the longer term”. The Memorandum says that s 588GA will “drive cultural change amongst company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery instead of simply placing the company prematurely into voluntary administration or liquidation”. The Memorandum acknowledges, however, that some companies “may not be able to recover and will still proceed to voluntary administration or liquidation despite the directors’ best efforts”. Under s 588GA, “provided that the director was developing or pursuing a course of action reasonably more likely to lead to a better outcome for the company then they will still have the benefit of safe harbour in these circumstances”. Voluntary administration in Australian insolvency law is conceptually modelled on two of the principal features of personal insolvency agreements under Pt X of the Bankruptcy Act namely: • provision for an insolvent debtor to transfer control of their property to a qualified insolvency practitioner promptly and economically; and • a mechanism for the debtor to make an arrangement with their creditors without the need to make applications to the court for the purpose of convening meetings of creditors and obtaining approval of the arrangement. These are two important aspects of the Pt 5.3A regime. It provides for the appointment of an insolvency practitioner, known as an administrator, who must be a registered liquidator, to assume control of a corporation’s affairs during a period of moratorium and investigation with a view to developing what is called a “deed of company arrangement” or “DOCA”. The DOCA then regulates the relationship between the corporation and its creditors. If a DOCA is not feasible, the company will invariably go into liquidation. Voluntary administration is a form of “external administration” for the purposes of the IPSC, which means that Pt 3 of the IPSC will apply to the conduct of administrations, including court powers under Div 90. The title “voluntary administration” is something of a misnomer, because companies can go into administration involuntarily, but it was largely felt that more 3 Treasury, Australian Government Response to the Productivity Commission Inquiry into Business Set-up, Transfer and Closure (May 2017), https://www.treasury.gov.au.

756

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.10]

often than not companies themselves would initiate the administration. Since the commencement of Pt 5.3A, practice has borne out that view.

Objects of Pt 5.3A [19.10] A purpose of Pt 5.3A is to enable companies to have a fresh start by permitting the extinguishment of claims pursuant to a statutory process and thereby allowing companies to put the financial past behind them and to continue to trade on successfully. This is expressed in the objects of the Part, in s 435A, Corporations Act: Object of Part The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

This statement of purpose does not necessarily limit the purpose for which a voluntary administration can be used, as it is not meant to be an exhaustive list of acceptable purposes: Vero Insurance Ltd v Kassem [2011] NSWCA 381; (2011) 86 ACSR 607 at [81]. However, the statutory provision will guide the court in exercising discretions under Pt 5.3A (such as under s 447A orders). The outcomes of voluntary administration should promote these purposes and not be inconsistent with them. Parties seeking to attribute a purpose or goal of Pt 5.3A must do so based on the wording of the provisions in Pt 5.3A: Mighty River International Ltd v Hughes [2017] WASCA 152 at [117] (where an argument that voluntary administration leading to a deed of company arrangement needed to involve property available for distribution was rejected by the court, which allowed the “holding DOCA” to proceed). As explained earlier, s 435A does not require that voluntary administration be restricted to cases where, at the date of appointment, there is some prospect of saving a company from liquidation. Part 5.3A is to be available where, although it is not possible for a company to continue in existence, an administration is likely to result in a better return for creditors than if there were to be an immediate winding up: Re Ansett Australia [2002] FCA 90; (2002) 20 ACLC 1,187, 1,206. Under the initial control of an administrator, for example, the business may more readily be sold as a going concern, with the result that the empty corporate shell (divested of its former business) can be wound up in liquidation. In Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391, Barrett J explained (at [19]) the goal of trying to save the business using a voluntary administration: “Examination of Pt 5.3A as a whole shows that there are several purposes which together contribute to the widely stated object. The provisions imposing the various moratoriums show that there is a purpose of allowing time for unpressured but reasonably prompt consideration of possible reconstruction possibilities. The provisions as to creditors’ meetings and creditor decision making, including those concerning deeds of company

[19.15]

19 Voluntary Administration

757

arrangement, show that there is a purpose of allowing reconstruction possibilities to be pursued in such a way that, if creditors so desire, a legacy of debt may be left behind and winding up, which would normally be the product of an intolerable debt burden, may be avoided. Implicit in that, of course, is the proposition that the company will thereby be permitted to return to the mainstream of commercial life. Another purpose is that, if the company is not capable of returning to the mainstream of commercial life, there will be some better outcome for creditors than that available in an immediate winding up.”4

Nevertheless, if liquidation is the only real option, a company should, in most cases, proceed through the creditors’ voluntary winding up process. Reforms to that process introduced in the Corporations Amendment (Insolvency) Act 2007 (Cth) have made creditors’ voluntary liquidations comparable with voluntary administrations in terms of their ease of prompt appointment of a liquidator. Since this change became operational on 31 December 2007 the numbers of creditors’ voluntary liquidations have increased dramatically and the numbers of voluntary administrations have declined.

Advantages and disadvantages [19.15] The advantages of voluntary administration (for the company and the creditors) are that: • the directors are not in control of the company during the life of the administration. Part 5.3A provides for the transfer of the direction and control of the company to the administrator and this is likely to appeal to creditors who may well have lost faith or trust in the directors of the company; • the change of control can occur quickly and without too much cost; • during the term of the administration, the company is protected from attack from creditors (except where the courts specifically allow) while the administrator formulates a proposal which will be put to the creditors concerning the future of the company; • without the leave of the court, winding up cannot occur during the administration; • creditors are the ones affected by the company’s difficulties and they are the ones who are given the power to decide on its fate;5 • the administration is not usually a lengthy process, so creditors are not precluded for any substantial period from taking action against the company if a resolution of the company’s affairs is not viable; • the company can put a proposal to the creditors without the need for the sanction of the courts and this will, if accepted, bind all creditors with provable debts. Although voluntary administration has a number of advantages, there are potential disadvantages for creditors such as suppliers with reservation of title clauses in their supply contracts, who are prevented from recovering their property held by the company without the administrator’s or the court’s permission. Lessors 4 This was applied in Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95; (2015) 106 ACSR 79 and Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373. 5 As to the role of creditors in Pt 5.3A and the processes in which they are involved, see Anderson, “Decision Making in a Voluntary Administration” (2004) 22 C&SLJ 163.

758

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.20]

(landlords) are also disadvantaged by voluntary administration as they are unable to retake possession of the leased property during administration even where the lease has terminated (often achieved through the use of an ipso facto termination clause which is triggered by the appointment of an administrator). Questions have also been raised about the overall cost of voluntary administration and whether the short time frame (usually no more than 25 business days) provides sufficient time to achieve the best outcomes. It is for these and other reasons, that the safe harbour regime has been introduced.6 One significant recommendation from the Productivity Commission Report to be implemented by the Government has been the long-debated introduction of protection for companies in administration against ipso facto contract clauses. This is implemented by Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth), being the same law that introduced the safe harbour regime, which introduces ss 451E-451H into Pt 5.3A. The provisions are expected to commence operation on 1 July 2018.

OVERVIEW OF VOLUNTARY ADMINISTRATION [19.20]

See Figure 19.1 on the following page.

6 Voluntary administration was the subject of reviews in the last decade that confirmed its usefulness, one by a Federal Parliamentary Joint Committee (Corporate Insolvency Law: A Stocktake) and the other by CAMAC (Rehabilitating Large and Complex Enterprises in Financial Difficulties), both in 2004. Both found that minor changes could make the procedure work more effectively. These “fine-tuning” changes were introduced by the Corporations Amendment (Insolvency) Act 2007 (Cth). The 2015 Productivity Commission Report came up with more fundamental suggestions for change, which were not accepted.

[19.25]

19 Voluntary Administration

759

Figure 19.1: Diagram of the administration process

COMMENCEMENT AND TERMINATION OF THE ADMINISTRATION An administration of a company commences7 (pursuant to s 435C(1)) when the administrator accepts an appointment from one of the following:

[19.25]

• the company itself (s 436A); • a liquidator or provisional liquidator of the company (s 436B); or

7 See generally, Anderson, “Commencement of the Part 5.3A Procedure: Some Considerations from an Economics and Law Perspective” (2001) 9 Insolv LJ 4.

760

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.30]

• a secured party (including a secured creditor) with an enforceable security over the whole, or substantially the whole, of the company’s property but not if a person holds an appointment as liquidator or provisional liquidator of the company: s 436C. Despite the choice of avenues for appointment it is the company that typically appoints the voluntary administrator, discussed at [19.40]. However, we should first consider how liquidators and secured parties may initiate voluntary administration. Whenever there are doubts concerning whether the appointment of an administrator is valid, the administrator, the company or any of the creditors may apply to the court for an order as to the validity of the purported appointment: s 447C.

Secured party creditor may appoint [19.30] A person entitled to enforce a security interest (such as a creditor with a valid company charge) over the whole, or substantially the whole, of the company’s property may appoint a voluntary administrator under s 436C. The interest held by the creditor must be in the nature of a security,8 and must be enforceable.9 A secured creditor may be prevented from appointing a voluntary administrator because of a need to comply with statutory requirements outside of the Corporations Act, such as provisions dealing with insolvency of farmers: Re Maria’s Farm Veggies Pty Ltd (admins apptd) [2016] NSWSC 1899 (Farm Debt Mediation Act 1994 (NSW)). In that case, it was held that this would not, however, remove the court’s jurisdiction under s 447A to validate the appointment by modifying the operation of s 436C, at least where the external statute did not directly prohibit the appointment. For security interests that come within the scope of the Personal Property Securities Act 2009 (Cth), the secured party must have “perfected” its security interest within the meaning of the PPSA: Corporations Act, s 436C(1A). This will usually involve the registration of the security interest on the PPSA (although there are other ways of perfecting security), attachment of the security interest (PPSA, s 19) and a valid security agreement (within the terms of PPSA, s 20). A secured creditor may have their debt extinguished by a deed of company arrangement (which would mean that they may no longer be a creditor), but this will not prevent them from appointing a voluntary administrator as their enforcement rights are preserved under Corporations Act, s 444D(2): Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373 (in that case the second administrator was removed so as to allow the DOCA to proceed). The question whether the security interest extends sufficiently over the company’s property is determined by whether the secured creditor has the capacity to take control of so much of the company’s business property and affairs as is necessary to conduct an effective administration.10 However, in Re Australian Property Custodian 8 Re Smarter Way (Aust) Pty Ltd [2000] VSC 408; (2000) 35 ACSR 595. 9 The security interest in Photios v Cussen [2015] NSWSC 336 was held to be unenforceable because no mortgage duty imposed by the relevant Duties Act had been paid. 10 See O’Donovan, Company Receivers and Administrators (Thomson Reuters, Westlaw AU) at [41.350].

[19.35]

19 Voluntary Administration

761

Holdings Ltd [2010] VSC 492, the court found that a security over only 68% of the value of the company’s assets was not over “substantially the whole” of the assets and was therefore insufficient to appoint a voluntary administrator.11 The secured party may not appoint if a liquidator or provisional liquidator has been appointed to the company: s 436C(2). It is less common for secured parties to appoint an administrator than for the company to commence the appointment as the secured party can usually appoint a receiver who is required to act in their interests only, whereas an administrator must act in the interests of all creditors. Secured creditors may want an administration rather than a receivership where there is a need for the moratorium in order to preserve the secured assets or to sell them in a more orderly fashion than would be available in a stand-alone receivership.

Liquidator may appoint [19.35] A liquidator or provisional liquidator may appoint an administrator under s 436B(1) in the same terms as the company, that is, “if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time”. They must not appoint themselves, their partners or employees unless with creditors’ approval or with leave of the court. Approval must be given before the appointment takes place: Re Keldane Pty Ltd [2011] VSC 385. In that case the court stated (at [13]): “the prohibition in s 436B is not something to be treated as a mere formality or mere procedural obstacle. Section 436B is the expression of a legislative policy designed to keep separate the roles, tasks, duties and privileges of liquidators on the one hand and of administrators of a company on the other. Its terms require compliance and dispensation from its requirements should not be given lightly.”

In the leading decision of Taylor; Re Origin Internet Solutions Pty Ltd [2004] FCA 382, the court gave leave for the liquidator to be appointed, saying that although the court is not unduly constrained in the way it exercises the discretion conferred under the subsection: “the most important consideration is to ensure that there is no conflict of duty or interest if the liquidator is appointed as administrator. If for any reason it is preferable that a completely independent person act as administrator then the liquidator’s application must be refused”: at [6].12

The law regarding the independence of liquidators, both with respect to real or perceived lack of independence, is generally applied in these situations: see [10.210]. Even though creditors may approve an appointee, the obligation to be independent prevails and the appointment should not be taken or put to creditors if there is a lack of independence: see further [19.145]. 11 This point was affirmed on appeal, but the appeal was nonetheless allowed on other grounds: National Australia Bank Ltd v Horne [2011] VSCA 280; (2011) 253 FLR 205. The approach of the trial judge at first instance was approved in Photios v Cussen [2015] NSWSC 336. 12 See also Re Cobar Mines Pty Ltd (1998) 30 ACSR 125 and Re Nardell Coal Corp Pty Ltd [2003] NSWSC 860; (2003) 47 ACSR 122; ASIC v Diploma Group Ltd (No 5) [2017] FCA 1147. In Re Kukulovski [2013] FCA 697, the partner of the liquidator was appointed as the administrator with approval from the court.

762

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.40]

Company’s decision to appoint [19.40] In most cases, the company makes the appointment. One significant reason for this is that once a company becomes insolvent or becomes likely to become insolvent the directors are faced with potential liability for insolvent trading (s 588G) and are obliged to consider the interests of creditors: see further Chapter 16. Section 436A provides that a company may appoint an administrator of the company if the board has resolved to the effect that in the opinion of the directors the company is insolvent, or is likely to become insolvent at some future time and that an administrator should be appointed. The appointment must be in writing and the decision must be made by a majority resolution of the board of directors, or, if there is only one director, by a written resolution of the sole director. As we have seen, directors may need to quickly initiate an administration in order to avoid any possibility of their incurring liability for insolvent trading under s 588G. That is one of the purposes and inducements of the voluntary administration regime. Section 588H, the section encompassing the defence to an insolvent trading claim, includes as an aspect of the defence that the director took steps to put the company into administration: s 588H(6). This is now subject to the safe harbour protection under s 588GA. Similar inducements to appoint are given by the penalty notice regime for directors under the Taxation Administration Act 1953 (Cth), discussed in Chapter 16. In this regard, the courts have generally been liberal in interpreting relevant provisions of the Act in relation to the initial directors’ meeting under s 436A. This accords with the intention of the legislation that directors should be readily able to quickly appoint an administrator without unnecessary procedure. If they were to be required to engage in a substantial examination, administrations could not be initiated as speedily (as envisaged by the legislation) once the directors realised that the company had a problem. Although directors are not required to examine the entirety of the company’s financial position or obtain expert opinions regarding the company’s solvency, they must actually form a concluded opinion about the company’s solvency: Wagner v International Health Promotions (1994) 12 ACLC 986 (“questionable solvency” was insufficient). It is not sufficient to merely rely on a particular director’s view about solvency, particularly when the other directors have not accessed any financial information: Re Condor Blanco Mines Ltd [2016] NSWSC 1196. That opinion must be genuinely held and not be used to commence administration for a collateral purpose: Kazur v Duus (1998) 29 ACSR 321 (where the administration was designed to hinder regulatory action).13 In ASIC v Planet Platinum Ltd (in liq) [2016] VSC 120; (2016) 112 ACSR 570, the court held that directors failed to pass an insolvency resolution in good faith where they told the first creditors meeting that the company was and would remain solvent and the appointment was simply to address litigation by ASIC. The validity of appointment by the board of directors is based on considerations under the law of meetings. Thus, there is a requirement that: 13 See also the summary in Rapsey v Lime Gourmet Pizza Bar (Charlestown) Pty Ltd [2015] NSWSC 244.

[19.42]

19 Voluntary Administration

763

• proper notice (both in terms of content and timing) of the meeting be given to all directors;14 • directors are aware that the discussion is a formal meeting of the board and not an informal discussion; • directors with a conflict of interest declare their interest (s 191) and, unless exempted, refrain from voting. The board may appoint an administrator by teleconference, even where the company’s constitution required the directors “to come together” for a valid board meeting: Re Giga Investments Pty Ltd (1995) 58 FCR 106. The appointment must still be recorded in writing. It is not required of an administrator, when accepting an appointment, that they go behind what appears to be a valid resolution of the board that the company is insolvent or likely to become so: DCT v Portinex (No 2) [2000] NSWSC 557; (2000) 34 ACSR 422. There is no need for an independent verification of the facts establishing the appointment, but rather “a review of whether the resolution appointing the administrator appeared, on its face, to be valid”: Rapsey v Lime Gourmet Pizza Bar (Charlestown) Pty Ltd [2015] NSWSC 244 at [72].

[19.42]

In Re Condor Blanco Mines Ltd [2016] NSWSC 1196 at [140]. Barrett AJA

said: “in general, it is not part of the administrator’s responsibility, in assessing the validity of his or her appointment, to delve into any purpose or motive of the directors beyond that of resort to Part 5.3A administration as a response to actual or impending insolvency.”

An administrator may have a duty to investigate the validity of their appointment where they are put on notice of potential invalidity: Correa v Whittingham [2013] NSWCA 263; 278 FLR 310. In Re Condor Blanco, Barrett AJA explained the nature of this duty (at [139]): “Both at the time of the appointment and subsequently, an administrator must be attentive to any matter coming to his or her notice that may call into question the premise upon which the appointment is made, that is, that directors genuinely holding the requisite opinion concerning solvency have validly and regularly passed a resolution in terms of s 436A. Two matters will therefore have to be tested: first, the formal validity of the resolution and, second (and to the extent that testing is possible on the materials available to the administrator), whether the directors voting for the resolution appear to hold the stated opinion at the time of voting. It may be expected that an administrator will make some inquiry of those by whom he or she is approached with a view to gaining insight into the company’s financial position and thereby to subject the expressed opinion of directors to a rough check. Publicly available information will also be examined. In that way, the administrator will discover who the directors are. The administrator must see that the board consisting of those directors has adopted due process to pass, by a majority of votes, a resolution in appropriate terms. But there, in my opinion, the responsibility ends in all but very exceptional cases.” 14 See McMaster v Eznut Pty Ltd [2006] WASC 109; (2006) 58 ACSR 199 (where a few minutes’ notice was sufficient as the director already knew of the purpose of the meeting and had indicated she would refuse to attend any meeting to appoint an administrator). Compare Re Keneally [2015] NSWSC 937; (2015) 107 ACSR 172 where less than two hours notice was found not sufficient for a valid directors’ meeting in circumstances where there was no pressing financial need to appoint an administrator on short notice.

764

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.42]

For example, there is no necessary requirement to check the company’s constitution to verify that the directors’ meeting was valid. However, the fundamental authority of the company to appoint an administrator must still exist. For example, it is common for company constitutions to provide that a valid directors’ meeting must have at least two directors who are able to vote (known as forming a sufficient quorum). This is also a replaceable rule as set out in s 248F. In situations where the directors’ meeting does not have sufficient participants to form a “quorum” the appointment will be invalid: see, for example, Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201, where the company’s constitution required two directors to appoint an administrator, and only one did so, the appointment was found to be invalid.15 The requirements for a sufficient quorum can pose problems during times of financial distress as directors may wish to resign once the company becomes insolvent: see, for example, Re HPI Australia Pty Ltd [2008] NSWSC 1106 where all of the directors except one resigned.16 Directors’ meetings may also be inquorate where the members become disqualified from serving as directors (for example where they become bankrupts: Calabretta v Redpen Developments Pty Ltd [2010] FCA 81; (2010) 183 FCR 47 or are convicted of a serious criminal offence: s 206B). In such situations the court may apply a remedial provision such as ss 1322(4) or 447A to remedy the defect and preserve the administrator’s appointment: DCT v Portinex (No 1) [2000] NSWSC 99; (2000) 156 FLR 453.17 These provisions may not be used, however, where the directors have simply not undertaken what s 436A requires, such as failing to pass a resolution that the company is insolvent or likely to become insolvent: Wagner v International Health Promotions (1994) 12 ACLC 986. The administrator may rely on the statutory assumptions under ss 128, 129 when accepting their appointment: Correa v Whittingham [2013] NSWCA 263. Although directors may be liable to the company for damages if they resolve to appoint administrators in circumstances where the section does not apply, the question is “whether the directors genuinely believed that the company was insolvent or likely to become so, and whether that belief was reasonable in the circumstances. That in turn will depend largely upon whether they took adequate steps to satisfy themselves that the statutory requirements were met before resolving to appoint the administrator”: Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182. A voluntary administration that is initiated by the directors for a collateral purpose may be held to be invalid by the court. For example, in Re Keneally [2015] NSWSC 937; (2015) 107 ACSR 172, the purpose of appointing an administrator was not 15 See also Johnson, “Appointing Administrators with an Improperly Constituted Board”, (2015) 27(1) A Insol J 26 ; referring in particular to Jack James as administrator of ZYL Ltd [2015] WASC 57. 16 It is possible that directors who resign could still be de facto or shadow directors: see for example, Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504 (managing director who proposed administration in order to issue shares through a DOCA and then resigned was held to be a de facto director). 17 Substantial injustice may be found where a director was denied an opportunity to participate in the meeting and to test the voracity of the claims of the other directors that the company was insolvent: Re Keneally [2015] NSWSC 937; (2015) 107 ACSR 172.

[19.45]

19 Voluntary Administration

765

because the company was insolvent (as there was no evidence of this) but rather to put pressure on a director involved in a dispute with another director. See also ASIC v Planet Platinum Ltd (in liq) [2016] VSC 120; (2016) 112 ACSR 570. In Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504, the court held that the appointment of an administrator for the purpose of entering into a DOCA that would involve a substantial share issue to dilute minority shareholders was an improper purpose, although the court refused to set aside the administration and the DOCA, in part because the applicant delayed in seeking relief. In Re Condor Blanco Mines Ltd [2016] NSWSC 1196 at [142], Barrett AJA explained: “If it were as plain as a pikestaff, without any form of inquiry, that directors were resorting to administration for an extraneous purpose (because, for example, they actually said so or immediately obvious and observable circumstances left no alternative explanation), the practitioner asked to accept appointment would fail to discharge the relevant responsibility by accepting. Beyond any such patently obvious case, however, there can be no expectation that the responsibility at the time of appointment extends to considering possibilities of improper purpose and abuse of process.”

In the context of the safe harbour regime under s 588GA, an acceptable outcome would be that, despite the directors’ genuine efforts to “save” the company, often on appropriate advice, this is not possible, and the adviser may in fact then advise the directors that voluntary administration is the best outcome. The validity of the director’s decision to appoint an administrator may be less subject to challenge in such a case. The company may still appoint an administrator after a receiver and manager has been appointed: Re Genasys II Pty Ltd (1996) 14 ACLC 729. It should be noted that in situations of overlapping appointments it is the receiver who is usually in control of the company due to the typically extensive nature of security instruments. In addition, a company that has been through the Pt 5.3A process, and is trading under a deed of company arrangement, can appoint an administrator if the directors consider that the company is again insolvent: Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373; Beatty v Brashs Pty Ltd (1998) 16 ACLC 504. But the company itself cannot appoint an administrator if it is in liquidation or provisional liquidation: s 436A(2).

An immediate effect [19.45] The effect of the appointment of the administrator is immediate; the company comes under the authority of the administrator with protection given by the various provisions of Pt 5.3A. On appointment, the administrator is obliged to lodge a notice of appointment with ASIC before the end of the next business day after the day of appointment: s 450A(1)(a); ASIC Form 505. The administrator must also publish a notice of appointment on the insolvency notices website (s 450A(1)(b)) which may be combined with the notice of the first meeting of creditors under s 436E(3)(b): s 450A(1A). If the administrator has been appointed by a secured party, the company must be notified of the appointment as soon as practicable and in any event before the end of the next business day: s 450A(2).

766

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.50]

When an administration ends [19.50] The administration will continue until it is terminated by one of the events contained in s 435C(2) and (3). The major ones are: • a deed of company arrangement is executed by the company and the deed’s administrator (s 435C(2)(a)); • the company’s creditors resolve that the administration should end (s 435C(2)(b)); • the company’s creditors resolve that the company should be wound up (s 435C(2)(c)); • the court orders the end of the administration, for example, because of some abuse of the Pt 5.3A process (s 435C(3)(a)); • the period prescribed by s 439A(5) for the meeting of creditors ends without the convening of the meeting (s 435C(3)(b)); • the creditors’ meeting convened under s 439A ends without a resolution under s 439C being passed (s 435C(3)(e)); • the company fails to execute a proposed deed of company arrangement (s 435C(3)(f)); • the court appoints a provisional liquidator or orders a winding up: s 435C(3)(g). Also, the court can terminate an administration under s 445D on the application of the company, a creditor, the administrator, ASIC or an “interested person” on the basis that the company is solvent or the provisions of Pt 5.3A are being abused. Section 445G allows the court to make an order either validating or voiding a deed. Most second creditors’ meetings make one of the three decisions open to the creditors under s 439C, though it is rare for creditors to decide to hand the company back to the directors. In some cases, the creditors may simply not be able to agree on the terms of an arrangement due to their different interests, and no resolution is passed, in which case the administration ends under s 435C(e)(3). A lack of a quorum at the second meeting, even when adjourned, will also result in the end of the administration.

The deed of company arrangement [19.55] The expected outcome of the voluntary administration process is, as we have outlined, the execution of a deed of company arrangement. If a deed is executed it will lead to another administration, governed by the terms of the deed of company arrangement. Although both administrations are dealt with in Pt 5.3A, it is important to realise that the period of voluntary administration, and the period of the administration of a deed, are two separate administrations. This distinction will be explained in more detail when deeds of company arrangement are examined in Chapter 20. EFFECT OF THE ADMINISTRATION On the company and its members [19.60]

The most important effect is that the company’s business, property and affairs come under the control of the administrator: s 437A. Unlike in bankruptcy,

[19.65]

19 Voluntary Administration

767

but similar to liquidation, the administrator does have legal title to the company’s property during administration. The administrator acts as the agent of the company: s 437B. During the period of voluntary administration the company’s property can only be dealt with by the administrator, or with their written consent, or by the leave of the court. Transactions not so sanctioned are void: s 437D. The position and property of the company will be protected after the appointment because there is a statutory moratorium as far as recovery and enforcement of pre-appointment liabilities are concerned. As a result of the appointment, and to inform those dealing with the company, the company is required to set out, in every public document and eligible negotiable instrument after the company’s name, the expression “administrator appointed”: s 450E. This is subject to the court dispensing with this requirement. Section 161A provides that a company that changes its name during, or six months prior to, an external administration should be required to disclose its former, as well as its current, name on its public documents for the period of that administration or any subsequent liquidation. Section 161A(3), (6) and (7) allow a voluntary administrator or deed administrator to seek leave of the court for an exemption from these requirements. Contravention of s 161A(2) or (3) is an offence. Section 157A permits administrators to lodge an application with ASIC to change a company’s name without the need for a special resolution of members, where it is in the interests of creditors as a whole to do so. As one might expect, the appointment of an administrator does not affect the company’s legal status – it retains its corporate legal personality. Shares

[19.65] During the period of the administration the position of the company’s shareholders is frozen, hence s 437F provides that a transfer of shares is void in this period unless the administrator gives consent to the transfer or the court authorises it. The administrator must be satisfied that any transfer is in the best interests of the company’s creditors as a whole: s 437F(2). If consent is refused by the administrator, any of the prospective transferors or transferees, or a creditor, can apply to the court for an order authorising the transfer. The administrator may be heard on any such application: s 437F(7). The administrator may give consent subject to conditions, the terms of which can also be the subject of review by the court: s 437F(6). In deciding whether to approve the transfer the court will consider whether the proposed transfer will satisfy the purposes of Pt 5.3A under s 435A: Re Tucker-Barlow-Gerrard Pty Ltd [2003] FCA 1310; (2003) 133 FCR 83. The ability to transfer shares can be important for an administrator who is trying to save the company by selling the business (including through a deed of company arrangement).18 A potential purchaser of the business may wish to acquire the business assets via a sale or alternatively may prefer to purchase the shares in the company. The choice between different purchase methods is influenced by various 18 See further Harris, “Using Voluntary Administration to Dilute Minority Shareholdings” (2016) 28 ARITA J 22.

768

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.70]

factors including taxation issues (such as the treatment of prior losses, CGT events and deductibility of business expenses), stamp duty, accounting and fundraising issues (whether the assets will be held on the company’s balance sheet or through a subsidiary or special acquisition vehicle) as well as regulatory and licensing issues (for example foreign entities may need to acquire assets through local subsidiaries). In recent years the use of voluntary administration as a means of entering a DOCA to access the court power to compel share transfers under s 444GA has been increasingly popular: see for example, Re Mirabela Nickel Ltd [2014] NSWSC 836; Re Nexus Energy Ltd [2014] NSWSC 1910; (2014) 105 ACSR 246. A similar regime applies in relation to the alteration in status of members of a company in administration: s 437F(8) – (15).

On general dealings with company’s property – s 437D [19.70] Section 437D is very similar to s 468 which applies to companies in liquidation (see [14.250]). A transaction or dealing entered into by or on behalf of the company is void unless it is entered into by the administrator, the administrator consented to it in writing, or it was entered into pursuant to a court order: s 437D(2). The section does not apply to transactions involving statutory charges because such dealings arise under statute rather than being transactions entered into by the company: Re QMT Constructions Pty Ltd [2000] 1 Qd R 284; Re Stockport (NQ) Pty Ltd [2003] FCA 31; (2003) 127 FCR 291. If an officer or employee of the company is knowingly concerned in or party to a void transaction he or she is in breach of s 437D(5) and commits an offence, and can be ordered to pay compensation: s 437E(1). Certain transactions which would otherwise be void are in fact exempt: s 437D(3). These transactions involve payments by an authorised deposit-taking institution (ADI) out of an account kept by the company with the ADI, where the payment was made in good faith and in the ordinary course of the ADI’s business. These payments, to be exempt, must have been made on or before the day on which the administrator gave to the bank written notice that the appointment had begun or before the administrator had published notice of the appointment (under s 450A(3)), whichever occurs first. The amendments made to the Corporations Act following the introduction of the PPSA expand the scope of the “property of the company” for the purpose of voluntary administration.19 Prior to these amendments (which took effect on 30 January 2012), goods supplied under a retention of title arrangement and leased property would not be considered the “property of the company” because it was owned by someone else. Of course, the moratorium that is imposed on owners, lessors and other creditors (discussed at [19.110]–[19.120]) could still prevent this property being removed from the company’s possession. The 2012 changes introduced the concept of “PPSA retention of title property”. This was included by way of the introduction of s 435B into Pt 5.3A of the Corporations Act, which 19 See Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth); Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth). Both of these amendment acts commenced when the PPSA commenced, which was on 30 January 2012.

[19.80]

19 Voluntary Administration

769

provides that “property of a company includes any PPSA retention of title property of the company.” Section 51F defines PPSA retention of title property as being: • personal property; • used or occupied by, or in the possession of, the corporation; and • the corporation does not have title to the property; and • a PPSA security interest is attached to the property within the meaning of the PPSA; and • the corporation is the grantor of the security interest within the meaning of the PPSA. Section 435B means that the company’s property during a voluntary administration may include goods supplied under a retention of title clause as well as goods leased, consigned or bailed (in certain circumstances).20 The expansion of the concept of the company’s property in voluntary administration by s 435B is significant when considering the position of secured creditors and their rights to appoint an administrator (under s 436C) and to avoid the moratorium (Pt 5.3A Div 7), which are discussed in Chapter 19.

On transactions of the company [19.75] During the period of administration, the administrator controls all financial and other dealings of the company. If the administrator, in good faith, makes a payment or enters into a transaction, s 451C says that it is valid and effectual for the purposes of the Corporations Act and cannot be set aside in a subsequent winding up of the company. Consequently, any payments made by the administrator to creditors cannot be attacked as unfair preferences if the company were to go into liquidation at a later stage. On the company officers [19.80]

The administration’s appointment will mean that company officers can only exercise their powers with the written approval of the administrator: s 198G. Obviously this is necessary if the legislature is going to give an administrator the power to control the company – otherwise the administrator’s decisions could be undermined by the officers. In addition, the creditors may have more faith in the success of the administration if the officers cannot act without the approval of the independent administrator. But officers are not removed from their positions (although the administrator may remove or replace them under s 442A); as with a receivership they will be entitled to resume their powers if and when the administration ends (including if the company enters into a deed of company arrangement, subject to the terms of the 20 A “PPSA security interest” does not include a “transitional security interest”: Corporations Act, s 51. A transitional security interest was one enforceable prior to the commencement of the PPSA: PPSA, ss 307, 308. That transitional period ended in January 2014 and no transitional security interests remain valid. All security interests had to be perfected, by means of other than the transitional rules, by the end of January 2014.

770

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.85]

deed).21 Although the term “officer” includes receivers, court-appointed receivers, court-appointed liquidators and provisional liquidators, the ones who are most affected by this are the directors and they must, before initiating administration, weigh up the fact that they will lose control against the fact that there will be possible benefits to the company. Employees are not officers; their position is considered below at [19.90]. Directors’ personal guarantees – s 440J

[19.85]

What is often important when considering an insolvent company are the rights of creditors in relation to the enforcement of guarantees. Often directors of the company have needed to give personal guarantees to persuade banks and other financial institutions to lend money to the company. Once the company goes into administration, creditors are required to obtain leave of the court to enforce guarantees against directors, their spouses, de facto spouses or their relatives: s 440J. This provision seeks to encourage directors of companies to take early steps to place their company under the guidance and supervision of an administrator. If directors do so, then, in general, they will be protected from being attacked on the guarantees. Directors would otherwise be discouraged from appointing an administrator if the guarantee became enforceable upon the appointment. In that regard, s 440J(1) is different from other provisions imposing embargos or moratoria during Pt 5.3A administration. Provisions such as ss 440B, 440D, 440F and 440G have the purpose of preserving the status quo so far as assets and resources of the company itself are concerned. In contrast, s 440J(1) affects the assets of the director and does not imperil the assets of the company: National Australia Bank Ltd v King [2003] NSWSC 525; (2003) 45 ACSR 413. The protection offered by s 440J extends to proceedings “in relation to” the guarantee. The words “in relation to” are of wide meaning and are “satisfied by the existence of a relationship or connection between the guarantee and the proceeding”: Waco Kwikform Ltd v Jabbour [2010] NSWSC 1379 (extension of caveat over property covered by director guarantee). The courts will generally refuse leave to a creditor to proceed under a guarantee. There is a presumption underlying Pt 5.3A that creditors ought not to be able to proceed against guarantors where the company is in administration. In Wallabah Pty Ltd v Navillo Pty Ltd (1997) 15 ACLC 396, relief under s 440J was refused where a director/guarantor disputed the validity of the guarantee and the amount owing, and this was known to the creditor, and the administrator was trying to sell the company’s major asset, and the creditor was not able to show it would suffer any disadvantage if the orders were not made. The disadvantage or prejudice that may be suffered by the guarantee creditor is a relevant consideration when determining whether to grant leave: see for example, Waco Kwikform Ltd v Jabbour [2010] NSWSC 1379. An issue can arise if the fact of leave being granted might have an adverse impact on any deed of company arrangement, for example, that might be supported by that director: National Australia Bank Ltd v King [2003] NSWSC 525; (2003) 45 ACSR 21 See Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 19 ACLC 659, 692.

[19.90]

19 Voluntary Administration

771

413. Leave was granted in BBC Hardware Ltd v GT Homes Pty Ltd (1997) 15 ACLC 431, where no such prejudice to the deed could be shown.22 But once a company has entered into a deed of company arrangement, s 440J does not apply and proceedings can then be taken against the guarantors.23 Leave is not required unless the circumstances come within the section; for example no leave is needed if the creditor obtains a judgment against the director guarantor before the company whose debts are guaranteed enters administration and the creditor wishes to have a bankruptcy notice issued. Section 440J is only concerned with the commencement of proceedings in relation to a guarantee or the enforcement of the guarantee; it does not restrict steps which may be taken by a judgment creditor to execute against the property of the judgment debtor guarantor to enforce the judgment debt itself: Re Behan (1995) 13 ACLC 1644, 1646. In Bank of Western Australia Ltd v Clift [2010] QSC 366; (2010) 80 ACSR 163, it was held that continuation of existing proceedings against the guarantor did not require leave under s 440J as the potential to discourage the appointment of an administration was minimised compared with a guarantee that had not yet been enforced. A similar finding was made in Mizuho Bank Ltd v Ackroyd [2016] NSWSC 1148.

On the company’s employees [19.90] Employees are not specifically affected by the legislation, although their retention as employees will very much depend on the outcome of the Pt 5.3A process.24 A contract of employment may provide the power to terminate in certain situations, including on insolvency or redundancy. However, in the absence of such a provision, the insolvency of the employer or employee or the purported redundancy of the employee’s position do not provide a power to terminate the contract at general law and the courts will be reluctant to imply such a term into the contract: Re South Head & District Synagogue (Sydney) (admin apptd) [2017] NSWSC 823. In that case it was held that a purported termination of a Rabbi’s employment was not permitted under the contract (which incorporated Jewish law and life tenure for the Rabbi) but that the administrator was not obliged to continue paying the employee. It is open to an employee whose contract is unlawfully terminated to elect to continue the contract rather than accept the repudiation by the company (through the administrator), but in such a case there is no obligation on the company to continue providing benefits under the contract. If the administrator wishes to continue trading the business with a view to selling it as a going concern, the retention and continuing support of at least some employees may be essential. Employees often have a good understanding of the nature (and problems) of the business and can assist an administrator with their reporting obligations by helping to identify creditors, locate and manage assets, 22 See also Coates Hire Operations Pty Ltd v McNaughton [2006] NSWSC 841; (2006) 24 ACLC 765. 23 Re Andersens Home Furnishing Co Pty Ltd (1996) 14 ACLC 1,710; cf Stegbar Pty Ltd v Mayfield (1994) 13 ACSR 354. 24 For a detailed examination see Anderson, “Voluntary Administration and the Protection of Employee Entitlements” (2012) 30 C&SLJ 170.

772

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.90]

and advise on how best to manage the business during the administration. It is also possible that employees may wish to buy out the business through a DOCA. Just as the management of a company that is not in voluntary administration may terminate the employment of employees, the voluntary administrator has the ultimate management power of the company and may similarly terminate employment contracts. If the administrator does terminate an employee’s services, the termination may give rise to rights to sue for unfair dismissal under statute or breach of contract at general law, but no personal liability will be incurred by the administrator who terminates the employment contract even if by causing the company to breach it. This is because the administrator did not personally engage the employees when they were appointed – the employment contracts for existing employees were originally signed by the company and the administrator assumes no responsibility for them simply on being appointed as administrator.25 While an employer can be ordered by a court to refrain from dismissing the employees during an industrial dispute, once the company enters administration those orders are subject to the administrator’s discretion to dismiss: Patrick Stevedores Operations No 2 Pty Ltd v MUA [1998] HCA 30; (1998) 195 CLR 1. Administrators are therefore only liable for the contracts of employment of employees they take on after their appointment (s 443A), including their ongoing employee entitlements. Employees of companies in voluntary administration are not eligible for claims under the Fair Entitlements Guarantee Act 2012 (Cth): see s 10 (which requires an insolvency event to have occurred) and s 5 (which defines an insolvency event as the appointment of a liquidator or bankruptcy trustee). For those employees who are retained, the administrator will pay ongoing wages and other entitlements of the employees out of the assets and trading income of the company. But the administrator is not personally liable for their ongoing accrual of employee entitlements. These payments are an expense of the voluntary administration. And given that voluntary administration is an interim form of external administration, employee entitlements that arose and existed prior to the appointment of the administrator will not usually be paid during voluntary administration; that will depend on the outcome of the Pt 5.3A administration. Employees are of course creditors of the company even if they may be contingent creditors in respect of such entitlements as recreation and long service leave. On that basis, employees are entitled to vote in respect of their claims that are deemed crystallised as if the company entered into a hypothetical liquidation as at the commencement of the administration.26 The courts are concerned to ensure that employees are able to take part in the Pt 5.3A process as creditors. In Pasminco Ltd [2003] FCA 265; (2003) 45 ACSR 1, in relation to notice of the meeting being given to employees, the court emphasised the need for creditors to be appropriately notified and informed (at [19]): 25 For a contrary view, see Wellard, “Debts ‘Incurred’ by Receivers, Administrators and Liquidators: The Case for a Harmonised Construction of ss 419, 443A and 556(1)(a) of the Corporations Act” (2013) 21 Insolv LJ 60 which contains a detailed examination of s 443A and employee entitlements. 26 Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24; Green v Giljohann [1995] VicSC 310; (1995) 17 ACSR 518.

[19.95]

19 Voluntary Administration

773

“[m]ore particularly is this so where there is a large body of creditors, such as employees, each with claims modest by reference to the overall indebtedness of the companies subject to deeds of company arrangement, but substantial and significant for each employee.”

In the Ansett administration the court allowed various unions representing employees to act as their proxies at the first meeting of creditors.27

On company contracts [19.95] Contracts with a company under administration are not automatically terminated. The appointment of an administrator does not show an intention on the part of the company to repudiate contracts already entered into, nor does it necessarily constitute a breach or repudiation of a continuing contract: Smith v DCT (1997) 71 FCR 150; (1997) 15 ACLC 3. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) provides protection for companies in administration against ipso facto clauses in contracts that are triggered by administration. These amendments introduce new provisions ss 451E-451H into Pt 5.3A. Section 451E(1) provides that a right can’t be enforced against a corporation for: (a) the reason that the company has come or is under administration; or (b) the company’s financial position, if the company is under; or (c) a prescribed reason; or (d) a reason that is in substance contrary to the provision. if the right arises for that reason by express provision of a contract, agreement or arrangement. The stay against the ipso facto clause lasts until the administration ends or until the court makes an order under s 451E(3), or until the company is fully wound up in a liquidation: s 451E(2). The right remains unenforceable even after the stay in respect of conduct during the stay period: s 451E(4). This means that if an ipso facto clause would be triggered by the appointment of a administrator but is stayed by s 451E, the right to terminate or vary the contract based on the administration will not be re-engaged once the administration ends. The court is given the power to order that rights are only enforceable with leave and with any conditions the court may see fit to impose, if the rights are enforceable because of a reason in s 451E(1): s 451G. Orders can be made even if the rights are likely to be exercised or are threatened to be exercised: s 451G(2). Interim orders can also be given (and an undertaking as to damages must not be required by the court): s 451G(5), (6). The stay does not apply to rights under contracts, agreements or arrangements entered into after the administration commences: s 451E(5). The stay also does not apply where the administrator consents to the exercise of the right: s 451E(7). There 27 Re Ansett Australia; Rappas v Ansett [2001] FCA 1348; (2001) 39 ACSR 296.

774

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.100]

is power to include further exceptions by Ministerial declaration or under the regulations: s 451E(5), (6). The court has the power to lift the stay under s 451F.28 The company in administration cannot require further credit or advance of money to be provided by a party whose rights are stayed under s 451E: s 451E(8). The above provisions also apply to self-executing provisions which can start to apply automatically: s 451GA. It is anticipated that these changes will commence on 1 July 2018. Unlike a liquidator, an administrator does not have any statutory right to disclaim contracts. If an administrator chooses to repudiate a contract, the other party will, as is usually the case under a receivership, be left with a claim which is an unsecured claim against the company for damages.29 Of course, the administrator is also an “officer” of the corporation and must exercise their powers for a proper purpose and in good faith (s 181) and must exercise due care and diligence: s 180. If a continuing contract is performed by the company when under administration the administrator is generally not liable for its continued or non-performance, just as a receiver is not liable in those circumstances. The administrator will be liable under s 443A for new contracts entered into, including with new employees engaged during the course of the administration. The liability imposed on an administrator under s 443A is discussed further at [19.225].

On the company’s creditors [19.100] The fact that the appointment of an administrator leads to a statutory moratorium substantially affects the creditors. One consequence of the moratorium is that legal proceedings, winding up proceedings and execution against company property cannot be commenced or continued by creditors (ss 440A, 440D, 440F) while the company is in administration. However, for some creditors, Pt 5.3A does impose a more onerous interference with their normal rights than under the liquidation or receivership provisions. For example, unlike liquidation, creditors who can claim title to assets – under lease agreements, supply of goods on consignment, or under retention of title clauses – are restrained from repossessing their assets once the company enters administration. The specific restrictions imposed on some secured creditors will be discussed later. Transactions that confer an interest in personal property (such as goods or accounts receivables) in order to secure the payment or performance of an obligation (including a debt) are “security interests”: PPSA, s 12(1). The PPSA also deems certain arrangements, including long-term leasing arrangements of personal property and commercial consignments, to be security interests: PPSA, s 12(3). The result of this is that many forms of commercial arrangements, such as supplies of 28 If there is any inconsistency between the stay provisions and the Payment Systems and Netting Act 1998 (Cth) or the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) then those Acts prevail to the extent of the inconsistency: s 451H. 29 Except where an award of damages would constitute an inadequate remedy: see Re Diesels & Components Pty Ltd [1985] 2 Qd R 456.

[19.105]

19 Voluntary Administration

775

goods under retention of title and finance leasing arrangements, need to be perfected under the terms of the PPSA. Perfection for most forms of arrangements now require registration of a financing statement, in addition to other requirements under the PPSA (see, in particular, ss 18 – 21). Errors in a financing statement may cause the security interest to be “unperfected” unless also perfected in another way. This is a significant issue in voluntary administration because unperfected security interests “vest in the grantor”: PPSA, s 267.30 This means that the secured party becomes unsecured and other perfected secured parties take priority. This occurred in Re Maiden Civil (P&E) Pty Ltd; Albarran and Pleash v Queensland Excavation Services Pty Ltd [2013] NSWSC 852; (2013) 277 FLR 337, where a lessor of excavation equipment failed to perfect their security interest and had to give up their title to the equipment to receivers appointed over the lessee (known as the “grantor” under the PPSA) by a secured party with a perfected interest in all of the grantor company’s property. The security interest of the lessor “vested” in the lessee when the lessee entered voluntary administration.31 Creditors are entitled to vote at two creditors’ meetings (ss 436E, 439C), to vote to remove the administrator and appoint someone else at the first creditors’ meeting (s 436E(4)) or thereafter (IPSC, s 90-35), to determine if there should be a committee of inspection appointed (s 436E(1)), and to decide, inter alia, whether or not to accept a deed of company arrangement (s 439C) or to put the company into liquidation. In addition, creditors have rights to seek information from the voluntary administrator (including the production of books and reports) and are entitled to receive a range of information on the progress of the administration: see generally Div 70 of the IPSC and IPRC, and IPRC, s 75-225 (report to creditors prior to second meeting). Secured parties may refrain from voting at the final creditors’ meeting in order to retain their right to realise or otherwise enforce their security even if a deed of company arrangement is entered into: s 444D(2). The general right of creditors to call a meeting to vote to remove an external administrator under IPSC, s 90-35 does not apply to voluntary administrations: IPSC, s 75-15(5)(b); nor if the company in administration is a member of a pooled group: IPSC, s 80-27(5)(b).

On secured parties and other owners and lessors of property Position prior to PPSA

[19.105] Prior to the commencement of the PPSA regime on 30 January 2012, Pt 5.3A contained different provisions detailing the effect of voluntary administration on various stakeholders, including secured creditors (previously) and owners and lessors of property who were not (at that time) considered secured creditors. In summary, while these provisions stated that charges were unenforceable during administration (prior s 440B, now substantially amended), the law also allowed 30 See also Corporations Act, s 588FL. 31 See also White v Spiers Earthworks Pty Ltd [2014] WASC 139; (2014) 99 ACSR 214; Forge Group Power Pty Ltd (in liq) (rec & man appt) v General Electric Int Inc [2016] NSWSC 52.

776

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.110]

major secured creditors to take action within the 13 business day “decision period” (s 9) provided that they had security over the whole or substantially the whole of the company’s property (without the extended scope of that term under s 435B): prior s 441A (now substantially amended). Non-major secured creditors were bound by the moratorium from the appointment (prior s 440B). Both major and minor secured creditors could continue enforcement action that began prior to the appointment of the administrator (prior s 441B). Owners and lessors whose property was being used by the company in administration (or was at least in the company’s possession) could not retake possession without the permission of the administrator or leave of the court (prior s 440C, now repealed). The introduction of the PPSA brought substantial amendments to the Corporations Act when the PPSA regime commenced on 30 January 2012. There were several significant changes for Pt 5.3A. The most significant change was brought about to accommodate the concept of a security interest under the PPSA, which is broader than the long-established concept of a company charge. The PPSA identifies a security interest by the substance rather than the form of the transaction. The result of this is that a number of commercial arrangements, including supplies of goods with retention of title (ROT) claims, and finance leases, are now classified as involving security interests. Furthermore, some transactions that do not have the purpose of securing obligations are deemed to be security interests because they involve apparent ownership. Certain long-term leases of goods, commercial consignments and some assignments of book debts are deemed security interests under the PPSA. Therefore, the prior distinction between secured creditors with a company charge on the one hand and owners and lessors of property used by the company on the other, is no longer as relevant except to the extent that the transaction involving the owner/lessor and the company is not a security interest under s 12 of the PPSA. The statutory review into the operation of the PPSA, conducted by leading finance and PPSA lawyer Bruce Whittaker, made over 400 recommendations to change the PPSA in 2015, to which, at the time of writing, the Government had not yet responded.32 The current position

[19.110]

Part 5.3A draws a distinction between third parties with rights in property used or in the possession of the company that are secured parties and those that are not secured parties (ie, some owners will not hold security interests in property used by the company in administration). A secured party is defined in s 51B of the Corporations Act as a party who has a security interest, either because of the PPSA (if the security interest is a security interest defined under that Act) or because of a charge, lien or pledge. This recognises that there will be chargees, lienees and pledgees who have security in property but not “security interests” for the purposes of the PPSA. For example, a mortgagee with a mortgage over land does not hold a PPSA security interest, as interests in land are generally excluded from the PPSA: s 8. Such a party would be said to hold a “charge” under the definition in s 9 of the Corporations Act, which defines a charge to include a mortgage, and this charge would make the mortgagee a secured party under s 51B.

32

See Whittaker, “Review of the Personal Property Securities Act 2009” (27 February 2015), https://www.ag.gov.au.

[19.110]

19 Voluntary Administration

777

The distinction between a PPSA security interest and a non-PPSA security interest is important because unperfected PPSA security interests will vest in the grantor company (which is typically the debtor who is granting a security interest in the property, but it may be a guarantor granting a security interest in its property for a third party debtor) upon the appointment of a voluntary administrator: PPSA, s 267. The Corporations Act also covers the rights of third parties in property used or in the possession of the company in administration who are not secured parties (either under the PPSA or otherwise). For example, a bailor of goods under a bailment for less than 12 months is unlikely to be a secured party because its arrangement is not a security interest under the PPSA: see PPSA, ss 12, 13. The bailor is an owner, not a chargee, lienee or pledgee and hence is not a secured party for the purposes of the Corporations Act: Corporations Act, s 51B.33 If the bailee is a company that enters voluntary administration, the bailor (as owner) still has rights in the property, but the exercise of those rights may be affected by the moratorium that exists during voluntary administration. The distinction between secured parties and non-secured owners and lessors is set out in s 440B, which states: Restrictions on exercise of third party rights Item If the third party is … 1. a secured party in relation to property of the company, and is not otherwise covered by this table 2. a secured party in relation to a possessory security interest in the property of the company 3. a lessor of property used or occupied by, or in the possession of, the company, including a secured party (a PPSA secured party) in relation to a PPSA security interest in goods arising out of a lease of the goods

then … the third party cannot enforce the security interest.

the third party cannot sell the property, or otherwise enforce the security interest. the following restrictions apply: (a) distress for rent must not be carried out against the property; (b) the third party cannot take possession of the property or otherwise recover it; (c) if the third party is a PPSA secured party – the third party cannot otherwise enforce the security interest.

33 See further Re Arcabi Pty Ltd [2014] WASC 310; (2014) 288 FLR 236 (non-PPSA bailment and consignment, albeit involving company in receivership).

778

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.120]

Restrictions on exercise of third party rights Item If the third party is … then … the following restrictions apply: 4. an owner (other than a lessor) of property used or occupied by, or (a) the third party cannot take in the possession of, the company, possession of the property or otherwise recover it; including a secured party (a PPSA secured party) in relation to a PPSA (b) if the third party is a PPSA security interest in the property secured party – the third party cannot otherwise enforce the security interest.

Limitations on enforcement

[19.120] Section 440B imposes certain limitations on secured parties in exercising their rights in property of the company, including PPSA retention of title property, or other property used or occupied by, or in the possession of, the company. The default position is stated in item 1 of the table that appears at the end of s 440B, which is that the secured party cannot enforce the security interest against the property. If the secured party does not fall within one of the following three situations, then this is the position. 1. A secured party who has a possessory security interest cannot sell the property or otherwise enforce their security interest in relation to the property: item 2. A possessory security interest is defined as a PPSA security interest that is perfected under that Act by possession or control, or as a lien or pledge in relation to the property: s 51D.34 2. A secured party who is a lessor of goods used or occupied by the company or in the possession of the company in administration (whether the party has a PPSA security interest or not) cannot take possession of the property or otherwise recover it. The party is also prohibited from carrying out distress for rent against the property or otherwise exercising enforcement rights under the PPSA: item 3. 3. A secured party who is an owner, but who is not a lessor, of property used or occupied by the company or in the possession of the company (whether under a PPSE security interest or not) cannot take possession or otherwise recover the property and cannot exercise PPSA enforcement rights against the property: item 4. This is consistent with the broader prohibition on enforcement processes during administration under ss 440D, 440F. Sections 440B, 440D and 440F each have exceptions where the administrator or the court grants permission. Decisions prior to the introduction of the PPSA suggest that the court will be reluctant to grant permission to take enforcement action under s 440B as such action could limit the effectiveness of administration in achieving the goals set out in s 435A: see for example Re Java 452 [1999] VSC 252; (1999) 32 ACSR 507. For a discussion of the relevant factors that the courts will take into account when considering whether to grant leave see: Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585, 614 [146]–[148]. The court’s power to grant leave is unqualified: Toll Holdings Ltd v Stewart [2016] FCA 256; (2016) 338 ALR 602 at [57]. In Toll, Rares J explained (at [56]: 34 A banker’s lien is exempt from Pt 5.3A Div 6: s 440JA.

[19.125]

19 Voluntary Administration

779

“the discretionary power to grant leave under ss 440B and 440D cannot be fettered by inflexible rules. The interests of justice in all of the circumstances of each case will be different and affected by those particular considerations.”

Rights of secured parties

[19.125] A secured party (as defined in s 51B) may exercise rights under Pt 5.3A Div 7. That Division allows for certain rights that may otherwise be restricted under Div 6 to be exercised. Pt 7.3A Div 7 is divided into secured parties who have security interests (Subdivision B) and those that do not (Subdivision C). Security interests are defined in s 51A as either: a PPSA security interest or a charge, lien or pledge. The moratorium that operates under ss 440B and 440F does not apply to a secured party, or to a receiver or other controller that it appoints, provided that the secured party has a security interest over the whole or substantially the whole of the company’s property and takes enforcement action either before or during the “decision period”: s 441A. The decision period is defined in s 9 as a 13 business day period beginning either on the commencement of the administration or when the secured party receives notice of the administration under s 450A. The secured party must take enforcement action against all of the secured property: s 441A(1)(b), (2)(d). In practice it is common for secured parties to obtain the prospective permission of the administrator by way of a deed of consent, which allows the secured party to take enforcement action even after the decision period.35 Thus, a secured party with security sufficient to come within s 441A may appoint a receiver or otherwise take enforcement action (for example by retaking possession as mortgagee in possession) even after the commencement of voluntary administration. The concept of “substantially the whole of the company’s property” was discussed at [19.30]. It should also be noted that s 435B expands the concept of the company’s property to include “PPSA retention of title property” (defined in s 51F). This could pose a problem for secured parties over companies that have few assets beyond goods supplied under retention of title or leases, as the secured party may not be able to establish that its security interest covers “substantially the whole” of the property. A secured party (whether with a substantial security interest or not) may also continue with enforcement action that was commenced prior to the commencement of the administration: s 441B. The forms of pre-appointment enforcement action are set out in s 441B(1), including entering into possession of the property, agreeing to sell the property or “exercising any other power in relation to” the property. Secured parties with security interests in perishable goods, regardless of whether the security interest is substantial or not, may recover the goods pursuant to s 441C. Furthermore, s 441E allows a notice to be given pursuant to a security agreement at any time. 35 See Katekar, “The Validity of Deeds of Consent in Administrations” (2008) 20 A Insol J 26.

780

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.126]

Vulnerabilities of secured parties

[19.126] There are two potential vulnerabilities for secured parties under Div 7, Subdiv B: firstly, the vesting rules for unperfected security interests; secondly, the potential for the court to make orders limiting their rights under s 441D. The vesting rules in the PPSA provide that an unperfected security interest will vest in the company in administration (as grantor of the security interest) if the security interest is unperfected when the administrator is appointed: PPSA, s 267. There are certain exceptions to this rule in PPSA, s 268. Commercial consignors and lessors or bailors under a PPS lease (as defined in s 13 of the PPSA) may receive compensation if their security interests are vested under s 267: PPSA, s 269. The Corporations Act also contains a vesting rule, which depends upon the timing of the security interest being created and the appointment of the administrator: discussed further in Chapter 15. The court may limit the power of secured parties in relation to the secured property under s 441D, but not if the secured party takes advantage of s 441A (ie substantial security interests enforced before or after the decision period): s 441D(1). The court may make orders limiting the secured party or its receiver or other controller from exercising certain powers or performing certain functions if the court can be satisfied that the secured party’s interests would be “adequately protected”. It is unlikely that depriving the secured party of its rights without compensation would constitute adequate protection: Debis Financial Services (Aust) Pty Ltd v Allied Bellambi Collieries Pty Ltd (1999) 17 ACLC 1,636; [1999] NSWSC 935. The exercise of discretion under s 441D may be guided by cases on s 444F: see [20.120]. Non-secured owners and lessors

[19.130] If the owner or lessor of property that is used or occupied by, or in the possession of, the company in administration but which is not covered by a security interest (either a PPSA security interest or other security interest as defined in s 51A of the Corporations Act), their rights may come within Pt 5.3A Div 7, Subdiv B of the Corporations Act. As noted above, previously s 440C dealt with owners and lessors who were not secured parties, but many owners and lessors of personal property are now classified as secured parties because they have a PPSA security interest. Section 441F provides that a person (including a receiver) may take possession or assume control of property used or occupied by, or in the possession of, the company in administration or exercise any other power in relation to the property, provided that the action was taken before the beginning of the administration. Section 441F does not require the owner or lessor to have physically taken possession, it is enough if re-entry is secured by the issuing or serving of process and no separate leave is required under s 440C: Lenin v Albarran [2003] NSWSC 1066; (2003) 21 ACLC 132. What will constitute sufficient action to recover possession, including the requirements of prior notice under property statutes, and the possibility of relief against forfeiture, is governed by the law of leases. Non-secured owners or lessors may also recover perishable property (s 441G) and may give a notice under an agreement about the property: s 441J. Similar to the

[19.140]

19 Voluntary Administration

781

position of secured parties, the court may grant orders limiting the powers of a receiver or other controller from taking action against the property: s 441H.

THE ADMINISTRATOR [19.135] An administrator must be a registered liquidator (s 448B) who gives consent in writing to accept the appointment: s 448A. A breach of s 448B is regarded seriously – a fine of $4,500 or imprisonment for six months, or both, being the penalty imposed. There are several factors which disqualify a person from acting as an administrator. These are listed in s 448C(1) and include a person who is: • a creditor of, or has an interest in, the company, of over $5,000 (s 448C(1)(a) – (b));36 • a director, secretary, senior manager or employee of the company (s 448C(1)(c)); • a director, secretary, senior manager or employee of a company that is a mortgagee of the company’s property (s 448C(1)(d)); • an auditor (s 448C(1)(e)) or a partner or employee of an auditor (s 448C(1)(f)) of the company; • a partner, employer or employee of a director, secretary, senior manager or employee of the company (s 448C(1)(g)); • an insolvent under administration.37 We have seen that if a company is in liquidation or provisional liquidation the liquidator or provisional liquidator (or employees, partners and other specified persons) are not permitted to act as administrator without the approval of creditors or the leave of the court: s 436B(2). If an administrator accepts an appointment while disqualified, they may be removed but that does not invalidate their appointment or render invalid any of their decisions or actions: Viscariello v Macks [2014] SASC 189; (2014) 103 ACSR 542 at [115].

Independence [19.140] An administrator must be independent in the same way as a trustee or a liquidator: Commonwealth Bank of Australia v Fernandez [2010] FCA 1487; (2010) 81 ACSR 262 at [63]. 36 See Re ACN NPD 008 144 536 Ltd [2004] NSWSC 450; (2004) 49 ACSR 527 (administrators of subsidiaries were trustees of parent company’s assets and were owed over $60,000 in that capacity, leave was granted to act as administrators subject to undertakings being given by them). 37 The term “insolvent under administration” is defined in s 9 of the Corporations Act to include someone who is an undischarged bankrupt or someone who is subject to a Pt IX debt agreement or a Pt IX debt agreement or a Pt X personal insolvency agreement under the Bankruptcy Act. Any person who becomes an insolvent under administration will have their registration as a liquidator automatically cancelled (IIPSC, s 40-20(1)(a)) and they will be ineligible to apply for re-registration for a further 10 years (IPSC, s 20-20(4)(d)).

782

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.140]

The same test applies generally, whether a fair-minded lay observer38 might reasonably apprehend that the administrator might not bring an impartial mind to the external administration of the company. Different issues can arise in administrations. The process leading up to the appointment of an administrator can involve a number of parties. The court accords the fair-minded observer knowledge of the reality of how administrators are selected and appointed. In one case, the appointment of administrators identified and selected by receivers of the company did not raise any question of their independence. The fair-minded observer would be taken to know that voluntary administrators may be appointed both by the company and by a secured creditor and that the administrator is required to make and disclose a declaration of relevant relationships and indemnities. That observer would also be taken to know that the receivers, and administrators, were accountants and professional insolvency practitioners in a competitive market, and that it would be expected that the former would be familiar with the latter’s competence, expertise and professionalism.39 There are particular disqualifications, at least without court leave. The purpose of the disqualifications in s 448C (and s 532(2)) is to give additional protection to the appearance of independence by excluding persons in those categories, whether or not they may be thought to have any conflicts of interest. In relation to all persons other than those named in the sections, the court must exercise its own judgment as to whether there is independence and an appearance of independence when the issue is raised.40 The court will decide to remove an administrator where it will be for the better conduct of the administration: Re Recycling Pty Ltd [2015] NSWSC 1016; (2015) 107 ACSR 406 at [94] (and the cases cited therein). The onus is on those seeking removal to demonstrate the benefit to the creditors. That burden will not be easy to discharge if the administrator has become well acquainted with the business and affairs of the company, with the result of the removal that substantial costs will be incurred by the replacement administrator: Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230. At the same time, the court will assess the whole circumstances and even where a valid concern about independence exists, that won’t inevitably lead to removal of the administrator. For example, in Re Korda, Ten Network Holdings Ltd (Administrators Apptd) (Recs and Mgrs Apptd) [2017] FCA 914, the court appointed another registered liquidator to investigate and report to creditors on specific matters in which the administrators may have been seen to have a conflict. The courts should also be “alert to the possibility that allegations of bias and conflict may [merely] reflect the tensions often present in an administration”: Hughes v Receivers and Managers of Westgem Investments Pty Ltd (No 3) [2012] WASC 360 at [18]. 38 In Re Korda, Ten Network Holdings Ltd (Administrators Apptd) (Recs and Mgrs Apptd) [2017] FCA 914, the court rejected arguments that this test should be applied in voluntary administration as being assessed against the standard of the fair-minded creditor (having regard to s 435A). 39 ASIC v Franklin; Re Walton Constructions Pty Ltd [2014] FCAFC 85; (2014) 223 FCR 204. 40 Domino Hire Pty Ltd v Pioneer Park Pty Ltd [2000] NSWSC 1046; (2000) 18 ACLC 13.

[19.140]

19 Voluntary Administration

783

The administrator is a fiduciary in relation to the creditors and has responsibilities to the stakeholders in the administration as much as does a liquidator. Both before and during the appointment, the administrator must “act objectively in a manner which gives due regard and balance to the interests of all creditors, including different classes of creditors where different classes exist”: Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 63 FCR 391. However, the administrator does not owe their fiduciary duties to individual creditors, and individual creditors cannot sue the administrator for compensation arising from breach of those remedies. The administrator’s fiduciary obligation (as an officer of the company) is owed to the company and the company (or another party through a derivative action) may seek to enforce the duty: see Macks v Viscariello [2017] SASCFC 172. The Macks case also demonstrates that not everything that an administrator does will fall within their fiduciary duties. In that case, compliance with statutory reporting obligations did not give rise to fiduciary duties because fiduciary duties are proscriptive not prescriptive in Australia (following Breen v Williams [1996] HCA 57; (1996) 186 CLR 71). It was also held that administrators do not owe a duty of care to individual creditors when carrying out their statutory obligations, although they owe statutory duties to the company to act properly and with due care and diligence. Even if the administrator can act objectively, the fair-minded observer’s perception of a lack of independence can prevent the administrator taking the appointment. These usually involve circumstances of prior contact of the administrator with the company or its directors, or with major creditors.41 As with liquidators, a person is not necessarily precluded from acting as an administrator just because they have had prior contact with the company or its directors and officers. It would be commercially unrealistic not to accept that an administrator may have given advice before appointment; in fact there is the potential for this to be required more in the context of a voluntary administration that is initiated by the directors. Only a few years after the introduction of the voluntary administration regime, in Commonwealth of Australia v Irving (1996) 65 FCR 291; 19 ACSR 45942 Branson J said that it was by then: “commonplace for a company to seek professional advice respecting actual or apprehended insolvency and for the advice received to be to appoint an administrator pursuant to Part 5.3A … Not infrequently, and in my view, not improperly, the proponent of the advice to appoint an administrator then accepts appointment as that administrator. There would, I consider, be an air of commercial unreality about any suggestion that this course of events is necessarily improper…”

Nevertheless, the Judge said that:

41 See the discussion in ASIC v Franklin; Re Walton Constructions Pty Ltd [2014] FCAFC 85; (2014) 223 FCR 204 concerning perceptions of bias of liquidators. 42 Commonwealth of Australia v Irving (1996) 65 FCR 291; 19 ACSR 459, 464-465.

784

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.142]

“substantial involvement with a company prior to its administration will disqualify a person from appointment as that company’s administrator. Such an involvement will be seen to detract from the ability of the person to act fairly and impartially during the course of administration.”43 “In particular, prior advice to the directors by the administrator, about their personal liabilities as directors or otherwise, can prevent the administrator taking an appointment as administrator given the need to investigate directors’ conduct, including insolvent trading.”44

[19.142] In Re Korda, Ten Network Holdings Ltd (Admin Apptd) (Recs and Mgrs Apptd) [2017] FCA 914, the administrators’ firm (including one of the appointees) had been involved in reviewing the financial position of the company for several months prior to taking the appointment. The firm was engaged by lawyers advising the company, a firm with whom the administrators’ firm had a referral relationship. Although the amount of pre-appointment work was substantial (and involved a substantial fee), the court did not find that this alone created actual or apprehended bias or conflict. The court did, however, appoint a special investigator to investigate and report on aspects of the pre-appointment work for the creditors (reviewing the work for potential voidable transactions) and to review the administrators’ conduct during the administration with respect to these matters. The administrators’ pre-appointment work was narrowly confined under the terms of the engagement and did not include advising the company or its directors. The question can also arise in the case of a person who is the investigating accountant on behalf of a secured creditor, which then seeks to appoint that person as administrator under s 436C. In Domino Hire Pty Ltd v Pioneer Park Pty Ltd (2000) 18 ACLC 13, the court disallowed investigating accountants who had then been appointed as administrators by a secured creditor under s 436C from being liquidators when the deed failed. The court found that although they had not displayed any actual bias or partiality towards the secured creditor, there was an appearance of lack of independence flowing from their prior appointment as investigating accountants. The ARITA Code allows its practitioner members to take an appointment as administrator after an investigating role but only in circumstances where the advice is confined: see Ch 6.8. An example of this occurred in Commonwealth Bank of Australia v Fernandez (2010) 81 ACSR 262; [2010] FCA 1487, where the original administrator was removed and replaced by alternative administrators. The replacement administrators had given a report to the mortgagee about the company in administration, but the scope of the report was limited. The court held that their report simply explained the general commercial risks for the bank, the financial position of the company and topics for further examination. The court noted that the report involved “no substantive analysis on any issue”. In Re Korda, Ten Network Holdings Ltd (Admin Apptd) (Recs and Mgrs Apptd) [2017] FCA 914, the 43 Similarly, in Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 63 FCR 391, the court accepted the practice whereby a potential administrator assisting the company in formulating a deed of company arrangement which is then recommended to creditors. 44 See also Club SuperStores Australia Pty Ltd (1993) 10 ACSR 730, 736, in relation to liquidators’ pre-appointment meetings with the directors.

[19.145]

19 Voluntary Administration

785

court noted that the ARITA Code, while a useful document for practitioners, does not determine legal questions of independence. This creates a potential situation where a practitioner who is an ARITA member can be held to be independent by the court but may not be independent by ARITA’s standards. It should be noted that there is no requirement for insolvency practitioners to be ARITA members, although most are. Personal relationships with directors or other parties can also result in a lack of independence. In Commonwealth v Irving (1996) 65 FCR 291; 19 ACSR 459, the court required the administrator to step aside as he had had a personal and social relationship as well as a professional one with one of the directors of the company. Issues of independence can also involve advisers to or connected with the administrator. In Re Smarter Way (Aust) Pty Ltd [2000] VSC 408; (2000) 35 ACSR 595, the court said it was undesirable for administrators to engage the solicitors of the appointing chargee for legal advice. A similar view was expressed in Commonwealth Bank of Australia v Fernandez (2010) 81 ACSR 262; [2010] FCA 1487. Although in Flynn v Theobald [2008] WASC 263, the court noted that this alone would be insufficient to warrant removing the administrator from office. Declaration of relevant relationships and indemnities: s 436DA

[19.145] Given that prior relationships and creditors’ indemnities exist, and even if they do not result in a lack of independence, they are required to be disclosed to creditors before and at a meeting. Section 436DA of the Corporations Act requires a declaration of relevant relationships (as defined in s 60) and a declaration of indemnities (as defined in s 9) to be supplied by an administrator appointed under ss 436A, 436B or 436C of the Act. The declaration must list any relationships falling within the definition of a “declaration of relevant relationships” and must state why any of these relationships do not result in the administrator having a conflict of interest or duty. A relationship is more than merely the potential for an administrator or liquidator to investigate a person’s conduct as part of their role: ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204. The declaration must be provided to as many creditors as is reasonably possible, at the same time as the administrator gives those creditors notice of the first meeting. The administrator must also table a copy of the declaration at the meeting. The DIRRI must also be lodged as soon as practicable with ASIC: s 436DA(4). As we explain,45 s 449CA requires a replacement administrator to make such a declaration. The ARITA Code of Professional Practice suggests a form of Declaration of Independence, Relevant Relationships and Indemnities – a “DIRRI” – be used.46 Finally, in order to ensure the independence of administrators, their appointment is not able to be revoked: s 449A. However, creditors may remove an administrator either at the first meeting under s 436E or, under the changes introduced by the ILRA, at any later time under IPSC, s 90-35. 45 See [19.160]. 46 See ARITA Code of Professional Practice, Pt C. In ASIC v Franklin, the court said that the Code is not extrinsic material that could be used to help interpret the meaning of s 60.

786

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.150]

It should be noted that mere disclosure is not enough to remove an actual or perceived conflict of interest: Re Korda, Ten Network Holdings Ltd (Administrators Apptd) (Recs and Mgrs Apptd) [2017] FCA 914. Principle 3 of the ARITA Code makes it clear that disclosure, and even acceptance by the creditors, of a lack of independence is not necessarily a cure. Receivers becoming administrators

[19.150] In considering whether to give leave to a person to act as administrator of a company where that person is the receiver of a company with a charge over the assets a related company, the courts will again invoke the principles applicable to cases where the removal of a liquidator on the ground of actual or perceived conflict of interest are considered: Re St George Builders Hardware Pty Ltd (1995) 13 ACLC 1801. In Nambucca Investments Pty Ltd v Star (1995) 13 ACLC 1814, the court refused leave to the receiver and manager of a parent company to be appointed administrator of a subsidiary company. In contrast, such leave was granted in Re Central Spring Works Australia Pty Ltd; Tubemakers of Australia Ltd v McLellan [2000] VSC 144; (2000) 34 ACSR 164, on various undertakings given by the receivers, including that they would bring any reasonable apprehension of conflict of interest to the court’s attention, and that they would inform creditors of their right to remove them if they saw fit. Removal of administrator [19.155] The court has broad powers to remove an administrator under the IPSC. These provisions replace the former s 449B. An administrator may also become disqualified from acting if their registration is cancelled or suspended under IPSC, Div 40. IPSC, s 45-1 allows the court to make such orders as it thinks fit in relation to a registered liquidator (which includes a voluntary administrator). Prior to making an order the court can take into account a range of matters, including the conduct of the administrator and whether their conduct has caused others to suffer loss or damage. An application may be made by ASIC (and not by creditors), although the court may act on its own initiative during proceedings before it: IPSC, s 45-1(2), (3). IPSC, s 90-15 allows the court to make such orders as it think fit in relation to the external administration of a company (which includes voluntary administration). The orders may be made on the court’s own initiative during proceedings before the court or by an application under IPSC, s 90-20. Standing to seek orders under IPSC, s 90-15 is given to (IPSC, s 90-20): • ASIC • the committee of inspection (if one is appointed and passes a resolution allowing a creditor to seek orders on behalf of the committee); • an officer of the company; • APRA (limited to friendly societies under the Life Insurance Act 1995 (Cth); or • a person with a financial interest in the external administration. A person with a financial interest is defined in IPSC, s 5-30 as: • the company;

[19.165]

19 Voluntary Administration

787

• a creditor of the company; • the external administrator of the company; or • a member of the company (only for companies in a members’ voluntary liquidation). IPSC, s 90-15(3) provides a number of example orders, which includes ordering that a person ceases to be the external administrator of a company, and/or an order that another registered liquidator be appointed as the external administrator of the company. Section 90-15(4) allows the court to take into account a range of factors when deciding whether and how to make an order, including the conduct of the administrator, any loss or damage caused to others by their conduct and “the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group”. The court can also make an order that the administrator make good any loss caused by their conduct: IPSC, s 90-15(6). If there is a vacancy in the office of administrator caused by the death, disqualification or resignation of the administrator, the appointor may appoint another administrator: s 449C(1). The new appointee, unless appointed by the court, must, within five business days of appointment, convene a meeting of creditors. That meeting has the same power as it had with respect to the original administrator, that is, it may determine whether to remove the new administrator and if so, appoint someone else: s 449C(4). The meeting is to be convened in the same manner as the meeting held under s 436E(3). If a company is under administration and if it is to be without an administrator, because for example, the initial appointee gave notice of their intention to resign, the court may appoint a replacement: s 449C(6) and see Re Ansett Australia; Rappas v Ansett [2001] FCA 1348; (2001) 39 ACSR 296 (the court will not allow the company to be without an administrator). It is also possible to use s 447A to remove an administrator: Paradise Constructors Pty Ltd v Sleiman [2004] VSC 92; (2004) 8 VR 171. Declaration by replacement administrator: s 449CA

[19.160] Section 449CA of the Corporations Act applies to a replacement administrator appointed under s 449C(1) otherwise than by the court. It requires the new administrator to make a declaration of relevant relationships and a declaration of indemnities: see [19.145]. The declarations must be circulated with the notice of meeting required under s 449C(5), and lodged with ASIC under s 449CA(4A). The new administrator must lodge notice of their appointment: Corporations Regulations, reg 5.3A.01. Section 447C: validity of appointment [19.165] As with a receiver in a receivership, the court has the power under s 447C to determine if an administrator has been validly appointed. The administrator, the company or any creditor may apply for an order declaring whether or not an appointment, on the ground specified in the application or some

788

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.170]

other ground, was valid. The applicant must be a creditor at the time of the application: Re Beechworth Land Estates Pty Ltd [2015] NSWSC 733; (2015) 106 ACSR 495. As noted above, an administrator is entitled to rely on a duly sealed appointment document as providing a proper basis of authority of the person executing it (Wagner v International Health Promotions (1994) 15 ACSR 419, 422) and is not required to look behind that document to ensure that it was executed in accordance with the company’s constitution, unless some issue of concern comes to the administrator’s attention. The administrator is entitled to rely on the statutory assumptions in ss 128 – 129 of the Corporations Act that the internal requirements of the constitution have been satisfied: Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310. This is consistent with the law of receivership. Section 447C declaratory orders do not remove any defect; the order may simply declare whether the appointment was or was not valid. This compares with ss 447A and 1322 under which orders may be sought to cure defective appointment: Smolarek v McMaster [2006] WASCA 216. But s 447A can be used to validate an appointment found defective under s 447C. Where the company is insolvent and there is an absence of any factors that would justify removing the administration (such as lack of independence), it is normally in the interests of the creditors that the appointment be confirmed, as any replacement administrator would incur further costs in investigating the company’s affairs.

Court directions [19.170] The administrator is entitled to seek directions from the court under IPSC, s 90-15 in any matter concerning the performance of any of their functions or powers. This power replaces the former s 447D of the Corporations Act, as well as the former s 479(3) for court liquidators and s 511 for voluntary liquidators. It has been held that similar considerations apply for court directions between external administrators: Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141.47 As an example, in Re Fincorp Group Holdings Pty Ltd [2007] NSWSC 628, there was a successful application for directions that the administrators could properly and justifiably enter into agreements providing cross-collateral security from companies within the group in order to arrange a loan facility for which the administrators would be personally liable.48 In another example, court directions were obtained in a situation where an administrator sought to sell the business prior to the final creditors’ meeting: Re Eisa Ltd [2000] NSWSC 940; (2000) 35 ACSR 394 (the sale had to be completed urgently without time to seek the creditors’ views). The introduction of the PPSA has given rise to additional complexity for administrators, who must now determine whether registrations of security interests on the PPSR are valid. As noted above, if a secured party fails to properly perfect their interest it will vest in the company in administration as grantor. In Carson; Re Hastie Group Ltd (No 3) [2012] FCA 719, the administrators of a group of 47 See further Agardy, “Applications by Insolvency Practitioners to the Court for Directions” (2011) 19 Insolv LJ 257. 48 See also Re Nexus Energy Ltd [2014] NSWSC 1041.

[19.170]

19 Voluntary Administration

789

construction companies had to deal with over 1,000 registrations on the PPSR. The administrators’ position was uncertain because many of the registrations were ambiguous, and many of the secured parties did not respond to the administrators’ requests for further information. The administrators obtained court orders under s 447D directing them to sell all the assets of the company, including those covered by PPSR registrations. The administrators were also directed to determine which registered creditors, if any, had rights to claim on the consolidated fund.49 Directions will not be given merely because the administrator wants reassurance about a commercial decision: Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409. The directions power has been used in many voluntary administrations, but perhaps was most used in the Ansett Airlines administration (Re Ansett Australia; Rappas v Ansett [2001] FCA 1348; (2001) 39 ACSR 296). Ansett was Australia’s second largest airline and collapsed into voluntary administration with hundreds of thousands of creditors and a hopelessly undercapitalised business. The best hope for creditors was to sell the business as a going concern as most of its assets were not owned but leased. The administrators made several applications for court directions as they dealt with trading on a complex but ultimately insolvent business. Another area where directions have been used extensively has been insolvent managed investment schemes, where administrators have had to deal with conflicting interests between scheme investors, owners of property and secured parties.50 One question that may need to be answered by the courts is whether the new IPSC, s 90-15 is broader than the prior s 447D. There is no indication in the Explanatory Memorandum that this was intended,51 although the wording of the new provisions are clearly broader and more general than the former provisions (which merely provided for directions to be given). The example given in IPSC, s 90-15(3)(a) allows the court to “determine any question”, which parallels the former power to give “directions about a matter arising in connection with the performance or exercise of any of the administrator’s functions and powers”. In Re TEN Network Holdings Ltd (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247, the court was asked to give orders modifying how creditor votes would be treated and who could be categorised as a creditor for the purposes of the administration, with the effect that the largest unsecured creditor’s votes would be significantly discounted. The Court declined to grant the orders, without deciding whether it had power to make such orders. The Judge was “inclined to think” that the provisions (ss 447A and 90-15) did confer such power, but that a court would only exercise such power “in the most exceptional of cases, given its apparent inconsistency with the regime for creditor voting under Part 5.3A”: at [137]. 49 See also Re Renovation Boys Pty Ltd [2014] NSWSC 340 (giving directions that charging a fee to recover property in order to recover costs of ascertaining and maintaining property was appropriate). 50 See Moore, “Directions Applications and the Rights of Third Parties” in Maiden (ed), Insolvent Investments (LexisNexis, 2015) Ch 12. 51 “Explanatory Memorandum to the Insolvency Law Reform Bill 2015”, at [6.141]-[6.143].

790

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.175]

Supervision of administrators [19.175] Administrators and their management of the company are subject to extensive supervision under IPSC Div 90, which provdes powers to the court, to ASIC and to creditors. The court has power to conduct an inquiry into the conduct of an external administration (including a voluntary administration) under IPSC, ss 90-5, 90-10. This may be conducted on the court’s own initiative during proceedings before it (s 90-5), or upon an application by a person with a financial interest, an officer of the company, the committee of inspection (if one has been appointed) or ASIC: s 90-10. The court may order a current or former external administrator to give information, provide a report or produce a document. The court also has extensive powers to “make such orders as it thinks fit in relation to the external administration of a company” under IPSC, s 90-15 and similar powers in relation to a registered liquidator under IPSC, s 45-1. The powers of the court, once enlivened, are broad and should not be read down: IND Energy Inc v Langdon [2014] WASC 364 (considering the former s 447E). The court may have regard to the wishes of the creditors or contributories prior to making an order and may direct that meetings be held to determine those wishes under IPSC, s 90-21. It had been held under the former court supervision power in s 447E that proof of actual prejudice was needed for court orders, not merely proof of potential prejudice: Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 201 FLR 456. It is unclear whether the new provisions will require a similar threshold to be satisfied. The courts have traditionally been unwilling to remake any business and commercial decisions made by an administrator, in order to see whether there is prejudice to creditors or members, even if those decisions have a legal element or a legal context: Re Pan Pharmaceuticals Ltd [2003] FCA 855; (2003) 47 ACSR 139 (where certain creditors were unhappy with rulings on proof of debt and proxy forms made by the administrator, and unsuccessfully challenged the presentation of a sale proposal to the creditors pending an appeal).52 One new power provided by the ILRA is the capacity to appoint a reviewing liquidator under IPSC, s 90-23(6), which may be done on an application to the court by ASIC or by a person with a financial interest in the external administration, provided that the court considers it appropriate to do so: IPSC, s 90-23(7), (8).53 ASIC also has the power to appoint a reviewing liquidator: IPSC, s 90-23(1). ASIC may exercise this power either on its own initiative on an application by an officer of the company or by a person with a financial interest in the external administration. 52 See also Re Joe & Joe Developments Pty Ltd [2014] NSWSC 1444; Correa v Whittingham (No 3) (2012) 267 FLR 120 at [115]. The appeal in Correa was allowed in part, but the parties did not appeal the findings regarding s 447E: Correa v Whittingham [2013] NSWCA 263. 53 See Courts’ Corporations Rules, r 7.11. It requires the application to be accompanied by the written declaration made by the proposed reviewing liquidator under IPRC, s 90-18.

[19.180]

19 Voluntary Administration

791

The order appointing a reviewing liquidator must set out the matters in relation to the external administration of the company which the liquidator is appointed to review and how the costs of carrying on the review will be determined: IPSC, s 90-23(5), (9). However, the matters can’t relate to remuneration (IPSC, s 90-23(10), which may be reviewed by the court under IPSC, Div 60. The creditors also have the power to appoint a reviewing liquidator by resolution under IPSC, s 90-24(2). The company may also resolve to appoint a reviewing liquidator for a members’ voluntary liquidation: s 90-24(2). Individual creditors or members (for an MVL) may also appoint a reviewing liquidator under s 90-24(4) if the administrator agrees to the appointment (s 90-24(5)). The scope of the review when the reviewing liquidator is appointed by the creditors or the members is to the remuneration of the administrator and the costs or expenses incurred by the administrator: s 90-24(1). Although, a reviewing liquidator cannot review remuneration of the administrator where no remuneration determination (under IPSC, Div 60) has been made: s 90-24(7). A reviewing liquidator must not review remuneration relating to more than 6 months prior to the review, and must not review costs and expenses relating to more than 12 months prior to the review: s 90-7. The costs of a reviewing liquidator appointed by the court or by ASIC are treated as expenses of the administration, while they are to be paid by the creditors or members if appointed under s 90-24: IPSC, s 90-27. The report of the reviewing liquidator is to be provided to the external administrator, the committee of inspection (if any is appointed) and to ASIC and tabled at the next meeting of creditors (if one is held): s 90-24(2).54 The court has broad powers to make orders in relation to a review conducted by a reviewing liquidator: s 90-28. The reviewing liquidator has extensive powers under IPRC, s 90-22.

Role and position of an administrator [19.180] The role of the administrator is such that he or she has effective control of the company. In carrying out this role the administrator may decide to discontinue the company’s business and dispose of any of its property, subject to the restrictions under s 442C of the Act. The role of the administrator must be contrasted with that of a liquidator. In Tolcher v National Australia Bank [2004] NSWSC 6; (2004) 182 FLR 419 Barrett J said (at [15]): “The duties and functions of an administrator under Pt 5.3A differ significantly from those of a liquidator. Such an administrator has control of the company’s business, property and affairs (s 437A(1)(a)) and may carry on the business and manage the property and affairs (s 437A(1)(b)). But an administrator does these things only to facilitate the investigation required by s 438A(a) and the assessment required by s 438A(b) so that creditors, guided by the administrator, may make a decision as to the company’s fate. One such fate may be winding up. Recovery, protection and preservation of the 54 There are exceptions for reviewing liquidators appointed by ASIC (report not to be provided to the committee of inspection without ASIC approval) and for court appointed reviewing liquidators (where the court may order how the information is to be provided): IPRC, s 90-24.

792

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.180]

company’s property are not of themselves the direct concern of an administrator even though they may be to some extent incidental to due performance under s 437A.”

The essential role of the administrator is detailed in s 437A(1): Role of administrator (1) While a company is under administration, the administrator: (a) has control of the company’s business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

Section 438A provides: Administrator to investigate affairs and consider possible courses of action As soon as practicable after the administration of a company begins, the administrator must: (a) investigate the company’s business, property, affairs and financial circumstances; and (b) form an opinion about each of the following matters: (i) whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors’ interests for the administration to end; (iii) whether it would be in the creditors’ interests for the company to be wound up.

For this purpose, the administrator is the agent of the company: s 437B. In that role, he or she has broad powers to deal with the company’s property and to carry on the company’s business. Importantly, the administrator is permitted to exercise the powers given to the officers of the company: s 437A(1)(d).55 The administrator has no greater right to use the company’s property than the company itself had. The administrator’s control of the company’s property is subject to pre-existing rights affecting it: Hyatt of Australia Ltd v Coolum Resort Pty Ltd [2012] QSC 49 at [69]. In the exercise of these powers the members and their interests are relegated. The focus is on the interests of creditors. The administrator is not bound by limitations or requirements in the company’s constitution as the administrator’s powers are statutory, not delegated from the members: Re Smith [2006] NSWSC 780; (2006) 58 ACSR 410; Re Bacchus Distillery Pty Ltd [2014] VSC 111; (2014) 98 ACSR 539. The administrator is entitled to the company’s books and the officers have an obligation to hand over any books in their possession: s 438C. The directors must give to the administrator a statement about the company’s business, property, affairs and financial circumstances within seven days of the commencement of the administration (s 438B(2), Form 507), and must assist the administrator whenever reasonably required to do so: s 438B(3). The wide powers of the administrator are more significant given the fact that, unlike, for example, Chapter 11 proceedings under the US Bankruptcy Code, the courts only have a supervisory and assisting role, not a directing role, in any administration. 55 The power to appoint directors under s 437A(1)(d) is narrower than the broader power to appoint and replace directors under s 442A: Scott v Port Hinchinbrook Services Ltd [2017] QSC 92.

[19.185]

19 Voluntary Administration

793

Powers and duties of administrators Section 437A

[19.185] The powers given to the administrator include the power to sell company property during the period of administration. This is illustrated by Re Eisa Ltd [2000] NSWSC 940; (2000) 35 ACSR 39456 (as noted at [19.170]) in which the administrator sought directions under s 447D of the Corporations Act that he was entitled to allow the company to complete a sale agreement to a secured creditor, the proceeds of which would discharge the security and provide a return for unsecured creditors. The sale was urgent and although certain creditors on the committee of creditors had approved the sale, the shareholders and other creditors had not been consulted. In approving the sale, Bryson J referred to the broad terms of the power of sale in s 437A(1)(c) and said that the sale would serve the objects stated in s 435A(b). A similar view was taken in the earlier decision in Brashs Holdings Ltd v Shafir (1994) 14 ACSR 192, where the court said that administrators had the power to dispose of all of the business and assets of the companies whose affairs they are administering, if it were appropriate, and without the necessity of holding a shareholders’ meeting. The rationale for this is that as the company is insolvent the interests of the creditors outweigh those of the shareholders, in that the creditors are the ones to lose out if the company continues to trade at a loss. In other cases, the administrator will invariably maintain the asset position of the company pending the decision by creditors at the second meeting. A voluntary administrator stands in a fiduciary capacity with the company under administration: Re Krejci [2006] NSWSC 782; (2006) 58 ACSR 403. It should also be remembered that the administrator is an officer of the company and any decision to either sell the business or reject a sale proposal must be exercised in good faith and for a proper purpose: s 181. The administrator must exercise their powers with reasonable care and diligence: s 180.57 The administrator is not required to present all potential purchase offers to the creditors in the report to creditors prior to the second meeting: see generally Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247 (where the court refused to prevent the creditors meeting being held where a proposed purchaser had argued that the administrators had not given sufficient consideration to their offer to purchase the company); Macks v Viscariello [2017] SASCFC 172 (where the administrator noted an offer whose conditions could not be satisfied but did not explain it in detail). Nor is the administrator under any legal obligation to accept an offer that provides the highest price: Robit Nominees Pty Ltd 56 See also Re Bacchus Distillery Pty Ltd [2014] VSC 111; (2014) 98 ACSR 539. 57 For an interesting decision that considers the potential to appoint a special-purpose administrator to investigate an administrator’s conduct, see Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 58 ACSR 234 (order refused). Compare, Re Korda, Ten Network Holdings Ltd (Admin Apptd) (Rec and Man Apptd) [2017] FCA 914, where a special investigator was appointed under s 447A to investigate the conduct of the administrators and to report to creditors.

794

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.190]

v Oceanlinx Ltd (in liq) (recs and mgrs apptd) [2016] FCA 225 (the higher offer was also conditional and administrators doubted the capacity of the purchaser to obtain finance). Sections 442A – 442F

[19.190] Additionally, the administrator is granted powers by ss 442A – 442C and 442D – 442F of the Corporations Act. Under s 442A the administrator may remove or appoint directors, act in the company’s name and on its behalf carry out the purposes of the administration. Section 442B permits an administrator to deal with any property subject to a circulating security interest, where the property no longer consists of circulating assets as if the assets were still circulating. This was previously described in the legislation as allowing an administrator to deal with assets covered by a floating charge which had crystallised (and hence become a fixed charge) as if the charge were still floating. The legal reason for distinguishing between fixed and floating charges was concerned with priority, but this is largely irrelevant now due to the introduction of the PPSA. The PPSA now provides that where a charge is described as being fixed or floating this may be read as a security interest over non-circulating assets or a security interest over circulating assets: PPSA, s 339.58 Changes were made to the Corporations Act in 2012 to make the terminology consistent, hence the prior reference to a floating charge in s 442B has been replaced by the term “circulating security interest”. It is important to note that priority in the PPSA regime does not depend on whether the security interest is over circulating or non-circulating assets. However, certain priorities under the Corporations Act (such as the priority afforded to employee entitlements under ss 433 and 561) do rely upon this distinction. Thus, the effect of s 442B is that the administrator can continue to deal with the secured assets in the ordinary course of business. This is an important power if the administrator needs to continue trading the business in order to meet the goals of Pt 5.3A under s 435A. Section 442C permits the administrator to dispose of assets that are either covered by a security interest (as defined in s 51A)59 or property that is used, occupied by, or is in the possession of the company where someone else is the owner or lessor of the property. However, in order to do so the administrator must comply with s 442C(2), which requires:60 • the consent of the secured party, owner or lessor; • the approval of the court; or • the disposal to be in the ordinary course of the company’s business. The court may not give approval for disposal unless it is satisfied that the secured party, owner or lessor’s interests will be adequately protected: s 442C(3). There is a 58 Circulating assets are defined in PPSA, s 340. That section provides, that typically (if s 340(2) – (4) does not apply) includes book debts (ie accounts) and inventory (as defined in s 341). 59 Section 51A defines a security interest as either a PPSA security interest or a charge, lien or pledge. 60 There is no private right of action arising from a breach of s 442C: THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] NSWSC 1136; (2014) 101 ACSR 202.

[19.190]

19 Voluntary Administration

795

similar element involved in other court orders during administration, which was discussed at [19.126]. The court may also grant an order preventing the administrator from disposing of the assets in the ordinary course of business if it is not satisfied that the disposal process would protect the interests of the secured party, owner or lessor: s 442C(4) – (6). A disposal of property under this provision extinguishes a security interest attaching to the disposed property prior to its disposal: s 442C(7).61 As to whether a disposal is in the ordinary course of business, decisions by courts given in respect of that expression in other contexts, in which the phrase has been interpreted broadly, are relevant. In Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333 it was held that if transactions are effected for the purpose of carrying on the business they are in the ordinary course of business; or, even if the disposal is exceptional in nature, if its aim is to keep the company going, they are likely to be regarded as in the ordinary course of business. The “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)” provides (at [55]) an example of where a creditor is secured over company stock which is being constantly used in production or turned over in a retail operation. In the context of goods subject to retention of title (ROT) claims, where the owner demands the return of the property, any disposal after that demand does not mean that the disposal is not made in the ordinary course of business: Corporations Act, s 442C(8). The owner of the goods supplied subject to a retention of title clause that is not covered by PPSA retention of title property is protected by s 442CC(2) which requires the administrator to set aside the sale proceeds to satisfy the outstanding secured and unsecured amounts. A secured party with a security interest in property that is covered by PPSA retention of title property obtains the same protection that they would have under the priority payment regime that operates under the PPSA: s 442CC(1A).62 One issue that has arisen in relation to the PPSA is where the administrator erroneously believes that the interest of the supplier or customer of the company in administration, in the goods held by the company, is a PPSA security interest. In THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] NSWSC 1136; (2014) 101 ACSR 202, a customer of CMA (THC) had yet to collect its goods that were purchased from CMA (in this case scrap metal) when the company went into administration. THC asked the administrators for permission to retrieve the goods but they were refused, based on claims that the transaction involved a security interest that was unperfected and hence vested in CMA at the time of the administration. THC gave documentary evidence (including its contract) to prove it was the owner of the scrap metal but the administrators sold the business, including the scrap metal, without THC’s consent. The administrators were found to have acted in breach of s 442C, and also to have caused the company to act in breach of its fiduciary duty, as the contract provided that CMA would maintain the goods “in good faith” during its bailment until the customer collected them (title passed on payment so 61 See further Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373. 62 See also PPSA, s 140.

796

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.195]

the goods were being bailed by CMA). The administrators were ordered to pay damages under s 1324(10) and were also liable as accessories to the company’s breach of fiduciary duty. The administrator’s powers to deal with assets are, however, subject to the powers of a secured party or receiver or other controller if ss 441A or 441C apply (s 442D); these allow secured parties to take enforcement action despite the appointment of an administrator in certain circumstances: see [19.125]. Privilege: s 442E

[19.195] In the same vein as the Corporations Act, s 535, which gives qualified privilege to a liquidator, s 442E gives an administrator qualified privilege in respect of statements made in the course of carrying out his or her duties and powers. The Corporations Act provides that the effect of s 442E is that an administrator has qualified privilege in proceedings for defamation and is not, in the absence of malice, liable to an action for defamation. “Malice” includes ill-will to the person concerned or any other improper motive. This is designed to protect an administrator from defamation proceedings initiated because of comments made in reports and other communications.

Administrator may agree to powers being restricted [19.200] While an administrator is granted wide powers by the legislation, an administrator may agree to those powers being restricted. This occurred in FCT v Prescribing Biochemists Pty Ltd (1994) 12 ACLC 905, where an administrator entered into a deed of appointment which provided that he was to refrain from exercising any of the powers granted under s 437A(1) without the written consent of the secured creditor. That creditor held a floating and fixed charge over all of the company’s assets except for fixed assets and goodwill. Another creditor argued that the terms of the appointment were inconsistent with the purposes of Pt 5.3A, but Sackville J rejected the argument, taking the view that the terms were consistent with Pt 5.3A and the special position enjoyed by a chargeholder who had begun enforcement of a charge before the administration commenced. It is also possible for an administrator to sign a deed giving approval to a secured creditor with security over substantially the whole of the company’s assets to appoint a receiver outside the permissible 13 business day “decision period”: see [19.125], [19.270]. This is known as a deed of consent and may be required by the secured creditor as a condition of not appointing a receiver when the administrator is initially appointed.63

Investigations [19.205] One of the major duties of an administrator is to investigate the company’s business and affairs and determine what would be the best outcome for creditors: s 438A. It is paramount that the administrator pursues adequate inquiries and investigations otherwise any subsequent deed of company arrangement 63 Katekar, “The Validity of Deeds of Consent in Administrations” (2008) 20 A Insol J 26.

[19.215]

19 Voluntary Administration

797

executed may be set aside by the court. These issues are dealt with in more detail in Chapter 20. See also Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247. However, it may be that the administrator is unable to pursue investigations because of a lack of co-operation by other parties, including the directors. In appropriate cases, it is open to the administrator to seek directions from the court. In setting aside a deed of company arrangement in JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691 because of inadequate information being provided to the administrator, the court said it would have been wise for the administrator to have approached the court for directions or other intervention at the time these issues became apparent. In Re White; Mossgreen Pty Ltd (Admins Apptd) v Robertson [2018] FCAFC 63, the court was critical of the administrators of an auction house who undertook detailed investigations and a stocktake of goods held on consignment for others (and therefore not property of the company) which took several months and cost over $1 million. The court refused to allow the administrators to charge a levy on consignors based on an equitable lien to cover the associated fees and expenses. The court noted that the administrators could have sought directions from the court before undertaking such detailed and expensive work where it was clear that the goods were not the property of the company and where many of the goods were of low value or had been abandoned by the consignors or where it was otherwise simple to identify and contact the true owners. Offences

[19.210] If an administrator discovers that a past or present officer or employee, or a member of the company may have been guilty of an offence in relation to the company, or a person involved with the company has improperly dealt with company property or money, or has been guilty of other specified behaviour, the administrator is required to provide a report to ASIC as soon as practicable and assist ASIC with information, generally giving every assistance: s 438D.64 This duty is analogous to those duties to report which are imposed upon receivers under s 422 and liquidators pursuant to s 533. A failure to carry out investigations under s 438D is a substantial breach of the requirements of the Corporations Act.65 Duty to report to creditors [19.215] The primary responsibility of the administrator is to provide a report to creditors, which includes the administrator’s recommendation regarding the creditors’ vote on the company’s future at the final meeting held under s 439A, traditionally called “the s 439A report”, and now required under IPRC, s 75-225(3)(a).66 The report must be sent out to creditors with the notice of meeting no less than five business days before the meeting is held: IPRC, s 75-225(3)(a). 64 See ASIC RG 16 and ASIC Form EX01. 65 DCT v Pddam Pty Ltd [1996] FCA 1386; (1996) 14 ACLC 659; Velkovski v Ryan [1996] FCA 1410; (1996) 19 ACSR 514. 66 The ARITA Code provides a sample report to creditors.

798

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.215]

Administrators also have a duty to provide creditors with information about their rights on their appointment (IPRC, s 70-30) and an obligation to provide information, reports and documents when requested by creditors unless it would be unreasonable to do so: IPSC, ss 70-40, 70-45 ss 70-40, 70-45 ; IPRC, ss 70-1 to 70-15. The word “creditor” is not a defined term in the Act and it can be an issue as to who should be notified of the meetings. In Selim v McGrath [2003] NSWSC 927; (2003) 22 ACLC 112, 128-129 Barrett J concluded that in the context of a s 439A meeting, creditors were all persons who have, as against the company concerned, “debts” or “claims” provable in a winding up. He said the boundaries were those set by s 553 which are very wide. Similar comments were made by the NSW Court of Appeal in BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 when discussing who is a creditor for the purposes of a deed of company arrangement. In preparing a report for creditors, the courts recognise that the administrator does not have the same time to carry out the detailed investigations as a liquidator, and that administrators may not have access to all relevant information (such as information held by third parties proposing a deed of company arrangement). Any challenges to administrators’ actions are determined in light of the time constraints within which they must investigate and report, and commercial practicality: DCT v Comcorp Australia Ltd (1996) 70 FCR 356; Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247. Thus, in Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 19 ACLC 659, Austin J endorsed the comments in DCT v Pddam Pty Ltd [1996] FCA 1386; (1996) 19 ACSR 498, 510 that a Pt 5.3A investigation is intended to be swift and practical.67 As an example, Austin J noted that it is often not practicable for the administrator to use the powers of compulsory examination available under the Act, given the limited time available for the administration. In his decision in DCT v Portinex Pty Ltd (No 1) [2000] NSWSC 99; (2000) 156 FLR 453, 481 he said that: “the balance between speed and accuracy of investigation is a delicate one, and the distinction between an adequate preliminary investigation which concludes that there are grounds for suspecting wrongdoing but goes no further, and inadequate investigation which fails to assemble available information with respect to wrongdoing, is a matter of degree.”

As we will see in Chapter 20, these issues will come to the fore at the time of a later challenge to the deed of company arrangement by a creditor. In Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247, the court refused to grant an injunction preventing a creditors’ meeting from proceeding despite some inadequacies with reports to creditors. The court held that the relevant information was widely available and it was open to creditors to adjourn the meeting to give themselves more time to consider alternate proposals compared with what was recommended in the administrators’ report. The court 67 See similar comments in Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247.

[19.220]

19 Voluntary Administration

799

was also satisfied that any potential prejudice to creditors could be addressed in an application to set aside the deed of company arrangement. Administrator’s opinion

[19.220] As noted at [19.220], the administrator must provide an opinion to the creditors about each of the three possibilities which are open to the creditors, and give reasons for those opinions: IPRC, s 75-225(3). The administrator is not permitted to just recommend one of the possibilities, thereby impliedly stating a view concerning the others. This will lessen the chance of something being overlooked and the creditors are likely to be in a better position to assess the recommendation: FCT v Comcorp Australia Ltd (1996) 70 FCR 356. An administrator must at all times act objectively in a way that gives due regard and balance to the interests of all creditors. At the same time, different classes of creditors also have to be considered. Where a deed is proposed that discriminates between creditors and there is no community of interest between the classes, it is important that the administrator examines the proposal carefully and ensures that the less advantaged class is not unfairly prejudiced. This may involve at least the administrator taking steps to ensure, as far as possible, that the deed is no less beneficial to all creditors than a liquidation: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 (where a lessor received less than full repayment but more than they would receive in liquidation while other creditors received full repayment). The level of information required is to be assessed within the time provided for by the administration (including any court extensions of the convening period): Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247. The administrator must:68 “take care to communicate with affected parties in a manner that is accurate, honest, open, clear, succinct and timely in order to ensure their effective understanding of the processes, and their rights and obligations.”

In that case, the court rejected criticism of the administrator’s report where the plaintiff had sought an injunction against a meeting going ahead where it was argued that the administrators could have provided more detailed information in their report to creditors (which was several hundred pages long), particularly regarding financial implications for creditors, shareholders and the purchasers. The court held that the administrators did not possess much of this information, and that their report adequately explained what their opinion actually was and the reasons for giving it in the report. In investigating the company’s affairs the administrator will require access to the company’s books and records. While no one may retain possession of the company’s books as against an administrator (s 438C(1)), an exception to this applies in relation to secured creditors who hold a charge and are entitled to certain books. However, the administrator has the right to inspect them and make copies of the books retained by the secured creditor: s 438C(2). 68 ARITA Code of Professional Conduct (3rd ed), Principle 4, approved by the court in Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247 at [47].

800

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.225]

In order to obtain possession of books, the administrator is entitled to give to a person who has the books written notice requiring the person to deliver them to the administrator: s 438C(3), Form 509A. The notice must give the recipient of the notice at least three business days within which to comply: s 438C(4).

Liability of an administrator [19.225] As with a receiver, an administrator is personally liable for debts incurred in the course of the administration in respect of services rendered, goods bought or property hired, leased, used or occupied: s 443A(1)(a) – (c). This was a fundamental recommendation of the Harmer Report that was intended to encourage trade creditors to deal with the company and assist the administrator in carrying on business. Section 443A applies to debts incurred by an administrator taken to be acting under s 437B as the company’s agent: Energy & Resource Conservation Co Ltd v Abigroup Contractors Pty Ltd (1997) 41 NSWLR 169. The provision does not refer to a court, which means that the jurisdictional forum where the liability may be enforced is not limited by s 58AA; a tribunal could hear a debt claim under s 443A: Clamms Seafood Pty Ltd v Lowe Lippmann Pty Ltd [2015] VCAT 146. An administrator is also personally liable for the repayment of money borrowed, plus interest and borrowing costs: s 443A(1)(d) – (f). This applies to finance obtained by the administrator during the administration. Administrators have only had this liability since amendments made to the Corporations Act in 2007. Prior to this several applications were made to the court to extend the administrator’s personal liability to facilitate the provision of finance during administration. The “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)” says that as an administrator is personally liable for such borrowings, “it is expected that administrators would exercise appropriate caution in using this option. However, in appropriate circumstances it would provide an administrator with the facility to offer a lender enhanced comfort that their funds will be repaid in the event of a failure”. In certain circumstances it may be necessary to obtain an order from the court under s 447A in order to limit the administrator’s personal liability under s 443A. The orders usually limit the liability to the value of the company’s assets so as to allow the administrator to rely upon the indemnity against those assets to satisfy the liability. For example, in Re Robinson; Darrell Lea Chocolate Shops Pty Ltd [2012] FCA 833, a loan was provided by a company associated with the directors in order to satisfy employee entitlements. Section 447A orders were given to limit the scope of the administrator’s liability for the loan under s 443A to the value of the company’s assets. This approach provides a beneficial outcome for stakeholders as the employees are paid, the company is able to continue operating to realise the value of work in progress and sell down its stock, and the administrator is not exposed to greater liability. The principles underpinning the grant of orders under

[19.225]

19 Voluntary Administration

801

s 447A to limit liability under s 443A were discussed by Gordon J in Mentha; Re Griffin Coal Mining Co Pty Ltd [2010] FCA 1469; (2010) 82 ACSR 142 at [30]:69 (a) the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Pt 5.3A; (b) typically the arrangements proposed are to enable the company’s business to continue to trade for the benefit of the company’s creditors; (c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement; (d) notice has been given to those who may be affected by the order.

While prejudice or disadvantage to creditors is an important consideration, it should not be a decisive factor, otherwise it may be more difficult to achieve the purposes of Pt 5.3A: McKinnon, Re Specialised Concrete Pumping Victoria Pty Ltd (admin apptd) [2016] FCA 325 at [29]. The administrator has a right of indemnity over the company’s assets to cover liability under this provision: s 443D. It should be noted however, that the company’s assets do not include PPSA retention of title property (as defined in s 51F). Under s 443E, debts covered by the administrator’s right of indemnity, in some circumstances, take priority over: • unsecured debts, • security interests that have vested in the company because of s 588FL or PPSA, ss 267 or 267A, • debts secured by a circulating security interest (previously called a floating charge). There are limits to the right of priority, which are discussed further at [19.230]. If the company in administration does proceed to liquidation, these expenses are generally entitled to a priority under s 556(1)(c) of the Corporations Act: see s 443E. In some cases they may be entitled to a higher priority under s 556(1)(a) or lower under s 556(1)(de). That is, these debts incurred by an administrator effectively receive priority over pre-administration debts. Also, like a receiver, an administrator is personally liable for the payment of rent in respect of a pre-administration lease which continues in force. As we have seen, the administrator is liable for rent owing in respect of the period beginning seven days from his or her appointment for premises which the company continues to occupy: s 443B. An administrator is not liable for the debts of the company except under ss 443A or 443B. The administrator is personally liable for withholding tax deductions which are made during the course of the administration: s 443BA. The administrator has a right of indemnity as against the assets of the company in respect of any such liability: s 443D(a). 69 See further Re Systems Advisers Group Pty Ltd [2013] NSWSC 826; Crawford, Re North Queensland Heavy Haulage Services Pty Ltd (admin apptd) [2017] FCA 723.

802

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.230]

However, an administrator does not personally incur liability merely through acting as the agent of the company: s 443C. The administrator must become registered for the GST and otherwise comply with tax obligations: see A New Tax System (Goods and Services Tax) Act 1999 (Cth).

Administrator’s lien [19.230] Generally, the administrator is entitled to be indemnified from the company’s property in respect of liabilities he or she incurs throughout the period of administration: s 443D. These debts include the debts under ss 443A and 443B and the tax liabilities (“remittance provisions”) under s 443BA: see s 443D(a). The right of indemnity also extends to the administrator’s remuneration determined under IPSC, Div 60 (s 443D(b)) and to “any other debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator”: s 443D(aa). The purpose of s 443D(aa) is to protect the administrator from liability for a tort such as conversion where goods are sold that are subject to a retention of title clause. The section extends protection in relation to other torts. Section 443F grants the administrator a lien over the company’s property to secure these rights of indemnity. However, the administrator has no statutory right of indemnity out of the company’s property in respect of liabilities that fall outside s 443D. The indemnity under s 443D also does not extend to a company that is operating under a deed of company arrangement: Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483; (2008) 66 ACSR 229. This, of course, is of little encouragement if the company is hopelessly insolvent. However, the right to the indemnity takes priority over all unsecured creditors and some other secured debts (discussed at [19.230]), but the right is subject to those creditors entitled to priority under s 556(1)(a) and (b). The administrator’s right gives a lien on company property (s 443F(1)), and, in effect establishes a statutory charge over the assets of the company. The right of indemnity extends to any other debts or liabilities incurred, in good faith and without negligence, by the administrator in the performance or exercise of his or her functions and powers as administrator: s 443D(aa). The Act does not exclude equitable liens: Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64. In that case, after being notified of the appointment of receivers, an administrator remained in office until being appointed liquidator. The administrator successfully claimed a lien for remuneration for work done on realisation of assets during that time. The court said that the Corporations Act should not be construed as excluding equitable liens which would otherwise be held to exist, were it not for the specific provisions of Pt 5.3A. In Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68; (2009) 40 WAR 5370 the Western Australian Court of Appeal held that the equitable lien is not limited by Pt 5.3A (including the 70 See also Re Webster; Willmott Forests Ltd v Fernandez [2012] FCA 82 (which discusses the limits of the equitable lien in this context).

[19.240]

19 Voluntary Administration

803

existence of a statutory lien) and may allow an administrator to claim remuneration and expenses under the equitable lien in priority to the holder of a fixed charge where the remuneration and expenses were incurred through work done exclusively in caring for, preserving and realising the company’s assets that were subject to the charge.71 This lien is recognised as the “Universal Distributing principle”, after the High Court’s decision in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171. In Primary Securities Ltd v Willmott Forests Ltd (rec and man apptd) (in liq) [2016] VSCA 309 it was held that the principle is not limited to situations where the work by the insolvency practitioner leads to the creation of a fund. See also the discussion of equitable liens in Re White; Mossgreen Pty Ltd (Admins Apptd) v Robertson [2018] FCAFC 63. One issue is that s 443E states that the indemnity is subject to s 556, which places claimants above the administrator and yet s 443D provides that the indemnity gives priority to the administrator over the creditors mentioned in s 556. However, an administrator will have the benefit of an equitable lien over assets realised in the course of the administration in respect of the value of the work conducted for the benefit of the company. That equitable lien is not subject to the priorities under s 556 in respect of assets of the administration, save that if any additional assets are recovered by a subsequently appointed liquidator, the administrator’s priority to payment out of those additional assets is governed by s 556: Weston v Carling Constructions Pty Ltd [2000] NSWSC 693; (2000) 35 ACSR 100; Lockwood v White [2005] VSCA 30; (2005) 11 VR 402. If there are insufficient assets realised to cover the administrator’s remuneration, it will become a deferred expense under s 556: ASIC v McKenney Consulting Pty Ltd [2003] VSC 527; (2003) 21 ACLC 314.72 If an administration is followed by a liquidation, there remains an issue whether the administrator (now the liquidator) may be liable for actions performed as an administrator, because the winding up relates back, under ss 513B and 513C, to the commencement of the administration.73 We have seen that, under s 451C, any transactions entered into by the administrator cannot be set aside in a subsequent liquidation.

Remuneration and expenses [19.235] The process for approving an administrator’s remuneration is the same as for a liquidators under IPSC, Div 60, and was discussed in Chapter 10. Lodgement of accounts with ASIC

[19.240] Accounts of administrators must be lodged with ASIC on an annual basis and at the end of the administration: IPSC, Div 70. ASIC may audit the books and accounts and the costs of an audit will form part of the expenses of the administration: IPSC, s 70-15. 71 See also Re Renovation Boys Pty Ltd [2014] NSWSC 340. 72 See CAMAC’s report, Issues in External Administration (November 2008) as to the lack of priority of the administrator’s remuneration in a liquidation. 73 Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238; Olsen v Nodcad Pty Ltd (1999) 32 ACSR 118; Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd [2008] NSWSC 452; (2008) 66 ACSR 199.

804

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.245]

STATUTORY MORATORIUM AND PROTECTION OF THE COMPANY [19.245] The administration period is a time for investigation and assessment. One of the advantages of the administration for the company is that there are certain protections granted by the legislation while the company is subject to assessment. Those protections are removed when the administration comes to an end (s 435C) by which time another administration – a deed of company arrangement or a liquidation – may impose other protective arrangements. Section 440D: stay of proceedings [19.250] Section 440D(1) of the Corporations Act establishes, in effect, a moratorium on civil actions against the company. Court proceedings in relation to company property or against the company cannot proceed or be commenced unless the administrator gives written consent or the leave of the court is obtained. This is in accord with the aim of the legislature which is to protect the company from all civil actions in order to permit the administrator to formulate a rational plan for future action: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [521]. In X v Milstead [2015] FamCAFC 50 the court reviewed the history of s 440D and stated (at [41]): “the purpose for the initial enactment of what is now s 440D of the Corporations Act was to, so far as possible, and insofar as the company was not the moving party, freeze the financial circumstances of the company in question, to permit the administrator to devise a plan of action for the future of the company in conformity with the statutory objects of s 435A.”

The section also serves to prevent the payment of preferences to creditors and any disposal of company property prior to the completion of the administration: Re Capital General Corporation Ltd [2001] VSC 570; (2001) 19 ACLC 848, 851. In Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207; [2011] NSWSC 1305 at [38] (ALR), the court noted that the stay in s 440D can assist in promoting the achievement of the objects of Pt 5.3A by: (a) affording the administrator time to assess and report on the company without the distraction of the proceedings; (b) putting a brake on legal and associated costs; (c) allowing time for the development of proposals which might preserve the value of the company as a going concern; (d) giving the creditors time to consider their position for the purposes of the creditors’ meeting; and (e) in appropriate circumstances, preventing a creditor from obtaining some advantage over other creditors or potential creditors.

In Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203, the court said that leave under s 440D should only be granted rarely, so as to ensure that the administrator is not deflected from the necessary tasks in having to defend litigation and in having to incur costs. In that case, Young J compared the higher threshold for leave being granted in respect of a company in voluntary administration compared with a company in liquidation. He went on to say (at 204-205): “To allow one creditor or potential creditor to proceed would not only take the administrator’s attention from what he needs to do under the division in a relatively short

[19.250]

19 Voluntary Administration

805

period of time, but it would also involve costs in running the legal action on behalf of the administrator, as well as perhaps giving the claimant some advantage over the other creditors or potential creditors.”

Creditors are therefore expected to lodge their proofs of debt in the administration where their claims can be fully assessed and determined by the administrator: BBC Hardware Ltd v GT Homes Pty Ltd (1997) 15 ACLC 431. However, Hammerschlag J expressed a contrary view in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305; (2011) 285 ALR 207, where he held that s 440D applications should be approached in a similar manner to other judicial discretions. The Judge stated (at [39]-[40]): “A stay is the starting point. There must be circumstances which warrant its displacement…Every application must be considered on its own circumstances. There are infinite possible scenarios. There may be a flurry or a dearth of meritorious applications. Those circumstances need have no particular quality of rarity.”

In Toll Holdings Ltd v Stewart (admin apptd) (recs and mgrs apptd) [2016] FCA 256 at [56]-[57], it was stated that: “the discretionary power to grant leave under ss 440B and 440D cannot be fettered by inflexible rules. The interests of justice in all of the circumstances of each case will be different and affected by those particular considerations…The Court’s statutory power to grant leave to proceed under each of ss 440B and 440D is unqualified”.

There have been many cases that have considered applications for leave under s 440D. A review of them reveals that the following factors are relevant:74 • who appointed the administrator; • who was applying for leave and whether they will suffer disadvantage if leave is not given; • whether the claim had a solid foundation and gave rise to a serious dispute; • whether the administrator would be unreasonably distracted from his or her statutory duties and be obliged unnecessarily to incur substantial legal costs; • whether the company is insured against the liability that is the subject of the proceedings; • whether the applicant will suffer any disadvantage if leave is not granted; • what funds the company has available to defend against litigation; • whether the applicant for leave is pursuing a monetary claim against the company in administration; and • whether there are good reasons for allowing a creditor to depart from the general intention of Pt 5.3A, which is that a creditor ought not be able to take action against the company in such circumstances. An administrator cannot be held liable for damages if he or she refuses to give approval to the commencement or continuation of proceedings: s 440E. The word “proceeding” is not limited to a proceeding in a court, despite the definition of the word “court” in s 58AA of the Corporations Act. Thus, the former 74 See Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203; J & B Records Ltd v Brashs Pty Ltd (1994) 13 ACSR 680; Wallabah Pty Ltd v Navillo Pty Ltd (1997) 23 ACSR 444; Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585 at [146]-[147].

806

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.250]

Australian Industrial Relations Commission was a court for the purpose of s 440D: Brian Rochford (admin apptd) Ltd v Textile Clothing & Footwear Union of NSW (1998) 47 NSWLR 47; as is the NSW Civil and Administrative Tribunal Appeal Panel: Scharer v Giro Construction Group Pty Ltd (in liq) (rec and man apptd) [2017] NSWSC 1568. However, leave under s 440D is not required for arbitration proceedings: Auburn Council v Austin Australia Pty Ltd [2004] NSWSC 141; (2004) 22 ACLC 766; Re THO Services Ltd [2016] NSWSC 509.75 The delivery of judgment in extant proceedings is a step in the proceedings that is caught by s 440D: X v Milstead [2015] FamCAFC 50. It is not open to an administrator to give permission for only part of the proceedings to continue: Scharer v Giro Construction Group Pty Ltd (in liq) (rec and man apptd) [2017] NSWSC 1568, the court saying that the “provisions should not be interpreted so as to give a procedural advantage to a company in administration” at [60]. The stay against a winding up application in respect of a company in administration should be dealt with under s 440A (see [19.255]), not s 440D: Re Plutus Payroll Australia Pty Ltd [2017] NSWSC 1041. In those cases where leave has been granted, it has usually been for a limited or particular purpose. For example, such leave may need to be given so as to at least allow the proceedings to be commenced to prevent the claim becoming statute barred. Other examples of leave being granted are: • to allow a subcontractor to obtain protection under the Subcontractors’ Charges Act 1974 (Qld): Civcrush Pty Ltd v Yeo & Co Pty Ltd (admin apptd) [2017] QSC 225; • to issue proceedings seeking an injunction to enforce patent rights (Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1998) 16 ACLC 36); • for the purpose of allowing proceedings against the company’s insurer (Godden v Banwell Pty Ltd [2003] WASC 217); • to bring proceedings for the appointment of a provisional liquidator to the company (Hall v Mercury Information Technology (South Australia) Pty Ltd [2002] FCA 272; (2002) 20 ACLC 496); • to allow a creditor to obtain declaratory relief where the creditor sought to exercise a right of subrogation against trust assets that were held by a corporate trustee that was placed in administration shortly before a case was due to commence against it: Commissioner of Taxation v Fitzroy All Pty Ltd [2013] WASCA 427. An appeal by the company itself is not a proceeding for which leave is required (Uvanna Pty Ltd v Tsang Chi Ming (1997) 72 FCR 502), nor is any response to that appeal by the respondent required. Similarly, the words “a proceeding in a court against a company” do not extend to a positive step taken by a respondent to an application brought against it by a company in administration, for example, a claim by a respondent for security for its costs: Pasdale Pty Ltd v Concrete Constructions Pty Ltd (1995) 59 FCR 446. However, an interlocutory proceeding by a plaintiff prior to the issue of a writ, for example for pre-trial discovery against the company, is 75 As to Fair Work Australia, now the Fair Work Commission, see Letizia v Australian Music Group T/A Allans Billy Hyde Music [2012] FWA 9609.

[19.255]

19 Voluntary Administration

807

covered by the section and leave is required: Aquila Resources Ltd v Pasminco Ltd [2002] WASC 53. The right to bring a statutory derivative action under Pt 2F.1A is a right that cannot be assigned and is not “property” of the company, therefore leave to maintain the proceedings is not required under s 440D: MG Corrosion Consultants Pty Ltd v Gilmour [2012] FCA 383; (2012) 202 FCR 354. Similarly, while a company’s cross-claim may be a “proceeding” for the purposes of s 440D(1), it was not a “proceeding ... in relation to [its] property” and was not stayed when the company entered administration: Arogen v Leighton [2013] NSWSC 1099. Secured creditors who are able to bring themselves under s 441B(1) (where enforcement begins before the start of the administration) can obtain leave more readily, for example if they seek a court order against the charged property. Under s 440D leave was given to a ship charterer to apply to arrest the ship in support of a statutory maritime lien for unpaid services; the court saying that the interests of the general body of unsecured creditors should be subordinated to what was a proprietary claim over the vessel by the charterer: ASP Holdings Ltd v Pan Australia Shipping Pty Ltd [2006] FCA 1379; (2006) 235 ALR 554.76 Although voluntary administration is not designed to deprive a person of their property, leave under s 440D will be required where the ownership of the property is in dispute: Phisci Pty Ltd v Green Frog Nominees Pty Ltd [2008] FCA 638.

Winding up action [19.255] The issue will often arise that an administrator is appointed when there is a pending winding up action by a creditor. In St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851; (2004) 50 ACSR 443, the court said that it should not be seen as unusual for a company that is subject to a winding up application to go into voluntary administration, which in many cases: “will be the proper and reasonable thing for directors to do … In some cases, the demands of a creditor and the indication that the creditor will pursue a winding up application will so focus the minds of directors that they become able to take stock of the company’s position more critically and, realising that the company is insolvent or likely to become insolvent, to see resort to the Pt 5.3A procedure as the appropriate course”: at 446.

In such cases, the court will adjourn the hearing of those proceedings provided that it is satisfied that it is in the interests of the creditors: Corporations Act, s 440A(2). In Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402; (2012) 92 ACSR 88 Black J noted (at [16]) that: “Generally, an adjournment under s 440A(2) of the Corporations Act requires that the court is satisfied that it is in creditors’ interests to continue the administration in all the circumstances, and this requires that there be sufficient possibility, as distinct from mere optimistic speculation, that creditors’ interests will be accommodated to a greater degree in an administration than in a winding up.” 76 Maritime law can raise particular issues in insolvency, certain maritime liens being secured claims against the ship supporting a right to arrest the ship for non-payment of the claim. See Yakushiji v Daiichi Chuo Kisen Kaisha [2015] FCA 1170; and Yu v STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (Receivers appointed in South Korea) [2013] FCA 680; (2013) 223 FCR 189.

808

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.255]

In order to satisfy the provision and to cause a court to order an adjournment, there would have to be some persuasive evidence to enable it to see that if there were assets realised under an administration it would produce a larger or accelerated dividend to creditors: Creevey v DCT (1996) 19 ACSR 456.77 The shortness and purpose of the adjournment are also issues for the court to consider, and the consequences of the adjournment. If the evidence is given from the administrator that an administration was likely to produce a better return for creditors, then the creditors would have the opportunity to question or reject that view at the meeting; the court should generally not pre-empt that decision: Re First Netcom Pty Ltd [2000] NSWSC 1045; (2000) 35 ACSR 615. Gyles J in DCT v K J Consulting Pty Ltd [2005] FCA 1827 discussed a number of factors influential against adjourning an application for a winding up order as: 1. the fact that the company is not trading; 2. the undoubted insolvency of the company; 3. the composition and attitude of the creditors; and 4. the recognition that a liquidator has more ability to follow potential breaches of the law than administrators. These have to be considered against the background of whether there is “a real prospect of a better outcome under the Deed than in a winding-up or, if the measure of the dividend is similar, whether the dividend can be achieved more quickly under the Deed”: David Lambourne Yacht Rigging v Perry Catamarans [2006] FCA 887; (2006) 58 ACSR 155. Even if the elements of s 440A are satisfied the court still retains the discretion to refuse the order. The interests of creditors as a whole must be considered, including creditors with differing interests. In David Lambourne Yacht Rigging v Perry Catamarans, the application for an adjournment was made by two secured creditors; however, a number of unsecured creditors opposed the adjournment. Although the court said that numbers in support or opposition are relevant but not determinative, the court considered that creditors’ interests as a whole required that the winding up proceed. If the majority of creditors supporting the administration are related creditors and the administration is proposing a deed that lacks a commercial rationale, then the court will place great weight on the views of unrelated creditors: Re Sales Express Pty Ltd [2014] NSWSC 460. Further, if the history of the case suggests that the administration is a tactical move, which amounts to an abuse of the provisions of Pt 5.3A, the court may decline the adjournment and order that the company be wound up: Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391.78 The court may also adjourn the application for further evidence to be provided as to the proposed deed: DCT v Distinctive Enterprises Pty Ltd [2007] FCA 2074. In Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 548, Palmer J said (at [11]): “If a company is insolvent and there is no realistic hope that it can be saved through an administration and Deed of Company Arrangement, then there are strong reasons why it 77 See also, DCT v Laguna Australia Airport Pty Ltd [2013] FCA 1271. 78 Compare Blundell v Macrocom Pty Ltd [2004] NSWSC 895; (2004) 50 ACSR 549.

[19.265]

19 Voluntary Administration

809

should be wound up as soon as possible. One of those considerations is that the sooner that there is an investigation into matters such as whether there has been insolvent trading or dispositions of assets which may be avoided, the better it will be for creditors.”

As explained at , the creditors’ costs of bringing the winding up application have priority if the company enters an administration under Pt 5.3A which results in a subsequent creditors’ voluntary winding up: s 556(1)(ba). It should be noted that s 440D (as to a stay of proceedings against the company) does not apply if there is an application to wind up the company, as this is specifically dealt with in s 440A, and no leave of the court under s 440D is required.79

Criminal or prescribed proceedings [19.260] The stay does not operate with respect to criminal proceedings or prescribed proceedings: s 440D(2). The latter term encompasses actions permitted because of public policy requirements: the “Explanatory Memorandum to the Corporate Law Reform Bill 1992”, at [522]. An example provided in that Explanatory Memorandum is an “action designed to prevent imminent environmental damage”. No proceedings are in fact prescribed. Sections 440F, 440G: suspension of enforcement and execution action [19.265] The stay carries over into the realm of enforcement of a judgment and execution against property. During the administration, no enforcement process in relation to company property can proceed or be commenced except with the leave of the court: s 440F. Court officials are restrained from issuing execution process against company property: s 440G. The use of the term “enforcement process” in s 440F, as defined in s 9, so close to s 440G suggests a distinction between execution in the traditional sense of the word and other enforcement processes. Accordingly, execution is defined narrowly, and includes, for example, the execution of a writ of possession of property by a mortgagee: Albert v Namba Pty Ltd (1997) 15 ACLC 1242; 24 ACSR 577. But in Morris v The Ship “Kiama” (1998) 16 ACLC 945, the arrest of a ship was not “a process of execution” within s 440G as the ship was arrested in accordance with admiralty rules and was sold to ensure that the purpose of the arrest would not ultimately be frustrated by holding expenses exceeding the ship’s value. Furthermore, where a court officer, usually a sheriff or registrar, receives a written notice of the administration the court officer is unable, during the administration, to take action to sell company property under execution process or to pay to any person, other than to the administrator, funds obtained as a consequence of execution: s 440G. The court officer is obliged to deliver to the administrator any company property in his or her possession under execution process (s 440G(3)), and to pay to the administrator all money in the officer’s possession as a result of execution process: s 440G(4). On the other hand, a court may permit a court officer 79 Australian Prudential Regulation Authority v Rural & General Insurance Ltd [2004] FCA 185; (2004) 136 FCR 149; Evans v Mullumbimby News Pty Ltd [2008] NSWSC 240.

810

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.270]

to take action or make a payment in respect of which he or she would be, ordinarily, prevented: s 440G(7). Where property is sold pursuant to execution process, a person who purchases it in good faith receives a good title as against the administrator and the company: s 440G(8).

Exceptions to the moratorium Secured parties

[19.270] The exceptions to the moratorium were discussed briefly above, during the discussion of the effect of administration on stakeholders. As noted above, Pt 5.3A Div 7 provides a range of exceptions to the moratorium depending upon when the party takes action and what type of interest they have. Pt 5.3A Div 7, Subdiv B applies to security interests (both PPSA security interests and charges, liens and pledges), while subdiv C applies to owners and lessors who do not hold security interests. The changes made to the Corporations Act following the introduction of the Personal Property Securities Act 2009 (Cth) on 30 January 2012 have increased the scope of what comes within a security interest to beyond what was previously covered by secured credit arrangements. A security interest under the PPSA (and hence a security interest under s 51A of the Corporations Act) includes most forms of arrangements that confer an interest in personal property to secure the payment or performance of an obligation (PPSA, s 12(1)) and also include a number of deemed security interests (under PPSA, s 12(3)) which include long-term operational leases and commercial consignments. The primary exception provides for secured parties who have security over the whole, or substantially the whole, of the company’s property and act either before or after the 13 business day “decision period” (s 9)which begins when the administration begins (or when the secured party receives notice of the administration): s 441A. This window of opportunity for a substantial secured party recognises the favoured position of such a secured creditor given by the Pt 5.3A regime. A secured party without such an extensive security can only continue with existing action that pre-dates the administration: s 441B. Where the secured party has used an exception to the moratorium to take or continue with enforcement action, the requirement in s 437D that only an administrator can deal with company property does not apply. The rationale is that it is not felt appropriate that a company should be able to frustrate the actions of the secured creditor by appointing an administrator: “Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [538]. As noted above the court may make an order limiting the powers of the secured party: s 441D. This is designed to prohibit a single creditor from frustrating the objectives of the administration: at [541]. An example is given in the Explanatory Memorandum of a company which, just before the commencement of the administration, has had a receiver appointed in relation to a machine which is essential to the operation of the company’s factory. If the administrator cannot use the machine the company cannot

[19.280]

19 Voluntary Administration

811

operate and the administration cannot succeed: at [543].80 In Fekala Pty Ltd v Cenbond Pty Ltd [2001] NSWSC 340; (2001) 37 ACSR 613, the court refused the secured creditor’s access to particular property because it appeared that it was only if the company’s property and business were to be sold together that any substantial money for unsecured creditors would be realised. Section 441E enables any secured party to give a notice pursuant to a charge after the commencement of administration, however enforcement will have to wait, ordinarily, until the end of the administration. The administrator may seek a court order under s 441D restricting the rights of a receiver or agent appointed by a secured party where the secured party has appointed the person prior to the commencement of the administration. This may be necessary to allow the administrator to sell the business as a going concern. However, s 441D does not apply where the secured creditor appoints the receiver or agent during the decision period (pursuant to s 441A): s 441D(1). Perishable property: s 441G

[19.275] A further exception to the general moratorium is found in s 441G, which allows a person with an interest in perishable property to recover that property. The term “perishable property” is not defined, nor have there been any decided cases on this section. One commentator has referred to the concept of perished goods in sale of goods legislation where “perished” is not limited to the physical destruction of the goods; it relates to the situation where the goods have so deteriorated they have lost their merchantable character.81 Owners and lessors who act before the administration commences

[19.280] As noted above, many forms of commercial arrangements involving leasing of personal property and supplies of goods will now be covered as security interests under s 441B under Pt 5.3A Div 7, Subdiv B. However, an owner or lessor whose interest in the property does not constitute a security interest under s 51A may enforce their rights against property held or used by the company if they appoint a receiver or use an agent to assume control of their property held, used or occupied by the company in administration before the administration begins: s 441F. However, s 441H provides that a court may order a person enforcing a right of an owner or lessor of company property (whether the enforcement began before or during the administration) to refrain from performing certain functions or powers in relation to the property: s 441H(1), (2). Such an order may only be made if the court is satisfied that the owner or lessor’s interests are adequately protected during the administration: s 441H(3). The order allowed under s 441H(2) is designed to ensure that exceptions to the stay, which are granted to protect the legitimate interests of creditors, owners and lessors, are not employed in a manner that prevents the possibility of an effective administration: “Explanatory 80 A similar fact situation occurred in Debis Financial Services (Aust) Pty Ltd v Allied Bellambi Collieries Pty Ltd (1999) 17 ACLC 1636; leave to appeal was refused: Debis Financial Services (Australia) Pty Ltd v Allied Bellambi Collieries Pty Ltd (2000) 35 ACSR 371. 81 Hambrett, “Voluntary Administration Procedure of the Corporate Law Reform Act 1992” (1993) 7 Commercial Law Quarterly 10, 12 (referring to Asfar & Co v Blundell [1896] 1 QB 123).

812

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.285]

Memorandum to the Corporate Law Reform Bill 1992 (Cth)”, at [547]. An administrator may wish to sell the business as a going concern and may need to prevent an owner or lessor from continuing to enforce their rights during the administration by obtaining an order under s 441H.

CREDITORS’ MEETINGS [19.285] We now examine the two creditors’ meetings held under the Pt 5.3A process. This is a topic that has been significantly altered by the ILRA, with the replacement of many rules relating to creditors meetings from the Act and the Regulations into the IPSC and the IPRC, Div 75. One of the significant changes made by the ILRA is the ability for creditors to pass resolutions without holding a physical meeting (circulating resolutions). This is now permitted under IPSC, s 75-40 (proposals without a meeting), which involves a single proposal for voting being sent to creditors inviting them to vote yes or no within a specific timeframe (at least 15 business days after the notice is given: IPRC, s 75-135(3)). The ILRA changes do not remove the need for two creditor meetings in voluntary administration. These meetings are critical events in the life of the administration.

The first meeting – options to have a committee of creditors and to replace the administrator [19.290] The first meeting is to occur within eight business days after the administration begins: s 436E(2).82 One purpose of the meeting is to allow the creditors to determine whether to appoint a committee of inspection: s 436E(1). The rules relating to committees of inspection arefound in IPSC and IPRC, which applies to both administration and to liquidation. The rules relating to committees of inspection were discussed in Chapter 15. A second purpose of the first meeting is to allow the creditors to remove and replace the administrator if they so decide: s 436E(4). It should be remembered that it is usually the directors who appoint the administrator on behalf of the company. Allowing the creditors to remove the administrator within the first eight business days gives the creditors (in whose interests the administrator is bound to act) a measure of control over the voluntary administration. For example, the creditors may choose to replace an administrator whom they perceive as being too sympathetic to the existing management of the company. This serves to foster creditor confidence in the voluntary administration procedure; and substantial secured creditors may be more ready to refrain from appointing a receiver during “the decision period” (see [19.270]) if they can be involved in determining who will act as the administrator.83 Creditors may also remove an administrator during the administration under IPSC, s 90-35. 82 That is, excluding the day of the appointment, by the end of the eighth business day thereafter. See Corporations Act, s 435C(1)(a) which provides that an administration “begins” when the administrator is appointed. Notices and advertising must occur not fewer than five business days prior to the meeting: s 436E(3). As to electronic notification, see s 600G(1)(a). 83 For an example of where the s 436E meeting was dispensed with using s 447A orders: see Pavlakis v Equmen Pty Ltd (No 2) [2014] FCA 951.

[19.300]

19 Voluntary Administration

813

Declaration by administrator: s 436DA

[19.295] As we discussed in the context of administrator independence (at [19.145]), and in support of the creditors’ right to replace the administrator, s 436DA requires a declaration of indemnities and relevant relationships to be supplied by an administrator appointed under ss 436A, 436B or 436C. A purpose of this declaration is to give creditors information about any connections of the administrator with the company that they may take into account in deciding whether to replace them with another administrator at the meeting. Meeting requirements

[19.300] This first meeting must be convened by the administrator giving written notice of the meeting to as many creditors of the company as is reasonably practicable and advertising the meeting on the Insolvency Notices website.84 This may be combined with a notice under s 450A: s 436E(3A). These steps must be taken at least five business days before the meeting. This is summarised as: Timing of first meeting Notice of meeting

within 8 business days within 5 business days

So, if the administrator is appointed on Monday 1 July 2019, the meeting must be held on or before Thursday 11 July, with notices and advertising attended to by at least Thursday 4 July.85 Like any meeting of creditors under Pt 5.3A there must be at least two creditors present for a valid meeting: IPRC, s 75-105.86 The meeting must, according to IPRC, s 75-30, be at a place convenient for the majority of creditors, being the majority of creditors in number and not value: M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (1996) 19 ACSR 27, 32. The meeting may use technology to assist creditors who are unable to attend in person: IPRC, s 75-75. There have been a number of cases where electronic notification to creditors has been permitted by the courts.87 It is possible to use s 447A orders to extend the timeframe within which to hold the first meeting: see for example, Carson; Re Hastie Group Ltd [2012] FCA 626 (where the administrator had incomplete details of over 50,000 creditors and needed extra time to convene the first meeting). 84 Corporations Act, s 436E(3); Form 529A; Corporations Regulations, reg 5.3A.03A. 85 That is, excluding the day of the appointment, by the end of the eighth business day thereafter. See s 435C(1)(a) which provides that an administration “begins” when the administrator is appointed. Notices and advertising must occur not fewer than five business days prior to the meeting: s 436E(3); and notice is “given” on the day of posting, see Re Yates [2006] FCA 370; but compare s 600G, which can allow electronic notification, but with notice deemed effected a day later. Public holidays are not business days and must not be counted: Mentha, in the matter of ACN 009 758 258 Pty Ltd [2009] FCA 603. 86 See further Touzell v Cawthorn (1995) 18 ACSR 328 where the only proof of debt admitted by the administrator was that of the company’s solicitor and hence there was only one creditor permitted to vote at the meeting. Evidence of inflated solicitor’s and administrator’s fees led the court to terminate the administration. 87 See the list of authorities in Re Creative Memories Australia Pty Ltd [2013] NSWSC 732; see also s 600G.

814

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.305]

The administrator or their nominee must preside at the meeting: IPRC, s 75-50(2). The administrator must preside at the second creditors’ meeting convened under s 439A meeting: IPRC, s 75-50(1). The court can vary the requirements relating to the first meeting: Loi (Administrator) v Homeland Furniture Wollongong Pty Limited (Admin Apptd) [2016] FCA 1036 (validating the notice to creditors) and in some cases, they have dispensed with it altogether, for example, in circumstances where liquidators appointed themselves administrators under s 436B, and creditors had been informed through the liquidation process.88

The second meeting – to decide on liquidation, a deed or return to the directors [19.305] The second meeting of creditors is where the future of the company is decided. This is called in order to have the creditors consider which of three routes they want the company to take. Section 439C of the Corporations Act states: What creditors may decide At a meeting convened under section 439A, the creditors may resolve: (a) that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or (b) that the administration should end; or (c) that the company be wound up.

The second alternative would see the end of the moratorium and a return of the management of the company to the directors, but this rarely occurs. If the last option is accepted, the company immediately commences to be wound up and the administrator automatically becomes the liquidator of the company: s 446A. If the meeting fails to pass the required resolution then the administration simply ends and control is deemed in law to have returned to the directors: s 435C(3). The administrator is required to give written notice of the meeting to as many of the company’s creditors as reasonably practicable and whose names and address are readily ascertainable; and, as with the first meeting, to publish a notice in the prescribed way: IPRC, s 75-225(1). Written notice of the meeting is “given” to the creditors on the date that the notice is put in the post. A meeting will not be invalid because of the accidental omission to notify a person who might be a creditor: Khoury v Zambena Pty Ltd (1997) 15 ACLC 620. Nor is an administrator under any legal duty to take active steps to seek out “non-obvious” creditors, for example those who have suffered economic loss as a result of the company’s actions: Selim v McGrath [2003] NSWSC 927; (2003) 22 ACLC 112. A defect in calling a meeting, such as by inadequate notice, may be cured under s 1322 of the Corporations Act as long as there is no substantial injustice in doing so. 88 Re Nardell Coal Corp Pty Ltd (2003) 47 ACSR 122; see also Kukulovski, in the matter of Corrimal Leagues Club Ltd [2013] FCA 697.

[19.310]

19 Voluntary Administration

815

Timing and extension of time

[19.310] The meeting must be held within five business days before or after the end of the convening period: Corporations Act, s 439A(2). The “convening period” is defined in s 439A(5) as being the period of 20 business days beginning on the business day after the administration began, that day being the date of the administrator’s appointment.89 Extended periods are provided for Christmas and Easter: s 439A(5)(a). Ordinarily, the second meeting will be around five weeks (25 business days) from the day when the administration commenced. Again, the time constraints placed on the administrator in convening and holding the meeting can be onerous. However, it is also possible for the meeting to be adjourned from time to time, under s 439B(2), for a period not exceeding 45 business days, to allow further investigation and report. This is summarised as follows: Convening of meeting Notice of meeting Timing of meeting Adjournment period

20 or 25 business days 5 business days within 5 business days before or after the end of the convening period 45 business days

If more time is required the administrator can apply to the court for an extension of the convening period: s 439A(6). Such an application can be made during or after the original convening period (s 439A(6)) but if applied for after, the court may only extend time if it is satisfied that an extension would be in the best interests of creditors (s 439A(7)) and the court may take that into account in making any order for costs: s 439A(8). Generally, costs of such an extension application may properly be ordered to be paid from the company’s assets: MI Design Pty Ltd v Dunecar Pty Ltd [2000] NSWSC 995; (2000) 35 ACSR 551. An order extending time may also be made under s 447A. Although early cases on voluntary administration expressed a view that the courts should be hesitant in granting extensions of time given the need for voluntary administration to be an efficient process, this stance has softened in more recent decisions and extensions are commonly granted as long as the administrator has a reason for requesting the extension and to grant it would assist with achieving the statutory object of voluntary administration. It should be noted that requests for extension of time are not always granted: see for example, Re Autodom Ltd [2012] FCA 1393 where the prejudice to the company employees was considered too great to justify the extension of time. Also, the period within which to convene a second creditors meeting applies to companies of all sizes, in straightforward and difficult situations. Hence, there is no presumption against an extension of time being granted, so long as the complexity of an administration (supported by admissible evidence) warrants it in order to 89 Extended periods are provided for Christmas and Easter: Corporations Act, s 439A(5)(a). Public holidays are not business days and must not be counted: Mentha, in the matter of ACN 009 758 258 Pty Ltd [2009] FCA 603. As to electronic notification, see s 600G(1)(b) – (c).

816

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.310]

enable administrators to properly carry out their functions: Re Riviera Group (2009) 72 ACSR 352; [2009] NSWSC 585 at 354-357, at [8]-[18] (ACSR). In that case, Austin J summarised the relevant factors that the court will take into account when deciding on applications for an extension of the convening period:90 • • • • • • • • • • •

the size and scope of the business; substantial offshore activities; large number of employees with complex entitlements; complex corporate group structure and intercompany loans; complex transactions entered into by the company (for example securities lending or derivatives transactions); complex prospects of recovery proceedings; lack of access to corporate financial records; the time needed to execute an orderly process of disposal of assets; the time needed for thorough assessment of a proposal for a deed of company arrangement; where the extension will allow sale of the business as a going concern; more generally, that additional time is likely to enhance the return for unsecured creditors.

In Re Parbery; NewSat Ltd [2015] FCA 435, the court considered the nature of applications to extend the convening period (at [59]): “The power to extend the time for convening the second meeting of creditors should be not exercised lightly or as of course. But this is not to suggest that juridical parsimony is paramount. Rather, Pt 5.3A should be given a commercial construction and application which reflects the reality of the setting in which both the company under administration and the administrator find themselves. The court must balance the expectation that administration will be a relatively speedy and summary matter against the consideration that undue speed should not be allowed to prejudice constructive commercial actions directed to maximising the return for creditors and potential return to shareholders. The lens to be used to assess that balance should not be so narrow that it focuses merely on some scholastic analysis of the text applied from the usually pessimistic perspective of an insolvency practitioner. After all, a potential outcome of Pt 5.3A may be a restructuring or a trade out which enables the company under administration and its activities to continue to the benefit of creditors and all stake-holders. The court must be commercially astute to facilitating such a potentially positive outcome where it is feasible. The first step in that process is usually the consideration of an application of the present type.”

Extensions of the convening period can be lengthy, with many cases receiving three- or four-month extensions. In some cases, multiple extensions of time have been granted. For example, in the administration of ABC Learning Centres, the receivers needed an extensive time period to negotiate the sale of a complex network of hundreds of child care centres operating around Australia with thousands of employees and tens of thousands of children under care. As noted above, the company was also under administration so as to provide the receiver with protection against lessors retaking possession of the land leased by the child care centres. Given the market turmoil caused by the Global Financial Crisis, the 90 See also Re Parbery; NewSat Ltd [2015] FCA 435 at [63].

[19.315]

19 Voluntary Administration

817

sale process took considerable time and this resulted in multiple extensions of the convening period to an overall period of more than 14 months: see Re ABC Learning Centres Ltd; Application by Walker (No 8) [2009] FCA 994; (2009) 73 ACSR 478.91 Complex administrations, such as those in the mining industry, will often require and be granted extensions: see Re Windimurra Vanadium Ltd and Midwest Vanadium Pty Ltd (No 4) [2009] WASC 373; Mentha, in the matter of Griffin Coal Mining Company Pty Ltd (No 3) [2010] FCA 1087. If the company is under the control of a privately appointed receiver and the receiver wishes to have the benefit of the moratorium period to assist in allowing a sale of a business as a going concern to occur (and thereby maximise a return to creditors), this is a relevant consideration in assessing whether an extension of the convening period is warranted: Gothard, Re Sherwin Iron Ltd (No 2) [2015] FCA 401 at [37]; Re ABC Learning Centres Ltd; Application by Walker (No 8). How long an extension of time

[19.312] In Re Harrisons Pharmacy Pty Ltd [2013] FCA 458 at [47], the court set out a range of considerations that may be relevant in determining how long an extension of the convening period may be granted: (a) The extension should be for no longer than is required for a diligent exercise of the powers of the administrators and where relevant, as here, the receivers and managers. While successive applications to the court involve cost, there are also fees incurred by administrators, receivers and managers which mount up over time and these are unnecessary expenses if the administrators or receivers and managers are not diligent. While it is true that, as here, it is possible for creditors to approach the court during the period of the extension, the occasion of an application for an extension provides a forum for the creditors to have their voices heard. (b) It is undesirable for claims which are subject to a moratorium to be extant any longer than necessary. (c) Where the primary asset of the business is goodwill, an overly protracted administration is unsettling to staff who may leave for more certain employment, diminishing the value of the business of the company in administration. (d) Unnecessary delay in prosecuting an administration exposes the assets of the company to market risk. (e) The longer the administration and the receivership, the greater potential there is for the interests of the secured creditor and the unsecured creditors to diverge, to the detriment of the unsecured creditors. (f) It was the intention of the legislature that administrations be conducted expeditiously.

Although administrators are generally able to abide by the times allowed, in the absence of an extension of time, the extent and depth of their reports are necessarily restricted by that limitation and creditors need to take this into account in assessing the administrator’s report. Of course, if material information is omitted from the report or the report is otherwise deficient then any subsequent deed of company arrangement may be challenged under s 445D.

Report to creditors: s 75-225 [19.315] For the second meeting, the administrator must give the creditors, with the notice of meeting, a report regarding the company’s financial position and a 91 See also Re Owen; RiverCity Motorway Pty Ltd v Madden (No 4) [2012] FCA 1491; (2012) 92 ACSR 255 where several extensions were granted for a total of almost three years.

818

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.325]

statement indicating the administrator’s opinion, with reasons, as to whether it is in the creditors’ interests to enter into a deed of company arrangement, whether the administration should terminate or whether the company should be wound up: IPRC, s 75-225. See further at [19.220].

Details of the proposed deed [19.325] If the administrator proposes a deed of company arrangement its details must be provided to creditors: IPRC, s 75-225(3)(vii). But that does not require every provision in the deed to be set out in the report – only the material details of the proposed deed need be supplied – but nevertheless offering to creditors what reasonably could be expected to be material to their decision whether to vote in favour of the deed: DCT v Comcorp Australia Ltd (1996) 14 ACLC 1616, 1645 and 1646; Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247. But a deed was set aside in M & S Butler Investments Pty Ltd v Granny May’s Franchising Pty Ltd (1997) 15 ACLC 1501; 24 ACSR 695 for reasons including that the administrator’s report said only that “the tangible assets of the company will be dealt with in accordance with a deed”. See further [20.90]. Thus s 439A implements the policy of informing creditors about the company’s financial position as soon as possible and enables creditors to vote promptly on the future steps to be taken after considering the administrator’s opinion. It may be said that the convening of the second meeting is the primary function of the administrator, in the sense that the administrator uses the meeting to advise the creditors of the results of the investigations into the company.

The meeting [19.330] The administrator is to preside at the meeting (IPRC, s 75-50) although s 447A has been used to allow the partner of the administrator to preside and to validate a meeting where the administrator had not presided: Silvia, in the matter of Tarpam Pty Ltd [2006] FCA 776. The 45 business day limit

[19.335] The meeting may be adjourned from time to time but can only be adjourned for up to 45 business days from the date when the meeting was first held (IPRC, s 75-140(3)), subject to any order of the court under s 447A. The provision for adjournments permits time in which negotiations can occur in relation to any proposals put to the meeting. On the other hand, if no resolution on the future of the company is made within the 45 business days, and no extension is granted, the administration automatically comes to an end (s 435C(3)(d)) and the directors will again assume control. The time limit serves to prevent creditors’ negotiations being drawn out; a time limit encourages action. Also, the administration is not open-ended so creditors will be entitled, after a reasonable time, to enforce their rights. Voting

[19.340] A resolution can be carried on the voices under IPRC, s 75-110(1)(G). But if a poll is demanded (as it can be) the resolution is passed if a majority of the

[19.345]

19 Voluntary Administration

819

creditors voting (whether in person, by attorney or by proxy) vote in favour of the resolution and the value of the debts owed to those voting in favour of the resolution is more than half the total debts owed to all creditors voting: IPRC, s 75-115. If no result is reached the administrator (who will usually be the person presiding at the meeting) may exercise a casting vote, unless the resolution relates to remuneration or removing the administrator: IPRC, s 75-115(3). The administrator may exercise a casting vote in favour of their removal: IPRC, s 75-115(5). The administrator must include in the minutes of the meeting the reasons for exercising, or not exercising, the casting vote: IPRC, s 75-115(6) However, in the case of a meeting of eligible employee creditors under s 444DA(2)(a), if no result is reached on a poll under subreg (2) or (3), the resolution is not carried and the casting vote is not available: IPRC, s 75-115(7). A resolution may be passed without a creditors’ meeting if a majority of creditors who respond to the administrator’s notice of a proposal vote yes. This is also a majority in value of responding creditors (ie, not of all of the creditors of the company) within the required timeframe (which must be at least 15 business days after the notice is given). A proposal without a meeting (sent to creditors under IPSC, s 75-40) will not pass if more than 25% in value of the responding creditors notify the administrator that they object to the matter being deal with without a meeting: IPRC, s 75-130. A creditor must have had their debt or claim admitted by the administrator for voting purposes in order to respond to a proposal: IPRC, s 75-130(4). The administrator must make a written record of the outcome of the proposal in the books of the administration under IPSC, s 75-10 and lodge notice with ASIC within five business days of the outcome being known: IPRC, s 75-130(6); ASIC Form 5022. Court’s power to review the voting

[19.345] The court has the power to review the outcome of a meeting in certain circumstances. IPSC, s 75-41 applies where a resolution has been voted on and the votes of a related creditor(s) of the company were disregarded such that either the resolution which was passed would not have been passed or the resolution which was not passed would have been passed or the issue would have been decided on a casting vote, and the result is contrary to the interests of the creditors as a whole or is reasonably likely to prejudice creditors.92 This of course involves consideration of the effect on all of the creditors, not merely those who dissent: Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178; (2011) 82 ACSR 300 at [183]. In that case, the court held that aside from considering the potential benefits to creditors that may result from the different outcomes, the court will also consider whether entering the deed will avoid or forestall proper investigations (at [191]). If the elements of IPSC, s 75-41 are established, the court can order, inter alia, that the related creditor(s) not be entitled to vote. This implements the recommendation of the Harmer Report that the unfair influence of related creditors over creditors’ 92 See the detailed discussion of the former provision (s 600A) in DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 99 ACSR 121; Promnitz v Indochine Mining Ltd [2015] FCA 857.

820

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.345]

meetings be prevented: at [580]. “Related creditor” is defined in IPSC, s 75-41(4) to mean a person who, when the vote was cast, was a related entity and a creditor of the company. The applicant must have been a creditor at the time when the resolution was passed: Hoath v Comcen Pty Ltd (2005) 53 ACSR 708; [2005] NSWSC 477 (approved in DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 99 ACSR 121). “Related entity” is defined in s 9. See also Guo v Song [2018] NSWSC 12. IPSC, s 75-42 applies where a resolution is passed by the casting vote of the chairperson. A creditor who voted against the resolution may apply to the court for an order setting aside or varying the resolution. Similarly, under IPSC, s 75-43 if a resolution is not passed because of the casting vote of the chairperson or the chairperson refuses or fails to exercise a casting vote, a creditor who voted for the resolution can apply to the court for an order that the resolution is taken to have been passed. The ARITA Code gives guidance on the exercise of the casting vote.93 In exercising the casting vote, the administrator must properly act in the interests of creditors as a whole, so that an unfair outcome for some creditors may be avoided: Re Martco Engineering Pty Ltd (1999) 32 ACSR 487 (where the ATO was the majority creditor and opposed a deed of company arrangement but the administrator exercised a casting vote – the court wound up the company). There is no rule that the administrator should exercise the casting vote to prefer the view of the majority in value over the view of the majority in number: Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 19 ACLC 659; Young v Sherman [2002] NSWSC 1020; (2002) 20 ACLC 149; although any large disproportion between the values of the debts would be a factor: DCT v Wellnora Pty Ltd (2007) 163 FCR 232; [2007] FCA 1234. If an administrator fails to exercise the casting vote, it has been held that the administrator does not act improperly: Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544. Indeed, IPRC, s 75-115(3), when referring to the administrator exercising a casting vote, is couched in discretionary and not mandatory language. Nevertheless, the discretion is not unfettered. An administrator should proceed to exercise the casting vote and resolve a deadlock (thereby resorting to the power for the purpose for which it exists) unless there is some good reason to refrain from doing so; and failure to exercise the casting vote for some irrational or irrelevant reason is inconsistent with the person’s duty: Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 289; (2007) 25 ACLC 415. The court’s role is not simply to determine how the administrator should have exercised the casting vote, but rather “to evaluate the decision-making process in which the chairperson engaged with a view to determining whether the decision was conscientiously made by reference to all relevant considerations appropriately identified and weighed by him or her”: Plumbers Supplies Co-operative Ltd v Firedam Civil Engineering Pty Ltd [2011] NSWSC 325. The chair should be motivated to act in the best interests of those affected by the vote: Commonwealth Bank of Australia v Fernandez (2010) 81 ACSR 262 at [100]; [2010] FCA 1487. 93 (3rd ed, 2014) at [24.7.4].

[19.365]

19 Voluntary Administration

821

Secured, admitted and unliquidated claims

[19.350] The entitlement to vote at a meeting will depend on the status of the person as a creditor. The ordinary meaning of the term creditor in a voluntary administration is a person who has a provable debt or claim under s 553 of the Corporations Act: Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24. Secured creditors

[19.355] Secured creditors can vote for the full amount of their debt. IPRC, s 75-87, which requires secured creditors in a liquidation to either surrender their security or vote only in respect of the balance owing under the security, does not apply to meetings under Pt 5.3A: IPRC, s 75-87(4). The reason for this is to ensure that secured creditors are involved in the administration process, which, it is considered, may in turn increase the likelihood of the success of the process. Admitted creditors

[19.360] Creditors in general are not entitled to vote unless their debts have been admitted wholly or in part by the administrator or they have lodged with the Chair presiding at the meeting particulars of their debts or, if required, a formal proof of debt: IPRC, s 75-85(3). “Particulars” means particulars sufficient to show, at least prima facie, the existence of the asserted debt or claim; the sufficiency of the particulars can be assessed in the context of pre-existing knowledge of the person making a decision about the proof – a decision-maker is not confined to the contents of the proof of debt document: Selim v McGrath [2003] NSWSC 927; (2003) 22 ACLC 112. IPRC, s 75-100 then sets out the process for the admission and rejection of proofs for the purposes of voting, including dealing with doubtful claims. The decision of the Chair presiding a tthe meeting in relation to a creditor’s entitlement to vote may be appealed to the court within 10 business days after the decision: IPRC, s 75-100(4). See further in relation to the Chair’s role relating to proofs of debt: Selim v McGrath [2003] NSWSC 927; (2003) 22 ACLC 112. Unliquidated debts, contingent debts etc

[19.365] Creditors are not entitled to vote in respect of unliquidated debts, contingent debts, unliquidated or contingent claims, or debts the value of which has not been established, unless a just estimate of the debt’s value has been made: IPRC, s 75-85(4). The person responsible for making a just estimate of value is the chairperson: see Re Free Wesleyan Church of Tonga in Australia Inc [2012] NSWSC 214; (2012) 260 FLR 348. In the context of making a decision on an entitlement to vote, the estimation of value does not require extensive deliberation and detailed inquiry: Selim v McGrath [2003] NSWSC 927; (2003) 22 ACLC 112.94 The administrator is entitled to take into account the surrounding circumstances when considering whether to allow a proof of debt: Spiteri v Lindholm [2003] VSC 42; 94 See also Bacnet Pty Ltd v Lift Capital Partners Pty Ltd [2010] FCAFC 36; (2010) 183 FCR 384.

822

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.370]

(2003) 7 VR 315 (where the company’s sole director’s proof of debt was rejected after he refused to produce the company’s books to assist with substantiating the claims made in the proofs of debt).95 Recording the votes

[19.370] Except where a poll is demanded, IPRC, s 75-110(3) provides that the Chair presiding at the meeting must declare a resolution has been: • passed; • passed unanimously; • passed by a particular majority; or • lost, on the voices. A vote will usually be taken on a show of hands which can fulfil the requirement that the vote be “on the voices”.96 The phrase “passed unanimously” means only that those who voted did so in favour of the resolution and that there were no votes against. In No 5 Lorac Avenue Pty Ltd v Brooke (1995) 16 ACSR 247, the fact that the Chair had declared the motion “carried unanimously” on a show of hands was not conclusive of the question whether secured creditors had voted in favour of the deed. The secured creditors had not voted. The issue was critical because if it was decided that the secured creditors had voted, they must have voted in favour of the deed (as the vote was unanimous) and, consequently, they would be bound by the deed and would be prevented by s 444D(2) from realising or dealing with their security. The secured creditors were bound by the deed. The court said (at [252]) that “carried unanimously” does not mean every creditor present voted. The term is consistent with a creditor having been present but having failed to record a vote either way. The court went on to say that where there is an informal vote such as “on the voices” or by a show of hands it is not possible to be accurate in recording those votes. The aim of the predecessor to IPRC, s 75-110(3) (reg 5.6.19) was to preclude argument about the result of a vote where there is no poll; once the Chair has made the declaration then that is proof of what is declared.

ROLE AND POWERS OF THE COURT [19.375] In Pt 5.3A administrations, the court does not necessarily have to be involved; this is unlike the case in formal schemes of arrangement under Pt 5.1 of the Corporations Act. The court does have an important supervisory role, in particular to ensure that there is a maintenance of the balance between the interests of all creditors. The non-involvement of the court distinguishes the Australian procedure from both the English procedure and the American Chapter 11 process. In Chapter 11, and to an extent in the United Kingdom, the court must generally be involved. In the United States, the courts have a directing role to play. If the courts are involved it is generally the case that this increases cost and reduces the speed with which the administration can be initiated. 95 See also Re Free Wesleyan Church of Tonga in Australia Inc [2012] NSWSC 214; (2012) 260 FLR 348. 96 See Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687, discussed at [15.85].

[19.385]

19 Voluntary Administration

823

While Australian courts are not given a directing role and do not necessarily have to be involved in any given administration, the courts have played an important role in the process and the way that Pt 5.3A has developed. From the earliest days of Pt 5.3A, the courts indicated their willingness to facilitate administrations, one example being the ready grant of extensions of time for the convening of the second meeting of creditors and extending the life of administrations, and in their flexible use of s 447A: see [19.385]. The ILRA has moved some of the court powers from Pt 5.3A into the IPSC and IPRC, Div90 (court powers) as well as specific powers in relation to remuneration reviews in IPSC, Div 60 and in relation to reviewing the outcome of meetings in IPSC, Div75 .

Particular powers [19.380] Part 5.3A provides the court with a number of wide-ranging powers. These include the powers to: • give an extension of the time for the convening of the second creditors’ meeting held pursuant to s 439A(6); • order a secured party or a receiver who entered into possession or assumed control of company property or entered into an agreement to sell such property in order to enforce a security interest before the commencement of the administration, not to perform certain functions (s 441D(2)); • grant leave to a secured party to enforce a security interest during the administration (s 440B); • order a receiver or other person enforcing a right over property held by the company, and who was appointed after the commencement of the administration, not to perform certain functions (s 441H(2)); • grant leave to a liquidator or provisional liquidator to be appointed as the administrator of a company (s 436B(2)); • appoint a fresh administrator where an administrator has ceased to act (s 449C(6)); • remove an administrator, on the application of ASIC or a creditor (IPSC, s 90-15); • give directions to the application of the administrator (IPSC, s 90-15); • declare whether or not a purported appointment of an administrator is valid (s 447C(2)); • give leave to the administrator to dispose of property that is subject to a charge, lien or pledge: s 442C(1).

Section 447A [19.385] The court is given a broad discretionary power under s 447A to make orders as it thinks appropriate concerning the operation of Pt 5.3A in relation to any particular company. Section 447A, which is contained in Pt 5.3A, says (in part): General power to make orders (1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end:

824

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.390]

(a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the court may order under subsection (1) that the administration is to end.

The extent to which s 447A can be used by the courts to facilitate and promote the purpose of Pt 5.3A has now been largely settled by the High Court’s decision in Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270. The High Court has effectively concluded that s 447A is an integral aspect of Pt 5.3A and should be given a wide operation. It can enable the court to make individual orders for a particular company, with respect to the manner in which Pt 5.3A, or any of its sections, should operate, depending on the circumstances applying. Section 447A allows the other provisions in Pt 5.3A to have an altered or changing operation, in the court’s discretion, and in relation to the particular company concerned.97 In the case before the High Court, the question was whether the court had power under s 447A to find that the second meeting of creditors was properly held; it had in fact incorrectly been held eight days too early, and thus not within five business days after the end of the “convening period” as required by s 439A. This was prior to the 2007 amendments that permitted the meeting to be held within five business days before the end of the convening period. The High Court unanimously held that s 439A could in effect be modified by s 447A to accommodate this error. That is, s 447A is available to alter the impact of a section even where the provision in question would be construed as absolute if it were read in isolation from s 447A: Re Vouris; Ex parte Epromotions Australia Pty Ltd [2003] NSWSC 702; (2003) 47 ACSR 155. The High Court said that s 447A is widely drawn and confers power to make orders which will have effect in the future but which are occasioned by something that has been done (or not done) under other provisions in Pt 5.3A. The court specifically rejected a suggested limitation on the section, according to which it could not be used to alter the times fixed by sections in Pt 5.3A which contain express provision for variation of the time so fixed. The court described (Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 at 281) s 447A as “an integral part of the legislative scheme provided for by Pt 5.3A”. However, the High Court itself expressed some reservation whether s 447A could be used to affect accrued rights of third parties. Before considering its limitations, we explain the broad range of circumstances where the section has been applied.

The breadth of the use of s 447A [19.390] Although applications under s 447A are generally made by administrators and deed administrators, the court may entertain applications from the company itself, a creditor, ASIC or “any other interested person”: s 447A(4). In deciding whether it should exercise its discretion under the section, the court will give weight to an administrator’s opinion that what is sought is in the best interests of the company as well as to the consistency of the administrator’s objectives with 97 For a summary of the principles underpinning the use of s 447A, see Hayes v Doran (No 2) [2012] WASC 486 at [406].

[19.390]

19 Voluntary Administration

825

the operation of Pt 5.3A of the Act: Re Ansett Australia Ltd (No 1) [2001] FCA 1806; (2001) 115 FCR 376 at [49] and [52]. In Re Gunns Plantations Ltd (No 1) [2012] VSC 655 at [96] it was noted that “the court must keep to the fore the commercial realities in exercising its discretion under s 447A of the Act.” The standing of the applicant is assessed at the time of making the application: Re Beechworth Land Estates Pty Ltd (No 3) [2015] NSWSC 733; in that case, the applicant not a creditor at the time the application was made. In Re Maria’s Farm Veggies Pty Ltd (admins apptd) [2016] NSWSC 1899 at [16] Black J held: “The section does not dictate the range of factual findings which need to be made, or the generality with which those circumstances might be identified. It seems to me that that section can readily apply in circumstances where there is a dispute about a matter, and the urgencies of the matter are such that it could not be readily determined on a factual basis while meeting the commercial urgencies of the matter. In those circumstances it is open to the Court to find, in a proper case, that the existence of that dispute warrants an order under s 447A of the Corporations Act that will provide for Pt 5.3A to operate in a particular way in relation to that company.”

That case held that s 447A could be used to validate the appointment of an administrator under s 436C even where the requirements of state legislation (the Farm Debt Mediation Act 1994 (NSW)) were not satisfied, although that legislation did not directly prohibit the appointment of an administrator in the circumstances. Section 447A has been relied upon in a variety of circumstances to allow the court to do such things as cure defective appointments, appoint a new administrator, terminate an administration, adjourn a meeting, extend the adjournment period for meetings, and extend required timelines. From the beginning of administrations, courts took an expansive and constructive view of the section. At an early stage after Pt 5.3A commenced, a court set aside a deed of company arrangement and ordered a fresh meeting of creditors because there was a dispute as to precisely what was said and done at the meeting which resolved that the company execute a deed: Re Giga Investments Pty Ltd (1995) 13 ACLC 1185. More significantly, the section was used in the interests of commercial morality by a court relying upon it to set aside a deed of company arrangement and wind up the company, the court saying that it was not bound by the views of the creditors who accepted the deed: DCT v Woodings (1995) 13 WAR 189; Paradise Constructors Pty Ltd v Sleiman [2004] VSC 92; (2004) 8 VR 171. Other examples of the use of s 447A include: • to terminate a voluntary administration because the appointment of the administrator by a creditor under s 436C was found to be an abuse of process (Spacorp Australia v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 979; Re Hayes Steel Framing Systems Pty Ltd (Admins Apptd) [2017] NSWSC 385); • to terminate a voluntary administration where the company was already in a deed of company arrangement and a secured creditor appointed a second voluntary administrator, whose appointment would have frustrated the operation of the deed (Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373); • to make orders allowing various trade unions to exercise the voting rights of employees by way of proxy at the first meeting of creditors; the large number of

826

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.390]

employees, spread throughout the country, was a factor in favour of the orders being made (Re Ansett Australia; Rappas v Ansett [2001] FCA 1348; (2001) 39 ACSR 296); • to validate the appointment of the administrator.98 In DCT v Portinex (No 1) [2000] NSWSC 99; (2000) 156 FLR 453, there had been no quorum at the board meeting held to appoint the administrator because of a failure by the company to adopt, properly, single director articles of association; but there was no evidence of prejudice to any shareholder, and creditors who claimed any prejudice could have recourse to other remedies, for example under ss 445D and 445G; • to validate the appointment of an administrator by a secured creditor under s 436C where the security was unenforceable because mortgage duty was not paid (Photios v Cussen [2015] NSWSC 336); • to determine prospectively (rather than retrospectively, as is the usual case) an administrator’s remuneration (Re Bosnjac Holdings [2005] FCA 275; (2005) 53 ACSR 8); • to change the way notices are given to creditors (Re MF Global Australia Ltd [2013] NSWSC 779 (notice by email permitted)); • to vary the operation of subordinate legislation applying during administration (Re Price Right Construction Pty Ltd (Admin Apptd) [2006] NSWSC 324; (2006) 57 ACSR 206); • to vary the scope of indemnity offered by s 443D to parties other than the administrator (Re Gunns Plantations Ltd (No 1) [2012] VSC 655 (the court noted it could make such an order but declined to do so on discretionary grounds)); • to relieve administrators of their personal liabilities under a proposed financing arrangement for the company, by treating those liabilities as being subject to a right of indemnity under s 443D: Mentha, in the matter of Griffin Coal Mining Company Pty Ltd [2010] FCA 764. Courts have also said that s 447A is available where the company has proceeded, under s 446A, from voluntary administration into a creditors’ voluntary winding up under Pt 5.5 of the Act, and there has been need to alter the effect of a provision in Pt 5.5; as long as the alteration allowed under s 447A is consistent with the objectives of Pt 5.3A: Gibbons v LibertyOne [2002] NSWSC 274; (2002) 167 FLR 310.99 A s 447A order may be used to vary a deed of company arrangement, where the deed has already terminated and the company is no longer in administration: Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504. In that case, the court noted that such an order may be used not necessarily to validate actions, but to vary rights or invalidate actions, although such circumstances “are likely to be rare” (at [224]). 98 See the detailed summary in Hayes v Doran (No 2) [2012] WASC 486 at [406]. If the validation of the appointment would not promote the purpose of voluntary administration expressed in s 435A then this favours declining to make the order validating the appointment: Re Keneally [2015] NSWSC 937; (2015) 107 ACSR 172. The costs of the application for validation are costs of the administration: Re James [2015] WASC 57. 99 See however, Harris and Gordon, “Lost in Transition: Section 447A and the Question of Members’ Rights when a Company Transitions from Voluntary Administration to a Creditors’ Voluntary Liquidation” (2005) 13 Insolv LJ 96.

[19.395]

19 Voluntary Administration

827

As we will see in Chapter 20, the section can be used in favour of deed administrators, for example to allow the pooling of assets and liabilities of insolvent corporate groups (Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209) and to vary a deed of company arrangement: Re Pasminco Ltd (No 2) [2004] FCA 656; (2004) 22 ACLC 774. Even where the court can rely on an existing remedial provision, it may reinforce or “boilerplate” the order by an additional order under s 447A. For example, where publication of a s 439A meeting did not appear five business days before the meeting, the court made an order, under s 1322(4) of the Corporations Act that the meeting of creditors was not invalid by reason of that failure, and “by way of boiler-plating”, it ordered that Pt 5.3A was to operate as though it required only four days’ notice: Mentha, in the matter of ACN 009 758 258 Pty Ltd [2009] FCA 603. In each case, however, the applicant has had to explain, based on reasons and evidence, why the provisions of Pt 5.3A are not adequate for the particular circumstances and the orders required; and why the orders under s 447A are needed. As we now discuss, although s 447A gives a broad power, the wording of the section does impose some important limits.

Limits on the use of s 447A [19.395] The particular terms of s 447A itself, and the High Court’s explanation of the limits of its application, are illustrated in Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd [2008] NSWSC 452; (2008) 66 ACSR 199.100 In that case, despite evidence supporting the inference that the directors had abused the voluntary administration process for the purpose of delaying the winding up and deferring the relation-back period, and hence the potential recovery of unfair preferences, the terms of s 447A were not broad enough to allow the section to be used. As the court explained, one straightforward reason for this was that the relation-back provisions (ss 513A(b) and 513C) are in Pt 5.6 of the Act and not Pt 5.3A. More fundamentally, the court noted the observations of the High Court in Australasian Memory Pty Ltd v Brien, suggesting that s 447A should not be used to alter a person’s accrued rights. In Rafferty’s Resort, an order to change the relation-back day would have altered the accrued rights of the persons who had the benefit of unfair preference payments in the relevant period that were immune from challenge – any order backdating the relation-back day would deprive those persons of their immunity.101 In Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504 at [226], it was doubted whether s 447A orders could be given so as to vary s 445H (which provides that termination of a deed does not affect the previous operation of the deed). Orders under s 447A cannot be used to amend Pt 5.3A to confer a power on the administrator that does not otherwise exist in Pt 5.3A: Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504 at [225]. In that case, the applicant 100 See also Harris, “The Constitutional Basis of s 447A: Is it a Power Without Limit?” (2006) 14 Insolv LJ 135. 101 Note that the calculation of the relation-back period between administration and liquidation has changed following the ILRA with the introduction of new s 91.

828

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.395]

unsuccessfully sought orders under s 447A that would provide the court with the power to amend the deed of company arrangement to remove the power of the administrator under the deed to issue shares as consideration of the provision of the deed fund. Similarly, the court refused a further application for orders under s 447A to require the deed proponent to retransfer shares issued to it under the terms of the deed. Also, an order under s 447A cannot deem a party to be a creditor for the purposes of Pt 5.3A if they do not have a debt or claim that can make them a creditor: BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336. In that case it was found that while Ms Sutton had standing to apply under s 447A, an order, in effect that she was a creditor, could not be made because she did not have a provable claim. Section 447A cannot be used to cure an administrator’s appointment which is prohibited because of the operation of a statutory provision outside of the Corporations Act, under State law: Correa v Whittingham [2013] NSWCA 263.102 Finally, any order altering the date of commencement of an administration is applicable to past events, rather than to how Pt 5.3A “is to operate” in the future. In Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270, the High Court said that while the expression “how this Part is to operate” is one that looks to the future rather than the past, the temporal requirement of the section is satisfied if the orders that are made have effect only from the time of their making; that is, they are orders with future effect, in respect of past matters or events. In Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504, the application for orders under s 447A to undo a share issue made by the administrator as part of a deed of company arrangement was rejected in part because it would be of retrospective effect and hence would not be an order about how Pt 5.3A “is to operate”. Section 447A orders cannot be made to require a secured creditor to amend or remove a security interest registered on the PPSR because that is not related to how Pt 5.3A is to operate: Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373. Nevertheless, the section has been used in a broad range of circumstances. The flexible but careful approach taken by the courts to s 447A has been invaluable in assisting the efficient conduct of administrations, in particular given the time constraints imposed under Pt 5.3A and the fact that a range of issues can arise that need flexible solutions. The courts necessarily have regard to the objects of Pt 5.3A, and the need for speed and economy in resolving a company’s financial predicament, in exercising their discretion under the section. If the applicant for orders under s 447A engages in undue delay in making the application this will be a discretionary factor against relief: Re New Bounty Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504. In that case the applicant waited until a deed of company arrangement was fully effectuated and shares issued under the deed had been completed before making an application under s 447A to have the share issue set aside. The application was rejected. 102 See also Re Maria’s Farm Veggies Pty Ltd (admins apptd) [2016] NSWSC 1899.

[19.415]

19 Voluntary Administration

829

Other powers of the court: ss 447B–447E [19.400] The court is empowered to make any order to protect the interests of creditors during the administration (s 447B) and to terminate a deed of company arrangement in certain circumstances: see s 445D. (discussed in Chapter 20). The administrator has a very important and powerful role with respect to the company’s affairs. Given this, the court can make any order it thinks fit, including removing an administrator: IPSC, s 90-14. But that does not mean that the court should examine the commercial decisions of the administrator: Re Pan Pharmaceuticals Ltd [2003] FCA 855; (2003) 47 ACSR 139. A number of parties, namely the administrator, the company or a creditor, are permitted to apply to the court to ask it to determine whether the appointment of an administrator is or is not valid: s 447C. The court is permitted to fill vacancies in the office of administrator: s 449C. The appointer of the administrator may apply for orders under s 449C. The court’s power to give directions under IPSC, s 90-15 was discussed above in [19.170].

LIQUIDATION AND ADMINISTRATION [19.410]

As often occurs where a company is insolvent, different kinds of insolvency administrations can impact on each other. At times in this chapter reference has been made to receivership occurring prior to or subsequent to the commencement of voluntary administration. In a substantial number of cases, the relationship between liquidation and administration is also relevant. There are three main situations where these interrelationships occur.

Progress from liquidation to administration by decision of the liquidator [19.415]

The first occurs where the company is being wound up and the liquidator resolves to appoint an administrator under s 436B of the Corporations Act: see [19.35]. In that instance, the liquidator’s powers are suspended. This is because s 198G provides that administration produces a suspension of powers of company officers and a liquidator is included as an officer. Note that the exception in s 198G(3)(a) speaks of “the external administrator” not “an external administrator” and so once the company enters administration the voluntary administrator would be “the external administrator”. When the voluntary administration comes to an end the liquidator’s powers revive. So, if a deed of company arrangement is agreed to, and the administration ends, there is need for the court to order a termination or a stay of the liquidation under s 482103 so that the status of liquidation does not impact upon the administration of the deed. In any event, in practical effect the liquidator and the administrator will be one and the same person, if he or she obtained the leave of the court under 103 DCT v Foodcorp Pty Ltd (1994) 13 ACSR 796, 798.

830

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.415]

s 436B(2). It is prudent to ask that the liquidation be stayed rather than terminated, so that if the deed is not successful there is winding up already in progress. However, if the winding up is a court winding up, the liquidation should properly be ended if it is otherwise likely to be in abeyance for some time. In deciding whether to allow a termination of the winding up, under s 482, the court will have regard to the principles by which the discretion under that section is exercised.104 The question of termination of the winding up should be addressed only when it is possible to see whether the deed of company arrangement proposal has found favour with creditors and has effectively set the company on a new path of such a kind that makes termination of the winding up the appropriate outcome: Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673; (2003) 46 ACSR 458. In Rupert Co Ltd v Chameleon Mining NL [2006] NSWSC 415; (2006) 24 ACLC 635 a recapitalisation was attended to by the deed and a creditors’ trust. In that case, the effect of the deed and the creditors’ trust was to transfer the creditors’ claims to the trust and release the company from liability to pay those debts. The evidence was that the company’s creditors would receive a substantial distribution from the trust whereas if the company had remained in liquidation, they would have received little or no return. The court terminated the winding up. The court will not accede to termination of the winding up in circumstances where the company’s solvency is based merely on deferral or subordination of certain debts of related creditors. The general objective of Pt 5.3A, of obtaining for creditors a better return than they would receive in an immediate winding up, is a factor the court will take into account in a case where a deed of company arrangement is promoted and termination of the winding up forms part of the overall plan in which the deed plays a part. However, this will not “justify the court’s re-launching a company which, viewed alone and in the context of its future activities or likely activities, presents a potential for a new group of creditors to be unacceptably prejudiced by legacies from its former life”: Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673; (2003) 46 ACSR 458. In Vero Workers Compensation v Ferretti [2006] NSWSC 292; (2006) 24 ACLC 454, the directors had large claims against the company and the company had no assets and the question was whether preservation of those claims was contrary to interests of future creditors and the public interest. There were difficulties in regarding the subordination of those claims, with the directors’ undertakings to the court, as sufficient to protect future creditors from the risk of being unacceptably prejudiced. The termination application was refused and the company remained in liquidation. If the creditors decide against a deed, it is probably appropriate that they resolve that the administration come to an end rather than resolve that the company should be wound up. If they resolve the former then the existing liquidation is revived along with the powers of the liquidator.

104 See Chapter 17 at [17.10], and Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70.

[19.420]

19 Voluntary Administration

831

Progress from administration to liquidation by a vote of creditors [19.420] In the second situation, the company has been subject to voluntary administration and not been in liquidation previously, and the creditors decide at the second meeting (s 439A) that the company should be wound up. In this case, there is a transition from administration to liquidation pursuant to s 446A(1)(a). In these circumstances, a resolution to wind up is deemed to have been passed and there is deemed to be no declaration of solvency as required by s 494: s 446A(2). The administrator may become the liquidator although creditors have the option of replacing the administrator: s 499(2A). The administrator/liquidator must lodge a notice with ASIC, within five business days of the date of the deemed passing of the resolution to wind up, stating that the company is taken to have passed a resolution to wind up: s 446A(5); ASIC Form 509D. A notice to this effect must also be published on the Insolvency Notices website within 15 business days of the deemed date of winding up. The effect of s 446A is to supplant in full the general statutory provisions dealing with voluntary winding up.105 As one might expect, the principles applicable to the position and qualifications and independence of a liquidator apply to a person who becomes the liquidator after having been the administrator under Pt 5.3A: Re Biposo Pty Ltd (1995) 13 ACLC 1271, 1277. Section 490 prevents a company going into voluntary liquidation while there is a pending winding up application before the court. But that section has been held not to apply where a court application remains on foot, and creditors then vote to wind up the company under s 439C. There is no requirement to obtain leave of the court under s 490. This is because s 446A deems certain resolutions to have been passed, and other requirements complied with, and s 490 has no place in that statutory regime.106 Nor is court leave required where an administrator who is owed more than $5,000 in relation to fees for acting as administrator is to become the liquidator through the operation of s 446A. This is notwithstanding the existence of s 532(2)(b), which prima facie seems to require the administrator to obtain leave. Part 5.3A’s enactment has had the effect of excluding the operation of s 532(2)(b): Energy & Resource Conservation Co Ltd v Abigroup Contractors Pty Ltd (1997) 41 NSWLR 169. However, it should be noted that s 448C imposes similar restrictions on voluntary and deed administrators: see [19.135]. 105 Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70, referring to Brown v Carpet Design Group Pty Ltd [1994] FCA 1118; (1994) 50 FCR 526. See, however, Harris and Gordon, “Lost in Transition: Section 447A and the Question of Members’ Rights when a Company Transitions from Voluntary Administration to a Creditors’ Voluntary Liquidation” (2005) 13 Insolv LJ 96. 106 The court in Brown v Carpet Design Group Pty Ltd [1994] FCA 1118; (1994) 50 FCR 526 took the view that because s 446A deems certain resolutions to have been passed, and other requirements complied with, s 490 had no place in that statutory regime; see also Weeks v Elan Trading Corporation [2006] QSC 44.

832

Keay’s Insolvency: Personal and Corporate Law and Practice

[19.425]

If a person who was the administrator of an administration becomes the liquidator of the company under s 439C(c), that is, the creditors vote at the second meeting for winding up of the company, the administrator is not to be retrospectively treated as not having been the administrator: Energy & Resource Conservation Co Ltd v Abigroup Contractors Pty Ltd (1997) 41 NSWLR 169. This applies even though, as a result of the decision of the creditors the liquidation is taken, by force of ss 513B and 513C, to have begun on the day which the administration commenced. If the liquidation was to operate retrospectively, the utility of the voluntary administration procedure would be destroyed for two reasons. First, those dealing with an administrator would not know if the protection afforded them under s 443A would be available or not – if the liquidation operated retrospectively then the section would not give protection to creditors. Secondly, if an administrator incurred liability within s 443A there would be an incentive for the administrator to encourage winding up because the personal liability would be eliminated. A company can also transition from a deed of company arrangement that has terminated according to its terms, where the deed provides for the company to move to a voluntary liquidation: s 446AA.

Progress from administration to liquidation by court order [19.425] The third case where liquidation and administration impact on one another occurs where the court is of the opinion that it is appropriate that a company under administration should be wound up. Such an order will invariably be made when a deed is set aside by the court or declared void under ss 445D or 445G. See also s 446AA(1)(a). These are discussed in Chapter 20. In the case of Storm Financial Ltd, the court wound up the company on an application by ASIC in the face of a Pt 5.3A administration in circumstances where there was real concern about the deed itself: ASIC v Storm Financial Ltd [2009] FCA 269; (2009) 71 ACSR 81. CONCLUSION [19.430]

Voluntary administration provides a prompt safe haven for companies and their directors where insolvency threatens or has occurred and results in the pressures from creditors being temporarily suspended. That temporary respite having been secured, the process then allows an objective assessment of the company’s position under the guidance and control of an insolvency practitioner. The often anticipated outcome of that process, the restructuring and salvaging of the company’s business under a deed of company arrangement, is the next stage of the process which we now consider. Australia’s voluntary administration regime stands in contrast to the corporate rescue regimes in the US and England, both of which give companies extensive protection against actions by secured creditors and far more time to formulate a restructuring plan than the Australian law does. It remains a matter of ongoing and healthy debate in Australia as to whether features of the English law (for example, whether there should be a prohibition on secured creditors appointing a receiver

[19.430]

19 Voluntary Administration

833

over a company in administration)107 and US law (as to some more flexible moratorium arrangement being introduced before informal insolvency) may be introduced here. Recent inquiries and reports have all recommended that steps be taken to provide greater flexibility for restructuring under Australian law.108 It remains to be seen whether the parliament will act on these calls. This is a time when the United States is considering changes to the Chapter 11 procedure to better promote restructuring and corporate rescue,109 and the European Commission is also promoting corporate rescue laws among its member states.110 Chapter 19 – Voluntary Administration Part 5.3A – Administration of a company’s affairs with a view to executing a deed of company arrangement – ss 435A – 451D Part 5.3A – Administration of a company’s affairs with a Corporations Regulations view to executing a deed of company arrangement – regs 5.3A.01 – 5.3A.07A Regs 5.6.11 – 5.6.56 Corporations Act

ASIC

Courts’ Corporations Rules ILRA

RG 82 – External administration: Deeds of company arrangement involving a creditors’ trust RG 16 – External administrators-reporting and lodging Rules 9.2, 9.2A (remuneration) The Act made a range of substantive changes to the matters covered by this chapter, particularly regarding the convening of creditors’ meetings, the powers of the court and the reporting obligations of administrators.

107 See further Walter, “The End of Receivers and Managers and the Beginning of a Streamlined and Collective VA Procedure?” (2010) 22 A Insol J 8. 108 See Productivity Commission, Business Set-up, Transfer and Closure (2015); Financial System Inquiry, Final Report (2014); Senate Economics References Committee, The Performance of ASIC (2014). 109 ABI Commission to Study Reform of Chapter 11, Final Report (2014). 110 See McCormack, Keay and Brown, European Insolvency Law Reform and Harmonisation (Edward Elgar, Cheltenham UK, 2017).

20

Deeds of Company Arrangement [20.05] INTRODUCTION .............................................................................................................. 836

[20.10] Types of deeds ................................................................................................... 838 [20.15] Pooling arrangements .................................................................................................. 839

[20.20] Company’s continued trading under the deed ........................................... 840 [20.25] ADVANTAGES OF DEEDS ............................................................................................. 841

[20.30] For the company and its directors ................................................................. 841 [20.35] For the creditors ................................................................................................ 841 [20.40] CREDITORS’ DECISION TO ACCEPT A PT 5.3A DEED ......................................... 842

[20.45] Deed administrator ........................................................................................... 843 [20.50] Form of the deed .............................................................................................. 844 [20.55] Execution of the deed ...................................................................................... 844 [20.60] Notice and lodgement ................................................................................................. 846 [20.65] EFFECTS OF THE DEED ................................................................................................. 846

[20.70] On the company ................................................................................................ 847 [20.75] Subject to deed of company arrangement ............................................................... 847 [20.80] Creditors’ trusts ............................................................................................................ 848 [20.85] Former name of company and change of name .................................................... 848

[20.90] On the directors ................................................................................................ 849 [20.95] On initiation of proceedings by creditors .................................................... 849 [20.100] Winding up ................................................................................................................. 850 [20.105] Enforcement and execution of judgment ............................................................... 850

[20.110] Period between approval and execution of the deed .............................. 851 [20.115] Extent of protection from creditors’ claims ................................................ 851 [20.120] On secured creditors ...................................................................................... 851 [20.125] On owners and lessors .................................................................................. 853 [20.130] On guarantees .................................................................................................. 855 [20.135] THE DEED ADMINISTRATOR .................................................................................... 856

[20.140] Liability for tax ................................................................................................ 856 [20.145] Remuneration .................................................................................................. 857 [20.150] EXAMINATIONS ............................................................................................................ 857 [20.155] ADMINISTRATION OF THE DEED ........................................................................... 858

[20.160] Recovery of funds ........................................................................................... 858

836

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.05]

[20.165] What claims are provable? ............................................................................ 859 [20.170] Future claims .............................................................................................................. 860 [20.175] Future breaches .......................................................................................................... 861

[20.180] Set-offs and netting ......................................................................................... 861 [20.185] Priority creditors ............................................................................................. 862 [20.190] Employees ................................................................................................................... 863 [20.195] Superannuation guarantee charge .......................................................................... 864

[20.200] Payment of dividends .................................................................................... 864 [20.205] Other procedural requirements .................................................................... 864 [20.210] Lodgement of accounts with ASIC ......................................................................... 865 [20.215] VARIATION OF THE DEED ......................................................................................... 865

[20.215] Section 445F ..................................................................................................... 865 [20.220] Section 447A .................................................................................................... 865 [20.225] TERMINATION AND AVOIDANCE OF A DEED ................................................... 866

[20.230] Termination in accordance with the deed: s 445C(c) ............................... 866 [20.235] Termination by notice: s 445FA .................................................................... 866 [20.240] Termination by a meeting of creditors: ss 445C(b), 445E ........................ 867 [20.245] Termination by the court: ss 445C(a), 445D ............................................... 867 [20.250] Voiding or validating a deed: s 445G ......................................................... 868 [20.255] Principles of application under ss 445D and 445G .................................. 870 [20.260] Differentiation between creditors ............................................................................ 872 [20.265] Some other reason ...................................................................................................... 874

[20.270] Use of s 447A in relation to Deeds .............................................................. 874 [20.375] Creditor support for investigations ........................................................................ 875

[20.280] Stay of a termination ...................................................................................... 876 [20.285] Previous operation of the deed not affected .............................................. 876 [20.290] Supervision by the court ............................................................................... 876 [20.295] DEEDS OF COMPANY ARRANGEMENT FOLLOWED BY LIQUIDATION ..... 877 [20.300] POST-DEED DEBTS ........................................................................................................ 877 [20.305] CONCLUSION ................................................................................................................. 878

INTRODUCTION [20.05]

In this chapter we examine deeds of company arrangement as being the process whereby the reconstruction of an insolvent company’s business as approved by creditors is implemented. In previous editions we also discussed schemes of arrangement in this chapter as a comparison with deeds, given that schemes have largely been replaced by deeds in insolvent reconstructions. With an increasing industry and government focus on restructuring and rescue of companies, and an increasing number of schemes being used in large company restructuring, we thought it appropriate to move the schemes discussion to the new chapter on restructuring (Ch 21).

[20.05]

20 Deeds of Company Arrangement

837

As we explained in Chapter 19, voluntary administration can be an effective tool for permitting an investigation of options for the insolvent company, allowing the creditors to see what might best benefit them given the company’s position and prospects. It also provides breathing space for the company, with protection from its creditors whilst it is under the control of an experienced administrator. However, voluntary administration itself does not purport to finally address the company’s insolvency. Voluntary administration is a conduit to the company’s future rather than an end in itself. To be seen as a corporate rescue measure, administration is only preparatory to another insolvency administration, namely a deed of company arrangement (“DOCA” or “deed”). If the creditors’ approve the company entering into a deed, it may be that the deed will see a successful restructuring of the company and the business may return to profitability. Alternatively, the deed may act simply as a means to maximise the outcomes for the creditors of the company, by way of a dividend return from a more structured sale of the company’s assets in its winding up. This outcome does not represent a failure of the voluntary administration process because the goal of that process is to save all or part of the business or to provide a better return than an immediate liquidation. Selling the business through a deed and then paying the proceeds to creditors (after costs and remuneration are paid) enables the business to continue trading under a new owner and preserves enterprise value and jobs. Whatever deed is implemented, it will follow on from voluntary administration.1 Therefore, one cannot say that deeds of company arrangement stand on their own like schemes of arrangement; they necessarily follow on from the process of administration. This is so even though in many cases the practitioner who was the administrator under voluntary administration becomes the administrator of the deed. The 2015 Productivity Commission Report criticised voluntary administration as not promoting corporate restructuring and turnarounds and recommended that voluntary administration (and therefore DOCAs) should only be available if the administrator believes (within one month after commencement) that the company will be viable business. This would obviously have limited the use of DOCAs as it would often not be possible to determine whether the business would be viable within that timeframe. Furthermore, DOCAs are often used at present not to ensure that a viable business emerges but to provide a better return to creditors through a quasi-liquidation process. This would have been prevented by the Productivity Commission’s recommendation, which the government ultimately rejected. The legal reality is that when a deed is executed the voluntary administration ends: s 435C(1).2 Therefore, a deed must be viewed as a totally separate and distinct administration, however closely related to the voluntary administration, and the rights and obligations of creditors and the company are likely to be quite different because they are governed by the terms of the deed itself. While a different form of administration, a company operating under a DOCA is still operating under 1 Compare company voluntary arrangements (CVA) under Pt 1 of the Insolvency Act 1986 (UK) which can be entered into in the absence of an administration. 2 Other ways that a voluntary administration may end, in terms of s 435C, are explained in Ch 19.

838

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.10]

Pt 5.3A of the Corporations Act and hence the court’s powers provided under Pt 5.3A Div 13 are still available even though the period of voluntary administration has ended. The efficacy of deeds in actually achieving the goals set out for voluntary administration in s 435A has been a topic of considerable public debate in recent times. There is little quantitative data on outcomes of deeds but a 2013 study3 produced these key findings: • 77% of deeds involves less than $1.5 million in unsecured debts; • the median duration of deeds was 11 months; • 75% of deeds involved the return of control of the company to its existing management; • 72% of deeds were used for “quasi-liquidations” with only 28% resulting in continued trading of the business. Perhaps the most significant finding of this study is the paltry return to creditors: less than six cents in the dollar. However, this is still more than the vast majority of liquidations which return no funds to creditors. Also, deeds more often allow a continuation of the business and of staff employment. It is also significant that the government safety net scheme for employees, the Fair Entitlements Guarantee (FEG), is not available for companies going through deeds; there is an expectation that the deed will properly attend to payment of the employees.

Types of deeds [20.10] There are few restrictions on the types of deeds that can be executed. The idea of the legislation is to permit flexibility so that the contents of any deed are able to meet the particular circumstances of the company and its creditors. The types of arrangement made can often bear similarity to those entered into under Pt 5.1 of the Act. The arrangement may involve: • a simple moratorium for a set period which allows for a freezing of claims; • a compromise of creditors’ claims whereby creditors agree to accept less than what is owed; • a rescheduling of the company’s debts whereby creditors are paid in instalments over a longer period of time; • a restructuring of the company’s debts whereby some or all of the creditors agree to accept assets, shares or other securities in exchange for some or all of their debts being satisfied; or • a mixture of these arrangements. In some cases, creditors may agree to a deed whereby the administrator simply sells the business of the company over a period in an orderly way, with the corporate entity remaining either proceeding to deregistration or used for other purposes. In such a case the deed is used to protect the company and its property during the sale process, which in complex cases might take months or years. This is 3 See Wellard, “A Review of Deeds of Company Arrangement” (2014) 26 A Insol J 12, funded by ARITA’s Terry Taylor Scholarship. The review was of a sample of 72 deeds in the period covering FY2012-2013.

[20.15]

20 Deeds of Company Arrangement

839

sometimes called a “holding DOCA” as it gives the DOCA administrator time to continue trading while attempting to sell or restructure the business. It is a legitimate purpose of Pt 5.3A of the Act: Mighty River International Ltd v Hughes [2017] WASCA 152 (although an appeal to the High Court was pending at the time of writing). A holding DOCA was successfully implemented in the restructuring of Arrium in 2016-2017. It should be noted, however, that the stay provisions that apply during voluntary administration (in Pt 5.3A Div 6) do not apply when the company is operating under a deed of company arrangement. A company trading subject to a deed can again be the subject of a winding up application in respect of a new debt incurred and not paid. Creditors also have the potential to agree among themselves to have their claims dealt with on different bases; some may agree to abandon their claims or they may agree to the subordination of their debts so that they rank after the other creditors in respect of the receipt of dividends from the deed: see for example, Brooke v No 5 Lorac Avenue Pty Ltd (1994) 14 ACSR 717 (related party creditors were subordinated). Creditors may agree to accept differing dividend rates for different creditors or classes of creditors. It is important to note that the significance of obtaining majority creditor approval for the execution of a deed is that the terms of the deed will bind all creditors, even those who did not vote or did not vote in favour of the deed: s 444D(1). Secured creditors are given limited protection under s 444D(2). Pooling arrangements

[20.15] The concept of the pooling of assets and liabilities of a corporate group was discussed in the context of liquidations, where there are now specific pooling provisions – see [15.310] – [15.325]. There are no provisions in Pt 5.3A that allow pooling in administrations but there is a history of cases where deeds of company arrangement have been used for this purpose.4 In the context of Pt 5.3A, a pooling arrangement can be effected by agreements made between all companies in the group and the administrators transferring the assets and liabilities to a single company in the group; that company is the one that executes the deed of company arrangement: see, for example, Mentha v GE Capital Ltd (1998) 16 ACLC 1032. In Re Solomons [2012] NSWSC 923, the pooling arrangement involved a deed that created a creditors’ trust. The court can allow for the holding of a consolidated creditor meeting, rather than holding separate meetings for each company under s 447A and/or give directions that it is proper for the administrators to sign and implement the necessary deeds: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209.5 4 See also Harris, “Corporate Group Insolvencies: Charting the Past, Present and Future of Pooling Arrangements” (2007) 15 Insolv LJ 78. 5 In Mentha v GE Capital Ltd (1998) 16 ACLC 1032 Finkelstein J noted that court directions were not needed as the creditors had the power to implement pooling deeds without court sanction.

840

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.20]

The court needs to be satisfied that creditors have been fully informed about the implications of the pooling arrangement and that they raise no objections. This cannot be demonstrated merely by the fact that no creditor voices an objection – a vote by the creditors must be conducted: Re Tayeh [2005] NSWSC 475; (2005) 53 ACSR 684. The court may refuse a pooling arrangement which serves to deprive some of the creditors of the advantages they would otherwise derive from a pari passu distribution from the company’s assets. A pooling arrangement was rejected in Re Ansett Australia Ltd [2006] FCA 277; (2006) 151 FCR 41 for that and other reasons. Although the Ansett group involved numerous companies, the court said that it is not enough to make a pooling order on the ground that the administration is complex or that the identity of creditors is difficult to determine.6

Company’s continued trading under the deed [20.20] During the operation of the period of the deed, the company may continue to trade or the company itself may be sold to generate a fund for distribution to creditors. In some cases, a prospective purchaser may wish to own the company itself and may purchase the business by buying the company’s shares. It is possible for insiders (such as directors, shareholders or employees) to propose a deed to buy back the company from the administrator and its creditors. It is possible for a prospective purchaser to seek a licence to run the business from the administrator during the administration, which involves paying a licensing fee that may serve as a deposit when the purchaser proposes a deed of company arrangement that would allow the purchase of the business at the end of the administration.7 Of course, no deed can proceed unless the creditors resolve to approve it. Debts incurred after the deed is entered into are not covered by the deed and thus those creditors can, if their debts are not paid, take action, including winding up action, against the company in respect of those claims. A secured creditor with an enforceable security over the whole or substantially the whole of the company’s assets may appoint a voluntary administrator over a company that is operating under a deed of company arrangement: see for example Re Bluenergy Group Ltd (Subject to a DOCA) (Admin Apptd) [2015] NSWSC 977; (2015) 107 ACSR 373. In that case, the court removed the administrators as it was considered that their continued appointment would frustrate the operation of the DOCA. However, many companies, having had their debts compromised after a period of insolvency, often trade out of their difficulties and continue profitably after the period of the deed’s operation concludes. In such cases, an important object of Pt 5.3A, the survival of the company, has been fulfilled. The success or failure of voluntary administration is not judged solely by the continued operation of the company via a deed of company arrangement however. 6 For a review of the Australian, Canadian, New Zealand and United States law on pooling see Harris, “Substantive Consolidation Under Statute Law: Lessons from Australia” [2008] Annual Review of Insolvency Law 541. 7 For an example of a licensing arrangement in conjunction with a DOCA, see DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 99 ACSR 121.

[20.35]

20 Deeds of Company Arrangement

841

ADVANTAGES OF DEEDS [20.25] The advantages of a successful deed flow to the creditors and the company and its directors, the expressed aim of Pt 5.3A being to produce a better outcome for all parties than a liquidation of the company. For the company and its directors [20.30] Often the advantage for a company is that it can continue to trade, generally with its usual customers, and survive its financial difficulties by relying upon the compromise effects implemented by the deed on existing creditor claims. It is usual for existing unsecured debts, including leasing costs and tax obligations, to be extinguished by the deed. However, if the company trades on under a deed, it is generally required to disclose this fact in its public documents – XYZ Pty Ltd (subject to a deed of company arrangement) – and this may discourage some new creditors from dealing with it: s 450E. Hence, there is some incentive to offer a deed that involves early payment of an agreed amount to creditors so that the deed administration terminates quickly. Some of the more particular potential benefits of a deed of company arrangement for the company’s directors are: • the avoidance of the stigma of being seen as those who managed a company to liquidation; • the end of pressure from creditors; • the potential to remove damaging contractual obligations, such as unprofitable leases, from the company’s ongoing obligations; • that there are no investigations pursued by a liquidator; • tax benefits – carrying forward past losses as deductions against future profits;8 • obtaining potential benefits from the advice of the deed administrator in restoring and developing the company’s business.

For the creditors [20.35] The benefit for the creditors is the potential for a better dividend than would be received if the company went into liquidation. A higher dividend may be paid because: • directors and others associated with the company might be willing to contribute funds, which would not be provided if the company were in liquidation, to enable the creditors to be paid a dividend, or be willing to subordinate what is owed to them by the company or even release the company from its liability; • the deed may provide for sale of the company’s business or the purchaser may inject capital and expertise into the business, thereby increasing the possibility of a better return; • allowing the business to trade on for a period under a deed may allow the company to realise the value of work in progress or to secure further orders/work from customers. Other possible advantages include: 8 See Sommer, Schofield and Gates, Tax & Insolvency (3rd ed, Thomson Reuters, 2011), Ch 12.

842

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.40]

• selection of the deed administrator, on the basis of their experience in a particular industry in which the company operates – for example telecommunications or hospitality – or the extent of resources available to the administrator, for example in a large corporate restructuring. This can help to strengthen creditor confidence in the ability of the management team to resuscitate the struggling business; • creditors who supplied goods and services to the company in the past are able to retain a customer for future trading; • a dividend may be received more quickly by creditors than if there were a winding up (where more extensive investigations and possibly litigation would occur); • as administrators of deeds do not have the power to attack antecedent transactions such as preferences, those creditors who received such payments would know that such payments are safe from recovery.

CREDITORS’ DECISION TO ACCEPT A PT 5.3A DEED [20.40] We now proceed to examine the process whereby a deed of company arrangement, being the prime means of corporate reconstruction, is implemented. This process compares favourably with the rather time-consuming and costly process under a scheme which is the major reason why deeds have largely supplanted schemes in dealing with insolvent companies. A deed of company arrangement may be proposed by any interested party, including the directors, shareholders or creditors. A deed must, however, be approved by the company’s creditors at the second meeting that occurs in a voluntary administration: s 439A. The meeting is required to be held within five business days before or after the end of the convening period, which is itself 20 or 25 business days in duration (depending on public holidays). At this meeting the administrator is required to propose one of three courses of action to the creditors concerning the future of the company: • that the company executes a deed of company arrangement (if one is proposed); • that the administration ends; or • that the company be wound up. Naturally, a deed should only be recommended if that course of action is in the best interests of the creditors. The second meeting was discussed in some detail in Chapter 19. If the administrator proposes a deed, s 439A(4)(c) requires the terms of the deed to be provided to creditors to allow them to make an informed decision about their interests. But this does not require every provision in the proposed deed to be set out in the report – just what is reasonably material to creditors in deciding whether to vote in favour of the deed: DCT v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616, 1645-1646. If important terms are not presented to the creditors this may allow the court to set aside the deed under s 445D for a material omission or under s 445G for non-compliance with Pt 5.3A, or to otherwise hold that entry into the deed was not in fact approved by the creditors because the document did not accord with the material information about the deed disclosed to creditors: see generally Re Recycling Holdings Pty Ltd [2015] NSWSC 1016; (2015) 107 ACSR 406.

[20.45]

20 Deeds of Company Arrangement

843

In Le Meilleur Pty Ltd v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115; (2011) 256 FLR 240, the description of the terms of the deed set out for creditors in the s 439A report did not state that the company’s land would be sold. While the administrator mentioned the sale of assets verbally at the creditors’ meeting the court held that the deed formally executed was not one approved by the creditors because it included key information that was not disclosed to them in the report. This resulted in a declaration that no valid deed existed and that the failure of the company, within the 15 business days period specified in s 444B(2), to execute a deed in conformity with the resolution of the creditors had the effect that, under s 446A(1)(b), the company entered into a creditors’ winding up with the administrators becoming the liquidators. The court held in the alternative that s 445D could be used to set aside the deed. It is prudent and, in most cases, appropriate for the administrator to give the creditors as much detail of the terms of the deed as possible. Certainly, the critical terms of the proposed deed should be explained in the report to creditors that accompanies the formal notice of meeting which convenes the meeting of creditors. An administrator may have a draft deed prepared and distributed to creditors as part of the report provided to creditors for the meeting. All of this would, naturally, enable the creditors to be better informed and should serve to engender a greater feeling of trust and goodwill needed for support of the deed.

Deed administrator [20.45] An administrator of a deed must be appointed: s 444A. This need not be, but usually will be, the company’s voluntary administrator, who will be conversant with the affairs of the company. If the administrator does not wish to continue to act, or the creditors want a new administrator, a resolution appointing another person (who must be a registered liquidator: s 448B) must be passed: s 444A(2). The same factors which disqualify a person from acting as a voluntary administrator (see [19.135]) apply in respect of a person acting as a deed administrator: s 448C(1). The person proposed as the administrator of the deed must sign a consent to act: s 448A. As with voluntary administrators, the appointment of a deed administrator is not able to be revoked: s 449A. The court has the power under IPSC, s 90-15 to remove an administrator of a deed of company arrangement on the application of (IPSC, s 90-20) a person with a financial interest in the administration (which includes the company, a creditor, or an external administrator: see IPSC, s 5-30) ASIC or the committee of inspection; the same section applies to voluntary administrators: see [19.155]. Also, and as with voluntary administrators, the court is permitted to fill vacancies in the office of administrator (s 449C) and, like voluntary administrators, two or more persons may be appointed as joint deed administrators: s 451B.

844

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.50]

Form of the deed [20.50] The administrator must prepare the proposed deed: s 444A(3). Certain matters must be included in the deed. These are listed in s 444A(4) and include: • who will be the administrator; • the property of the company available to pay creditors’ claims; • the nature and duration of any moratorium period; • the extent to which the company is to be released from debts; • the circumstances which will see the deed terminate; • the day on or before which claims must have arisen if they are admissible under the deed; and • the order in which the proceeds of the property of the company are to be distributed amongst creditors. Certain provisions will apply to a deed unless specifically excluded: s 444A(5). The Corporations Regulations, reg 5.3A.06 provides that these provisions are specified in Sch 8A of the regulations.9 There is no indication in the legislation to what extent the prescribed provisions in Sch 8A may be excluded or modified before the deed can be set aside. Nevertheless, as indicated above, deeds may take a variety of forms and depending on the purpose of the deed, many of the provisions in Sch 8A may not be necessary. For example, under many deeds an administrator is only required to collect payments periodically from the company and distribute them to the creditors according to the terms of the deed. In other deeds the administrator is required to control the company’s business. Although deeds are flexible instruments, their binding effect cannot extend beyond the terms of, Pt 5.3A Div 10: Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509 (where releases involving creditor rights against third parties were held to sit outside the scope of the deed provisions in the Act).

Execution of the deed [20.55] If the creditors resolve that a deed of company arrangement is to be entered into, the deed must be executed by the company within 15 business days after the end of the meeting of creditors. The term “within” does not include the day that the creditors passed the resolution – this is because the time period commences “after the end of the meeting”: Pleash v Buler [2010] FCA 464. That may be extended by the court on an application made within those 15 business days: s 444B(2):10 see Hurt v Ausroc Metals Ltd [2017] WASC 169, where application was made on the 15th day, and a long extension of one month was granted in view of 9 These provisions are discussed in detail in Hamilton, “Deeds of Company Arrangement: The Prescribed Provisions” (1995) 3 Insolv LJ 67. 10 See also Re Sydney Ringtread [2001] NSWSC 424; (2001) 19 ACLC 1,215 (extension granted); Mentha v Sydney Airports Corporation Ltd [2002] FCA 530; (2002) 120 FCR 310 (refused, one consideration being the continued constraints placed upon owners and lessors of property while the deed remained unexecuted); Re Hi-Fi Sydney Pty Ltd (admin apptd) [2015] NSWSC 781 (refused).

[20.55]

20 Deeds of Company Arrangement

845

the complexity of the arrangements consequent upon the execution of the deed.11 The court commented that parties should seek to have a deed executed within the 15 business days. As with other time limits in Pt 5.3A it is also possible for the court to extend time under s 447A even where the application for an extension is made after 15 business days have expired: see for example Re Pleash [2012] FCA 1125 (company operated under a deed for several months which had not been properly executed under s 444B, s 447A order granted extending the time for execution). A difficulty with that period expiring is that the company then automatically goes into liquidation: s 446A. That occurred in Re Edward Gem Pty Ltd [2005] FCA 74; (2005) 141 FCR 408 but the court made orders under s 447A extending the time within which the deed could be validly executed to the date on which the deed was in fact executed; as a precaution, the court also terminated the liquidation under s 482. The administrator is also required to execute the deed, and this is to be done as soon as practicable after the company has done so: s 444B(5). As explained, if the company simply fails to execute the deed within the requisite time period, perhaps because the directors decide that the deed cannot be implemented, s 446A(1)(b) applies and the administrator becomes the liquidator of the company automatically: s 446A(3). The company is deemed to have passed a special resolution under s 491 that it be wound up voluntarily (s 446A(2)) and notice (ASIC Form 509D) must be lodged with ASIC by the liquidator: s 446A(5). The administrator also has to lodge a notice with ASIC that the company has failed to execute the deed: s 450C; ASIC Form 509F. Section 444B(6) says that “when executed by both the company and the deed’s proposed administrator, the instrument becomes a deed of company arrangement”. But although called a deed of company arrangement, it is not a deed at law, and the requirements for execution of a deed under seal do not apply. In MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24; (1999) 195 CLR 636, only one director of the company counter-signed when the common seal of the company was affixed, yet there should have been a counter-signing by a second person, either the secretary or another director. A challenge to the deed on this basis therefore failed. There was no need to comply with the usual formalities applying to the execution of deeds. Thus, the requirements for execution of a deed of company arrangement are those found in the Corporations Act. Section 127(1) of the Act provides that a company may execute a document without using its common seal by way of two directors signing, a director and a secretary, or the one director/secretary of a proprietary company. The obligations on all parties involved with a deed, including the creditors, stem from the combined operation of the deed and the relevant provisions of the Corporations Act. The combined effect of ss 444A and 444D is that a deed binds all creditors of the company that existed prior to the date specified in the deed, 11 Section 447A uses the word “claims” to mean the same thing as the phrase “debts and claims” as used in s 556: Re Baseline Constructions Pty Ltd (Subject to DOCA) [2017] NSWSC 1018.

846

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.60]

although creditors with security or property rights (such as lessors) are given some measure of protection where they do not vote in favour of the deed: s 444D(2), (3). “Sections 444D and 444G identify persons who are bound by a deed. Those persons are not parties bound together by contract. They are persons whose rights and obligations are created by law by virtue of the execution of the relevant instrument. They are akin, in that respect, to persons bound by a scheme of arrangement under Part 5.1 of the Corporations Act 2001”: Reed Constructions Australia Ltd v DM Fabrications Pty Ltd [2007] NSWSC 1190; (2007) 25 ACLC 1463 at [20]. As we explain at [20.120] – [20.130], once a deed is approved then the creditors are bound by it during the period between the creditors’ meeting and execution of the deed: s 444C. The administrator is also entitled, prior to the execution of the deed, to seek an order of the court that a secured creditor not be permitted to realise or deal with its security in order to protect the property used by the company for the beneficial operation of the deed: s 444F. Notice and lodgement

[20.60] The deed administrator must send to each creditor of the company written notice of the execution of the deed and lodge a copy of the deed with ASIC: s 450B; Form 509E. The deed administrator must also lodge the annual administration return with ASIC every 12 months: IPSC, s 70-5. If the deed administrator becomes aware that there has been or is likely to be a material contravention of the deed by a person bound by the deed, they must notify the creditors: s 445HA(2). EFFECTS OF THE DEED [20.65] Once the deed is executed, the voluntary administration terminates (s 435C(1), (2)(a)), the moratorium restrictions come to an end and are replaced by the deed’s provisions and any relevant statutory provisions that apply. The deed binds the deed administrator, the company and its officers and members: s 444G. It also releases the company from a debt to the extent that the deed provides for that release and to the extent that the creditor is bound by the deed: s 444H. It was noted in Hanson Construction Materials Pty Ltd v Davey [2010] QCA 246; (2010) 79 ACSR 668 at [44] that: “The Act does not specify what form of words must be used, or even that the word ‘release’ must be used. The deed must specify to what extent the company does not have to pay its debts and to that extent it is released from them.”

If a creditor fails to lodge a proof of debt in an administration of a deed, then it may be prevented from setting off that debt against a claim by the company in later proceedings, as the claim of the creditor is extinguished by the deed.12 But it has been held that it would be unconscionable not to permit a creditor who did not 12 GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd (1997) 15 ACLC 109; reversed, on another point, on appeal GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888.

[20.75]

20 Deeds of Company Arrangement

847

know that one of its debtors had executed a deed to set off its debt against a claim by the debtor company: Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 132 FLR 247.

On the company [20.70] The company will be bound by the deed throughout the term of operation of the deed: Corporations Act, s 444G. The nature of the effects on the company will depend on the terms of the actual deed. The deed will usually vary the operation (or even terminate) of the rights and obligations arising from contracts between the company and its creditors. The new protections against ipso facto clauses introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) (due to commence by 1 July 2018) are not triggered by the company’s entry into a deed of company arrangement. Indeed, the stay against ipso facto clauses will end when the deed is executed (ie “when the administration ends”): s 451E(2)(a). However, s 451E(4) provides that such rights as are caught in the stay period during administration remain unenforceable indefinitely after the end of the stay. The protection against ipso facto clauses during administration is discussed in Chapter 19. “Subject to deed of company arrangement”

[20.75] While the company is subject to the deed, the words “subject to deed of company arrangement” must be inserted in brackets after the company name on every public document and eligible negotiable instrument of the company: s 450E, subject to leave of the court to dispense with these words. Application to the court for leave can be made by the administrator or any interested person. The court may only grant leave if it is satisfied that to do so will not result in any significant risk to the interest of the company’s creditors, including contingent or prospective creditors, as a whole. Such an application was refused under the previous law (using s 447A) in circumstances where the directors were only willing to propose a deed if their telecommunications company could trade without the disclosure of the fact that it was trading under a deed. One reason given was that the telecommunications industry was competitive and the experience of customers with One.Tel, which went into liquidation, would discourage them from trading with any company trading under a deed of company arrangement. In Multelink Aust Ltd [2003] NSWSC 836; (2003) 21 ACLC 1,661, 1,665 Bryson J said that: “it is not just to allow the company to test its commercial prospects in the future under the Deed of Company Arrangement at the expense of the warning which in the ordinary workings of the law persons who come to deal with the company in the future would have.”

The section now specifically permits such applications to be made but there still needs to be evidence that there will be no “significant risk” to the company’s creditors as a whole.

848

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.80]

Creditors’ trusts

[20.80] One mechanism that has been developed to address these concerns is the use of a creditors’ trust by which the company is quickly moved out of the deed of company arrangement regime and the stigma involved. This typically involves changing creditor rights against the company into rights as a beneficiary of a trust whose funds are set up by the deed (usually from asset sales as required under the deed). The company’s debts are extinguished by the deed and the deed can be terminated as having achieved its purpose (which is to establish the trust fund) and the company is then free to return to ordinary trading without the stigma of having “subject to deed of company arrangement” in all its public documents. The creditors’ trust device can be achieved very quickly, even within a day or two after executing the deed. Creditors must appreciate, however, that such a device fundamentally changes their legal rights as they stop being creditors under a deed of company arrangement and thereby lose the rights and protection of the Act. Creditors who become beneficiaries under a creditors’ trust deed will, however, have rights and remedies under State-based trust law. In that respect, concerns have been expressed regarding the operation of creditors’ trust deeds.13 But as the court said in Re Bevillesta Pty Ltd [2011] NSWSC 417, whatever might be the concerns, there can be sound commercial reasons to adopt such a trust where it allows a chance for a return for creditors who would otherwise receive no return on a liquidation. Such a view was endorsed in the context of TEN Network Holdings: see Re TEN Network Holdings Limited (Admins Apptd) (Recs and Mgrs Apptd) [2017] NSWSC 1247. Former name of company and change of name

[20.85] As we saw in relation to voluntary administration (at [19.60]), s 161A of the Corporations Act provides that a company that changes its name during, or six months prior to, an external administration should be required to disclose its former, as well as its current name on its public documents for the period of that administration or any subsequent liquidation. Contravention of s 161A is an offence. The section allows a deed administrator to seek leave of the court for an exemption from these requirements. This provision is based on the fact that companies commonly change their name, often to their Australian Company Number (ACN), before appointing an administrator, in order to minimise the potentially damaging commercial effect of having their company’s name associated with a voluntary administration. Creditors may be disadvantaged if they do not associate the ACN name with the company with which they had been dealing. Section 161A serves to protect those creditors from being misled or uninformed.14 Section 157A permits a deed administrator to lodge an application with ASIC to change a company’s name without the need for a special resolution of members, 13 See Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186; (2009) 71 ACSR 65; see ASIC Regulatory Guide (RG 82) – External Administration: Deeds of Company Arrangement Involving a Creditors’ Trust, May 2005. That Guide is being updated by ASIC to reflect judicial criticism of an aspect of it in Re Bevillesta Pty Ltd [2011] NSWSC 417; see ASIC Corporate Insolvency Update, Issue 6, December 2017. 14 “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, at [4.226].

[20.95]

20 Deeds of Company Arrangement

849

where it is in the interests of creditors as a whole to do so. Given that a company name is an asset that may have some value as part of a business sale, facilitating a change of name may serve to maximise the value of that asset for the benefit of creditors.15

On the directors [20.90] When voluntary administration ends and the deed operates, the directors’ powers are revived: Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 19 ACLC 659 (where shares were issued to a director when the company was under a deed). But the deed binds the officers of the company (s 444G), and it may restrict the powers of the directors in some way. For example, the administrator may be granted the sole power to do something reserved formerly for the directors, or even to appoint and remove directors of the company: North Sydney District Rugby League Football Club v Hill [2000] NSWSC 249. In Cresvale Far East, the court said that the directors must exercise any powers they have in a manner consistent with the terms of the deed under which the company operates. Any restrictions on the powers of directors under the deed may not be known to third parties with whom the directors deal. Those third parties should be able to rely on the directors’ customary or apparent authority16 so as to bind the company. A deed can, however, only deal with property and liabilities of the company. In M & S Butler Investments Pty Ltd v Granny May’s Franchising Pty Ltd (1997) 24 ACSR 695, the court set aside a deed that purported to release directors of the company from personal guarantees given by them to creditors for the company’s debts. Such a release is now prevented by s 444J in any event. In Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509, the High Court found that the deed provisions in the Act only dealt with rights that creditors had against the company operating under a deed, and did not allow a deed to include releases of creditor claims against third parties (in that case related offshore parties in the Lehman Group). This may be compared with schemes of arrangement under s 411 (discussed in Chapter 21) which may include third party releases provided that the release has a sufficient nexus to the operation of the scheme: Fowler v Lindholm [2009] FCAFC 125; (2009) 178 FCR 563.17

On initiation of proceedings by creditors [20.95] The deed binds all creditors so far as any claims arising on or before the date mentioned in the deed; usually, this will be the date of the appointment of the administrator: s 444D(1). Thus, those creditors’ claims are compromised by the terms of the deed. Section 444D(1) captures personal rights (known as “rights in personam”) that all creditors who are subject to the DOCA’s terms have against the debtor company. This includes the personal rights that secured creditors may have 15 “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, at [4.225]. 16 O’Donovan, “Voluntary Administrations and Deeds of Company Arrangement: Avoiding the Pitfalls” (1994) 12 C&SLJ 517, 518. See ss 128 and 129 of the Corporations Act as to various statutory assumptions of company authority. 17 See further Harris, “Charting the Limits of Insolvency Reorganisations” (2010) 32 Syd LR 141.

850

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.100]

against the company: Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95; (2015) 106 ACSR 79; Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373. Secured creditors will also have rights in property held by the company as collateral (known as “rights in rem”) and s 444D(2)(a) provides that a secured creditor is not prevented from “realising or otherwise dealing with the security interest” unless the DOCA so provides, and the secured creditor voted in its favour. Subsection 444D(2)(b) also recognises that a court may make an order restricting the secured creditor’s rights under s 444F. The deed would not bind a creditor whose debt is not provable, even if it arose before the date in the deed, for example, a fine or penalty that came within s 553B of the Act.18 Winding up

[20.100] Once a deed is executed, a creditor who is bound by a deed is unable to apply for a winding up order against the company; nor can it proceed with such an application that was pending: s 444E(2). Where such a pending application was filed before the commencement of the voluntary administration, a costs order can be made against the company where the application is dismissed and the creditor who applied for the winding up is bound by the deed. Section 444E(2) does not have the effect of terminating a winding up application – once the administration of a deed comes to an end the winding up proceedings can continue19 – nor does s 444E(2) nullify such proceedings for other purposes (Torsir Pty Ltd v Maxgrow Developments Pty Ltd (1995) 121 FLR 170), although they may be dismissed by the court.20 Enforcement and execution of judgment

[20.105] The execution of a deed also prevents those bound by the deed from beginning or proceeding either with an action against the company or in relation to its property, or beginning or proceeding with an enforcement process in relation to company property, except with leave of the court: s 444E(3); see also Phoenix Institute of Australia Pty Ltd v ACCC [2017] FCAFC 155. If leave is sought then the courts will apply the principles applied by the courts when hearing applications for leave under s 471B in relation to liquidations, rather than the more stringent test applied to applications for leave to proceed against a company in a Pt 5.3A administration: Meehan v Stockman’s Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123.21 The application of those principles will mean that it will be generally inconsistent for a creditor to continue with a litigation claim against a company subject to a deed. Despite not being bound by the deed, secured creditors are still required to seek leave of the court by reason of s 444D(2): see [20.120]. Similarly, owners and lessors 18 See Murray, “Penalties and Fines in Corporate Insolvency” (2004) 4 INSLB 141. 19 FAI Workers’ Compensation (NSW) Ltd v Philkor Builders Pty Ltd (1996) 14 ACLC 1059. 20 See further Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 182; (2007) 61 ACSR 524. 21 For a discussion of the principles, see [13.50] – [13.65]. These were summarised in Young v Brachdale Pty Ltd [2010] VSC 654 at [23].

[20.120]

20 Deeds of Company Arrangement

851

of property used by the company (but who do not hold a PPSA security interest) may exercise rights against the property but must seek leave under s 444E(3) prior to taking court action: see [20.125].22

Period between approval and execution of the deed [20.110]

If a deed is approved by the creditors, they are bound by its terms even prior to its execution and they must not do anything inconsistent with the deed unless with court approval: Corporations Act, s 444C. Thus, as we have seen, pending execution of the deed, a creditor cannot proceed with any winding up application, nor seek to proceed with any enforcement of a judgment, without the court’s leave. Thus, the company’s position remains protected pending the deed’s execution within the 15 business days required, or such further time as ordered by the court. If the deed is not executed within time, then the administration ends and the company automatically enters a creditors’ voluntary liquidation: s 446B.

Extent of protection from creditors’ claims [20.115]

In so far as a deed’s main effect will be on the creditors of the company, one of the most critical aspects is determining which of those creditors is bound by the deed. The extent of creditors’ claims covered by a deed is very wide and are discussed below.

On secured creditors [20.120] The rights that a secured creditor has to realise or otherwise deal with its security interest are not limited by the operation of the deed unless the secured creditor voted in favour of the deed or it was prevented by court order: s 444D(2). This provision is necessary because otherwise secured creditors would be bound by the deed as they fit within the term “all creditors” in s 444D(1). Of course, it is possible for the terms of the deed to exclude particular creditors, and it is common to explicitly provide in a deed that nominated secured creditors are excluded. The right to realise or otherwise deal with a security interest includes the power to appoint a voluntary administrator under s 436C if the nature of the security interest is over the whole or substantially the whole of the company’s assets: Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373 at [72] per Black J. In that case, a company with two secured creditors entered into administration followed by a deed. The first secured creditor entered into a debt for equity swap which left the second secured creditor as the only remaining secured creditor over “all present and after-acquired property of the company” (ALLPAP).23 The deed extinguished the debts of the company, including the debt (a right in personam) owed to the remaining secured creditor who appointed a voluntary administrator. This meant that the secured creditor was no longer a creditor (as its debt had been extinguished), but it maintained enforcement rights against property under s 444D(2). There is nothing in Pt 5.3A that prevents a company operating under a deed from entering voluntary administration. However, in this case the voluntary 22 See J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172. 23 “ALLAP” is the PPSA equivalent of a fixed and floating charge under pre-PPSA law.

852

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.120]

administration effectively frustrated the operation of the deed and the court terminated the voluntary administration under s 447A. The court noted that there was nothing to prevent the secured creditor from appointing a receiver. Secured creditor is defined in s 51E as meaning a creditor of the corporation whose debt is secured by a “security interest”. A security interest is defined in s 51A as either a PPSA security interest, or a charge, lien or pledge.24 This includes suppliers with retention of title rights and finance lessors and long-term lessors of personal property. Prior to 30 January 2012 these parties had been covered by s 444D(3) as owners and lessors, but are now classified as “secured creditors”. Non-PPSA secured parties (ie, owners and lessors without PPSA security interests) may be covered by s 444(3). Secured creditors may have a security interest that includes ALLPAP (“all present and after acquired property”. This security interest will attach to property acquired after the administration commences (which is typically the cut of date for debts provable in the deed) which could include funds or property transferred to the company under the terms of a deed by the proponent of a deed. This result seems inconsistent with the purpose of a deed, which is to try to save a business or to provide a better return than an immediate liquidation. As noted above, unless excluded by the terms of the deed, a secured creditor’s personal rights against the debtor will be bound by the terms of the deed under s 444D(1). It is common for deeds to extinguish debts and claims bound by the deed (see s 444H), and this is provided by the default deed provisions in Sch 8A, item 6 of the regulations. A deed may extinguish a secured debt so that there is no longer any debt owed following the execution of the deed: Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373. This includes a right to receive future rent: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34; Henaford v Strathfield Group Ltd [2009] NSWSC 539; (2009) 72 ACSR 240. Similarly, the deed may extinguish a contingent liability owed to the secured creditor under a guarantee arising under a pre-administration contract that has not crystallised at the time of the execution of the deed: Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95; (2015) 106 ACSR 79. What s 444D(2) preserves is the secured creditor’s extra curial enforcement rights against the collateral (such as the right to retake possession) that existed at the time of the execution of the deed: Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95; (2015) 106 ACSR 79 at [226] per Newnes and Murphy JJA; Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373 at [49], [66] per Black J. In order to stop a dissenting secured creditor from threatening the viability of the entire deed, the court has the power to order that a creditor not realise or deal with the security (s 444F(2)) if satisfied that such an exercise would have a material adverse effect on achieving the purposes of the deed and that the creditor’s interests will be adequately protected under the deed: s 444F(3). The applicant for 24 That is, a security interest recognised under the PPSA: Corporations Act, s 51. The definition of security interest under s 51 does not require that the security interest be “perfected” within the meaning of the PPSA.

[20.125]

20 Deeds of Company Arrangement

853

an order under s 444F(2) has the onus of satisfying the court that in relation to matters referred to in s 444F(3)(b), a secured creditor’s interest will be adequately protected if an order is made.25 If secured creditors who voted in favour of the deed need to initiate legal proceedings in order to enforce their rights, they are required to obtain the leave of the court under s 444E, even if they did not vote in favour of the deed: J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172. According to the court in that case, this occurs because ss 444D, 444E and 444F set up a code relating to court proceedings in respect of claims arising on or before the day specified in the deed, with the result that the court will have general control of such proceedings by way of deciding whether leave to proceed should be granted.

On owners and lessors [20.125] The same situation that applies in respect of secured creditors applies to owners and lessors of property in the possession of the company.26 As noted above, lessors and suppliers of personal property may have PPSA security interests and if so are dealt with as secured creditors under s 444D(2). Owners and lessors are able to deal with their property and therefore are not bound by the deed unless they voted in favour of the deed or they are prevented by court order: s 444D(3). They may have a range of claims against the debtor company in addition to their right to retake possession of the property used or leased by the company. These may include rent in arrears, rights to future rent and compensation due to breaches of contractual provisions (such as a lease covenant to maintain the property). These rights, assuming that they arise under circumstances that exist prior to the appointment of the administrator (the “relevant day” for the purposes of ss 444A, 444D), may be compromised or even extinguished by the deed: see the discussion in Re Baseline Constructions Pty Ltd (Subject to DOCA) [2017] NSWSC 1018. An example of this occurred in Henaford Pty Ltd v Strathfield Group Ltd [2009] NSWSC 539; (2009) 72 ACSR 240, where a deed proposed a creditors’ trust that would allow the business to continue trading. The deed also extinguished the lessor’s rights to future rents, which the lessor challenged as being unfair given their rights to participate in the creditors’ trust was limited. The company retained possession of the property and continued trading. The lessor did not, however, terminate the lease and was unsuccessful in its attempt to obtain court declarations that its claims to future rent were not bound by the deed. As the Full Federal Court found in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34, a claim for future rent is a claim that arises before the relevant day because the right to receive rent derives from the original lease contract signed prior to when the administration commences. 25 J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172, 180; Hamilton v National Australia Bank (1996) 14 ACLC 1,202 (protection ordered where liquidation would result in no assets being covered by the security and the deed would thereby offer the secured creditor a better return). 26 The similarity between the position of a secured creditor on the one hand and an owner and a lessor on the other was explained in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34; 14 ACLC 1737, 1743; [1996] FCA 1830.

854

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.125]

It should be noted that an administrator will have personal liability for rental obligations during the administration (not including the DOCA) unless they give notice to the owner or lessor under s 443B within five business days of their appointment that states that the company does not propose to exercise rights in relation to it. Such a notice does not necessarily repudiate the lease and the lessee (debtor) company may continue to accrue liabilities under the lease; however, these will invariably be compromised by any subsequent deed or liquidation.27 The court may order that the owner or lessor of the property used or occupied by the company is not to occupy or take possession of it: s 444F(4). An example occurred in Roder Zelt-Und Hallenkonstruktionen GmbH v Rosedown Park Pty Ltd (1995) 57 FCR 216; [1995] FCA 1221, where the court said that a creditor who supplied goods under a contract containing a retention of title clause must obtain leave under s 444E(3) before initiating proceedings. The court also said that just because the creditor had obtained leave under s 440D(1) when the company was under administration did not mean that it was not required to obtain leave under s 444E, when the company was subject to the deed. The administration under the deed represented a different administration from the voluntary administration. The court will only order an owner or lessor not to take possession of its property if it is satisfied that taking possession would have a materially adverse effect on achieving the purposes of the deed, and having regard to the terms of the deed, the terms of the order and any relevant matter, the interests of the owner or lessor would be adequately protected: s 444F(5). The use of the term “adequate protection” has been used rather than complete protection or perfect protection: Re Hi-Fi Sydney Pty Ltd [2015] NSWSC 1312 at [59] per Brereton J. In Strazdins v Birch Carroll & Coyle Ltd [2009] FCA 731; (2009) 178 FCR 300 the deed administrators were successful in obtaining an order under s 444F prohibiting the landlord retaking possession of its premises. In granting an order under s 444F prohibiting BCC (the landlord) from retaking possession after terminating a 10 year lease during the administration, the court took into account the fact that loss of the premises would entirely frustrate the purpose of the deed. If the deed failed, the business of DNPW would go into liquidation and employees and other creditors would face substantial losses. However, the court’s s 444F order was necessarily subject to conditions, including that the deed administrators continue complying with the terms of the prior lease. Lander J held that the interests that require protection should be assessed as at the

27 Silvia v Fea Carbon Pty Ltd [2010] FCA 515; (2010) 185 FCR 301. The rights of lessors under State property law, particularly the conditions needed for valid termination and tenant rights to relief against forfeiture, must also be considered. See further Cheetham and Greenberg, “A Tenant in the Building is Worth Two in the Bush: Dealing with Corporate Tenants Who are Insolvent” (2010) 38 ABLR 150; Gormly, “How Can a Lessor Stop a Lessee’s Administrator Running its Property into the Ground?” (2006) 14 Insolv LJ 81.

[20.130]

20 Deeds of Company Arrangement

855

time just before the company enters administration, rather than by reference to the commercial advantages that the lessor sought to benefit from due to the company’s administration.28 As with the situation facing secured creditors, owners or lessors of property who voted in favour of a deed may later need to initiate legal proceedings to enforce their rights and they are required to obtain the leave of the court under s 444E to do this: J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172. Again, as with secured creditors, it will be necessary for owners and lessors to obtain leave under s 444E even if they did not vote in favour of the deed: J & B Records. The ability of a lessor to terminate the lease is subject to powers of the lessee to apply for relief against forfeiture: see the discussion in Re Hi-Fi Sydney Pty Ltd [2015] NSWSC 1312. In that case the court held that the ability of the lessor to terminate a real property lease which was allowed upon the appointment of an administrator under the terms of the lease was subject to the statutory obligation on the lessor to give a notice prior to termination under s 129 of the Conveyancing Act 1919 (NSW).29

On guarantees [20.130] A deed will extinguish the principal debt owed by the company if the deed so provides: Corporations Act, s 444H. This does not affect a creditor’s rights under a guarantee or indemnity given by a third party, whose liability remains: s 444J. This had been the conclusion of case law (see, for example, Re Andersens Home Furnishing Co Pty Ltd (1996) 14 ACLC 1,710) but s 444J was introduced in 2007 in order to provide certainty.30 In Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509, the High Court confirmed that deeds which purported to obtain releases by creditors of rights they may have against third parties were not permitted. Even where a deed provides that a guaranteed debt is deemed to be fully satisfied, this will not affect the creditors’ rights against the third party guarantor.31

28 See also Re Hi-Fi Sydney Pty Ltd [2015] NSWSC 1312, where a landlord also terminated a long-term lease due to the appointment of an administrator and refused to rescind the termination in an attempt to obtain a shorter lease. The deed could not be completed and the company ended up in liquidation after the case was decided: see NT Pubco Pty Ltd v DNPW Pty Ltd [2011] NTSC 51. The orders made in Strazdins have been subject to criticism: Re Lindholm; Munday Group Pty Ltd v Tsourlinis Distributors Pty Ltd [2011] FCA 195 at [62]ff. However, it was cited with approval in Re Hi-Fi Sydney Pty Ltd [2015] NSWSC 1312 at [59]. 29 For similar provisions in other jurisdictions see: Civil Law (Property) Act 2006 (ACT), s 426; Law of Property Act 2000 (NT), s 138; Property Law Act 1974 (Qld), s 124; Landlord and Tenant Act 1936 (SA), s 11; Conveyancing and Law of Property Act 1884 (Tas), s 15; Property Law Act 1958 (Vic), s 146; Property Law Act 1969 (WA), s 81. 30 “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, at [7.12]. 31 See for example, Boral Bricks Pty Ltd v Davey [2010] QSC 131; [2011] 2 Qd R 301; Hanson Construction Materials Pty Ltd v Davey [2010] QCA 246; (2010) 79 ACSR 668.

856

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.135]

Those directors or other persons who have guaranteed the debts of the company are contingent creditors of the company itself and they will be bound by the deed: Re Zambena Pty Ltd (1995) 13 ACLC 1020. As we have seen, s 444D refers to a deed binding all creditors and this includes such creditors as would be creditors for the purposes of a winding up: Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24.

THE DEED ADMINISTRATOR [20.135] An administrator of a deed is an “officer” of the company and is therefore required to adhere to those duties of company officers contained in Pt 2D.1 of Ch 2D, including duties of care and diligence (s 180),32 and good faith: s 181.33 A deed administrator is also an “external administrator” under the IPSC, s 5-20, which means that Pt 3 of the IPSC will apply to deeds of company arrangements and deed administrators. In carrying out the duties arising under the deed, the administrator is acting as the agent of the company (Sch 8A, cl 134), and has the benefit of the powers contained in cl 2 of that Schedule. This clause grants to the administrator an extensive and broad range of powers necessary for the administration of the deed. These include powers of sale, to sue and be sued, to call for and assess proofs of debt, to conduct examinations and so on. Many deeds will exclude Sch 8A in whole or in part and instead insert appropriate provisions in the deed as needed for the particular circumstances of the company. The continued independence of the deed administrator remains important. If any issue arises during the administration of the deed in which the administrator has a conflict of interest, he or she may need to be replaced. Any such issues should properly be anticipated before being appointed as deed administrator. If a conflict nevertheless arises, the court may decide to appoint a “special purpose administrator” under s 447A to deal with the particular issue in hand.35 The court may also use s 447A orders to remove a deed administrator, to appoint an additional deed administrator or to vary the deed.

Liability for tax [20.140] The administrator of a deed has a potential liability for relevant tax instalment deductions due, but unremitted, to the Commissioner of Taxation, in relation to the earlier administration of the company: s 443BA. The administrator’s right to be indemnified from company property extends to that liability but not 32 See Hill v David Hill Electrical Discounts Pty Ltd [2001] NSWSC 271; (2001) 37 ACSR 617. 33 See Glover and Duns, “Insolvency Administrations at General Law: Fiduciary Obligations of Company Receivers, Voluntary Administrators and Liquidators” (2001) 9 Insolv LJ 130; Anderson, “Miracle Workers or Ambulance Chasers? The Role of Administrators in the Part 5.3A Process” (2004) 12 Insolv LJ 238. 34 As we have explained, s 444A(5) makes Sch 8A of the regulations applicable to all deeds unless it is specifically excluded: see [20.50]. 35 See the summary in Hughes v Receivers and Managers of Westgem Investments Pty Ltd (No 3) [2012] WASC 360 at [18].

[20.150]

20 Deeds of Company Arrangement

857

beyond the period of administration. Hence, if not all instalments (such as withholding tax deductions) are remitted before the end of the administration, the administrator of the deed would be liable for them unless he or she ensures that there is a satisfactory indemnity from the company or a creditor(s) in place when the deed becomes operative. A deed administrator is obliged to become registered for the purposes of the GST and otherwise comply with GST obligations: A New Tax System (Goods and Services Tax) Act 1999 (Cth), Div 58.36

Remuneration [20.145] The administrator of a deed of company arrangement is entitled to remuneration for necessary work properly performed in relation to the deed as is provided for under a remuneration determination approved by a resolution of the creditors, or committee of inspection (if not approved by a resolution of the creditors) or if there is no such agreement or resolution, by the court: IPSC, ss 60-5, 60-10.37 The court can also review any remuneration that has already been determined, on the application of a person with a financial interest in the external administration (see IPSC, s 5-30), or ASIC: IPSC, s 60-11.38 In exercising those powers, the court must take into account the factors listed in IPSC, s 60-12, such as the extent to which the work done was reasonably necessary, the complexity and value and nature of the company property being dealt with and so on: see Paul’s Retail Pty Ltd v Morgan [2010] NSWCA 217; (2010) 79 ACSR 580. Deed administrators do not have the statutory lien in respect of liabilities incurred and remuneration claimed which is available to an administrator of a voluntary administration under s 443F. However, the administrator of a deed is entitled to some statutory priority awarded by s 556 and is entitled, as a matter of justice, to claim an equitable lien (like a voluntary administrator) over the property of the company which comes under his or her control: Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483; (2008) 66 ACSR 229.39

EXAMINATIONS [20.150] Under Corporations Act, ss 596A and 596B the administrator of a deed can conduct examinations of company officers and others who are or have been involved in the examinable affairs of the company. The power to examine is usually associated with liquidators and the power is discussed in detail in Chapter 15. Sections 596A and 596B provide that an “eligible applicant” may examine certain persons and this term includes an administrator under a deed (as well as the administrator of a voluntary administration). An administrator may seek to examine an examinable officer under s 596A as of right. However, if the 36 A company subject to a deed of company arrangement is called an “incapacitated entity” for the purposes of that Act: see s 195-1. 37 Courts’ Corporations Rules, r 9.2, Form 16. 38 Rule 9.2A, Form 16A. 39 See further Re Jick Holdings [2009] NSWSC 574; (2009) 234 FLR 22.

858

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.155]

administrator wishes to examine anyone else concerning the affairs of the company, an application for the examination will have to be made to the court under s 596B. The court has a discretion whether or not to permit a s 596B examination. In Flanders v Beatty (1995) 16 ACSR 324, the administrators of a deed executed by Brashs successfully applied to the court for the issue of a summons to examine the members of an accounting firm which acted as auditors of the company, as well as seeking the production of documents relating to professional negligence insurance policies of the firm. The court said that in enacting Pt 5.3A the legislature was of the view that administrators should have the same power to engage in examining persons as liquidators. Administrators are permitted to examine where the object of the examination is to advance the administration of the deed. The court rejected the argument that the examination was improper because only designated creditors, and not the company as a whole, would benefit. The deed administrator was also supported in Re Italo-Australian Centre [2002] 1 Qd R 254, the court declining to limit the questions able to be asked in an examination only to those matters that the deed authorised the administrators to investigate. Thus the deed administrator could ask questions about insolvent trading and possible contraventions of the Corporations Act. Nevertheless, the provisions of the deed may be relevant to the threshold question of whether the court should make an order for the issue of the summons: Sandhurst Trustees Ltd v Harvey [2004] SASC 157; (2004) 88 SASR 519. The term “eligible applicant” includes a person authorised by ASIC to conduct an examination and ASIC’s decision can be challenged. In Ryan v ASIC [2007] FCA 59; (2007) 158 FCR 301, the administrators of the company challenged, unsuccessfully, the appointment of shareholders as eligible applicants to conduct examinations But ASIC can only authorise an examination during the term of the deed: Ariff v Fong [2010] NSWSC 696; (2010) 240 FLR 300.

ADMINISTRATION OF THE DEED [20.155] What actually needs to be done in the administration of the deed depends almost totally on the terms of the deed. The tasks required where there is a compromise will obviously differ from those required where a major financial and operational restructuring is envisaged. The following discussion focuses principally on the standard powers and responsibilities of an administrator contained in Sch 8A of the Corporations Regulations. It should be noted that if the tasks required to be undertaken by the deed are not done then it may allow the creditors to pass a resolution terminating the deed: ss 445C, 445CA. Recovery of funds [20.160] Once the deed is operational, the initial task for the administrator is to call in the funds payable under the deed. These may come from the sale of assets, or part of the business, or from funds injected by the directors or a third party. Once funds that are available to pay creditors have been collected, the administrator will call for proofs of debt from those creditors who are subject to the deed, and make a

[20.165]

20 Deeds of Company Arrangement

859

decision whether to accept or reject them. At that point, a creditor has the right to seek court orders under IPSC, s 90-15 if dissatisfied with the administrator’s decision.

What claims are provable? [20.165] A critical issue for the administrator in administering a deed is to know what claims are to be admitted to proof. It can be a difficult question to assess at what point a mere potential claim against the company becomes subject to a deed, and at what time that claim is assessed. Section 444A(4)(i) requires a deed to indicate what date, not being later than when the administration began, on or before which claims must have arisen to be admissible to proof. Most often, this date will be the date of the voluntary administrator’s appointment. A starting point in considering the effect of this section is to see what is meant by the word “creditor” as it is used in Pt 5.3A. In s 444D(1), it is not limited merely to those who had debts that were presently due and payable by the date specified in the deed. The Appeal Division of the Supreme Court of Victoria in Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 preferred a broad interpretation on the basis that the purpose of s 444D(1) was to ensure all creditors with claims arising on or before the date of the voluntary administrator’s appointment are bound. The use of the word “creditors” in Pt 5.3A does not differ substantially from its use elsewhere in the Corporations Act in relation to winding up. Thus, the term “creditors” for the purposes of Pt 5.3A should be interpreted in the same way as if the company had gone into liquidation and the “relevant date” for the purposes of s 553 for the determination of provable debts was the date specified in the deed. In that respect, s 553 provides that all debts payable by, and all claims against, a company in liquidation (present or future, certain or contingent, ascertained or sounding only in damages) are admissible in the winding up, conditional on the circumstances giving rise to the debts or claims having occurred before the relevant date. Thus, any creditors with claims that can be made against the company and which are founded on circumstances occurring before the date of the voluntary administrator’s appointment, are bound by the deed and can prove in it. However, not everything that may be described as a claim is sufficient to confer this creditor status. In BE Australia WD Pty Ltd v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336, the Court of Appeal held that a claim for compensation orders being pursued under an unfair contracts provision in the Industrial Relations Act 1996 (NSW) was not a claim for the purposes of a deed. The nature of the purported creditor’s rights under that Act was distinguished from claims for compensation under the Trade Practices Act 1974 (Cth) (now the Australian Consumer Law) or s 1041H of the Corporations Act for misleading or deceptive conduct. Those statutes provide for compensation once loss flowing from the misleading conduct is established. In contrast, the Industrial Relations Act only allows compensation following the exercise of judicial discretion; it is not concerned with compensation as an enforcement of legal rights. The purported creditor did not have a claim that arose from an existing legal obligation owed to her by the company. However, while she was not a creditor with a provable claim, she was still an “interested person” for

860

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.170]

the purposes of applying for s 447A orders; but the court held that s 447A could not be used to treat a non-creditor as a creditor with a provable claim. A creditor’s debt will however be provable even where the obligation to pay only arises after the date of the appointment of the administrator, for example, where the company breaches its contractual obligations through the administrator deciding not to continue with the contract. But this is only the case as long as the circumstances giving rise to the legal obligation to pay arose prior to that date. Such an unsecured creditor will be bound by the deed. Common examples of such debts include wages and rental costs. Guarantors who are contingent creditors of the company are also bound by the deed: Re Zambena Pty Ltd (1995) 13 ACLC 1020. However, as explained at [20.130], rights that creditors have against third party guarantors of the debtor company’s debt cannot be included in or extinguished by a deed: Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509. A costs order made against the company after the relevant date under the deed is not a provable claim, nor is it in a liquidation: Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd [2015] FCAFC 63; (2015) 231 FCR 17. Future claims

[20.170] In Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34, a question in issue was whether a lessor’s rights to future rent from the company was a claim that was provable in the administration of the deed. The Full Federal Court held that such a right is an existing right and not a mere expectancy. Therefore, a claim to rent payable, after the date of the voluntary administrator’s appointment, under a lease in existence at the date of the deed, is a claim that has arisen on or before that date. This led the Full Court to assert that a claim for rent, where the claim is not ascertained (either in accordance with the terms of the lease or as damages at law) until after the administrator’s appointment as a result of either the administrator’s repudiation (accepted by the lessor) or the termination of the lease by the lessor (exercising a contractual right to do so) would be a claim arising on or before the specified date, being the date of the deed. The Full Court also said that where a lender lends money on the security of a mortgage given by the borrowing company, the claims of the lender for principal and interest are claims arising on or before the date of appointment even though the contract of loan provides that payments are to be made by periodic instalments. It has been argued that lessors should not be bound in respect of future breaches of covenant; if a repudiation of a lease occurred after the date of the voluntary administrator’s appointment then it is arguable that the claim is not admissible as it did not arise until after that date.40 However, there is justification for saying that a lessor should be bound in respect of liability of the company for payment of future rent. 40 O’Donovan, “Which Claims are Admissible under Deeds of Company Arrangement?” (1995) 69 ALJ 905, 907-908.

[20.180]

20 Deeds of Company Arrangement

861

Future breaches

[20.175] In contrast, the Full Court in Lam Soon Australia v Molit held that future breaches of covenant by the company were not contingent claims, but mere expectancies, and hence were not covered by any deed. In Thiess Infraco (Swanston) Pty Ltd and Smith [2004] FCA 1155; (2004) 50 ACSR 434, Finkelstein J, after an extensive review of the authorities, expressly disagreed with this statement, saying that it is “contrary to both the purpose of the legislation and authority”: at 440. On appeal, the Full Federal Court in Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49; (2005) 218 ALR 1 did not address this issue and it remains unresolved.41 Potential claimants under a car warranty were held to be creditors bound by a deed in Re Motor Group Australia Pty Ltd [2005] FCA 985; (2005) 54 ACSR 389, the court saying that even if the claims were “mere expectancies”, s 447A of the Corporations Act could be used to include them as creditors. However, the court in BE Australia WD Pty Ltd v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 read down this decision in finding that warranty claimants are in fact contingent creditors, suggesting that if Re Motor Group held otherwise, it was incorrect: at [206]. In ACCC v Phoenix Institute of Australia, it was held that the ACCC was a contingent creditor under a DOCA in respect of claims for relief under the ACL for misleading or deceptive conduct and unconscionable conduct based on prior conduct.42 In summary, the courts determine whether a claim is admissible or not according to the principles that have become reasonably settled in relation to liquidations.43 Under those principles, most claims against a company (provided they are based on an existing legal obligation owed by the company at the time of the voluntary administrator’s appointment, the usual date specified in the deed) will be subject to the deed, thus allowing the company to continue to trade with no past claims surviving.

Set-offs and netting [20.180] One of the principal tasks of the administrator in most deeds is then to make distributions to the creditors in accordance with the terms of the deed. One provision contained within Sch 8A of the regulations is that entitling a creditor to set off debts owed to it against debts owed to the company in circumstances where such a concession is permitted. Thus the same principles under s 553C of the Corporations Act that apply to a company in liquidation (see [15.285] and Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (rec and man apptd) [2017] WASC 152) also apply to a company under a deed when the administrator is assessing debts that come within that section: GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd (1997) 15 ACLC 109. Indeed, if such a provision were not available in a deed, either by way of operation of the Schedule, or in the terms of the deed itself, the court may make an order under s 445G(4) varying the deed to include it: 41 See further Re Opes Prime Stockbroking Ltd [2008] FCA 1425; (2008) 171 FCR 473. 42 See ACCC v Phoenix Institute of Australia Pty Ltd (Subject to DOCA) [2016] FCA 1246; upheld on appeal Phoenix Institute of Australia Pty Ltd v ACCC [2017] FCAFC 155. 43 An example is Re Baseline Constructions Pty Ltd (Subject to DOCA) [2017] NSWSC 1018.

862

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.185]

Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 14 ACLC 1,168, or such a deed could be set aside: Re Opes Prime Stockbroking Ltd [2008] FCA 1425; (2008) 171 FCR 473, 477.44 The mere payment of a dividend under a deed is not sufficient to determine whether set-off has been exercised: MK Builders Pty Ltd v 36 Warrigal Road Pty Ltd [2014] VSC 149. Market netting typically arises under the members’ rules of a stock or futures exchange or a clearing house. The rules may provide for the novation (an agreement discharging one contract and entering into a new one) to a “clearing house” of contracts entered into by members, and the setting-off of obligations under those contracts in the event of default by a member and for the purpose of settlement. In insolvency terms, such rules serve to negative the debtor–creditor relationship in respect of the obligations to which the rules apply in favour of a relationship between each creditor and the clearing house. The effect can be to give a creditor priority rights outside the particular insolvency administration. The High Court in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 rejected an argument that such netting arrangements were contrary to public policy as being against the pari passu principle. The House of Lords in British Eagle International Airlines v Compagnie Nationale Air France [1975] 2 All ER 390 had found that clearing house arrangements were against public policy because they sought to exclude certain property of the insolvent company from the pool available for distribution to creditors and thereby infringed the pari passu rule. In the particular circumstances in Ansett Australia Holdings Ltd, which was under a deed of company arrangement, the administrators unsuccessfully claimed credits due to Ansett (but not processed through the clearing house) as at the commencement of the administration, contending that the deed prevailed over the clearing house agreement. The High Court found that the IATA agreement and regulations applied and Ansett’s rights were not to debts owed to it by other members of the clearing house scheme, but rather the contractual right to receive payment from the IATA if, on clearance, a credit was due to it.45

Priority creditors [20.185] Schedule 8A of the Corporations Regulations also requires an administrator to apply the funds realised under the deed according to the priorities set out in s 556 of the Corporations Act. This provision has been dealt with in detail in Chapter 15 (see [15.315] – [15.385]). A question arises in circumstances where the deed seeks to vary those priorities listed in s 556. The reaction from priority creditors is likely to be to vote against the deed and, if necessary, to apply to the court to set it aside, in the event of resolution in favour of such a variation being 44 There may, however, be situations where the deed has already terminated: see, for example, Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186; (2009) 71 ACSR 65. 45 See also Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38; [2012] 1 AC 383; Petch, “Derivatives and the Elusive ‘Principles of Insolvency’ in Australia: A Post-Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Analysis” (2012) 30 C&SLJ 253; Kulkarni, “The Anti-deprivation Rule in Australia” (2014) 88 ALJ 722.

[20.190]

20 Deeds of Company Arrangement

863

passed. The courts have held that a deed may not reduce or extinguish the rights of those persons who would be entitled, pursuant to statute, to be paid in priority to others on a winding up. DCT v Winterburn Trading Pty Ltd (1993) 27 ATR 189 involved the Taxation Commissioner’s right to a priority payment under former s 221P of the Income Tax Assessment Act 1936 (Cth). In that case, the court accepted the submission of the Commissioner that the priority had to be retained on the basis that those who would enjoy a priority claim in a winding up should be entitled to be treated as having the same priority in a deed. Such a priority cannot be removed, at least without the agreement of the priority creditor. Other cases46 have taken the same approach, even in situations where outside parties contribute funds under the deed, thereby increasing the Commissioner’s, or other priority creditors’ return. Employees

[20.190] An employee’s claim for unpaid wages and other entitlements under s 556 is another example of a priority creditor. Such claims have further protection under a deed as a result of amendments introduced through the Corporations Amendment (Insolvency) Act 2007 (Cth). Section 444DA of the Corporations Act requires the priority of employee entitlements to be maintained in a deed, subject to employees agreeing that it not apply. This statutory priority was introduced as a result of the 2007 changes. Previously, employees had themselves to “initiate potentially expensive court proceedings to challenge a DOCA that treat[ed] them unfairly”. The legislature considered that “[t]he flexibility of the voluntary administration procedure and the policy of encouraging business rescues are not unduly compromised” by this priority.47 Section 444DA(1) requires all deeds to include a provision to the effect that the assets of the company are applied such that eligible employee creditors are entitled to a priority at least equal to what they would have been entitled to under the priority set out in ss 556, 560 and 561.48 But under s 444DA(2), this requirement will not apply if, by resolution, eligible employee creditors consent to the non-inclusion of such a provision at a meeting which is held before the s 439A meeting. The administrator must convene the meeting by giving written notice of the meeting to as many of the company’s eligible employee creditors as reasonably practicable at least five business days before the meeting, together with a statement setting out the administrator’s opinion about whether it would be in the eligible employee creditors’ interests to not include the provision in s 444DA(1) in the deed, the reasons for that opinion and other information that will enable the employee creditors to make an informed decision.49 46 See DCT v B&G Plant Hire Pty Ltd [1994] FCA 1257; (1994) 52 FCR 257 and DCT v All Suburbs Car Repairs Pty Ltd [1994] FCA 1393; (1994) 14 ACSR 753. 47 “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, at [3.41]. 48 See also, Mighty River International Ltd v Hughes [2017] WASCA 152. 49 See the ARITA Code at [25.7].

864

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.195]

Section 444DA(5) allows the court to approve an alteration of the employee priorities in a deed, if the court is satisfied the alteration is likely to result in the same or a better outcome for eligible employee creditors than would result from an immediate winding up of the company.50 An application may be made by the administrator of the deed, any eligible employee creditor or any interested person. The court may make an order before or after the s 439A meeting. In addition, s 556(1)(e) includes the superannuation guarantee charge along with superannuation contributions as a priority claim. This priority then applies to a deed because that priority is mandated under s 444DA.51 Superannuation guarantee charge

[20.195] The question of double proofs of debt could once have arisen in relation to unpaid superannuation entitlements of an employee, with proofs lodged by both the employee and the ATO, in relation to the superannuation guarantee charge (SGC), because the two classes of debt were see as legally distinct. Section 444DB now provides that only the SGC should be admitted. It includes an interest component, which provides employees a greater benefit. There is a similar provision for liquidations: s 553AB.

Payment of dividends [20.200] On the proofs of debt being assessed, the administrator is required to pay a dividend return to creditors in terms of the deed. In receiving their entitlements, creditors are accepting them in full satisfaction and complete discharge of all debts or claims which they have against the company as at the date of the administration: Corporations Regulations, Sch 8A, cl 5. Once the full entitlements are received by the creditors, their claims against the company are extinguished (Sch 8A, cl 6) and the deed may be pleaded by the company against any creditor as a bar to any claim that is admissible under the deed: Sch 8A, cl 7. However, claims by the company, even against a creditor, are not extinguished and may be pursued by the company during or after the termination of the deed: Arcfab Pty Ltd v Boral Ltd [2002] NSWSC 1188; (2002) 43 ACSR 573. Other procedural requirements [20.205] Other procedural aspects of the deed’s administration are dealt with in Sch 8A of the Corporations Regulations. There may be a committee of inspection which will assist and advise the administrator: cl 11. The provisions in the Corporations Act that address committees of inspection in liquidations are to apply, with the necessary modifications. 50 See Re Vouris and Tonks as Deed Administrators of Good Impressions Offset Printers Pty Ltd [2012] NSWSC 603. 51 See further Anderson, “The Treatment of Employee Priority in a Deed of Company Arrangement” (2009) 17 Insolv LJ 147.

[20.220]

20 Deeds of Company Arrangement

865

Lodgement of accounts with ASIC

[20.210] Deed administrators are required to lodge annual administration returns and end of administration returns with ASIC under: IPSC, ss 70-5, 70-6 and these may be audited by ASIC. The costs of an audit are payable by the company. VARIATION OF THE DEED Section 445F [20.215] Importantly, the deed of company arrangement flexibility in that deeds may be varied, under Corporations creditors’ meeting convened under Div 75 of the IPSC and ), being terminated or avoided in the case of some unanticipated

regime allows for Act, s 445A (by a rather than simply circumstance.

A meeting to consider a variation of the terms of a deed may be convened by the: • deed administrator (IPSC, s 75-10); • deed administrator when requested by the creditors (IPSC, s 75-15); or • deed administrator when requested by ASIC (IPSC, s 75-20). It is also possible for the creditors to pass a resolution varying a deed without conducting a meeting. The deed administrator would issue a proposal for voting under IPSC, s 75-40. The meeting must be convened by the giving of notice in writing to as many of the creditors as reasonably practicable (IPRC, s 75-10) at least 10 business days before the meeting: IPRC, s 75-20(1). The deed administrator or their nominee must preside at the meeting. At the meeting the creditors may, by resolution, agree to vary the deed provided that the variation is not materially different from the proposed variation in the notice of meeting: s 445A. Such a variation can only be made by creditors with the administrator’s consent: Surber v Lean [2000] WASCA 380; (2000) 23 WAR 445. If a variation is accepted, a dissenting creditor has the right to apply to the court under s 445B for an order cancelling the variation. In other circumstances of an application under s 445G to declare a deed, or part of the deed, void, the court may order the deed to be varied, but this can only occur with the administrator’s consent: s 445G(4).52

Section 447A [20.220] Section 447A of the Corporations Act may also be used by a court to vary or amend a deed in a variety of circumstances.53 These have included varying the operative date of the deed (Mulvaney v Wintulich (1995) 60 FCR 81), removing a certain condition in the deed (Hamilton v National Australia Bank (1996) 14 ACLC 1,202); deferring a payment schedule agreed under the deed (Re Pasminco Ltd (No 2) 52 See also Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 132 FLR 247. 53 See generally Ansett Australia Ltd v Ansett Australia Ground Staff Superannuation Plan Pty Ltd [2002] VSC 114; (2002) 41 ACSR 598.

866

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.225]

[2004] FCA 656; (2004) 22 ACLC 774) and changing the deed’s termination date (Silvia; Re FEA Plantations Ltd [2013] FCA 469). There are limits to the use of s 447A, one explained earlier that the section cannot be used to give a person the status of being a creditor; nor authorising a summons after the deed had ended. In Re New Bounty Holdings Pty Ltd [2015] NSWSC 1060, the court refused to use s 447A to set aside a share issue that has been authorised under the deed. While s 447A can be used to vary or terminate a DOCA,54 and it can be used after a deed has terminated, the section could not be used in this case to terminate the share issue (for the purposes of a debt for equity swap) while at the same time keeping the DOCA fund in place.

TERMINATION AND AVOIDANCE OF A DEED [20.225] Under s 445C of the Corporations Act, a deed will terminate when: • the court makes an order under s 445D terminating the deed. This provision, and the related s 445G, is discussed at [20.255]; • the company’s creditors resolve to terminate the deed at a creditors meeting; • the deed states circumstances in which it will terminate and those circumstances have occurred (s 445C); or • the deed administrator executes a notice of termination of the deed in accord with s 445FA. It is convenient to examine these out of the order in s 445C.

Termination in accordance with the deed: s 445C(c) [20.230]

At the time a deed is approved and executed, it is hoped that the deed is administered properly, the company is able to fulfil the terms of the deed and the circumstances in the deed providing for the termination of the deed duly occur, namely the achievement of the aims of the deed, including the survival of the company and the payment out of the expected dividend to creditors; in that case, s 445C(c) applies. The deed must state the circumstances in which the deed is to end (s 444A(4)(g)) which will often be when the final payment is made: see DCT v BE100 Property Investments Pty Ltd [2016] FCA 597. The company will then continue as a solvent company with no restrictions remaining from its time in administration, and with the claims of all past creditors covered by the deed extinguished.

Termination by notice: s 445FA [20.235] It is important that the public record formally reflect that the company has come out of external administration and that control of the company has reverted to directors. Section 445FA therefore requires a deed administrator to notify ASIC when the deed administrator has applied all of the proceeds of the realisation of assets available for the payment of creditors, or paid to creditors the full sum determined by creditors to be received under the deed, or all the 54 See Re GIGA Investments Pty Ltd (1995) 17 ACSR 547; Erol v Cavus [2012] QSC 371.

[20.245]

20 Deeds of Company Arrangement

867

obligations under the deed have been fulfilled. Notice of termination of the deed must be lodged with ASIC within 28 days.

Termination by a meeting of creditors: ss 445C(b), 445E [20.240] However, the need for termination of the deed will not always arise in such a positive way as the successful completion of the deed. If the company is unable to meet the terms of the deed, or there is creditor dissatisfaction with the conduct of the processes or the deed itself, the legislation provides bases for the creditors to reconvene to decide upon the continuation of the deed (s 445C(b)), or, if necessary, for an application to be made to the court for termination of the deed: s 445C(a). Section 445C(b) requires reference to s 445E. That latter section provides that the company’s creditors may pass a resolution terminating the deed and also, if the notice convening the meeting so states, pass a resolution that the company be wound up. Thus, the deed may specify that certain goals are to be achieved, for example, on a monthly basis, and if this does not occur then the creditors’ meeting can be held at which they can decide to end the deed: s 445C(b). However, creditors may only do this if there has been a breach of the deed and the breach has not been rectified before the resolution is passed: s 445CA.55 According to the “Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth)”, at [7.22], the breach need not be material but minor or technical breaches should be able to be easily remedied before the resolution is passed. As with the procedure for a variation of a deed, a meeting to consider a termination of a deed may be convened to pass a resolution to terminate the deed. Where a deed terminates under s 445C(b), the administrator must lodge a notice of the termination with ASIC (ASIC Form 509G) and send the notice to each of the company’s creditors: s 450D.

Termination by the court: ss 445C(a), 445D [20.245] Apart from any action the creditors may take through the meeting process, s 445D of the Corporations Act allows a creditor or the company or “any other interested person” to apply to have the deed terminated: s 445D(2). This section is used in circumstances where there is some complaint by a creditor about the terms of the deed or the adequacy of the information provided to creditors at the second meeting. Section 445D(1) lists seven grounds on which a court may terminate a deed. The section is as follows: Section 445D When Court may terminate deed (1) The Court may make an order terminating a deed of company arrangement if satisfied that: 55 See Whittingham; Re The Spanish Club Ltd [2009] NSWSC 1426. Directors have an obligation to inform the deed administrator if they become aware that the deed has been or is likely to be materially contravened: s 445HA.

868

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.250]

(a) information about the company’s business, property, affairs or financial circumstances that: (i) was false or misleading; and (ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed; was given to the administrator of the company or to such creditors; or (b) such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or (c) there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or (d) there has been a material contravention of the deed by a person bound by the deed; or (e) effect cannot be given to the deed without injustice or undue delay; or (f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be: (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or (ii) contrary to the interests of the creditors of the company as a whole; or (g) the deed should be terminated for some other reason.

A person has standing to seek relief under the section as an “other interested person”, regardless of whether they are a “creditor” for the purposes of that section.56 The court retains the discretion as to whether to set aside a deed even where a contravention of s 445D is established. The principles underpinning the application of s 445D are discussed further at [20.255].57

Voiding or validating a deed: s 445G [20.250] In addition, the deed may be voided or validated under s 445G when there is “doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with” Pt 5.3A or complies with it. This section says: Section 445G When Court may void or validate deed (1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or the Commission, may apply to the Court for an order under this section. (2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground. (3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that: 56 Allatech Pty Ltd v Construction Management Group Pty Ltd [2002] NSWSC 293; (2002) 41 ACSR 587; approved by the NSW Court of Appeal in BE Australia WD Pty Ltd v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336. See also Bovis Lend Lease v Wily [2003] NSWSC 467; (2003) 21 ACLC 1,737; Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; (2005) 145 FCR 220. 57 See further, the summary in Hayes v Doran (No 2) [2012] WASC 486 at [406].

[20.250]

20 Deeds of Company Arrangement

869

(a) the provision was substantially complied with; and (b) no injustice will result for anyone bound by the deed if the contravention is disregarded. (4) Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed’s administrator.

Section 445G generally applies to situations where there has been some deficiency in or non-compliance with the statutory processes leading up to the deed being approved and executed; such as the adequacy of execution of the deed,58 or the use or validity of proxies (Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450), although mere doubts concerning compliance are not sufficient to terminate on their own. Jurisdiction under s 445G may apply even where the deed is wholly invalid.59 In contrast, s 445D applies when the formal processes have been followed, but there is complaint about the underlying circumstances surrounding the deed’s approval. These provisions, and the distinction between them, are very similar to those which may result in a Pt X agreement under the Bankruptcy Act being set aside by a court and the decisions of the courts there are of general relevance to matters that arise for consideration under s 445D: see [8.235]. In determining whether a provision was substantially complied with, the courts assess what has been lost by each respective contravention compared with what would have been the case if there had been no contravention: FCT v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616. If the court declares a term of a deed to be void, it may order the deed to be varied, but this can only occur with the administrator’s consent: s 445G(4). The word “substantially” involves some degree of compliance. The procedural or substantive nature of the defect is another factor, as is the delay in seeking the declaration. Any “injustice” caused by the defect must be real and not illusory, that is, it must have some actual impact on the creditor adversely affected: Australian Guarantee Corporation v Lawrence (1999) 17 ACLC 1,226. Thus a wrongful rejection of a proof of debt for voting purposes will not invalidate a deed if the resolution in favour of the deed would still have been carried: Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450. Section 445G is to be applied strictly but at the same time s 445G(3) is a “safety valve” to allow an arrangement to proceed despite some defect: FCT v Comcorp Australia Ltd (1996) 70 FCR 356; (1996) 14 ACLC 1616. The power under s 445G(2) to declare a deed void includes the power to declare part of the deed void as against a specified person: Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 132 FLR 247. 58 For a discussion of the execution requirements, see MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636, discussed at [20.85]. 59 See City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130; (2009) 179 FCR 243. Although the Full Federal Court’s decision was affirmed on appeal to the High Court (Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509) this point was not addressed.

870

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.255]

Principles of application under ss 445D and 445G [20.255] The focus of the courts is on the purposes of Pt 5.3A of the Corporations Act and the statutory regime which it provides, in particular in relation to the need for administrations to be conducted and resolved promptly. The court’s power to grant orders under either or both of ss 445D and 445G are discretionary,60 and hence delays in bringing the application will be a relevant factor: Hayes v Doran (No 2) [2012] WASC 486 at [406]. For example, in TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd [2012] NSWSC 766 it was held that even though there were material omissions and misleading information in an administrator’s report to creditors, that alone was not enough to warrant orders under s 445D where liquidation would not produce a more favourable result for creditors than continuing with the deed. Similarly, in DCT v Pddam Pty Ltd (1996) 14 ACLC 659, the court declined to set aside a deed under s 445G because this would not confer any practical benefit on any creditor; the loss of benefits under the deed would not impose real hardship on employees (who were being paid fully under the deed); and no other creditor, save for the applicant, opposed the deed. The onus of proving the justification for such orders is on the applicant. For example, it is not incumbent on the administrator to prove the sufficiency of their s 439A report: Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178; (2011) 82 ACSR 300. Applications under s 445D will often plead a number of the grounds set out in that section, and there will be overlap between them based on the particular facts that have occurred, in addition to any grounds under s 445G.61 Thus, in Australian Guarantee Corporation v Lawrence (1999) 17 ACLC 1,226, the creditor’s application was based on alleged deficiencies in proxies and the meeting process (s 445G), as well as on lack of information given to the creditors: s 445D. Resort may also be had to the court’s broad power under s 447D: DCT v Woodings (1995) 13 WAR 189. Section 445D is most often used by a dissatisfied creditor who seeks to challenge the deed. In JA Pty Ltd v Jonco Holdings [2000] NSWSC 147; (2000) 33 ACSR 691, the court made a finding of dishonest conduct by the company, its directors and its related creditors in the way the deed was put forward as a means to defeat the plaintiff creditor’s claims. The administrator had been deprived of the necessary books and records, he had been misled as to the right of the company to pursue trust property to the value of $3 million, and his report to creditors recommended against a deed and in favour of liquidation. At the meeting of creditors, the vote was narrowly in favour of the deed. In terminating the deed under s 445D, the court found that there had been false and misleading information and omission of material matters under s 445D(1)(a), (b) and (c), and there was injustice and oppression and unfair prejudice under 60 See the leading decision in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510. 61 See also Re Le Meilleur Pty Ltd v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115; (2011) 256 FLR 240 (information provided to creditors was misleading and deed was also invalid as it did not accord with proposal put to creditors).

[20.255]

20 Deeds of Company Arrangement

871

s 445D(1)(e) and (f).62 In terms of the objects of Pt 5.3A, the court considered that the creditors would benefit more from a liquidation of the company than through a deed, in particular because of a liquidator’s access to the $3 million trust property. Further, in reliance on s 445D(1)(g), the fact that related creditors who did not claim under the deed would remain be in a better position than those the creditors who were denied access to the trust property was “some other reason” for terminating the deed. The court concluded by saying that the information withheld from the administrator and the creditors was “so gross and the circumstances so unredeeming … that the best efforts of the administrator could not have availed”: at 721. One argument that is often raised is that the deed is being used to avoid the public scrutiny that investigation by a liquidation would involve. This may be relevant in determining whether “effect cannot be given to the deed without injustice or undue delay” (s 445D(1)(e)): Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd [2001] NSWSC 89; (2001) 37 ACSR 394 at [191] (NSWSC); (applied in DCT v TMPL Pty Ltd (No 3) [2011] FCA 1403; (2011) 289 ALR 69). This is also relevant when considering whether there is “some other reason” to set aside the deed under s 445D(1)(g): as to which, see [20.265]. In Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd [2013] QCA 405; (2013) 97 ACSR 390, the court considered that a deed was being proposed to avoid liquidator investigation of various property transfers that seemed to lack commercial merit. It is not necessary that it be proved that a liquidation would give a better return than the proposed deed: DCT v TMPL Pty Ltd (No 3) [2011] FCA 1403; (2011) 289 ALR 69. A creditor will often apply under s 445D(1)(c) on the basis of omission of relevant information from the statement or report of the administrator. However, the court must find that it would have been material to the creditor’s decision. In determining whether the information was material, the Full Federal Court in DCT v Comcorp Australia Pty Ltd (1996) 70 FCR 356; 14 ACLC 1616 said that if creditors had requested further information from the administrator, which had not been provided, then the omission of that material from the statement would support the view that the information was material to the creditors in making their decision. But if it is considered by the court that the creditors acting on that information may have approved a modified deed, then the court can order that the deed be so varied.63 In determining the materiality of any missing or incorrect information, evidence can be led that the creditors would not in fact have voted any differently, or the court may adjourn the proceedings and invite the administrator to obtain such evidence: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510.64 In assessing this ground, the court also takes into account the fact that the administrator must report quickly, and that there will be information that is not 62 See also DCT v TMPL Pty Ltd (No 3) [2011] FCA 1403; (2011) 289 ALR 69. 63 Emanuele v ASC (1996) 63 FCR 54, not disturbed by the High Court on appeal, Emanuele v Australian Securities Commission (1997) 188 CLR 114. 64 See further the summary in Hayes v Doran (No 2) [2012] WASC 486 at [406]; Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178; (2011) 82 ACSR 300 at [61]ff.

872

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.260]

able to be ascertained and assessed by the time of the meeting. In such circumstances, it is generally a matter for the administrator’s judgment as to whether the meeting should nevertheless be held and then adjourned in order to allow more information to be obtained, or whether an extension of the convening period under s 439A should be sought in order to allow more time to prepare and gather information for the meeting, or whether the meeting should simply proceed.65 Lack of notification of a creditor, or creditors, of the meeting, and hence their non-attendance, can be a ground for termination of a deed.66 In JA Pty Ltd v Jonco Holdings [2000] NSWSC 147, (2000) 33 ACSR 691, the court rejected the argument that the vote would not have been different had all creditors attended the meeting; the fact that false information was provided did not allow that conclusion to be properly drawn. However, there is no ground for setting aside a deed that does not produce the return for creditors that they anticipated, as long as there was no misleading information concerning that prospect given to them: C&E Pty Ltd v CMC Brisbane Pty Ltd [2004] QSC 416; (2005) 51 ACSR 583. Undue delay in providing funds for distribution under the terms of the deed may be a reason to terminate it under s 445D(1)(e): Commonwealth Bank of Australia v C2C Developments Pty Ltd [2013] NSWSC 724 (in that case an invalid variation to the deed also supported its termination). An application under s 445G may be made by the administrator, a member or creditor of the company, or ASIC. The court is empowered to declare the deed or a provision of it to be void or not void on the ground mentioned in the application, or some other ground: s 445G(2). There is no predisposition as to whether to terminate or not merely because one or more grounds in s 445D are made out, the court will need to consider the creditors’ interests and the public interest in making that decision: Re Recycling Holdings Pty Ltd [2015] NSWSC 1016; Re Britax Childcare Pty Ltd [2016] FCA 848. Undue delay by the applicant is relevant for assessing whether to exercise that discretion to set the deed aside: Traivelog Pty Ltd v Electrometals Technologies Ltd [2015] QSC 27. Differentiation between creditors

[20.260] A deed may, in certain circumstances, be valid notwithstanding that there is some differentiation made between the treatment of different classes of creditors.67 This will not of itself establish that it is unfairly discriminatory or prejudicial which is the test under s 445D(1)(f)(i) of the Corporations Act: DCT v Portinex Pty Ltd (No 1) (2000) 156 FLR 453 at [102]. As the court said in Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598 at [62], “Part 5.3A does not require a pari passu distribution. What is 65 See the review of the authorities in Re Mustang Marine Australia Services Pty Ltd; Perpetual Trustee Co Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429. 66 Although defects can be remedied by press advertisement: Australian Guarantee Corporation v Lawrence (1999) 17 ACLC 1226. 67 See further the summary in Hayes v Doran (No 2) [2012] WASC 486 at [406].

[20.260]

20 Deeds of Company Arrangement

873

required is a better return to creditors than an immediate winding up …. That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up”. So, a deed may provide for the payment of differential dividends among creditors: “(p)rovided there is a legitimate business rationale for discrimination between classes of creditor there will be no basis to impugn such arrangements”: Hayes v Doran (No 2) [2012] WASC 486 at [480]; see also Hamilton v National Australia Bank (1996) 66 FCR 12, 38. There must be reasonable grounds for that differentiation that are in accord with the object and spirit of Pt 5.3A: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 (where the lessor creditor of an unprofitable business that was closed down was paid less than those creditors of the profitable business that continued to operate under a deed). A deed can provide for different benefits to different creditors provided that all creditors receive as far as possible no less than the amount they would receive in a winding up of the company: Lam Soon. Thus, circumstances may apply where certain creditors must be paid in full to ensure their continued support for the company so as to allow it to continue trading, such as lessors of leased vehicles which are required by the company to enable it to continue to trade: Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450. Oppression, a ground under s 445D(1)(f), may arise where there is an unfair distinction made between creditors, such as terms in favour of a related creditor: BGC Contracting Pty Ltd v Kimberly Gold Pty Ltd (2000) 35 ACSR 633. It has also been used as a basis of a creditor’s application in circumstances where the shareholder of a company associated with a director had obtained a collateral benefit, and the deed served to force the company to continue a trading relationship with people in whom it had no confidence. This happens particularly when there is no advantage for the creditors in the third party obtaining the collateral advantage: Kalon Pty Ltd v Sydney Land Corp Pty Ltd (No 2) (1998) 26 ACSR 593. Oppression may also arise where personal guarantees given to a creditor are sought to be extinguished: M & S Butler Investments Pty Ltd v Granny May’s Franchising Pty Ltd (1997) 15 ACLC 1501.68 But mere advantage to third parties, even directors, is no ground for setting aside a deed if there is good reason for that financial arrangement: Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd (1997) 70 FCR 450; [1997] FCA 66. The fact that a deed may only operate for a short period before the company is expected to again become profitable is a factor against a deed being terminated: Employers’ Mutual Indemnity v JST. In Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; (2005) 145 FCR 220, the Commonwealth had distributed moneys to employees of the insolvent company under GEERS (now the Fair Entitlements Guarantee – FEG) on the basis that in a liquidation the Commonwealth would obtain priority by virtue of s 560. In an administration followed by a deed of company arrangement, such a priority 68 See now s 444J; Hanson Construction Materials Pty Ltd v Davey [2010] QCA 246; (2010) 79 ACSR 668 (a deed that purported to deem debts covered by guarantees to be paid in full had no effect on the creditor’s right to enforce the guarantees).

874

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.265]

would be provided by the deed maintaining the priority given to employees by s 556, thus giving the Commonwealth the same priority it would have enjoyed in a winding up. The Commonwealth applied for the termination of the deed on the ground that this priority was not offered and it argued that this was contrary to the integrity of GEERS. The court said that the Commonwealth could not base its case on s 445D(1)(f) because “creditors”, for the purpose of that subsection, do not include post-administration creditors. However, the Commonwealth’s case proceeded under both s 445D(1)(e) and s 445D(1)(g). The court found that when a third party, rather than the company, is the source of the funds that will go to creditors, funds may well be distributed other than if the company were in a winding up. However, in this case, the court saw the payment by the directors as compensation to the company for the loss of its opportunity to pursue certain causes of action against the directors through liquidation. The deed put in place a de facto liquidation in which the property of the company was to be distributed between its creditors and fairness required that the property be distributed as in an actual winding up. “Some other reason”

[20.265] Courts have the power to terminate a deed under s 445D on the basis of “some other reason”, a “catch-all” provision for circumstances which do not fall within the other grounds. In the case of DCT v B&G Plant Hire Pty Ltd (1994) 52 FCR 257 the court ordered the termination of a deed which failed to provide for the Commissioner’s right to a tax priority. If a deed is not shown to be for a purpose authorised by s 435A it may also be terminated under s 445D(1)(f): Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34. In Young v Sherman [2002] NSWCA 281; (2002) 170 FLR 86, the deed offered creditors a premium of 110 cents in the dollar if claims against one creditor were successful. In setting aside the deed, the NSW Court of Appeal found this to be “contrary to the policy of the Act and the public interest” saying that “the stated object of Pt 5.3A to bring about a better return for company creditors and members could readily be subverted by gratuities paid to achieve other objects”. Similarly, in DCT v Woodings (1995) 13 WAR 189, the deed was set aside and the administration terminated due to the company’s director buying creditor proxies with promises to pay particular creditors in full.69 Where a deed is approved or rejected only because of votes by a related entity (such as a director who is also a creditor, or a parent company who is also a creditor) IPSC, s 75-41 allows an application to be made to the court to have the resolution overturned. In any application to set aside a deed, the administrator is the proper contradictor to defend those proceedings rather than the directors: Kalon Pty Ltd v Sydney Land Corp Pty Ltd (No 2) (1998) 26 ACSR 593.

Use of s 447A in relation to Deeds [20.270] We have discussed the application of s 447A of the Corporations Act in relation to the administration process in Chapter 19. The use of s 447A to avoid 69 See also Canadian Solar v ACN 138 535 832 Pty Ltd [2014] FCA 783 (secret deals with particular creditors to buy their votes).

[20.375]

20 Deeds of Company Arrangement

875

Pt 5.3A being used as an abuse of process is expressly mentioned in s 447A(2)(b) as a ground for ordering that an administration should end.70 In the context of a review of a deed, the courts will take an expansive view of s 447A and make a termination order where it is appropriate and where the circumstances do not strictly come within either ss 445D or 445G. In DCT v Woodings (1995) 13 WAR 189, referred to at [20.265], the director had been involved in the systematic stripping of companies and he had engaged in obtaining proxies by fraud. In winding up the company, the court said that it was not in the public interest that the company continue to operate under the control of that director. Similarly, in JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691, the court was reinforced in its decision by its general reliance upon s 447A. See also ASIC v Midland Highway Pty Ltd (Admin apptd) [2015] FCA 1360; (2015) 110 ACSR 203. Section 447A has also been invoked in circumstances where the directors have not advised the administrator of all claims that existed against the company and were known to them, including disputed claims, and notice has not been given to those claimants.71 However, as discussed at [19.395], the limits of s 447A were reached in Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd [2008] NSWSC 452; (2008) 66 ACSR 199 where, despite what the court saw as an abuse of process in relation to the available relation-back provisions in a liquidation, following on from a voluntary administration, the terms of s 447A were not broad enough to allow the section to be used. Section 447A is confined to being used in relation to Pt 5.3A administrations, an order under the section cannot affect accrued rights, and it is to be used only for future events in an administration.72 Creditor support for investigations

[20.375] The courts have taken into account whether the creditors were prepared to fund further inquiries by the administrator into matters about which those creditors had expressed concern. In DCT v Portinex (No 1) (2000) 156 FLR 453, the Deputy Commissioner applied to set aside the deed based on, inter alia, the claimed inadequacy of investigations by the voluntary administrator. Austin J, in noting that the Deputy Commissioner had not indicated any willingness to fund further inquiries by the administrator, said that: “if the principal external creditor, presented with a report which reflects an adequate though preliminary investigation, wishes to have further investigations made, and the administrator is willing to conduct an additional investigation if costs and expenses are met, and no arrangements are made for costs and expenses to be covered, there is no adequate basis for the creditor to criticise the administrator for not undertaking those investigations.” 70 This is discussed in Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391 at [16]. There is a detailed summary of the law in Hayes v Doran (No 2) [2012] WASC 486 at [406]. 71 Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 132 FLR 247. 72 For a discussion of the court’s expansive jurisdiction under Corporations Act, s 447A see Re New Bounty Pty Ltd [2015] NSWSC 1060. See also Harris, “The Constitutional Basis of s 447A: Is it a Power without Limit?” (2006) 14 Insolv LJ 135.

876

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.280]

Hence, if a creditor is to seek to have the deed set aside and the company placed into liquidation, it may be expected to provide the funding to allow the investigations to be made by the administrator.73 It should also identify those claims that can be pursued. It should follow from this that if a creditor wishes to persuade a meeting of creditors that liquidation is a better option than a deed, then that creditor may need to be prepared to indicate that it will fund the liquidator for those matters to be pursued: see for example Bathurst City Council v Events Management Specialist Pty Ltd [2001] NSWSC 34; (2001) 36 ACSR 732. However, the absence of such funding should not preclude a proper recommendation for liquidation, or the execution of a deed, to be approved. The circumstances in JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691 were such that the deed would be set aside for the apparent dishonesty and deception of creditors that it involved, whether or not there would be funds in a liquidation to pursue these issues.

Stay of a termination [20.280] A termination of a deed may be stayed pending an appeal, or for other reasons. In Re Rugs Galore Australia Pty Ltd (1999) 17 ACLC 1,529, Gillard J stayed an order under s 445D, on condition that the company would not deal with its assets otherwise than in the ordinary course of business, nor attempt to enforce the deed. The company then appointed a new administrator with a view to executing another deed. In declaring the appointment of the new administrator valid under s 447C, Gillard J took into account the fact that the new deed may have led to the company being able to continue in existence in accordance with the objects of Pt 5.3A. The appeal from the order terminating the deed, and an appeal from the order validating the appointment of the second administrator, were both dismissed.74 However, the Full Court expressed preference for a stay order, such as that granted in Re Spargold Enterprises Pty Ltd (1999) 17 ACLC 1,526, that was more certain in its operation. Previous operation of the deed not affected [20.285] In the event of the termination or avoidance of a deed, wholly or in part, the previous operation of the deed is not affected: s 445H. Consequently, what occurred before the termination or avoidance is not, unless it was itself a breach of the Act, rendered nugatory. Supervision by the court [20.290]

As explained at [19.175] in relation to voluntary administrators, deed administrators are also subject to the supervision of the court, under IPSC, Div 45 (as registered liquidators) and Div 90 (as external administrators). The court can make “such order as it thinks fit”, and prior to making orders can take into account the conduct of the deed administrator and whether their conduct has 73 Similar issues arise in relation to Pt X agreements under the Bankruptcy Act: see Chapter 8. 74 McVeigh v Linen House Pty Ltd [2000] 1 VR 31.

[20.300]

20 Deeds of Company Arrangement

877

caused loss or damage to any other person. An application under IPSC, s 45-1 may be made by ASIC or by the deed administrators, while an application for orders under IPSC, s 90-15 may be made by a person with a financial interest in the external administration (see IPSC, s 5-30), the committee of inspection, an officer of the company or ASIC.

DEEDS OF COMPANY ARRANGEMENT FOLLOWED BY LIQUIDATION [20.295] Under certain circumstances a company under administration or a company being administered pursuant to a deed of arrangement may go into liquidation. This may occur in these circumstances: • the company fails to adhere to the requirements for the execution of the deed, as required by s 444B(2); • at a creditors meeting resolves to terminate the deed to wind up the company. A company may also transition from voluntary administration into a creditors voluntary liquidation if the creditors vote for this at the second creditors’ meeting held under s 439A: s 446A(2)(a). Section 446A(2) says that in those circumstances, a resolution to wind up is deemed to have been passed under s 491 and there is deemed to be no declaration of solvency as required by s 494. Hence, the administrator/liquidator is obliged to lodge, within five business days of the date of the deemed passing of the resolution to wind up, a written notice stating that the company is taken to have passed a resolution to wind up. Section 499(2A) – (2C) allows the creditors to appoint a new person as deed administrator of the company; if they do not, the existing voluntary administrator remains deed administrator. If a court orders a deed to be terminated under s 445D, or where the deed specifies an event of termination and those circumstances exist, the company will move into a voluntary liquidation: s 446AA.

POST-DEED DEBTS [20.300]

A deed of company arrangement will, as we have seen, release the company from all provable liabilities incurred to the date nominated in the deed. The company is therefore fully liable for debts incurred in any continued trading under the deed after that date, namely to trade creditors and suppliers, to the tax authorities and others. In the continued conduct of the company’s business under the deed, such creditors will expect their full debts to be paid on normal trade terms. They will know that the company is under a deed because of the prescribed words after the company’s name in its public documents. While under the deed, the company may find that it is again unable to pay those liabilities, and may again become insolvent, even though it operates under the deed. As we have discussed, the further insolvency of a company subject to a deed may be dealt with by way of its liquidation, or its further entry into another deed. In such a case, it is open to the administrator to apply to the court under s 445D to have the deed terminated. In

878

Keay’s Insolvency: Personal and Corporate Law and Practice

[20.305]

any event, another administrator can be appointed, even while the company is under a deed of company arrangement that has not yet terminated: Beatty v Brashs Pty Ltd (1998) 79 FCR 551. If a deed administrator continues to trade the business of the company while it cannot pay its current liabilities to post-deed creditors as they fall due, the administrator may be liable for insolvent trading under s 588G if it can be shown that he or she acted as a shadow director of the company. Alternatively, the administrator may be liable for breach of his or her fiduciary duties in those circumstances: Hill v David Hill Electrical Discounts Pty Ltd [2001] NSWSC 271; (2001) 19 ACLC 1,000. In such a situation where a company that is trading subject to a deed becomes insolvent, the deed administrator has a duty of impartiality to all creditors, that is, not only to those being paid under the deed, but also to the post-deed creditors. That situation arose in Re Spargold Enterprises Pty Ltd (1999) 17 ACLC 1,526, where the administrator was in a position to pay a distribution under the deed but post-deed creditors were not being paid. The court ordered that the deed be terminated and that the company be wound up, in which case all creditors would be dealt with equally in the course of the winding up.

CONCLUSION [20.305] The deed of company arrangement represents an initial successful outcome of the process that commenced when the company entered voluntary administration. That success is confirmed when the administration of the deed is completed, the creditors receive their dividend payments, and the company continues on successfully. There will, however, be cases where the deed does not allow the company to succeed and its termination will serve to have the company, and the creditors, face a liquidation that may or may not have been inevitable from the beginning. The acceptance of a deed that is not in the interests of creditors, through misrepresentation or withholding of information, will also result in a failure of the process. Ultimately, the deed represents the attempt by the company and its creditors to resolve their joint financial predicament; such attempts will succeed or fail depending on many factors, but informed decisions by creditors and open disclosure by the company may ensure that the ultimate purpose of Pt 5.3A, the survival of the company, will result. It is, however, an expensive process, in terms of the necessary involvement of administrators and their staff, who are expected to take charge of a company business and produce an intensive and useful report for creditors that in the end result may only confirm, after remaining company funds have been expended, that the insolvency of the company cannot be remedied other than through liquidation.

[20.305]

20 Deeds of Company Arrangement

879

Chapter 20 – Deeds of Company Arrangement Part 5.3A – Administration of a company’s affairs with a view to executing a deed of company arrangement – ss 435A–451D Part 5.3A – Administration of a company’s Corporations Regulations affairs with a view to executing a deed of company arrangement – regs 5.3A.01 – 5.3A.07A ASIC RG 82 – External administration: Deeds of company arrangement involving a creditors’ trust r 9.2, Form 16 Courts’ Corporations Rules r 9.2A, Form 16A Corporations Act

21

Restructuring and Workouts [21.05] INTRODUCTION .............................................................................................................. 882 [21.10] DEFINING RESTRUCTURING AND WORKOUTS ................................................... 883 [21.15] FORMAL AND INFORMAL PROCESSES ................................................................... 885

[21.25] Pre-packs ............................................................................................................ 889 [21.30] PARTIES INVOLVED IN RESTRUCTURING AND WORKOUTS ........................... 890

[21.35] The debtor .......................................................................................................... 890 [21.40] The debtor’s executive management ............................................................ 891 [21.45] The debtor’s board ........................................................................................... 891 [21.50] Senior secured creditor(s) ................................................................................ 892 [21.55] Junior secured creditors ................................................................................... 893 [21.60] Hedge and swap providers ............................................................................. 894 [21.65] Advisors .............................................................................................................. 895 [21.70] Equity investors ................................................................................................ 896 [21.75] Lessors ................................................................................................................ 896 [21.80] Unsecured creditors .......................................................................................... 897 [21.85] Employees .......................................................................................................... 897 [21.90] SAFE HARBOUR FOR RESTRUCTURING .................................................................. 898

[21.90] Overview ............................................................................................................ 898 [21.95] Elements of the safe harbour .......................................................................... 899 [21.100] Duration of the safe harbour ........................................................................ 901 [21.105] Establishing the safe harbour ....................................................................... 901 [21.110] Evidential burden ....................................................................................................... 902 [21.115] Valuation issues .......................................................................................................... 903 [21.120] FORMAL RESTRUCTURING MECHANISMS .......................................................... 905

[21.120] Introduction ..................................................................................................... 905 [20.125] Schemes: operation ......................................................................................... 907 [21.130] Schemes: creditor classes ............................................................................... 908 [21.135] Schemes: reporting .......................................................................................... 910 [21.140] Administration of a company reconstruction under a scheme .............. 911 [21.145] Schemes: termination of a scheme ............................................................... 912 [21.150] DOCAs for restructuring ............................................................................... 912 [21.155] CORPORATE LAW ISSUES ........................................................................................... 914 [21.160] RESTRUCTURING LISTED ENTITIES ........................................................................ 916

882

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.05]

[21.165] ISSUES OF RESPONSIBILITY AND LIABILITY OF ADVISERS ............................ 917

INTRODUCTION [21.05] This book has primarily focussed on insolvent companies and individuals, particularly with the legal, commercial and practical problems generated by insolvent estates. The law has traditionally concentrated on formal insolvency proceedings, mostly through the use of “external administration” under the supervision of the courts and stakeholders. However, the social narrative regarding insolvency is changing. There has long been recognition that insolvency proceedings are limited in the extent to which they can assist in achieving one of insolvency’s aims, to rehabilitate the company’s business so that it may again trade profitably. Indeed, this was one of the key areas of focus for the Harmer Report in the 1980s and one of the main drivers behind the introduction of voluntary administration in 1993. Law reform across the globe has been focussing on corporate rescue and rehabilitation,1 with recognition that formal insolvency proceedings can be costly, given the attention required to be given to the engagement of all the stakeholders, and the spotlight on process and transparency. Formal insolvency proceedings also produce a stigma that can make rehabilitation more difficult, and in some cases impossible.2 As with many areas involving legal disputes, society attempts to have the parties resolve their issues without formal and expensive court proceedings, allowing the parties themselves to come to a resolution rather than have one imposed by a court. This preference is not to negate the value of the formal process, but instead to recognise its place among many other avenues that might be first tried. In the same way, while the formal processes we have described in this book are of great value, they should be seen in the context of being merely one of the available means to address a company’s financial difficulties. Informal processes will still involve legal compliance, but remain outside, and pre-empting, the formal process of insolvency. In many ways informal restructuring efforts involve bargaining in the shadow of formal insolvency proceedings, because that is often the likely outcome if the restructuring efforts fail. In that vein, Australian law has been amended recently to facilitate restructuring outside of formal insolvency proceedings, through the introduction of what is termed the “safe harbour” for company directors (discussed below from [21.90]). Across the business community, there is widespread acceptance that being able to restructure a business before it becomes formally insolvent can provide greater returns not only for the company involved, but for its stakeholders and the broader community. This new chapter gives an overview of the restructuring and workout 1 See, for example, European Commission, “Proposed Directive on ‘Preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures’” (22.11.16) http://europa.eu/rapid/press-release_IP-16-3802_en.htm. 2 Tajti, “Bankruptcy Stigma and the Second Chance Policy: The Impact of Bankruptcy Stigma on Business Restructurings in China, Europe and the United States” (2017) China EU Law Journal (forthcoming).

[21.10]

21 Restructuring and Workouts

883

processes aimed at rehabilitating and rescuing businesses that become financially distressed so that they can avoid formal insolvency and continue operating to the benefit of their stakeholders. And while safe harbour itself is part of the process under the Corporations Act, an insolvent restructuring might nevertheless proceed and be achieved completely outside Corporations Act 2001Ch 5. There are risks involved for the directors and others but the parties may consider that their aim can safely be achieved.

DEFINING RESTRUCTURING AND WORKOUTS [21.10] The concepts of restructuring and workouts are often used interchangeably in the context of a financially distressed business and do not lend themselves to a precise universal definition. The terms may also have different connotations in different disciplines, such as accounting and finance,3 management4 and law.5 The terms are also often used in conjunction with reorganisation, compositions and arrangements with creditors. Another term that is often used in this context is “turnaround”, which commonly refers to the attempt to return a business to profitability (or to return to a previous level of profitability).6 In this text, the term workout refers to an informal agreement between a debtor company and one or more of its major creditors which alters the terms of their contractual payment arrangements to allow the debtor to improve its financial position and hopefully return to solvency. A restructuring may involve the implementation of a workout proposal, in which case it is usually referred to as a balance sheet restructuring (because the effect of the restructuring seeks to repair the company’s balance sheet by reducing or delaying repayment obligations and/or increasing equity funding). However, restructuring involves more than simply addressing a company’s debt problems. Companies attempting to turnaround their businesses that are experiencing financial difficulties also typically need to change the internal operations of the business with a view to decreasing costs, increasing free cash flow and ultimately growing profits. This is referred to as an operational restructuring.7 Australia’s insolvency laws in the Corporations Act provide two primary mechanisms for implementing a restructuring plan by using a creditors’ scheme of arrangement (discussed below from [21.120]) or a deed of company arrangement (see Chapter 3 See, for example, DiNapoli, Sigoloff and Cushman, Workouts and Turnarounds: The Handbook of Restructuring and Investing in Distressed Companies (Irwin Professional, 1991). 4 See, for example, Slatter and Lovett, Corporate Turnaround: Managing Companies in Distress (Penguin, 1999); Bibeault, Corporate Turnaround: How Managers Turn Losers Into Winners! (McGrath-Hill, 1998). 5 See, for example, Mallon, Waisman and Schrock (eds), The Law and Practice of Restructuring in the UK and the US (2nd ed, Oxford University Press, 2017); Howard and Hedger, Restructuring Law and Practice (2nd ed, LexisNexis, 2014); Larkin (ed), Restructuring and Workouts (2nd ed, Globe Business Publishing, 2013). 6

See generally, Adriaanse and van der Rest (eds), Turnaround Management and Bankruptcy: A Research Companion (Routledge, 2017).

7 There is a detailed discussion of this in Slatter and Lovett, Corporate Turnaround: Managing Companies in Distress (Penguin, 1999).

884

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.10]

20) to effectuate a restructuring of the company’s debt obligations. In legal commentaries, these are typically referred to as “debt restructuring”. It is important when considering restructuring and workouts to distinguish between the goals of saving a company and saving a particular business owned by the company. It is the business that contains value in terms of: • preserving employment; • realising the value of completing work in progress; • preserving existing supply relationships; • maintaining tax payments through continued trading of the business; • fulfilling custoemr deliveries; • maintaining competition in product and service markets. It is trite to note that companies are separate legal entities that can (and do) own businesses which may comprise a mix of tangible assets (such as plant and equipment) and intangible assets (such as receivables, intellectual property and goodwill). When restructuring a company in financial distress, it is possible to implement a restructuring plan that will save some or all of the business by selling it to a new owner (which may be a third party or a vehicle set up to acquire the business assets) and then shutting down and disposing of the corporate shell that sold the business assets (usually through liquidation and deregistration). This is different to restructuring the company’s existing debt obligations while retaining the assets within the company. Of course, the prevalence of corporate group structures may mean that only some companies within the group are affected by the restructuring, for example, a “top hat restructuring” involves restructuring ultimate holding companies in a group while operating subsidiaries may be largely unaffected.8 The selection of strategy will depend upon the circumstances of the company, the market in which it operates and the interests of key stakeholders. For example, a company operating a business in a highly regulated environment where licences are needed to operate, and where it is difficult and/or expensive to transfer an operating licence to a new owner, may need to implement a balance sheet restructuring to retain its business assets in the same corporate entities with amended debt obligations. If the success of the business does not depend on who owns or operates the business assets, then it may be possible to transfer the assets to an acquisition vehicle so as to leave creditors who are “out of the money” (ie will not receive a return in liquidation) in the old company while creditors who will maintain an ongoing relationship with the business will swap some or all of their debt owed by the old company for debt and or equity in the new business (known as a “hive down restructuring”). The focus of this chapter is on the restructuring of large businesses. But the processes can and are also applied to smaller entities encountering financial 8 For a discussion of various restructuring “exits” see Howard and Hedger, Restructuring Law and Practice (2nd ed, LexisNexis, 2014), Ch 6.

[21.15]

21 Restructuring and Workouts

885

distress. A small business that loses a major customer may find itself in difficulties, often arising from too narrow a customer base. Without prompt attention and advice, the business may fold. The government’s explanation of the need for safe harbour does, in fact, focus on these smaller to medium entities. The “Explanatory Memorandum to the section 588GA Bill” refers (at Example 3, [1.47]) to Sue the restauranteur who is warned by her accountants that her business may soon become insolvent, but she delays and a bank receiver is appointed; and Nik, the owner of a whisky bar, who discovers that his recorded stock levels are far higher than his actual stock and that his cash reserves are low. He seeks the advice of an accountant to check his figures and a logistics manager to evaluate his stock control processes. The EM then goes on to describe the board of a large listed mining company becoming concerned about the impact of ill-advised asset purchases and a drop in the iron ore price. They seek advice from a turnaround firm with a range of expertise. For the purposes of this book, our focus will be on large business because that is where the expertise and law is developing. We refer to SMEs as and where relevant.

FORMAL AND INFORMAL PROCESSES [21.15] Informal restructuring attempts often go hand in hand with formal legal restructuring mechanisms. While informal workouts may offer flexibility and confidentiality, they lack the ability to bind dissenting creditors and so a formal mechanism (such as voluntary administration or a scheme of arrangement) may be necessary.9 The parties to a restructuring effort will differ from company to company. For many businesses, it is likely that only the company’s relationship bank(s) will need to be involved in the workout negotiations. Where senior secured lenders (who rank first in priority) are fully supportive of a restructuring plan, it may not be necessarily to involve other creditors because the workout proposal may free up sufficient cash to allow the company to continue paying junior creditors (both secured and unsecured) to minimise the risk of enforcement or wind up action by individual creditors. Informal mechanisms are, however, vulnerable to “holdout creditors”. Obviously the larger the group of creditors needed to approve the workout proposal, the greater the transactional risk of holdout creditors. This may take the form of one or more senior secured lenders rejecting a restructuring plan, although where finance is provided by multiple lenders10 it may be possible facilitate a restructuring using contractual rights under the terms of financial contracts and inter-creditor priority deeds (known as “inter-creditor agreements”).11 Holdout creditors could also 9 For a detailed analysis of informal rescue procedures see: Finch and Milman, Corporate Insolvency Law: Perspectives and Principles (3rd ed, OUP, 2017), Chs 6 and 7. 10 For a discussion of group lending and workouts see: INSOL International, Statement of Principles for a Global Approach to Multi-Creditor Workouts II (May 2017); Weil, Gotshal & Manges, Restructurings (2nd ed, 2000), Ch 2. 11 For a discussion of inter-creditor agreements see King and Wood Mallesons, Australian Finance Law (7th ed, Lawbook Co., 2015), Ch 22.

886

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.15]

involve strategically important creditors, such as lessors of essential equipment or land or premises, refusing to allow for the leased property to be used in the restructured business (for instance, refusing to assign a lease to a new acquisition vehicle). In such cases, it may be possible to negotiate a restructuring plan with key stakeholders and then seek to implement it through a formal legal mechanism, such as a scheme of arrangement or a deed of company arrangement to gain the capacity to enforce the deal on dissenting creditors. This highlights one of the essential differences between formal and informal processes. The formal processes under Corporations Act 2001, Ch 5 can provide a legal and enforceable structure, and a moratorium against claims, that supports a restructure, over the opposition of some parties. In contrast, an informal restructure requires negotiation and agreement of the main parties. In some situations, it may be necessary to start with a formal appointment to obtain legal protection against enforcement action by creditors and then use the moratorium period to negotiate a viable commercial solution. However, given the potential adverse effects of a formal insolvency appointment (including adverse publicity and negative effects on goodwill), a corporate restructuring plan usually begins with an informal workout, and may then progress to formal insolvency proceedings if necessary. The primary goal of informal rescue attempts is to address the problems in the company’s capital structure, at least on a temporary basis, in order to enable the company to develop a longer-term business reorganisation plan that will return the company to a viable status, or at least to maximise the assets available for creditors (usually secured creditors). The safe harbour against insolvent trading is aimed at giving directors greater flexibility to negotiate workouts without the fear of personal liability so as to encourage workout and restructuring efforts. Informal rescue mechanisms are useful because their confidential status means that the company can continue trading without its employees, suppliers and customers being aware of its financial difficulties. It is important that signs of financial distress are identified and managed as early as possible. As the company approaches insolvency, and signs of its distress begin to appear, the options for a viable rescue become narrower. Corporate lending contracts are structured to provide covenants that act as monitoring mechanisms so that the secured lender becomes aware of the potential for financial distress before the company is actually past the tipping point of insolvency.12 This may include setting minimum levels of cash that must be kept and requiring reporting on stock turnover and aged debtors. Ratios such as the “debt service cover ratio”, “liquidity ratio” and the “quick ratio” provide measures on which debtors are expected to report and which can be objectively measured to identify signs of financial distress. We have referred to these in our Chapter 1

12 For a review of financial covenants, see: Australian Finance Law (looseleaf service, LexisNexis AU), at [3A.180].

[21.20]

21 Restructuring and Workouts

887

comments as indicators of insolvency.13 Debtors are usually expected to report back to their senior secured lender(s) on a periodic basis, and are obliged to notify them of any covenant breaches. A breach of a covenant may constitute an event of default, or may trigger other consequences such as payment accelerations or a review of the terms of the loan. If the debtor gets into a position where it may fail to comply with one or more covenants it might need to seek a waiver or variation of those covenants. The introduction of protection against ipso facto clauses that are triggered on the appointment of an insolvency practitioner (particularly for schemes, administration and receivers and managers) in July 2018 will help to reduce some of the adverse effects of formal insolvency to facilitate more effective restructuring efforts using formal tools where necessary. It is common for the senior lender(s) to be given the power to cause the debtor company to appoint an investigating accountant who can report back to the company and its secured lenders on the financial state of the business and likely asset recovery rates.14

[21.20] The informal restructuring process may involve several distinct phases starting with the short-term plan (which may be measured in days or weeks), during which time the company will seek to maximise its available cash, minimise new costs being incurred and try to obtain the support of its key secured creditors to enter into some form of standstill period where the major creditors agree that they will not take enforcement action usually contingent on certain financial and operational milestones being achieved (such as reducing costs and selling assets). If the short-term plan is successful this can allow for medium-term and longer-term plans to implement financial and operational restructuring.15 In addition to a temporary deferral of enforcement action, a standstill will also usually involve some form of relief from covenant breaches, which could be a waiver or a resetting of the covenants (to remove a default) and/or a temporary deferral of interest payments (to free up cash flow for operations).16 The standstill agreement may be a formal, legally binding contract or may be an informal agreement.17 Of course, any deferment or rescheduling of loan obligations will 13 See also Alix, Rock and Stenger, Financial Handbook for Bankruptcy Professionals (2nd ed, West Publishing, 1996). 14 For an overview of investigating accountant’s roles see: O’Donovan, Company Receivers and Administrators (looseleaf service, Westlaw AU), at [3.1090]. That role is discussed in the context of liquidator independence in Chapter 10, that is, when an investigating accountant seeks an appointment as liquidator. 15 See Buljevich, Cross-Border Debt Restructurings (Euromoney Books, 2005), Ch 4; Slatter and Lovett, Corporate Turnaround: Managing Companies in Distress (Penguin, 1999). 16 See the practical discussion in C Campbell and B Underdown, Corporate Insolvency in Practice (Paul Chapman Publishing, 1991), Ch 4; Slatter and Lovett, Corporate Turnaround: Managing Companies in Distress (Penguin, 1999), Ch 6. 17 Buljevich, Cross-Border Debt Restructurings (Euromoney Books, 2005), pp 69-71; Bromley, VanLare, Hailey and Chiu, “Arriving at a Compromise with, and Identifying Key Stakeholders: Waivers, Amendments, and Standstills, Participations, Debt Buy-backs, Intercreditor Agreements and Make-Whole Provisions” in Mallon, Waisman and Schrock (eds), The Law and Practice of Restructuring in the UK and the US (Oxford University Press, 2017), Ch 5.

888

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.20]

necessarily generate further fees and charges requiring payment at a later date and thereby increacing the company’s overall debt position. The initial period will need to identify what the major problems with the business are, and formulate a period of relief that is designed to give the debtor company time to develop a plan to improve the company’s position, usually through cost cutting, internal management improvements and asset sales. Some companies may also pursue equity capital-raising or seek refinancing facilities either from some or all of the existing lenders to external refinancing. These steps take place during the medium-term phase of the rescue attempt. It will usually be necessary for the senior secured lender(s) to agree to move from the initial phase to the medium-term phase, which may be done by extending the standstill agreement and setting up further clear milestones (such as asset sales and/or increases in financial performance) that need to be reached during the restructuring period. Once the company has been (hopefully) stabilised, the debtor’s management will work on the longer-term reorganisation plan. This is designed to address what is almost invariably a broken capital structure. In short, a company’s capital structure is broken where its debt payment obligations are consistently higher than its revenue generation (a similar test to the cash flow assessment under s 95A. The capital structure can be fixed by adjusting the debt obligations to meet the current and future predicted cash flows. This may be achieved by swapping some or all of the company’s secured debt for equity in the business.18 It may also be achieved by reorganising the debt obligations, for example, by swapping short-term debt for longer-term debt, or high interest-bearing debt for lower interest debt (at least in the short to medium term). If there are multiple creditors who need to be bound by such an agreement then it is possible to use a scheme of arrangement under s 411 to bind the secured creditors as a class (discussed [21.130]). It may also be possible to bind dissenting creditors in a syndicated loan facility (ie a loan made by a group of creditors under a collective agreement – the syndicated facility agreement)19 by operation of a majority voting system amongst the participants in the syndicate.20 Where secured creditors support a restructuring plan but there are one or more dissenting unsecured creditors, this may be addressed by implementing a deed of company arrangement: see Chapter 20. Even if the businesses cannot be returned to full financial health, this does not mean that restructuring attempts should be abandoned. In such cases, a period of informal rescue may allow the debtor and its secured lender(s) to determine a program of asset sales, which may provide a better return than simply shutting the 18 See Clowry, “Debt-for-equity Swaps” in Larkin (ed), Restructuring and Workouts (2nd ed, Globe Business Publishing), 2013, Ch 3; Chatterji and Hedges, Loan Workouts and Debt for Equity Swaps a Framework for Successful Corporate Rescues (Wiley, 2001). 19 See generally, Rhodes (ed), Syndicated Lending: Practice and Documentation (5th ed, Euromoney, 2009). 20 Waiver or variation of some covenant breaches might require 100% approval from the participants in the syndicate: see Bromley et al, “Waivers, Amendments, and Standstills” in Mallon, Waisman and Schrock (eds), The Law and Practice of Restructuring in the UK and the US (2nd ed, Oxford University Press, 2017), Ch 5.

[21.25]

21 Restructuring and Workouts

889

business down in liquidation, which results in a perceived fire sale and generally lower returns for all of the stakeholders. This accords with s 588GA. Formal rescue laws provide a mechanism to undertake a similar process to an informal rescue attempt but with a greater degree of formality, greater control and powers etc, though without confidentiality. However, a formal legal process brings with it rights under the Corporations Act, such as the right of a voluntary administrator to continue dealing with assets subject to a circulating security interest.21 A formal legal appointment also brings in the court as overall supervisor of the administration. In voluntary administration courts can give permission to administrators to undertake certain actions,22 can vary personal liability or extend indemnities23 and may also issue orders limiting the rights of secured parties.24 It is common, however, for formal rescue mechanisms to be used in conjunction with informal arrangements. Formal mechanisms can be used to implement a sale process that has been discussed prior to the formal appointment. This may be necessary to address dissenting creditors such as the ATO and other revenue authorities and lessors of property that will no longer be used by the company during restructuring.25

Pre-packs [21.25] Restructuring and workouts in Australia should be distinguished from a pre-pack sale process, which has generated a considerable debate in other jurisdictions, particularly the United Kingdom.26 A pre-pack sale involves using the formal appointment to implement a pre-approved sale process where the buyer has already agreed to the purchase. There is no genuine public sale process as the parties have already agreed on the outcome. Pre-packs have not been as popular in Australia because of the stricter independence requirements imposed on the profession by both the courts and professional bodies. Practitioners who undertake extensive advisory work for a debtor company are not sufficiently independent to then take an appointment as administrator or liquidator of the company if that is required. Advising a company on a pre-pack of its assets and liabilities to present to creditors through a formal insolvency usually serves to prevent the adviser being appointed. That would generally be the case with a safe harbour adviser under s 588GA. 21 Corporations Act, s 442B. 22 See for example, Corporations Act, s 442C. 23 Corporations Act, s 447A; Mentha; Re Griffin Coal Mining Co Pty Ltd [2010] FCA 1469. 24 Corporations Act, s 441D. 25 Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34. 26 See Brown, “Unlocking the Pre-pack” (2009) 9 INSLB 164; Poulos and McCunn, “Pre-pack Transactions in Australia” (2011) 19 Insolv LJ 235; Wellard and Walton, “A Comparative Analysis of Anglo-Australian Pre-packs: Can the Means Be Made to Justify the Ends?” (2012) 21 International Insolvency Review 143; Umfreville, “Review of the Pre-pack Industry Measures: Reconsidering the Connected Party Sale Before the Sun Sets” (2018) 31 Insolvency Intelligence 58. For a discussion of pre-packaged and pre-negotiated reorganisations in the US see: Krause (ed), A Practitioner’s Guide to Pre-packaged Bankruptcy (ABI, 2011).

890

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.30]

The nature of the work done by an adviser must however be assessed in each case. In Korda, in the matter of TEN Network Holdings Ltd (Admin Apptd) (Rec and Man Apptd) [2017] FCA 914 months of pre-administration work was undertaken by practitioners to prepare the company for an orderly administration if workout negotiations failed. Those negotiations were being conducted by separate advisers. The court pointed out that this was not a UK style pre-pack administration because the pre-appointment work done by the practitioners was simply to prepare the company for administration rather than to assist the company resolve its financial difficulties. In the end, those difficulties were not resolved and the court appointed those practitioners as administrators, although with some accounting imposed.27

PARTIES INVOLVED IN RESTRUCTURING AND WORKOUTS [21.30]

In this section, we outline the common parties involved in restructuring and workouts.28 Of course, every restructuring effort is different because every company is different. A particular distinction may be drawn between attempts to restructure small and medium sized companies with efforts to restructure large companies. Attempting the workout of a small or medium sized business may involve simply the debtor’s management and a sole senior secured lender (such as a bank), while restructuring large companies may involve dozens of stakeholders. The restructuring of publicly listed companies presents further challenges (ie compliance with the ASX listing rules) that are not found in other restructurings. We may also add cross-border implications, with businesses and assets in multiple jurisdictions generating a diversity of stakeholder perspectives and legal frameworks within which to implement the restructure. Lastly, businesses involved in heavily regulated or nationally significant areas (such as financial services, mining, defence and infrastructure) will also bring their own unique challenges. The list below is therefore only a broad guide of some of the common stakeholder groups, and the particular risks associated with each.

The debtor [21.35] The debtor company is the key stakeholder in the restructuring effort but, as we have explained, a distinction needs to be made between the company and the business assets that the company operates. A successful restructuring may involve the sale or disposal of one or more business assets and the closure of one or more companies in the group. Restructuring is not concerned necessarily with the preservation of the corporate shell, but rather with the business and the economic benefits that business produces for the business owners and their stakeholders. It is common to attempt to continue trading the business during the restructuring effort so as to preserve goodwill, realise the value of work in progress and to promote a higher sale price of business assets (as opposed to a fire sale on liquidation). If the value of the business assets will not be adversely affected by a formal insolvency appointment (such as liquidation or administration) then a formal restructuring of some or all of the company’s debts may be better 27 See further, Harris, “Unpacking the Ten Network Administration” (2017) 28 Journal of Banking and Finance Law and Practice 343. 28 Slatter and Lovett, Corporate Turnaround: Managing Companies in Distress (Penguin, 1999).

[21.45]

21 Restructuring and Workouts

891

undertaken using a formal insolvency proceeding in order to gain the benefit of a statutory stay and the benefit of court supervision and statutory debt compromises. The company may have a team of financial, legal and strategic advisors, depending on the size and value of its business. Key risks: Trading on the business will require the continued support of the company’s key stakeholders (such as secured lenders, employees, suppliers and customers). It is common to attempt to undertake restructuring on a confidential basis with senior lenders and other key parties to the workout proposal so as not to raise concerns with key stakeholders, such as suppliers and employees. It is important to review the company’s key contracts (such as finance, leasing and supply agreements) to determine how the restructuring may affect the future value of the business.

The debtor’s executive management [21.40] The debtor’s executive management will be central participants in a restructuring effort as they control the information flow and execute the company’s strategic initiatives. One concern for executive managers may be compliance with their statutory duties as officers of the company, such as the duty of care and the duty to act in the best interests of the company, which may include consideration of creditor interests (see Chapter 16). It is possible that the restructuring efforts will detract management’s attention away from running the business, which may require the use of one or more specific persons responsible for coordinating the restructuring efforts, sometimes called a Chief Restructuring Officer (or CRO). It is also possible that a steering committee will be established to coordinate the restructuring, which will include members of company management such as the CEO, CFO, General Counsel etc. Individual managers will also be concerned with the effects that a poorly executed restructuring may have on their professional reputation. Dealing with the pressure of financial distress and the expectations of key stakeholders during the restructuring can result in changes to executive management, including the appointment of interim CEOs and CFOs (for example, if a senior secured lender has lost confidence in senior management of the company). Key risks: Compliance with officers’ legal duties.

The debtor’s board [21.45]

The debtor company’s directors will be closely involved with the restructuring efforts, and will usually convene more frequent board meetings to remain informed of developments and to make decisions when needed. The non-executive directors may be concerned about their role and potential liability, so much so that it is not uncommon for one or more non-executive directors to retire or resign from the board. Insolvent trading liability is particularly concerning for directors (and does not apply to officers who are not also members of the board). The introduction of the statutory safe harbour protection against insolvent trading can assist directors provided that they comply with the requirements of s 588GA.

892

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.50]

Directors are also required to comply with a range of statutory and general law duties (such as the duty of care and the duty to act in the best interests of the company). Key risks: Compliance with directors’ duties and threat of insolvent trading liability.

Senior secured creditor(s) [21.50] Secured creditors have both rights in personam (against the debtor, for example, under a contract providing for a debt to be owed) and rights in rem (against property of the debtor). The reference to a senior secured creditor recognises that the company may have granted security to more than one creditor and the order in which those secured creditors may take enforcement action against the company’s property as collateral is governed by some order of priority (hence junior secured creditors are subordinated to the senior secured creditors). The rules of priority are beyond the scope of this book, and will depend on the particular financing documents entered into by the particular debtor company, but top priority will usually take the form of an ALLPAP security interest over all of the debtor company’s property. This form of security is often taken by sophisticated secured lenders such as banks. Priority may also be provided for by contract between the secured creditors (known as an inter-creditor agreement). Also, priority may be determined by the priority rules of the PPSA and of the general law of security (such as priority between a first and second mortgage holder). Attention should be given to the particular collateral covered by the security, as security may only be over particular assets, or only in respect of assets in a particular company in the debtor company’s corporate group. For example, a secured creditor (such as a bank) may have security over the assets of a holding company, but another secured creditor (such as an equipment finance company) may have security over equipment held in an operating subsidiary. In such a case, the bank is structurally subordinated because it only controls the holding company’s assets and the finance company may enforce against the equipment directly. The secured debt may be held by a single creditor (such as a bank with a relationship with the debtor or an equipment finance company) or may be held by a group of secured creditors through a loan syndication or a club loan. Group loans tend to involve multiple banks, but may also involve other large financial institutions such as pension funds and hedge funds. It is also possible that the senior secured creditors will be holders of the company’s debt securities (such as debentures or bonds) but these are more likely to be subordinated to the position of group loans. When a debtor’s financial position begins to deteriorate senior secured creditors may seek to reduce their risk of default by selling some or all of their debt owed by the borrower (known as debt trading), usually at a discount of face value (such as

[21.55]

21 Restructuring and Workouts

893

selling out at 70c in the dollar).29 A person who buys debt at a discount to face value may still vote in a creditors’ meeting for the full value of the debt and is not limited only to the price that they paid for the debt, as there is no rule in corporate insolvency law that limits this, unlike in bankruptcy (see IPRB, s 75-110(4)). In recent years the debt trading market in Australia has been active, particularly for large public companies and this has meant that a debtor’s senior secured lenders can change from a small number of banks to dozens (or more) of debt traders comprising hedge funds, private equity and other specialist distressed debt investors. Often these funds (such as Apollo, Oaktree, Bain Capital Credit and Centerbridge) are foreign funds that specialise in restructuring large companies.30 Of course, banks can have many levels of relationships with corporate borrowers (including commercial banking facilities, advisory roles, corporate finance and financial services) and the ongoing value of these relationships continuing may mean that the banks refrain from selling their debt. Where a group of lenders includes original lenders and debt traders, the original lenders are typically referred to as the “par lenders” because their exposure is the face value of the debt. Given the high levels of control and influence that senior secured lenders may have over the company and its future, there is a risk (albeit a small one in practice) that the creditors will be found to be shadow directors of the debtor, because the debtor’s directors are accustomed to act in accordance with the creditors’ wishes. However, in the authors’ view this risk is minimal, particularly after courts have found that secured creditors who impose conditions on continued financial support (even detailed conditions that curtail management decision-making) are only acting in their own commercial interest and not as part of the governing structure of the debtor company (who always retains a choice as to whether to agree to the bank’s terms) and hence are not shadow directors: see Buzzle case.31 Key risks: Risks include default on the loans and receiving less than 100c in the dollar. Although, the financial state of the debtor may mean that full recovery is impossible and, therefore, the key risk is not receiving the best return on the debt.

Junior secured creditors [21.55]

As noted above, corporate debtors often have levels of secured debt and the priority position of each level will be determined by the relevant contract that gives rise to the debt and/or by an inter-creditor agreement. Where bonds are issued by the company (technically debentures under the Corporations Act), these bonds may come in various categories, each with its own risk and reward profile

29 See further Stefanidis, “Reviving the Incentive to Compromise in Corporate Restructure: The Role of Secondary Debt Markets” (2017) 28 Journal of Banking and Finance Law and Practice 135. 30 Watterson, “Pulling Back the Shades: Demystifying Vulture Funds” (2016) 27 Journal of Banking and Finance Law and Practice 131. 31 Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47. See further Watterson, “Minimising the Risk of Shadow Directorship: Advice for Distressed Debt Investors” (2016) 27 Journal of Banking and Finance Law and Practice 310.

894

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.60]

(known as tranches, often with alphabetical designation: Tranche A debt etc).32 With the retail corporate bond market very limited in Australia (at least outside of financial institutions and large infrastructure companies), many corporate borrowers seek to issue bonds into offshore capital markets such as the US private placement market and the terms of the debt issuance are usually governed by New York or English law. This will mean that any restructuring will need to comply with foreign laws (such as the US Trust Indenture Act 1939). Bonds are often held by trustees who represent the debt investors (in Australia they are known as debenture trustees) and this may require the trustee to seek a vote of the bond holders to make decisions such as whether to waive covenant breaches. Where a formal restructuring is proposed using a scheme or a deed of company arrangement, it will be the ultimate investors (the bondholders) who are the creditors for voting purposes, not the bond trustee who represents their interests. Often one of the major issues in proposing a restructuring is to determine where the value breaks in the capital structure (also sometimes called the debt stack). This refers to the level in the capital structure that is unlikely to receive full repayment. In some restructurings, there may be debate about the appropriate enterprise valuation of the debtor and this can result in junior secured creditors being “out of the money”. Classes of creditors who are out of the money may be excluded from any formal restructuring using a scheme of arrangement and this can be used to pressure junior secured creditors to accept the workout proposal even if it pays them less than they are entitled under an alternate enterprise valuation. Key risks: Enterprise valuations that leave them out of the money. Being required to give up security under an inter-creditor agreement.

Hedge and swap providers [21.60]

Hedge and swap providers are contractual counterparties who will be required to pay the company (or provide something of value to the company, such as transfer securities) if certain events specified in their contract occur at some point in the future (such as the price of a commodity moving above or below a set level). These contracts may be one-off or ongoing for a period of time. They provide the debtor company with a way to manage financial risks or obligations (such as entering into an interest rate hedge contract to manage the risk of changing interest rates, or a foreign currency swap to manage exposure to financial obligations owed in a foreign currency when the debtor earns revenues in a different currency). Hedge and swap contracts will provide certain events that will close out the contract and require any final payments to be made, with insolvency or the appointment of a liquidator or administrator likely to be included as such an event. These parties will therefore have a keen financial interest in if or when the close out event occurs as this may significantly affect their financial exposure (or likely financial return). For example, if the hedge or swap provider would make money if 32 Another common reference is “Term Loan A debt”, “Term Loan B debt”, which is often shortened to TLA and TLB, with the “A debt” being paid in priority to the “B debt”. See further Speechley, Acquisition Finance (Bloomsbury Professional, 2015), Ch 5.

[21.65]

21 Restructuring and Workouts

895

the restructuring fails and the company enters liquidation then they may try to reduce the chances of a restructuring succeeding. These are likely to be stakeholders only in large restructurings. Key risks: The contract ends in an “out of the money” position for the hedge or swap provider.

Advisors [21.65] Restructuring can often involve a range of professional advisors, such as lawyers, investment bankers, accountants and corporate finance advisors, management consultants and asset valuation and sales consultants. Of course, the value of the company’s assets and the likely return to key stakeholders must be sufficiently large to justify the cost involved in engaging external professional advisors and so large numbers of advisors are likely only to be found in large company restructuring efforts. However, there are advisors for debtors of all sizes, with specialist turnaround advisors and consultants who can assist with restructuring negotiations with sophisticated creditors such as banks, landlords and the ATO.33 The introduction of the safe harbour laws allows the court to consider whether directors have obtained “advice from an appropriately qualified entity who was given sufficient information to give appropriate advice” (s 588GA(2)(d)), and the Explanatory Memorandum (at [1.68]) specifically cautions directors against turning to advisors who target company directors suggesting illegal activity. The Federal Government has raised the possibility of introducing heavier regulatory supervision requirements for persons who promote illegal phoenix activity.34 This could mean that while directors are free to choose their own advisors, if they choose an advisor promoting phoenix activity then not only could the directors lose the protection of the safe harbour against insolvent trading but could also face tighter regulatory scrutiny in future corporate dealings. Advisors could also face potential risks of being officers or shadow directors of the debtor company. However, where the advisors are acting in their professional capacity in advising the debtor company it is unlikely that they will be found to be officers or shadow directors. Advisors could also be found to be accessories to breaches of the Corporations Act by being “involved in a contravention” of directors’ duties (such as the duty to act in the best interests of the company) or misleading conduct (for example, where the advisors draft company announcements). Involvement in a contravention is defined in s 79. Key risks: Engaging advisors will increase the cost of the restructuring efforts but this may be necessary. Advisors may face personal liability. Selecting inappropriate 33 These consultants should be distinguished from those “pre-insolvency advisors” who market their services as assisting debtors, and in some cases assisting directors personally, to avoid paying the company’s debts through asset transfers, destruction of books and strategic insolvency proceedings. 34 Treasury, Reforms to Address Illegal Phoenix Activity (27 September 2017), http://www.treasury.gov.au. See also the detailed reports undertaken by Professor Anderson and her colleagues at Melbourne Law School relating to identifying and regulating phoenix activity: http://law.unimelb.edu.au/ centres/cclsr/research/major-research-projects/regulating-fraudulent-phoenix-activity.

896

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.70]

advisors could result in directors losing the safe harbour defence against insolvent trading and may produce further regulatory scrutiny.

Equity investors [21.70] Shareholders in the company may participate in restructuring efforts by offering to provide further equity to assist with repairing the company’s balance sheet, or may provide a potential option to purchase company assets. It may also be necessary to obtain shareholder approval for certain actions, such as changing the company’s constitution or to comply with ASX Listing Rules for substantial changes to the business and to raise more than 15% of the shares in the company within a 12 month period (if issuing further equity is part of the restructuring plan, such as part of a debt for equity swap). For companies that have stapled securities (where shares are attached to interests in a trust) it will be necessary to comply with trusts law (and potentially Ch 5C of the Corporations Act if the trust structure is also a managed investment scheme). Where equity has no value (ie because there are not enough assets to repay all creditors, who must be paid before equity holders in liquidation and administration), then equity holders may be excluded from a scheme of arrangement (for formal restructuring). Equity holders do not get to vote in either administration or liquidation. If voluntary administration is followed by a deed of company arrangement, it may be possible to seek court approval to require equity holders to transfer their shares as part of a debt for equity swap under s 444GA (discussed [21.150]). It is also possible that major equity holders will have other valuable rights that are important for any successful restructuring. For example, in entrepreneurial businesses it is common that the founder may own intellectual property rights separately from the company and these may be needed to continue trading on the business. In such cases, it may be possible to gain equity holder support for the restructuring by providing some form of residual equity value in the ongoing company (known as “stub equity”). Key risks: Equity investors may lose confidence in the future of the company which may reduce the capacity to refinance the business. Equity investors may seek court protection if they believe that equity is being undervalued in the restructuring proposal.

Lessors [21.75] Lessors of property used by the company will often not need to be involved in a restructuring because the effect of the restructuring plan is to provide for lease payments (at least on leased assets important for the company) to continue to be made. Lessors may need to be involved where the restructuring seeks to vary the terms of the lease (such as by reducing rent or maintenance obligations) or where there is a proposal to sell the business to a new owner (and hence assign the lease to the lessee). Where the lessor unreasonably refuses consent it may be possible to seek equitable relief from the court through “relief against forfeiture”. The introduction of protection against ipso facto clauses in contracts (including in leases) will make formal restructuring mechanisms using a scheme of arrangement,

[21.85]

21 Restructuring and Workouts

897

receivership and voluntary administration more attractive because lessors cannot terminate or vary the terms of the lease contract simply because of the scheme, receivership or administration. Key risks: Termination or variation of the lease or other enforcement action by the lessor where lease terms are not complied with.

Unsecured creditors [21.80] In most restructuring efforts, unsecured creditors (such as trade suppliers) may not even be aware that restructuring efforts are ongoing because the terms of the restructuring provide sufficient cash flow to ensure that existing obligations continue to be met to avoid enforcement action that may derail the restructuring effort (such as winding up applications). Key suppliers will of course need to be kept on side to ensure the continued trading of the business, but the appointment of restructuring advisors and the ongoing support of major secured creditors may provide greater confidence in suppliers that their terms of trade will continue to be met. Changes to the Corporations Act in 2018 to introduce protections against ipso facto clauses in contracts for companies that enter schemes of arrangement, receivership or voluntary administration may provide incentives for unsecured creditors to participate in restructuring given the limits that will be imposed on their rights if formal proceedings are commenced to implement the restructuring. One particular unsecured creditor deserves special mention: the Commissioner of Taxation. While the Commissioner is an unsecured creditor with no special priority to company assets in insolvency, the Commissioner has a range of statutory powers under taxation laws that can adversely affect restructuring efforts, such as the power to issue garnishee notice on the company’s debtors which can remove vital cash flow from the business, or the power to issue director penalty notices which may cause directors to put the company into liquidation or administration in order to avoid personal liability for the company’s tax debts (see Chapter 16). However, the Commissioner may also assist the restructuring by accepting some form of compromise or repayment arrangement. Key risks: Unsecured creditors will take enforcement action.

Employees [21.85]

Employees are, of course, an important stakeholder in any restructuring effort. It is important to retain valuable employees for the future success of the business (and retention benefits may need to be offered to ensure this). Employees are often also a useful source of information about the problems of the business and (possibly) how to address them. Lastly, restructuring businesses often involves significant change to workplace conditions (including reduction in employee headcount) which may require consultation and negotiation to comply with workplace laws. Key risks: Valuable employees leaving the company. Employees not supporting restructuring plans which can hinder its effectiveness.

898

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.90]

SAFE HARBOUR FOR RESTRUCTURING Overview [21.90]

As we explained in Chapter 16, one of the risks that has traditionally cast a shadow over restructuring efforts has been the threat of insolvent trading liability for company directors and those who act as shadow directors.35 This risk is particularly concerning because the ability to determine a company’s solvency at a specific point in time can be difficult, and the uncertainly can cause directors to be overly cautious and may even lead some of them (particularly non-executive directors who are not part of the day-to-day running of the business) to resign or place a company into formal insolvency earlier than necessary.36 This is concerning because it means that some companies that enter formal insolvency possibly could have been saved, and this brings an economic cost of lost enterprise value as well as the costs of the insolvency proceeding itself. Concerns have also been raised that the threat of insolvent trading may discourage people from taking up positions as company directors, although there appears to be no dire shortage of persons willing to do so. The government has sought to address these issues by the introduction of the safe harbour for company directors in s 588GA (and for holding companies in respect of subsidiary liability in s 588WA), which commenced on 19 September 2017. As the Explanatory Memorandum states (at [1.13]): “This change is intended to encourage those company directors to remain in control of a business in financial difficulty and take reasonable steps to restructure and/or allow it to trade out of its difficulties.”

The Explanatory Memorandum states further (at [1.16]): “The aim of the safe harbour reform is to facilitate more successful company restructures outside of a formal insolvency process where doing so would achieve a better outcome for the company than immediately appointing an administrator or liquidator. This encourages directors to closely monitor the financial position of the business, engage early with financial distress and then actively take steps to either restructure the business or, if that is not possible, to move quickly to formal insolvency.”

It should be noted that the government did not remove or limit the liability under s 588G; rather it has provided a regime that, if complied with, serves to avoid that liability. The defences to insolvent trading remain, under s 588F. Section 588GA operates not so much as a defence for directors as a means for directors to properly avoid s 588G liability in the first place. If s 588GA is not available, for whatever reason, the director may still fall back on any defence they may have under s 588F. It is also important to note that the protection of the safe harbor under s 588GA is only for insolvent trading liability. It does not apply to other duties that company directors may have, including the duty to act in the best interests of the company (which includes a duty to consider creditor interests when a company is insolvent) or the duty of care. Simply by satisfying the requirements of the safe harbour will 35 See further Harris, “Reforming Insolvent Trading to Encourage Restructuring: Safe Harbour or Sleepy Hollows?” (2016) 27 Journal of Banking and Finance Law and Practice 294. 36 Explanatory Memorandum, at 3.

[21.95]

21 Restructuring and Workouts

899

not necessarily be sufficient to establish that the director has acted with due care and diligence, nor will acting with due care and diligence necessarily establish the safe harbour. The duties are separate and distinct, although it may be accepted that unreasonable behaviour (such as taking unreasonable risks) may be sufficient to establish both a breach of the duty of care and to take the conduct outside of the protection of the elements of the safe harbour. Clearly acting against the interests of the company (so as to breach the duty to act in good faith) will fail to meet the “better outcome for the company” requirement in the safe harbour. On the other hand, directors’ compliance with s 588GA may well assist in establishing their compliance with the obligations imposed on directors under ss 180 and 181 (acting in good faith and properly).

Elements of the safe harbour [21.95]

The safe harbour applies where (s 588GA(1)):

1. at a particular time after the director starts to suspect the company may become or be insolvent; 2. the director starts developing one or more courses of action; 3. the course(s) of action is/are reasonably likely to lead to a better outcome for the company; 4. the debt is incurred directly or indirectly in connection with any such course of action during the safe harbour period. Each of these elements will now be discussed. 1. at a particular time after the director starts to suspect the company may become or be insolvent Insolvent trading liability can apply even where the individual director has no suspicion of insolvency, because it applies where the company is insolvent and a reasonable person would be aware of grounds to suspect insolvency (or where the director is aware of such grounds): see Chapter 16. The safe harbour will only apply once the director “starts to suspect” the company is or may become insolvent. This is a flexible test that should not be too onerous to establish, but it will require that the director be at least aware of the company’s financial position. The Explanatory Memorandum (at [1.16]) explains that directors must closely monitor the financial position of the company’s business. The duties of directors require more than this, in that they are required to actively monitor the financial affairs of the company under s 180(1). 2. the director starts developing one or more courses of action This requires that the director(s) take action, it is not enough to simply allow things to continue with a hope that the company’s finances will improve. As the Explanatory Memorandum states (at [1.19]): “hope is not a strategy. Directors who merely take a passive approach to the business’s position or allow a company to continue trading as usual during severe financial difficulty, or whose recovery plans are fanciful, will fall outside the bounds of the safe harbour.”

900

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.95]

The foreign cases on wrongful trading (in the United Kingdom) and reckless trading (in New Zealand) have consistently emphasised that directors must have a plan to address the company’s issues, and not merely sit on their hands or adopt a “business as usual” approach.37 3. the course(s) of action is/are reasonably likely to lead to a better outcome for the company A better outcome for the company is defined in s 588GA(7) as meaning “an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company”. This will need to be determined based on the circumstances of each individual company. It is important to note however that the focus here is on the course of action likely to lead to a better outcome for the company. The mere fact that the course(s) of action taken by the directors did not succeed in saving the business (because it has ended up in liquidation), or that the conduct resulted in a worse outcome for the company (due to unforeseen circumstances, such as changes in trading conditions) does not mean that the safe harbour is inapplicable.38 The safe harbour is to be judged at the time that the conduct is undertaken, not by the consequences of that conduct. As noted by the Explanatory Memorandum (at [1.18]), “directors must operate in a rapidly changing and uncertain environment, often without the benefit of complete information”. 4. the debt is incurred directly or indirectly in connection with any such course of action during the safe harbour period This requirement has been contentious, with several submissions to public consultation on the draft laws questioning how this is to be established. Would ordinary business debts be properly classified as being “incurred directly or indirectly in connection with” the course of action? In the authors’ view the only sensible answer must be yes. The safe harbour would be close to useless if ordinary business debts involved in trading on a business during a restructuring would not covered. Unfortunately, the Explanatory Memorandum gives little explanation as to what this phrase may mean. On a purposive interpretation it is likely to mean that debts which are not conducive of the course of action likely to lead to a better outcome are not covered by the safe harbour. Insolvent trading liability has been described as addressing the moral hazard inherent in the decision-making processes of directors as the company enters the zone of insolvency where directors are accountable to shareholders but where creditors arguably have a bigger stake in the company’s future than the shareholders. In such a case, it makes economic sense for them (at least in the absence of legal disincentives) for the directors to make increasingly large bets with the company’s assets in order to attempt to save it as shareholders will likely receive nothing if the company falls into insolvency. For example, directors may decide to make unreasonably risky decisions in the slim (perhaps vain) hope that these decisions may succeed and save the company. The safe harbour is, therefore, not a licence for directors to continue to trade and incur debts with only a vague or amateurish attempt at trying to attend to the company’s 37 For a review of the United Kingdom and New Zealand caselaw see Harris, “Reforming Insolvent Trading to Encourage Restructuring: Safe Harbour or Sleepy Hollows?” (2016) 27 Journal of Banking and Finance Law and Practice 294. 38 This is recognised by the Explanatory Memorandum at [1.21].

[21.105]

21 Restructuring and Workouts

901

problems as they go along, with some informal or intermittent advice guiding them. It is a limited protection offered for reasonable and structured efforts made to try to save the business by engaging in conduct that is likely to lead to a better outcome for the company.

Duration of the safe harbour [21.100] The safe harbour lasts until (s 588GA(1)(b)): i. the [director] fails to take any such course of action within a reasonable period after that time – the end of that reasonable period; ii. the [director] ceases to take any such course of action; iii. any such course of action ceases to be reasonably likely to lead to a better outcome for the company; iv. the appointment of an administrator, or liquidator, of the company.

Establishing the safe harbour [21.105] The effect of the safe harbour in s 588GA(1) is that, provided it is not removed by other circumstances, there is no breach of insolvent trading in s 588GA(2). Directors who wish to raise the safe harbour bear an evidential burden to establish the matters in s 588GA(1): s 588GA(3). The evidential burden is defined in s 588GA(7) to mean “the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist”. Directors may seek to establish that their course of conduct comes within s 588GA(1) by pointing to evidence of matters such as (s 588GA(2))): • they are properly informing themselves of the company’s financial position; or • they are taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or • they are taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or • they are obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or • they are developing or implementing a plan for restructuring the company to improve its financial position. Directors may lose the protection of the safe harbour if at the time the debt was incurred the company is failing to pay employee entitlements (including superannuation contributions) when they fall due, or where the company is failing to maintain its notices and reporting obligations to under income tax laws. These failures must be “less than substantial compliance” or form part of two or more failures within a 12 month period in order to remove the safe harbour: s 588GA(4)(b). The safe harbour is taken never to have applied where the director fails to complete the RATA or fails to assist a liquidator and that failure amounts to less than substantial compliance: s 588GA(5). A director may seek a court order to retain protection of the safe harbour despite the application of s 588GA(4) or (5) if

902

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.110]

the court can be satisfied that the failures were due to exceptional circumstances or that it is otherwise in the interests of justice to make the order: s 588GA(6). Directors can also lose the ability to rely upon certain books or information when seeking to discharge their evidential burden where they fail to permit inspection of the books or fail to deliver the books of the company as required under the Act or where a warrant is issued by the court where the court is satisfied that the director has concealed destroyed or removed company books: s 588GB(1). Where a director fails to give information about the company when required under the Act, then that information is not admissible in evidence for the purpose of seeking to rely on the safe harbour: s 588GB(2). There are limited exceptions to this where: • the director did not possess the book or information and there were no reasonable steps that they could have taken to obtain them (s 588GB(3)); • the court orders that the exclusion does not apply (s 588GB(4)); • the entity which gave notice requesting the information or book did not also give notice of the effect of s 588GB (s 588GB(5), (6)). Evidential burden

[21.110]

Some comment on the policy implications of the government opting to impose a mere evidential burden on directors is warranted, because it is one aspect of a general change in focus to informal restructuring. The safe harbour law that was introduced in 2017 took a threshold view that the lesser evidential burden of proving attention to the safe harbour criteria would be imposed on the directors. The alternative, to impose a higher legal burden of proof by way of a defence to a s 588G claim was clearly rejected. A “legal burden” of proof, on the balance of probabilities, means “the burden of proving the existence of the matter” and applies in relation to other claims that may be made against directors, for example, for breach of duty, or certain voidable transactions. If that evidential burden is discharged by a director under s 588GA, to that lower threshold, what has been called the “deferred” legal burden of proof remains with the liquidator to prove that the director has breached s 588G and has not met the carve-out requirements of s 588GA. The essence of a carve-out is based on the broad policy that it is generally for the prosecutor (liquidator) to prove its case; but in some cases, the defendant will be more aware of their own circumstances than the prosecutor, hence the law imposes some onus on the defendant to explain them. The significance of this is that there is a clear policy in favour of the approach taken by the government of encouraging early or preventive action by directors. If the directors’ company ends up in liquidation, despite their efforts to save it, a liquidator will now have to assess the directors’ conduct in light of the usual evidence in support of s 588G, and in light of what the directors did, in whole or in part, in accord with the criteria in s 588GA. The liquidator retains the burden of proof on the balance of probabilities. The government policy accepts that it is better overall to offer that incentive to directors, and to lessen the threats currently involved in a liquidator later finding fault with their conduct and pursuing them for insolvent trading. Overall, creditors, and businesses, should be better off.

[21.115]

21 Restructuring and Workouts

903

We have explained that under IPSC, s 100-5, a liquidator may now “assign” or sell a s 588G claim. One circumstance may be that the liquidator has no funds to bring the claim, or the liquidator, in consultation with the creditors, is not willing to risk what funds are available. The claim may well be valid and be of value to a purchaser. Any such transaction, including through general litigation funding, and the consideration paid has to be assessed in light of s 588GA. Any negotiation for payment by directors for a claimed breach of s 588G will now be more difficult. But to emphasise, that is an accepted outcome of the increased support now offered directors in their restructuring efforts and accords with what we explained at the beginning of this chapter as the changing social narrative about insolvency. Valuation issues

[21.115]

A text on insolvency law is not the place to engage in a detailed analysis of methods of valuing companies and their assets.39 However, determining an accurate valuation of the company is often one of the most contentious (and litigated) issues in corporate restructuring and workouts and so a brief overview, to the extent necessary for appreciating the reasoning in restructuring cases, may be useful. Obtaining a realistic valuation of a company in distress, both during restructuring efforts and on a future projected basis, is a critical step that will frame the restructuring options available to the company. In many restructurings, the failure to implement a restructuring plan will lead to the company entering one or more forms of external administration. This will crystallise the financial position of the creditors, and will usually lead to enforcement action by secured creditors such as appointing a receiver over the company and its assets and usually a sale or transfer of those assets. The likely realisable value of the company’s assets if the restructuring fails and the company enters formal insolvency (which may differ from the company’s internal valuations based on market conditions) will provide a benchmark against which the restructuring options may be measured. This will also set the range of creditors who will need to be closely involved in the restructuring. For example, if a liquidation analysis reveals that the capital structure breaks in the mezzanine debt40 then it is on that debt that the restructuring must be focussed to repair the company’s balance sheet and provide a realistic and sustainable basis for future trading. The most common methods for valuing distressed businesses are: • liquidation analysis – which assumes that the company is shut down and the assets are sold by an insolvency practitioner (whether a liquidator or receiver), 39 See further Stark, Siegel and Weisfelner, Contested Valuation in Corporate Bankruptcy (LexisNexis, 2011); Howard and Hedger, Restructuring Law and Practice (2nd ed, LexisNexis, 2014), Ch 5. 40 This is the level of debt (usually unsecured or subordinated secured debt) that sits between the senior secured and general unsecured creditors. It carries higher risk than first ranking senior secured debt and so will also involve higher rates of interest and will usually carry a range of restrictive covenants (such as negative pledges). See further Speechley, Acquisition Finance (Bloomsbury Professional, 2015), Ch 8.

904

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.115]

usually with some degree of market discount due to the distressed position of the business. This will involve valuing each of the business assets and estimating what would be likely to result as a gross recovery value (ie not including the costs of the liquidation itself). Many forms of common company assets, such as real property, motor vehicles and liquid securities will have ready available markets which can be used to determine their likely value. Expert valuers may be sought out, and particular forms of property (such as intellectual property, and property that has no ready market) may be more difficult to value. When there is only one restructuring plan available and the alternative is insolvency for the company then a liquidation analysis is likely to be the preferred valuation.41 • discounted cash flow (DCF) method – this is a going concern valuation that involves estimating the economic value of the company’s future free cash flows over a period of time (eg the next 5, 10 or 15 years) and then converting that amount into a net present value (NPV) by applying a discount rate that is equal to the opportunity costs of funding for the company (using either the weighted average cost of capital (WACC) or the adjusted present value (APV) for the company). The company’s free cash flow is determined by calculating the EBITDA (earnings before interest, taxes, depreciation and amortisation) less capital expenditure, working capital requirements and income tax. Clearly this method will rely heavily on the accuracy and robustness of the company’s internal financial records and management’s business plan projections. As the expert valuation in the Ten Network restructuring shows, just because a valuation is on a going concern basis does not mean that there will necessarily be any residual equity value.42 • comparable valuation methods – these are going-concern valuations that involve calculating a multiple of certain financial measures (such as the company’s EBITDA) against transactions involving similar companies (eg Company X is similar to the company being restructured and recently sold for 10 x EBITDA in a private sale). Obviously, this is easier for publicly listed companies that have fully transparent financial statements, but it can still be used for proprietary companies by using transaction databases that are available from commercial information vendors. There is clearly considerable discretion involved in determining what is a similar enough comparator to assess, as every company is different (even companies working in the same industry, or companies of a similar size, or similar levels of costs or profitability). Company valuation is not an exact science, and there is ample room for the exercise of discretion and professional judgment, which may create uncertainty and options for challenges in court with competing valuations.43 Selecting a preferred valuation can have a significant effect on the company’s stakeholders because the valuation selected may show that their interests are “out of the money” (ie likely to receive nothing in liquidation) and this may result in their class of interests being excluded 41 See, for example, Re Nexus Energy Ltd (subject to DOCA) [2014] NSWSC 1910; Re TEN Network Holdings Ltd (subject to a DOCA) (rec and man apptd) [2017] NSWSC 1529. 42 See the discussion of various valuation scenarios using DCF in Re TEN Network Holdings Ltd (subject to a DOCA) (rec and man apptd) [2017] NSWSC 1529. See also Re Bluebrook Ltd [2009] EWHC 2114 (Ch) (which considered liquidation and DCF valuations for a restructuring using a scheme). 43 See, for example, the detailed arguments of multiple competing valuations in Re Boart Longyear Ltd (No 2) [2017] NSWSC 1105.

[21.120]

21 Restructuring and Workouts

905

from the restructuring altogether.44 Valuation is a particularly important issue for equity holders who may be effectively shut out of formal insolvency proceedings based on an out of the money valuation for equity and this may mean that their shares are cancelled or transferred without their consent by court order. However, where equity retains some value, shareholders must have a voice in the restructuring efforts. The difficultly lies in predicting how the proposed restructuring is likely to affect the company’s financial position. It may be that changing the business will lead to improved cash flow and a lowering of costs which may resolve the financial problems and preserve equity value. On the other hand, if in the absence of a restructuring proposal being approved the company would be likely to enter liquidation, then a liquidation value is more appropriate and this is likely to see equity having a nil value.

FORMAL RESTRUCTURING MECHANISMS Introduction [21.120] Ideally a restructuring can be achieved by obtaining the consent of all necessary parties, which allows flexibility and, hopefully, confidentiality to preserve the business’ goodwill. However, this is not always possible and if there is no contractual mechanism to bind dissenting creditors, such as relinquishing security in certain situations under an inter-creditor agreement or a 90% voting threshold for waivers of covenant breaches waivers in a syndicated secured loan agreement, then it may be necessary to implement the restructuring plan by using a formal restructuring mechanism using a creditors scheme of arrangement or a deed of company arrangement which will allow the restructuring plan to bind dissenting creditors. A deed will generally be a better option than a scheme of arrangement under Pt 5.1 because it is less costly and quicker to initiate. As a deed can be varied by resolution of the creditors (s 445F) and without the need for court approval, it is more flexible than a scheme. Part 5.1 schemes have never been the most common form of insolvency appointment, but they offer particular advantages over DOCAs for large and more complex company reconstructions. Schemes can bind secured creditors45 and can include the release of creditor rights against third parties (such as the release of guarantees), neither of which can be done using a DOCA.46 While each year there may be only a small number of creditors’ schemes (usually less than 10), there are typically hundreds of DOCAs entered into every year.47 44 See, for example, Re Bluebrook Ltd [2009] EWHC 2114 (Ch) where mezzanine lenders were out of the money on a liquidation analysis, as accepted by the court (which rejected the DCF/Monte Carlo simulation desktop valuation which projected value for mezzanine lenders). 45 Re Nine Entertainment Group Ltd (No 1) [2012] FCA 1464; (2012) 211 FCR 439; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554; Re Boart Longyear Ltd (No 2) [2017] NSWSC 1105. 46 Lehman Bros Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509; Fowler v Lindholm [2009] FCAFC 125; (2009) 178 FCR 563. See further, Harris, “Adjusting Creditor Rights against Third Parties during Debt Restructuring” (2011) 19 Insolv LJ 22; Harris, “Charting the Limits of Insolvency Reorganisations: Lehman Brothers Holdings Inc v City of Swan” (2010) 32 Syd L Rev 141. 47 ASIC, Insolvency Statistics Series 2, Insolvency Appointments.

906

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.120]

Schemes are regulated by Pt 5.1, particularly s 411, which provides a mechanism to bind all creditors, or all creditors in a particular class, to a “compromise or arrangement”.48 Creditors for this purpose are those who would have a provable debt or claim if the company went into liquidation: Re Glendale Land Developments Ltd [1982] 2 NSWLR 563. A scheme does not have to include all creditors, and may leave out a class of creditors who would have no value in a liquidation: Re Tea Corp Ltd [1904] 1 Ch 12 (applied in Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 258 ALR 362). The scheme procedure is complex and requires two court approvals that can slow down the restructuring process, whereas a DOCA needs no court approval and can be fully implemented as quickly as immediately after the conclusion of the second creditors’ meeting. The prevailing narrative concerning schemes may be changing. There is law reform support for increasing the flexibility of schemes to promote their use for corporate debt restructuring, and creditors’ schemes have become the leading restructuring tool in Europe through the use of English schemes of arrangement. Many of the largest debt restructurings in recent years have used schemes rather than voluntary administration followed by a DOCA, for example, Alinta, Centro, Nine Entertainment, Emeco, Atlas Iron, BIS Industries and Boart Longyear. Both schemes and DOCAs allow for the compromise and or extinguishment of the company’s debts as well as rescheduling the debt by extending out repayment requirements and to extinguish debts. Both schemes and DOCAs may be initiated by the company or any of the creditors, but a scheme will need to be proposed formally by the company given the information that is required to be given to creditors prior to voting. The major creditors should be contacted to gauge their reaction to the proposal as their support is often crucial to the successful restructuring. If general support is obtained, a scheme must be prepared which the company will be capable of performing and which is considered to have the general support of creditors. If the intended scheme is complex and involves debts of large amounts, substantial creditors (such as banks and key suppliers) may be asked to be involved in the preparation process, and may enter into some form of agreement to support the scheme proposal (such as a scheme implementation deed). Proposals for both schemes and DOCAs will generally address the powers and duties of the scheme/DOCA administrator, the duration of the scheme/DOCA, the control procedures to be put in train, the reporting requirements expected of the company, the extent of the forgiveness of the debt, when creditors will be paid, the consequences of breaches, what rectification will be required, and the termination and extension procedures. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) will introduce changes to the scheme provisions to provide for protection against ipso facto clauses where a scheme has been announced or where the court orders the 48 For a comprehensive treatment of schemes of arrangement see: Damian and Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement to Effect Change of Control Transactions (3rd ed, Ross Parsons Centre, 2013); Alexander (et al), Takeovers and Reconstructions in Australia (LexisNexis Advance), Chs 15 and 16; Pilkington, Schemes of Arrangement in Corporate Restructuring (2nd ed, Sweet and Maxwell, 2017).

[20.125]

21 Restructuring and Workouts

907

convening of a creditor meeting to consider and vote on the scheme under new ss 415D-G. Similar provisions will also be inserted into the receivership and voluntary administration provisions and are discussed in Chapters 18 and 19. The provisions are expected to commence in early 2018.

Schemes: operation [20.125] Once the proposal has been prepared, the following procedure is to be completed. The details of the scheme must be disclosed to creditors in an explanatory statement: s 412. This document must clearly explain the operation and effect of the proposed scheme: Re Dorman Long & Co Ltd [1934] Ch 635. A report of the affairs of the company should be included in the statement. The report needs to consider the financial position of the company and annex the reports and copies of documents required by the regulations: Corporations Regulations 2001 (Cth), Pt 2 of Sch 8: reg 5.1.01. That schedule must show the expected dividend payable to creditors under the scheme as compared with a winding up, and information about the creditors and the amounts of their claims. It must also attach a report as to affairs (a RATA, ASIC Form 507) and the scale of fees of any scheme administrator. The explanatory statement must be comprehensible to the ordinary person and this is to be assessed in a practical, realistic way having regard to the complexity of the proposal. But complexity of the issues does not permit non-disclosure of material matters: Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 24 ACLC 545. An application to the court must then be made to allow for the distribution of the explanatory statement to the creditors and to permit the convening of a creditors’ meeting to vote on the proposed scheme: s 411(1). ASIC must be given at least 14 days’ notice of the court application to allow it to make a submission on the proposed scheme: s 411(2). The court will usually permit the creditors’ meeting to be held as long as the explanatory statement and the conduct of the proposed meeting comply with the requirements under Pt 5.1. The court will not allow the meeting to be held if it is clear that the scheme proposal could not be approved (for example, if it were being proposed, to in effect, defraud particular creditors): FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69. Substantive arguments regarding the fairness of the scheme are usually left to the creditors to decide at the meeting, with the availability of creditors appearing at the second court hearing to lodge notices of opposition.49 It is not the role of the court to consider whether a better scheme could be proposed: Re Boart Longyear Ltd [2017] NSWSC 567 at [28]. Allowing the first meeting to proceed, does not mean that the court is bound to approve the implementation of the scheme: ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485. The creditors’ meeting must vote for the scheme proposal, which is passed if a majority of creditors entitled to vote and who are present or voting by proxy, vote in favour of the scheme. The debts owed to that simple majority of creditors must 49 Re Centro Properties Ltd [2011] NSWSC 1465; (2011) 86 ACSR 584; Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 (where the role of the court was discussed).

908

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.130]

comprise at least 75% of the total debts owed to the creditors entitled to vote and who are present or vote by proxy. One complicating factor with scheme meetings is the potential requirement to divide creditors into different classes, which is dealt with further below. If debts are held by multiple related parties simply to satisfy the headcount test, then the court will consider the weight of those votes in exercising its discretion as to whether to approve of the scheme at the second hearing: Re Boart Longyear Ltd (No 2) [2017] NSWSC 1105. Once the creditors have approved of the scheme proposal the court must agree to the scheme before it can be implemented.50 The court will only approve the scheme if the procedure required for convening creditor meetings and distributing the explanatory statement has been complied with: Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213. The court will also consider the commercial morality of the scheme, that is whether the scheme is (despite the majority approval by the creditors) so unfair that no reasonable business person would approve it: . The court will also consider the commercial morality of the scheme, that is, whether the scheme is (despite the majority approval by the creditors) so unfair that no reasonable business person would approve it: Re Alabama. This includes consideration of the effect of the scheme on affected parties: Re Centro Properties Ltd [2011] NSWSC 1465; (2011) 86 ACSR 584; Re Boart Longyear Ltd (No 2). This provides a valuable safety net for dissenting creditors who would otherwise be bound by the scheme. The court will assess the scheme as a whole, having regard to the totality of the give and take that is the compromise or arrangement between the company and its creditors: Re Permanent Trustee Co Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601. The role of the court is not, however, to judge the commercial merits of the proposal or to decide what is, or is not, in the best interests of the creditors – that is for them to decide in the meeting, provided that the creditor vote is representative of the class of creditors and is taken in good faith and for a proper purpose: Re Boart Longyear Ltd (No 2). The court may also take into account public policy grounds, such as not allowing a clearly insolvent company to continue trading: Re Universal Liquors Pty Ltd (1991) 9 ACLC 918.51

Schemes: creditor classes [21.130] Unlike deeds of company arrangement, which allow all creditors to vote in the one class, scheme creditors must be divided into separate classes where the scheme would affect the legal rights of different creditors included in the scheme differently. As noted above, it is not necessary to include all creditors within a scheme, and the majority voting requirement only applies to creditors who are bound by the scheme, not creditors who are not included. The decision as to how to compose the classes of creditors for a scheme is an important one, because each class will need to approve of the scheme with the same double majority threshold requirement, and unlike in many foreign jurisdictions, Australia has no concept of cross class cram down to allow the court 50 For a detailed review of the authorities regarding the second court hearing see: Re Boart Longyear Ltd (No 2) [2017] NSWSC 1105. 51 The role of public policy was discussed in Re Centro Properties Ltd [2011] NSWSC 1465; (2011) 86 ACSR 584; Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358.

[21.130]

21 Restructuring and Workouts

909

to approve the scheme where any class rejects it. It is common therefore for scheme proponents to seek fewer classes to be recognised.52 The question of class composition is difficult because drawing the class too broadly could result in empowering the majority to oppress a minority, who have different legal rights. In Re Opes Prime Stockbroking Ltd [2009] FCA 813, Finkelstein J noted (at [66]) that the second court hearing provides a built-in protection against oppression. Drawing the class definition too narrowly (and thereby allowing for a variety of classes) could enable a small minority to frustrate the wishes of the majority. Lord Millett said in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634 at [26] that “(f)ragmenting creditors into different classes gives each class the power to veto the Scheme and would deprive a beneficent procedure of much of its value”. This view was applied in First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116. Just because creditors receive different economic outcomes under the scheme (such as different rates of repayment, different payment dates or payment in different manners) does not mean that their legal rights are sufficiently different to require them to be put into separate classes: First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116. The test for determining whether creditors need to be put into separate classes is “creditors whose rights are so dissimilar as to make it impossible for them to consult together with a view to their common interest must be placed into separate classes”: Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 (a case involving creditors comprised of holders of insurance and an unsecured lender). This issue of creditors’ rights differing may be distinguished from the circumstances of creditors whose mere economic interests differ. In First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116 at [80] the court (per Bathurst CJ) explained: “The test seems to me to involve three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class.”

The context of the scheme is important for determining class composition,53 because if the only alternative to the scheme is liquidation and the creditors are not having their legal rights treated differently than under the scheme compared with liquidation then it is difficult to argue that their rights are sufficiently different to require separate classes. For example, employees receive priority payment in liquidation and so if a scheme proposed to lower that priority position (assuming there would be a return in liquidation) the employees would need to be in a separate class because their legal rights to priority are different to other unsecured creditors. One way of addressing this would be to not include the employees in the scheme by ensuring that the scheme provided sufficient funds to satisfy their claims. In Boart Longyear, certain creditors had contractual change of control rights which they were required to give up under the scheme, while the creditors 52

For a discussion of class composition issues see: Harris, “Class Warfare in Debt Restructuring: Does Australia Need Cross-Class Cram Down for Creditors’ Schemes of Arrangement?” (2017) 36 University of Queensland Law Journal 73.

53 First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116 at [82].

910

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.135]

proposing the scheme would then be able to take control of the debtor company (and additional equity was to be issued to facilitate this). The court held that this was not sufficient to require voting in separate classes because the change of control rights would be of little value in liquidation and the scheme provided more than they would receive in liquidation: First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116. The issue of class composition will ordinarily be dealt with as part of the court’s consideration of whether to sanction the scheme approved by creditors at the second hearing because that will give affected parties an opportunity to make submissions to the court, but that is not to say that composition issues cannot be raised at the first hearing: First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116.

Schemes: reporting [21.135] The scheme administrator will be required (by the contract binding them to the scheme) to report to creditors concerning the management of the scheme. The administrator would be expected to provide creditors with prompt warnings of any deviation from what had been accepted in relation to the running of the business and any breach of the terms of the scheme. In addition, the administrator must ensure that all provisions of the Corporations Act and other statutes are adhered to. The scheme administrator is a fiduciary and owes strict duties as such: James v DCT (1988) 6 ACLC 1118. The administrator is also an officer within the meaning of s 9 and consequently is bound to comply with all duties imposed upon officers of a company under the Corporations Act, including those under ss 180 – 183. As with liquidators and administrators, if someone complains to the court or to ASIC about the conduct of the scheme administrator, or ASIC or the court believes that the administrator is not performing their duties correctly, the administrator may be held liable for misfeasance, neglect or omission and be required to make good any losses that the company has sustained: s 411(9), IPSC, Div 90. The scheme administrator can seek relief from any liability under ss 1317S or 1318, depending upon whether the liability arises under the civil penalty provisions or otherwise. However, provided the scheme administrator is acting within the terms of the scheme, he or she is not liable for corporate liabilities. This is because an administrator is the agent of the company. The administrator could, however, be sued for insolvent trading under s 588G if he or she could be deemed to be a director by s 9, for example as a shadow director. The introduction of the new safe harbour defence under s 588GA should assist persons attempting to implement a scheme of arrangement to restructure a company. The remuneration of the administrator will be determined by the scheme document. A liquidator, an administrator, or deed administrator or ASIC may apply to the court for the remuneration of an administrator to be reviewed: s 411(9).

[21.140]

21 Restructuring and Workouts

911

If requested in writing by a scheme administrator, a past or present officer or employee of the company must assist the administrator by delivering up all property or books in their control as well as disclosing all of the company’s property: ss 589(1)(g), 590. The administrator must lodge with ASIC all particulars relevant to the appointment (ss 411(9) and 415; reg 1.0.03A) and end of administration return: s 411(9). Where the administrator ceases to act, ASIC must be notified within seven days: s 411(9); reg 1.0.03A. See also ASIC’s Regulatory Guide (RG 60) – Schemes of Arrangement.

Administration of a company reconstruction under a scheme [21.140] Naturally, what actually occurs during the course of the scheme administration will depend largely on the nature of the scheme. If the scheme involves supervision of the continuation of the company’s business by the scheme administrator, it will be necessary for the administrator to develop a good working relationship with the managers of the debtor company’s business. If the administrator is managing a broad scheme, he or she will often be empowered to sell assets, terminate parts of the debtor’s operations, exercise the powers of the directors and arrange for the payment of creditors, according to the terms of the scheme document. During the course of the scheme, creditors will be required to prove their debts and any disputes will have to be settled. One of the crucial aspects of the administration of a scheme is the distribution of funds to the creditors. The administrator must pay moneys to those persons entitled to receive them and in the order of priority provided for in the scheme document. This document will specify the procedures for dealing with claims and paying dividends. As noted above, schemes may deviate from the system of priority payments mandated in liquidation under s 556 of the Corporations Act. Those persons and companies who become creditors after the scheme has been approved will be given priority over the pre-scheme creditors. As far as the pre-scheme creditors are concerned it is prudent, except in special circumstances, to provide that the priorities proposed in the scheme are identical with those in a liquidation. If this is done, the approval of the creditors is often obtained more easily, because as winding up is a distinct alternative to the scheme, the nomination of the priority order in a winding up defuses objections to the scheme by creditors who would benefit under the winding up priorities. Also, if the priorities proposed in the scheme document differ from those in a liquidation, ASIC or the court may object to them. Further, if the winding up priorities are adopted and liquidation supervenes before the scheme is completed, creditors are not prejudiced. Nevertheless, an aspect of a scheme can be that the pari passu distribution does not apply. As for secured creditors, if they wish to prove in the scheme as an unsecured creditor the same principles as those which apply in insolvency generally apply, namely, the creditor should value the security or sell it and deduct the amount of that value or proceeds of sale from the amount owing.

912

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.145]

Naturally, in order to obtain the services of an administrator, priority will need to be given to his or her remuneration, costs and expenses in administering the scheme.

Schemes: termination of a scheme [21.145] The Act does not specifically provide for the termination of a scheme. Ordinarily, the scheme document itself will provide for its own termination. Indeed, if the scheme does not so provide, it is likely that the court would not approve the scheme. As schemes are flexible and can between them provide for widely different terms, it is not possible to lay down any concrete statements concerning termination provisions. However, schemes may state that the scheme terminates after the passing of a set amount of time, by a resolution of creditors passed after the scheme has either attained or failed to attain its objectives, or after the distribution of a final payment to creditors, or at the discretion of the scheme administrator. The court has no specific power to terminate a scheme. A scheme may, in some situations, be terminated by a subsequent scheme which has secured court approval: Re Gasweld Pty Ltd (1986) 5 NSWLR 494. Also, a scheme will usually be terminated if a winding up order is made against the company on the application of a post-scheme creditor. The court may also make a declaration that the scheme has been terminated by the creditors: BTS Bearings Pty Ltd v Transmission Supplies Pty Ltd (1983) 1 ACLC 923. The scheme administrator must file a notice of cessation and a final account of receipts and payments with ASIC within seven days of the termination: ss 411(9), 427(4). A scheme may also be varied by the court under s 411(6) when it sanctions a scheme that has been approved by the creditors: see further Snowside Pty Ltd v Boart Longyear Ltd [2017] NSWCA 215.

DOCAs for restructuring [21.150] Deeds of company arrangement are discussed in detail in Chapter 20. What is relevant for this chapter is to highlight briefly how DOCAs can be used to implement a restructuring or workout plan. A DOCA can be a useful statutory tool for repairing a company’s distressed balance sheet. A DOCA can be used to compromise debts, including secured debts, and will bind unsecured creditors. Secured creditors, and owners and lessors will retain any enforcement rights they have against the property used by the company or held by the company (s 444D(2)). A DOCA can be used to help repair a company’s balance sheet by swapping some or all of the company’s debt for assets or other consideration such as securities, including shares or other equity interests in the company (such as warrants) (known as a “debt for equity swap”) or by swapping existing debt for new debt arrangements.

[21.150]

21 Restructuring and Workouts

913

A debt for equity swap may be implemented by causing the company to issue new shares or other equity instruments to a DOCA proponent (or their nominee), or may involve seeking a court order to transfer existing shares to the DOCA proponent (or their nominee) under s 444GA. Deed administrators do not have the benefit of s 437A (as administration has ended at that point: s 435C(2)(a)), but are given a default power to ‘to enter into and complete any contract for the sale of shares in the company’ under Corporations Regulations (Cth), Sch 8A, cl 2(zc), but this is not a general management power that would allow new shares to be issued (existing management would need to do that).54 The default provisions in Sch 8A can be replaced by an arrangement where existing management are expressly given some power (including the power to issue shares): s 444A(5); reg 5.3A.06. If the DOCA does not exclude the management powers of the directors then they retain the power to issue shares, although being bound by the DOCA they must not do so inconsistently with the operation of the DOCA: s 444G. For an example of shares being issued as part of a debt for equity swap under a DOCA see Re New Bounty Pty Ltd [2015] NSWSC 1060 (where new shares were issued in consideration to discharge outstanding interest but not the principal on an intra-group loan). Section 444GA was introduced into the Corporations Act in 2007 following recommendations by CAMAC’s report Rehabilitating Large and Complex Enterprises in Financial Difficulties (2004) and since 2010 has been used with increasing frequency to implement debt for equity swaps.55 The provision allows for shares to be transferred under a deed of company arrangement whether either the member consents or where the court grants an order under the provision: s 444GA(1). The court may only grant leave “if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company”: s 444GA(3). The key term here is unfair prejudice. Clearly requiring members to give up their shares for no consideration is prejudicial, but this alone is not enough to cause the court to refuse the order. Where the DOCA proposal is the only proposed restructuring option for the company, and where if the DOCA fails the company will likely enter liquidation without a financial return to members, then the members’ shares are unlikely to hold any value. In such a situation there can be no prejudice to members by making an order under s 444GA(1). The relevant comparison is between the position of the members if the proposal does not proceed and their position if leave to transfer shares is granted, and if on either occurrence the members receive no return there is no unfair prejudice.56 In the leading case of Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301, Martin CJ explained at [79]: “If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation,

54 Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 19 ACLC 659, 434-436. 55 See, for example, Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301; Re Mirabela Nickel Ltd [2014] NSWSC 836; Re Nexus Energy Limited [2014] NSWSC 1910; (2015) 105 ACSR 246; Re 3GS Holdings Pty Ltd [2015] VSC 145; Re Kupang Resources Ltd [2016] NSWSC 1895; Re TEN Network Holdings Ltd [2017] NSWSC 1529. See further Turner, “Debt for Equity Swaps and Corporate Restructuring under s 444GA of the Corporations Act” (2015) 26 JBFLP 269. 56 Re Lewis, Diverse Barrel Solutions Pty Ltd [2014] FCA 53 at [19].

914

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.155]

and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair.”

This view has been applied in subsequent cases. It is common for those opposing a restructuring to argue that the DOCA proposal is unfairly prejudicial because it undervalues the company and that if the court rejects the s 444GA application then the DOCA proponent (or some other potential bidder) will need to increase their offer so that the unfair prejudice is removed. However, this is unlikely to be accepted by the courts, at least in the absence of a binding alternate proposal.57 The fact that a major creditor (even the largest creditor) is proposing the DOCA and seeking control of the company is not, of itself, grounds to refuse the order.58 Prejudice to members is not the only issue that the courts will consider, and members are not the only stakeholders who have standing to oppose a s 444GA application. ASIC, creditors of the company and other interested persons are also given standing to oppose the application under s 444GA(2). If the court was satisfied that the DOCA infringed against commercial morality or was otherwise designed to remove rights that would be available in liquidation then this may engage the court’s discretion to refuse to grant leave. Such a case would also allow for the DOCA to be set aside or varied under s 445D, which is discussed in Chapter 20.

CORPORATE LAW ISSUES [21.155] Restructuring and workouts can involve a broad range of corporate law and governance issues, which again will be dependent on the specific facts of the case. It is outside of the scope of this book to discuss these issues in detail, but a brief overview of some of the issues may be useful.59 Directors’ and officers’ duties are always an important issue during restructuring. As noted in Chapter 16, the duty of care and diligence, and the duty to act in good faith and for a proper purpose are particularly relevant during restructuring attempts. Directors must exercise caution when issuing shares during debt for equity swaps and when sanctioning asset transfers as part of a restructuring plan as this may trigger concerns regarding the duty of care as well as the duty to act for a proper purpose. As demonstrated by the Bell litigation (see Chapter 16) the duty to act in good faith in the best interest of the company includes a duty to consider the interests of creditors as a whole and not to simply prefer one group of creditors over another. Of course, voidable transactions and insolvent trading (now subject to new safe harbour protection, discussed above) also address conduct during restructuring. Where public companies are being restructured it is important to consider the application of Chapter 2E, which prohibits the provision of a financial benefit to a 57 See Re Nexus Energy Limited [2014] NSWSC 1910; (2015) 105 ACSR 246; Re TEN Network Holdings Ltd [2017] NSWSC 1529. 58 Re TEN Network Holdings Ltd [2017] NSWSC 1529. 59 See further Austin and Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis AU); Simkiss et al, Takeovers and Reconstructions in Australia (LexisNexis AU).

[21.155]

21 Restructuring and Workouts

915

related party. It is possible that the proponent of the restructure will be a related party (as defined in s 228) and is receiving a financial benefit (as defined in s 229) then the transaction must either be approved by members (with appropriate voting exclusions) or fit within the carve outs which include arm’s length transactions (s 210). Chapter 2J also provides a range of rules relating to changes in a company’s capital structure, including reductions of capital through share buy-backs. The rules provide for prescribed information and approval procedures for members to approve transactions. Insider trading is another issue that will need to be managed by workout participants. Insider trading involves either using inside information (ie nonpublicly available material information) to buy or sell securities or procuring another person to do or communicating the inside information to another person where the insider should know that the recipient will buy or sell securities or procure another person to do so: s 1043A. Insider trading can make it difficult for parties involved in restructuring steering committees (who receive confidential information) to actively trade the company’s securities.60 Restructuring a company may require alteration to the company’s constitution, for example, to vary rights attaching to classes of shares, removing pre-emptive rights or to vary powers provided to management. In such cases obtaining member approval will be required by passing a special resolution under s 136 and if members’ rights are affected then minority oppression under s 232 may be a transaction risk. Furthermore, variation of class rights requires compliance with the approval processes under Pt 2F.2. These matters cannot be avoided by using a scheme of arrangement (which cannot sanction what would otherwise breach the Act) or by a DOCA (because a DOCA can only affect the rights between the company and its creditors for debts owed by the company to those creditors). If the restructuring involves raising new finance, then the company might need to comply with Chapter 6D, which may require a prospectus or other formal disclosure document provided under that Chapter, although if the restructuring is implemented using a scheme of arrangement (s 708(17)) or a DOCA (s 708(17A)) then securities issued through the scheme will not require a disclosure document. The capital raising may also be structured so as to come within the other exceptions to needing a formal disclosure document under s 708 (such as issuing securities to sophisticated investors). Chapter 6 takeover regulation may also need to be complied with, where the company being restructured is a listed company or an unlisted company with more than 50 members: s 606. Chapter 6 imposes a prohibition on a person acquiring a relevant interest in voting shares equating to more than 20% of the shares in the target company, unless the person complies with Ch 6, which may require making a takeover bid for the target company or using one of a number of other exceptions 60 Liquidators and trustees have exemption from liability under s 1043A in defined circumstances: reg 9.12.01.

916

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.160]

to the 20% prohibition contained in s 611. If the restructuring uses a scheme to transfer the shares then this will fit within s 611, but shares issued by a DOCA will not be exempt from takeover regulation.

RESTRUCTURING LISTED ENTITIES [21.160] Where the company being restructured has its securities listed on a licensed financial market (such as the ASX) there will be additional legal issues that may need to be addressed in addition to the provisions in the Corporations Act.61 The listed status of a company being restructured can provide value to a potential purchaser of a business. One option is to use the listing for what’s known as a “backdoor listing” where the listed shell is retained but the business conducted by the company may change, which may be easier than undertaking a full new listing through an IPO (initial public offering).62 The ASX Listing Rules provide a range of matters that must be complied with, unless a waiver from the ASX is obtained. These include • continuous disclosure rules (LR 3.1); • rules relating to ongoing operational requirements (LR 12.1); • rules relating to the minimum rights attached to listed securities, such as voting rights (LR 6); • rules relating to issuing new shares above 15% of the voting rights within a 12 month period, which requires member approval (LR 7).63 One of the most important rules to comply with for listed companies will be the continuous disclosure rules contained in ASX LR 3.1 and in Corporations Act, s 674. These require that material information must be disclosed to the ASX first, the carve outs in ASX LR 3.1A apply. The disclosure requirement in LR 3.1 must be complied with even if the information has already been disclosed publicly, while s 674 only applies to information that has not already been made publicly available. The failure to comply with LR 3.1 can lead to suspension of listing or even de-listing. A breach of LR 3.1 is required in order to breach s 674, and a breach of s 674 can lead to liability both for the company and for persons involved in the contravention (s 674(2A)). Alleged breaches of continuous disclosure obligations have provided the foundation for most of the shareholder class actions in recent years. If a company being restructured is vulnerable to a shareholder class action then implementing the restructuring using a formal tool such as a scheme of arrangement or a DOCA can address the potential liability to shareholders because of the operation of s 563A, which subordinates such claims and s 600H which restricts the information and voting rights of holders of subordinate claims. These provisions have been used in several recent restructurings using creditors’ schemes of arrangement such as for Boart Longyear and Atlas Iron. 61 For a detailed discussion of the ASX Listing Rules see: LexisNexis, Australian Corporation Law: Principles and Practice (LexisNexis Advance). 62 See further ASX GN 12 for a discussion of back door listings and ASX LR 11.1 (which covers major changes to the listed company and its activities). 63 Companies with market capitalisation of less than $300 million may raise up to 25% of the shares within a 12 month period without member approval: ASX LR 7.1A.

[21.165]

21 Restructuring and Workouts

917

It was noted above that the Corporations Act contains rules relating to related party financial benefits. The ASX LR 10 (transactions with persons of influence) also contains rules that require member voting for certain transactions and for certain votes to be excluded from the vote (a voting exclusion statement under LR 14.11).

ISSUES OF RESPONSIBILITY AND LIABILITY OF ADVISERS [21.165] It remains to be said that corporate restructuring can be a complex and difficult assignment for an adviser and for the directors and management involved. A formal appointment as liquidator or administrator (or scheme manager) under the Corporations Act not only provides a statutory route to follow, with associated powers and duties, but also statutory protection and support, at least in the absence of breach of duty, with ready access to the court as may be needed. In contrast, an adviser of a company in restructuring a company’s affairs at an earlier stage, or during the “safe harbour” period, is “at large” in terms of the responsibilities and potential liabilities that may arise. It is not the intention to address liabilities here, beyond pointing out that any professional adviser is subject to liability in negligence, and under contract, in terms of their retainer.64 In relation to business and financial advice, common issues in negligence include the level of skill and standard of care expected of an adviser, claimed exclusion from the retainer, questions of causation of any economic loss, and of quantification of damages as a consequence of a “failed” restructure. Retainer documents need to be carefully drawn, including as to the limits of any promised outcomes, the need for an assurance of full information by the company, and how the adviser is to be remunerated. More particular areas of potential liability exist if the adviser is seen as being a de facto director of the company, a significant area of caution for advisers acting as CFOs, described earlier. Misconduct by the directors themselves in the restructure in which the adviser is found to be complicit can result in personal liability under Barnes v Addy principles or under Corporations Act, s 79. Misrepresentations or undue warranties in transactions with other parties during the restructure can also result in liability. Any “safe harbour” adviser in particular needs to appreciate that their retention by the directors can offer protection from liability if the company ends up in liquidation and the liquidator brings a claim for insolvent trading. The director would be seeking to discharge their evidential burden, that despite the failure of the restructuring, and the insolvent trading that occurred, the elements of s 588GA were met, one in particular being that a competent adviser was engaged. That may be the subject of challenge, by the liquidator, and potentially, in response, by the directors, as to the quality of the restructuring advice. The awkward outcome could be that a director who has sought to defend a s 588GA claim by showing that a competent adviser was retained might then resort to a claim that the adviser was in fact negligent such that the director’s reliance on their advice should be excused. Such issues can arise in relation to the similar defence under s 588F, which also has reliance on an adviser as an element. 64 See generally Walmsley et al, Professional Liability in Australia (3rd ed, Lawbook Co., 2016).

918

Keay’s Insolvency: Personal and Corporate Law and Practice

[21.165]

Into this mix could be added the concurrent or separate liability of other parties, including secured and other creditors.65 Again, the legal issues associated with insurance are not covered here but it is enough to say that advisers should have professional indemnity (“PI”) cover in respect of turnaround/restructuring advisory services, including those engagements which are subject to safe harbour protection. Outside Directorship Liability (“ODL”) D&O policies are also available which cover potential exposure to the risks associated with any formal or de facto director role in the distressed company.66 The safe harbour law does not prescribe any details of advisers’ qualifications or professional standing in order for them to be “appropriately qualified”. Nevertheless, the protection of the directors will generally be dependent on having obtained advice suitable to the business and the extent of its difficulties. Taking advice from an accountant with limited restructuring experience in relation to a major business enterprise may well not suffice. The Explanatory Memorandum in fact gives some attention to what it says is expected of an adviser, including as to qualifications and experience, professional standing and oversight, and insurance.67 While the conduct of an adviser would be judged by reference to the law of negligence and other related bases, the adviser’s reliance on guidance in professional standards would assist both the adviser, and the director, from any challenge. The TMA Code,68 issued in response to the introduction of the safe harbour laws, offers useful guidance, including in relation to the extent of the retainer, responsibilities both of the adviser and what may be expected of the directors, conflicts, and remuneration. Such professional standards can inform the law in determining the standard of conduct of professionals.69

65 See Hip-pocket Injuries in Workouts: Accessory Liability for Bankers and Advisers, paper given by the then Justice RP Austin, Banking & Financial Services Law Association 23rd Annual Conference (August 2006). See http://www.supremecourt.justice.nsw.gov.au/. 66 See Walmsley et al, Professional Liability in Australia (3rd ed, Lawbook Co., 2016), 216-222. 67 Treasury Laws Amendment (2017 Enterprise Incentives No 2) Bill 2017, at [1.66] and following – “Discussion on getting advice from appropriately qualified advisors”. 68 See TMA Australia: Best Practice Guidelines – Navigating Safe Harbour, 2017. 69 Dean-Willcocks v CALDB [2006] FCA 1438. See also Walmsley et al, Professional Liability in Australia (3rd ed, Lawbook Co., 2016), at [1.650]/

Index A Acts of bankruptcy “absenting” oneself, ................................. [3.180] agreement, failure to execute/setting aside/terminating of, .................. [3.190] Australia, act committed in, .................. [3.195] bankruptcy notice, failure to comply with, .. [1.140], [3.175], [3.200], [3.240], [3.245] commission of as proof of insolvency, . [1.140] complete, ................................................... [3.185] continuing, ................................................ [3.180] creditor’s meeting, failure to attend, .... [3.190] creditor’s petition requirements, .......... [3.170], [3.175], [3.340], [3.385] date of, ........................................... [3.240], [6.12] commencement of bankruptcy and, ............................................ [3.170], [3.192] creditor’s petition presentation and, .......................................................... [3.170] debt agreements, ............................ [9.30], [9.55] declaration of intention to present a debtor’s petition, ............................................ [3.45] departing or remaining out of Australia, ............................................ [3.180], [3.195] extension of bankruptcy period for, .......................................................... [7.125] execution against debtor, ........................ [3.185] final judgment or order that has not been stayed, ............................................ [3.205] setting aside, effect, ........................... [3.275] intent to delay or defeat creditors, ...... [3.180], [3.192], [3.195] onus on creditor, ................................ [3.180] non-compliance with bankruptcy notice, .. [1.140], [3.175], [3.200], [3.240], [3.245] Part IX debt agreements, .............. [9.30], [9.55] Part X agreements, ..................... [3.190], [3.192] personal insolvency agreement, ............ [3.190] place of, ..................................................... [3.195] preference, debtor giving before bankruptcy, .......................................................... [5.180] proof of, ..................................................... [1.140] creditor’s petition hearing, at, ........ [3.345], [3.375] relation back, doctrine, ............................. [2.95] s 188 authority, ......................................... [3.190] sale of property, ........................................ [3.185] suspension of payment of debts, .......... [3.192] transfer of property, ................................. [3.192] Adjournment creditor’s petition, ........................ [3.365], [8.60]

meetings of creditors Pt X agreements, .................. [8.150], [8.170] winding up, ........................................ [15.95] Administration (company) — see Voluntary administration Administration of bankruptcy annual administration return (AER), .. [2.265], [6.585] assets of bankrupt — see Property of bankrupt books and records of bankrupt — see Documents carrying on business, ................. [6.290]-[6.300] ipso facto clauses, .............................. [6.290] claims of creditors — see Claims of creditors – bankruptcy consolidation of estates, .......................... [6.320] costs orders, .............................................. [6.315] court directions, ....................................... [6.315] court’s review of, ..................................... [2.345] cross-border bankruptcies — see Cross-border bankruptcies date of commencement of bankruptcy, . [6.12], [7.115] deceased estates, ................................ [6.590] subsequent bankruptcies, ................. [7.180] directions from the court, ....................... [6.315] disclaimer of assets, .................... [6.220]-[6.290] distribution of estate to creditors — see Distribution of estate – bankruptcy dividend returns — see Distribution of estate – bankruptcy end of — see End of bankruptcy financial support for proceedings, ........ [6.420] best interests of creditors, obligation, .......................................................... [6.450] creditor’s indemnity, .......................... [6.425] government funding (s 305), ........... [6.440] litigation funding, .............................. [6.430] trustee funding, .................................. [6.435] giving notice of the bankruptcy, ............. [6.45] income of the bankrupt — see Income of the bankrupt Inspector-General in Bankruptcy, .......... [2.110] interviewing the bankrupt, ...................... [6.35] legal privilege, ...................................... [6.40] investigation of bankrupt — see Investigation of bankrupt meetings of creditors — see Meetings of creditors – bankruptcy notice of bankruptcy, ................................. [6.45]

920

Keay’s Insolvency: Personal and Corporate Law and Practice

Administration of bankruptcy — cont order of payment — see Order of payments priority payments — see Priority payments – bankruptcy offshore information notices (s 81A), ... [6.275] overview, ....................................... [6.05], [6.595] personal insolvency agreements, effect on, .......................................................... [8.205] possession of property, ........................... [6.170] preliminary inquiries and actions, ......... [6.10], [6.190] priority payments — see Priority payments – bankruptcy private examinations, .............................. [6.215] s 77C notices, ...................................... [6.215] procedures, ................................................ [6.200] proof of debts — see Proof of debts – bankruptcy property of bankrupt — see Property of bankrupt public examinations (s 81), ...... [6.230], [6.245] abuse of process, ................................ [6.265] affidavit in support of summons, ... [6.240] application for summons, ... [6.235], [6.240] contemplated proceedings, .............. [6.265] discharge or adjournment of summons, ............................................ [6.265], [6.270] existing proceedings, ......................... [6.265] order for, .............................................. [6.235] persons who may be examined, ..... [6.235] power to examine, ............... [6.245], [6.250] privilege, .............................................. [6.260] production of books, ......................... [6.245] relevant person, .................................. [6.235] restrictions on, .................................... [6.255] privilege, ......................................... [6.260] summons to attend, ............. [6.200], [6.240] affidavit in support, ......................... [6.240] application for, .................. [6.235], [6.240] discharge or adjournment of, ........ [6.265], [6.270] produce books, and, ........................ [6.245] reporting, ..................................... [2.265], [6.585] s 77A notice, .............................................. [6.205] s 77AA notice, ........................................... [6.210] s 77C notices, ............................................ [6.215] statutory notices, challenging, ............................................. [6.220]-[6.225] search warrants, ............... [4.25], [6.20], [6.195] access to premises, ............................. [6.210] special priorities — see Priority payments – bankruptcy statement of affairs, ................................... [6.30] statutory notices challenging, ........................... [6.220]–[6.225] s 77A notice, ........................................ [6.205]

s 77AA notice, ..................................... [6.210] s 77C notices, ...................................... [6.215] time limit for compliance with, ....... [6.225] trustee — see Trustee warrant to search and seize property, ... [4.25], [6.20], [6.195] Administration of liquidation — see Liquidator Administration, voluntary — see Voluntary administration Administrative Appeals Tribunal (AAT) debt agreements, appealing rejection of, ............................................................ [9.35] debtor’s petition, appealing rejection of, ............................................................ [3.70] discharge of bankruptcy, objecting to, ............................................ [7.145], [7.150] jurisdiction in bankruptcy, ....................... [2.20] winding up, review of ASIC decision, ........................................................ [10.190] Administrators accounts, lodgment with ASIC, ........... [19.240] appointment, ............................... [19.25], [20.45] acceptance of, ...................................... [19.40] company’s decision to appoint, ...... [19.40] court’s power to validate, ............. [19.390], [19.400] defective, court’s power to cure, ... [19.390] disqualification from, ...................... [19.135] immediate effect, ................................ [19.45] liquidator, by, ...................... [19.35], [19.415] provisional liquidator and, .............. [12.85] receiver and manager appointed, after, .......................................................... [19.42] registered liquidator, requirement, ........................................................ [19.135] replacement administrator, ............ [19.155] schemes of arrangement, ................ [21.135] secured party creditor, by, ................ [19.30] teleconference, by, .............................. [19.40] validity, .... [19.25], [19.40], [19.42], [19.165] administrator’s duty to investigate, .................................................... [19.42] court’s power to determine, ........ [19.390], [19.400] conflict of interest, ................................. [19.140] contracts of company, dealing with, .... [19.95] costs incurred before winding up, ...... [15.365] court directions, ..................... [19.170], [19.380] court powers, .......................................... [19.175] inquiry into conduct of administration, ........................................................ [19.175] removal of administrator, .............. [19.140], [19.155], [20.45]

Index Administrators — cont supervision, ....................................... [19.175] validity of appointment, determining, ........................................................ [19.165] creditors appointment by, ................................. [19.30] reporting to, ...................................... [19.215] second meeting of creditors, ........ [19.305] creditors’ voluntary liquidator, becoming, ............................................ [11.45], [20.55] declaration of relevant relationships and indemnities, ................. [19.145], [19.295] deed administrator — see Deed administrator defamation proceedings, qualified privilege in, .................................................. [19.195] directors, removing and replacing, ....... [18.20] disposal of property, .............. [18.190], [19.185] disqualification, ...... [19.135], [19.140], [19.155] removal by court, ............. [19.140], [19.155] duties — see powers and duties below fiduciary duty, ........................................ [19.185] indemnity, ................................ [19.225], [19.230] court’s power to vary scope, ......... [19.390] debts covered by, ............................. [19.225] lien over property, ........................... [19.230] right of, .............................. [19.225], [19.230] independence, ......................... [19.140], [19.142] declaration of relevant relationships, ........................................................ [19.145] investigating role, after, .................. [19.142] pre-appointment work, ................... [19.142] relationship with directors, ............ [19.142] investigations, ......................... [19.180], [19.205] joint, ............................................................ [20.45] liability, .................................................... [19.225] lien over company property, ................ [19.230] offences, reporting to ASIC, ................. [19.210] opinion of, ............................................... [19.220] personal liability, .................................... [19.225] rental obligations, ............................ [20.125] powers and duties, ................................ [19.185] directors, removal or appointment, .......................................... [18.20], [19.190] disposal of assets, ............................ [19.190] duty of care and diligence, ............ [19.185] duty to act objectively, .................... [19.215] investigations, ................................... [19.205] notice requiring delivery of books, ........................................................ [19.220] opinion, providing, .......................... [19.220] PPSA regime, .................................... [19.190] reporting offences to ASIC, ............ [19.210] reporting to creditors, ..................... [19.215] restrictions, ........................................ [19.200] sale of property, ................................ [19.185] security interests, re, ........ [19.190], [19.200]

921

pre-appointment work, ......................... [19.142] provisional liquidator and, .................... [12.85] qualification and registration, proposed reform, ............................................. [9.10] qualified privilege, ................................. [19.195] receivers becoming, ............................... [19.150] receivers distinguished, .......................... [18.05] registered liquidator, must be, ............. [19.135] removal, ................................................... [19.155] court, by, ........... [19.140], [19.155], [19.380], [20.40] creditors, by, ...................................... [19.145] disqualification, ................ [19.140], [19.155] first meeting of creditors, ............... [19.290] remuneration and expenses, ................ [19.235] costs incurred before winding up, ........................................................ [15.365] court’s power to determine, .......... [19.390] lodgment of accounts with ASIC, . [19.240] schemes of arrangement, ................ [21.135] replacement administrator, .................. [19.155] court power to appoint, .................. [19.380] declaration by, .................................. [19.160] revoking appointment, ............................ [20.45] role and position, ................................... [19.180] schemes of arrangement, ...................... [21.135] special purpose, ...................................... [20.135] supervision by court, ............................ [19.175] vacancy in office, .................................... [19.155] court’s power to fill, .......... [19.400], [20.45] validity of appointment, .......... [19.25], [19.40], [19.42], [19.165] administrator’s duty to investigate, .......................................................... [19.42] court’s power to determine, ......... [19.390], [19.400] Administrators of debt agreements — see Debt agreement administrators Affidavits bankruptcy notice, in support of setting aside, .......................................................... [3.260] sequestration orders, for, ........................ [3.133] affidavit evidence, .............................. [3.375] statutory demand accompanying, .................... [11.95], [11.190] application to set aside, .................. [11.125] Annual administration return (AER) liquidator lodgement requirements, ..... [15.45] trustee reporting requirements, ............ [2.265], [6.585] Annulment of bankruptcy application for, ............................................ [7.70] hearing, .................................................. [7.80]

922

Keay’s Insolvency: Personal and Corporate Law and Practice

Annulment of bankruptcy — cont notice of, ................................................ [7.75] automatic, .................................................... [7.30] consequences of, ......................................... [7.95] validation of prior acts, .................... [7.100] court order, by, ............................... [7.25], [7.65] debtor’s petition abuse of process, .............................. [7.85] ought not to have been accepted, ... [7.65], [7.90] ought not to have been presented, .. [7.65], [7.85] presentation while creditor’s petition pending, ..................................... [3.125] solvency and, .......... [3.120], [7.30], [7.80] discretion to refuse, ............................. [7.80] legal consequence, ............................... [7.10] procedural irregularity, ....................... [7.80] sequestration order ought not to have been made, .................................... [7.65], [7.80] trustee’s report, .................................... [7.75] who can apply, ..................................... [7.70] creditor agreement, by, ............................. [7.25] debts, effect on, .......................................... [7.15] deceased estates, ...................................... [7.175] discharge distinguished, ........................... [7.20] discharged bankrupt applying for, ......... [7.35] effect of bankruptcy, .................................. [7.95] end of administration, ............................... [7.10] meaning, ...................................................... [7.15] moratorium provisions and, .................... [3.10] operation of law, by, .................................. [7.30] overview, ..................................................... [2.70] payment of debts, by, ................................ [7.30] property of bankrupt, effect on, . [4.45], [7.15], [7.100] refusal, .......................................................... [7.80] conduct of bankrupt during bankruptcy, ............................................................ [7.80] views and interests of creditors, ....... [7.80] remuneration of the trustee, protecting, .......................................................... [7.170] requirements for, ........................................ [7.15] resolution of creditors, .............................. [7.25] meeting of creditors, ........................... [7.45] scheme of arrangement or composition — see Schemes of arrangement “retrospective annihilation”, .................... [7.15] scheme of arrangement or composition — see Schemes of arrangement sequestration orders, setting aside, ...... [7.165] setting aside, ............................................... [7.60] solvency of bankrupt, ..... [3.120], [7.30], [7.80] validation of prior acts, .......................... [7.100] voluntary bankruptcy, ............................... [3.10]

Appeals Administrative Appeals Tribunal, to — see Administrative Appeals Tribunal judgment debt, against, .......................... [3.390] jurisdiction in bankruptcy, ....................... [2.20] proof of debt determinations, against bankruptcy, .......................................... [4.165] winding up, ...................................... [15.300] receiver, against decisions of, ............. [18.420], [18.580] categories of decision, ..................... [18.422] conduct of receiver, ......... [18.422], [18.423] error of fact or law, .......................... [18.422] s 423, under, ...................................... [18.423] s 599, under, ...................................... [18.422] rejection of debtor’s petition, ................... [3.65] sequestration orders, against making of, .......................................................... [7.170] winding up order, stay pending appeal from, .......................................................... [17.20] Assets bankrupt, of — see Property of bankrupt winding up, company assets in — see Winding up – dealing with company assets Associated entities — see Entities Auditor fees priority payments, ............................. [6.545] privately appointed receiver, under, ........................................................ [18.380] priority payments, ................................... [6.545] resignation, .............................................. [18.380] winding up effect on, ............................ [13.105] Australian Financial Security Authority (AFSA) Advertisement of creditors’ meetings on, .......................................................... [2.115] creditor’s meeting scrutiny, .................... [6.105] Inspector-General in Bankruptcy, .......... [2.110] offence reporting, ..................................... [4.245] pre-referral enquiries (PREs), .......... [4.245] public “tip-offs”, ................................. [4.245] referral of offences by trustee in bankruptcy, .................................... [4.245] practice statements, ................................. [2.130] regulation and enforcement, .................. [4.245] Australian Restructuring Insolvency and Turnaround Association (ARITA), .............................................. [1.75], [2.380] Australian Securities and Investments Commission (ASIC) administration of winding up, ............ [10.120]

Index Australian Securities and Investments Commission (ASIC) — cont further report to ASIC (s 533), ...... [15.120] statutory report to ASIC, ................ [15.115] Assetless Administration Fund, .......... [15.120] criminal offences and, ..................... [16.170] company directors, prosecutions, ....... [16.175] company registration, ........................... [10.125] deregistration, ................................... [10.120] corporate misconduct, ............................. [1.205] deed of company arrangement, lodgements, ........................................................ [20.210] deregistration of companies, ................ [10.120] initiated by ASIC, .............. [17.45], [17.120] property vesting in ASIC, ................ [17.60] disclaimer of asset, lodgement, ........... [15.210] liquidator misconduct, ............................ [1.205] pre-insolvency commercial conduct, .... [1.200] Published Notices Website (PNW), .... [10.125] receivers application for appointment, ......... [18.130] reporting requirements, .................. [18.305] regulatory guides (RGs), ...................... [10.130] reinstatement by, ...................................... [17.75] supervision of liquidator, ..................... [10.355] winding up administration of, ............................. [10.120] forms, ................................................. [10.125] investigative powers, ...................... [10.120] liquidator appointment, .... [10.390], [11.50] powers, ................................ [10.30], [10.120] Published Notices Website (PNW), ........................................................ [10.125] reports to, .......... [10.120], [15.115], [15.120] Avoidance provisions corporate insolvency, ................................. [5.10] defences to voidable transaction claims — see Voidable transactions effect, .......................................................... [4.170] intent, ............................................... [5.20], [5.60] nature of voidable transaction, ................ [5.15] preferences — see Preferences protective provisions — see Protective provisions relation back, ............................................ [14.40] superannuation contributions made to defeat creditors, ............................ [5.05], [5.105] account-freezing notices, .................. [5.120] “eligible superannuation plan”, ...... [5.110] “out of character”, ............................. [5.110] recovery of void contributions, ....... [5.120] third party, by, .................................... [5.115] transferees main purpose, ................ [5.110] void transfers, ..................................... [5.115] transfers to defeat creditors — see Transfers to defeat creditors

923

undervalued transactions — see Undervalued transactions unfair preferences — see Preferences voidable transactions — see Voidable transactions

B Bankruptcy administration — see Administration of bankruptcy alternatives to, .................. [1.60], [1.75], [1.150] declaration of intent to present a debtor’s petition, and, ................................... [3.15] information to be given to debtor, ... [3.15] annulment — see Annulment of bankruptcy Australia, departing or remaining out of acts of bankruptcy, ............... [3.180], [3.195] consent to leave, ................................. [6.375] departing or remaining out of Australia, ............................................ [3.180], [4.235] extension of bankruptcy period for, .......................................................... [7.125] intent to delay or defeat creditors, ............................................ [3.180], [3.192] benefits to society, ...................................... [2.42] commencement, . [1.90], [2.80], [3.133], [3.170], [3.192] acts of bankruptcy and, ...... [3.170], [3.192] creditor’s petition, based, ................... [2.85] debtor’s petition, based, ......... [2.90], [3.85] relation-back day and, ........ [3.170], [4.200] compulsory proceedings, .......................... [2.50] consequence of, debtor understanding, ................................................ [3.10], [3.15] consumer, .................................................. [1.190] corporate insolvency — see Winding up course of, overview, ................................... [2.45] Court Rules, ................................................ [2.20] debt recovery and, ..................... [3.360], [3.365] debtor’s petition — see Debtor’s petition deceased estates — see Deceased estates discharge — see Discharge of bankruptcy dividends to creditors, .............................. [2.65] report to creditors, ............................... [6.60] effects — see Effects of bankruptcy extension of, .................................. [7.20], [7.135] history and development of law, ............ [2.05] Act of 1542, ........................................... [2.05] impecuniosity defence, ........................... [1.145] investigation, ..................... [2.35], [6.20], [6.185] bankrupt request for information, .... [6.85] creditors, information provided to, .. [6.55] interviewing the bankrupt, ................ [6.35] involuntary, ................................................. [2.50] legislation, ........................................ [2.10]–[2.22]

924

Keay’s Insolvency: Personal and Corporate Law and Practice

Bankruptcy — cont matrimonial, ................................................ [2.05] misconduct of bankrupts, penalties, .... [2.365] notice of, ...................................................... [6.45] offences, ........................................ [4.225]-[4.245] statement of affairs, relating to, ...... [4.245] time limit for prosecution, ............... [4.240] overview, ............. [1.75], [1.190], [7.05], [7.185] pari passu distribution, ............................. [2.25] penalties, .................................................... [2.365] period of, .......... [1.155], [4.230], [7.05], [7.105], [7.115] extension of, ............................ [7.20], [7.120] prior conduct of bankrupt, ...... [4.225], [4.235] concealing or removing property, .. [3.440], [4.235] debts incurred without ability to repay, .......................................................... [4.235] professional industry bodies, ................. [2.380] protection and rehabilitation, .... [2.30], [4.160] purposes, .......................................... [2.24]–[2.42] realisation of property, .............................. [2.60] regulation, ................................................... [1.75] relation back, doctrine, ............................. [2.95] act of bankruptcy, ................................ [2.95] defences, ................................................ [2.97] property of bankrupt, identification, ............................................................ [2.95] subsequent dealings, ........................... [2.95] vesting of property, ............................. [2.95] restrictions on dealings, ............................ [2.40] subsequent bankruptcies, ................. [7.180] timing and dates, ....................................... [2.75] vesting of property, ........... [2.55], [4.25], [4.50] family law property order, subject to, ............................................................ [4.25] registered on title, ................................ [4.50] relation back and, ................................ [2.95] voidable transactions, timing, ............... [2.100] voluntary annulment, ............................................ [3.10] debtor’s petition — see Debtor’s petition moratorium or stay against civil recovery processes, .............................. [3.10]-[3.45] enforcement process, ........................ [3.35] farmers and rural producers, ............ [3.75] frozen debts, ...................................... [3.35] proclaimed law, and, ......................... [3.75] secured creditors, protection, ........... [3.40] stay period, ........................................ [3.35] overview, ............................................... [2.50] Bankruptcy law court rules, .................................................. [2.20] Insolvency Law Reform Act 2016, ....... [1.155], [2.22] legislative changes, .................... [1.155], [1.160]

legislative framework, ................ [1.75], [1.190], [2.10]–[2.22] penalties, .................................................... [2.365] regulations, .................................................. [2.15] Bankruptcy notice abuse of process, as, ................................ [3.330] setting aside, ......................... [3.330], [3.335] application, ................................................ [3.220] challenges to, .............................. [3.245], [3.385] affidavit in support of, ...................... [3.260] counter-claim, set-off or cross-demand, ............................................ [3.310]–[3.320] extension of time for compliance, ... [3.260] final judgment, application to set aside, ............................................ [3.255], [3.265] time limit on, ...................................... [3.250] claim threshold, ............ [3.155], [3.215], [3.390] counter-claim, ................ [3.310]–[3.320], [3.335] set-off and cross-demand distinguished, .......................................................... [3.315] court’s powers, ......................................... [3.335] creditor’s petition — see Creditor’s petition cross-demand, ............... [3.310]–[3.320], [3.335] counter-claim and set-off distinguished, .......................................................... [3.315] date of issue, ............................... [3.215], [3.285] new notice, .......................................... [3.305] debt threshold and, ..... [3.155], [3.215], [3.390] defective bankruptcy notice application by creditor for new notice, .......................................................... [3.305] discretion of court to make sequestration order, .............................................. [3.380] essential matters, .................. [3.290], [3.295] going behind the judgment, ............ [3.390] misleading debtor, ............... [3.285], [3.295] overstatement, .................................... [3.300] setting aside, application, ................. [3.280] technical defects, ................................ [3.385] delay in issuing, ....................................... [3.330] error in, ...................................................... [3.285] extension of time for compliance, ......... [3.260] after expiry, ......................................... [3.265] refusal of application, ......... [3.260], [3.270] failure to comply, ..................................... [1.140] final judgment or order, ......................... [3.205] setting aside application for, .................. [3.255], [3.265] effect on act of bankruptcy, ............ [3.275] form, ............................................. [3.285], [3.335] joint debtors, ............................................. [3.210] limits on court’s powers, ........................ [3.335] misleading debtor, ..................... [3.285], [3.295] non-compliance with, . [1.140], [3.175], [3.200], [3.240], [3.245], [3.445] date of, ..................................... [3.240], [6.12]

Index Bankruptcy notice — cont sequestration proceedings based on, .......................................................... [3.355] nullity, ........................................................ [3.285] overstatement, .......................................... [3.300] overview, ................................................... [3.200] requirements for issue of, ....................... [3.205] sequestration orders and, ....................... [3.165] service, ........................... [3.220], [3.225], [3.335] substituted service, ............................ [3.230] time limit on, ...................................... [3.235] set-off, ............................. [3.310]–[3.320], [3.335] counter-claim and cross-demand distinguished, ............................... [3.315] setting aside abuse of process, as, ............ [3.330], [3.335] application for, .................................... [3.245] affidavit in support of, .................... [3.260] solvency, .................................................... [3.325] statutory demand, comparison, ............. [11.80] time for compliance with, ...................... [3.240] counter-claim, set-off or cross-demand, .......................................................... [3.310] extension of, .......................... [3.260], [3.320] after expiry, ..................................... [3.265] validity, ......................................... [3.280]–[3.305] form, ....................................... [3.285], [3.335] overstatement, .................................... [3.300] Banks foreign liquidators and, .......................... [10.25] statutory manager, appointing, ............. [10.25] winding up, .............................................. [10.25]

C Carrying on a business bankruptcy, following, .............. [6.290], [6.295] deregistration of company where not, ........................................ [17.115], [17.120] ipso facto clauses, .................................... [6.290] liquidator, by, .......................... [10.310], [15.235] provisional liquidator, ....................... [12.60] receivers, .................................................. [18.345] Charges creation to defraud creditors, ................ [4.235] creation under s 139ZR, ............ [5.265], [5.275] debenture deed, ........................................ [18.22] enforcement before winding up commencement, .......................... [14.240] equitable charge, property held in, ....... [4.110] fixed charges, ............................................ [18.50] floating charges, ....................................... [18.50] joint property, over, ................................. [5.265]

925

priority of, ................................................. [5.265] s 188 authority, subsequent to signing, . [8.75] sale of property under, ........................... [5.265] secured creditors, ..................................... [6.505] security interest, ....................................... [18.50] definition, ............................................ [13.70] invalidation of, ................................. [14.270] Claims of creditors – bankruptcy annulment and, ........................................ [7.100] debts compared, ....................................... [1.120] debts provable in bankruptcy — see Proof of debts – bankruptcy discharge of bankruptcy effect on, ........ [7.110] insured bankrupts, ................................... [6.500] legal effect of bankruptcy, ...................... [4.145] debts provable in bankruptcy — see Proof of debts – bankruptcy enforcement of repayment of debt prohibited, ..................................... [4.150] liquidation distinguished, .................... [15.245] non-provable claims, ................. [6.465], [6.470] fines and penalties, ............................ [6.465] loss a result of misleading and deceptive conduct, ......................................... [6.465] unliquidated damages, ..................... [6.465] proof of debts and claims — see Proof of debts – bankruptcy purchased debts, ...................................... [6.510] restrictions on claims, ............... [4.155], [4.160] purpose, ............................................... [4.165] secured creditors — see Secured creditors trustee determining, .................. [4.150], [4.165] types of claims, ......................................... [4.155] Claims of creditors – liquidation bankruptcy distinguished, .................... [15.245] categories of, ........................................... [15.245] debts compared, ....................................... [1.120] overview, ................................................. [15.245] pooling, .................................................... [15.310] court-ordered pooling, .... [15.320], [15.325] ancillary orders, ............................ [15.320] deed of company arrangements, .... [20.15] groups of insolvent companies, ...... [20.15] determination, .................................. [15.315] effect, .................................. [15.315], [15.320] eligible unsecured creditor, ............ [15.315] intermingled assets, ......................... [15.325] liquidators powers, .......................... [15.315] voluntary pooling, ........................... [15.315] proof of debt — see Proof of debts – winding up relevant date, .......................................... [15.250] secured creditors — see Secured creditors unliquidated damages in tort, ............. [15.245] Committee of inspection bankruptcy

926

Keay’s Insolvency: Personal and Corporate Law and Practice

Committee of inspection — cont Inspector-General attending, ........... [6.165] meeting of creditors, calling, ............. [6.95] meetings, ............................................. [6.165] members, ............................................. [6.165] overview, ................................. [6.95], [6.165] realising the assets, ............................ [6.330] winding up, ................................ [10.55], [15.40] expenses, priority of payment, ...... [15.385] members acquiring assets, ............. [15.240] Company registration Corporations Act under, ....................... [10.125] deregistration of company — see De-registration of company register information, .............................. [10.125] Compositions or schemes of arrangement — see Schemes of arrangement Compulsory bankruptcy act committed in Australia, .................... [3.195] bankruptcy notice — see Bankruptcy notice civil money judgment, ............................ [3.130] court process, ............................................ [3.133] creditor’s petition — see Creditor’s petition date of commencement of bankruptcy, .............................................. [3.133], [6.12] acts of bankruptcy and, ...... [3.170], [3.192] relation-back day and, ........ [3.170], [10.90] execution against debtor, ........................ [3.185] final judgment or order that has not been stayed, ............................................ [3.205] intent to delay or defeat creditors, ...... [3.180], [3.192] departing or remaining out of Australia, ............................................ [3.180], [4.235] onus on creditor, ................................ [3.180] joint creditors, ........................................... [3.210] non-compliance with bankruptcy notice, .. [1.140], [3.175], [3.200], [3.240], [3.245] overview, ................................................... [3.130] Part X agreements, ..................... [3.190], [3.192] procedures, ................................................ [3.220] application, .......................................... [3.220] National Personal Insolvency Index (NPII), search, ............................................ [3.220] sequestration orders — see Sequestration orders

C Compulsory winding up application for order — see Winding up – application for court order

ASIC investigation, .................... [10.70], [10.80] bankruptcy notices, comparison, .......... [11.80] contributories, meaning, ......................... [10.70] court order, .................... [10.45], [10.65], [10.75] creditor as applicant, ................. [10.70], [10.75] creditors’ voluntary distinguished, ...... [10.45] date of commencement, ............ [10.90], [10.95] debt recovery, for, ................................... [11.170] demands — see Statutory demands de-registration of company ASIC initiated deregistration, ......... [17.45], [17.120] court ordered deregistration, ........... [17.40] discretion of court, ................................... [10.80] genuine disputes about debt, ............. [11.150], [11.155] appeals, .............................................. [11.160] costs, claiming, ................................. [11.165] genuine disputes, meaning, .......... [11.155], [11.160] granting order, ........................................ [11.255] grounds for, ................... [10.65], [11.55], [11.70] s 461, ....................................... [10.70], [11.55] insolvency establishing, ........................................ [10.75] presumptions, ....... [11.65], [11.70], [11.265], [11.270] proof of, ................................. [10.75], [11.75] statutory demand, non-compliance with, .......................................... [11.75], [11.305] interim order, .......................................... [11.255] liquidator — see Liquidator numbers and trends in, .......................... [10.85] oppressive conduct, ................... [10.70], [10.80] order for, .................................. [11.315], [11.320] application for — see Winding up – application for court order companies absence, made in, ......... [11.255] court’s discretion, ............................. [11.265] granting, ............................................. [11.255] interim, ............................................... [11.255] notice of, ............................................ [11.320] refusal, ................................................ [11.265] service, ............................................... [11.320] subsequent, ........................................ [11.300] overview, ........................ [10.45], [10.50], [11.55] relation-back day, ....................... [10.90], [10.95] s 513A Corporations Act, ....................... [10.70] statutory demands — see Statutory demands surplus assets, ......................................... [15.440] trends in, .................................................... [10.85] voluntary distinguished, ...................... [10.100]

Index Compulsory winding up — see Compulsory winding up Contracts bankrupts property, disclaimer of assets, .......................................................... [6.290] breach of contract, damages award for, .......................................................... [4.125] contractual liabilities of receiver, ........ [18.515] contracts made before receivership commenced, ................................ [18.460] contracts made within the scope of agency, ........................................................ [18.440] employment contracts distribution priorities and, ............. [18.385] receivership effect on, .... [18.385], [18.555], [18.565] receivers appointment effect on, ......... [18.550] receivership, ............................................ [18.515] contracts made before, ... [18.460], [18.550], [18.565] contracts made during, ................... [18.440] ipso facto clauses and, .................... [18.550] termination and ipso facto clauses, ...... [13.85] voluntary administration, effect on, ..... [19.95] winding up effect on, .............................. [13.85] Controllers — see Receivers Controllership — see Receivership Controlling trustee appointment, setting aside, ...................... [8.95] business of debtor, carrying on, .............. [8.85] conflicts of interest, disclosing, ............... [8.90] directions, applying for, ............................ [8.85] duties, ............................................... [8.85], [8.90] ending of controlling trustee relationship, .............................................. [8.95], [8.200] investigation of debtor, ............................. [8.90] s 189A report and declaration, ....... [8.100], [8.120] trustee’s “professional” opinion, ..... [8.105] meeting of creditors — see Meetings of creditors – Pt X agreements notifying creditors, .................................... [8.90] Part X agreements — see Personal insolvency agreements (Pt X) period of control, ........................... [8.65], [8.95] stay of creditors’ claims, ..................... [8.75] powers and duties, ........................ [8.85], [8.90] property of debtor, control of, ................. [8.85] related entities, ......................................... [8.100] remuneration, ................. [1.210], [8.75], [8.175] creditors reviewing, ........................... [8.180] reporting to creditors, ............................... [8.90] declaration of relationships, ............. [8.100]

927

investigation of debtor, ..................... [8.105] s 189A report and declaration, ....... [8.100], [8.120] meeting of creditors, ....................... [8.150] qualified privilege, .......................... [8.100] statement under s 189B, ...... [8.110], [8.120] trustee’s “professional” opinion, ..... [8.105] s 188 authority, and, .................................. [8.75] period of control, ............................... [8.190] trustee administering agreement, ........... [8.95] Corporate insolvency administration — see Voluntary administration liquidation — see Winding up overview, ....................................... [1.70], [1.195] receivership — see Receivership winding up — see Winding up Costs orders, ........................................................ [6.315] priority debt, ............................... [3.425], [4.185] sequestration orders, ............................... [3.425] statutory demands, setting aside, ....... [11.165] Counter-claim bankruptcy notice, following receipt of, .............................. [3.310]–[3.320], [3.335] cross-demand and set-off distinguished, .......................................................... [3.315] leave to enter defence of, ....................... [3.320] Court-appointed receiver — see Receivers, court-appointed Creditors claims of bankruptcy, in — see Claims of creditors – bankruptcy liquidation, in — see Claims of creditors – liquidation concessions, effect of, .............................. [1.125] contingent creditor, ................................ [11.215] declaration of intention to present a debtor’s petition effect, ...................................................... [3.20] notification following, ......................... [3.20] secured creditors, ................................. [3.40] declining payment, .................................. [3.415] definition, ................................................ [20.165] dividends to/distribution of company assets bankruptcy — see Distribution of estate – bankruptcy winding up — see Distribution of company assets – winding up foreign, ....................................................... [5.245]

928

Keay’s Insolvency: Personal and Corporate Law and Practice

Creditors — cont information trustee must provide to — see Trustee meetings — see Meetings of creditors order of payment bankruptcy — see Priority payments – bankruptcy deeds of company arrangement, ......................................... [20.185]-[20.195] winding up — see Priority payments – winding up petition — see Creditor’s petition presumption of insolvency, and, .......... [1.140], [11.265], [11.270] prospective/future creditor, ................. [11.215] protections debtors bankruptcy, before, .............. [3.435] interim trustees, ................................. [3.445] voidable transactions, .......... [3.435], [4.170] warrant for arrest of debtor, ........... [3.440], [6.195] recovery of payment from payments received by execution or garnishment, ................................. [4.175] relation back, doctrine — see Relation back remuneration of trustee, approving, ..... [6.50], [6.90] rights, ........................................................... [6.90] Pt X agreements, concerning, .......... [8.180] secured creditors — see Secured creditors substitution of, ............................ [3.360], [3.370] trustee relations with, ....... [6.10], [6.50], [6.55] voluntary administration administrator’s duty to report to creditors, ........................................................ [19.215] appointment of administrator, ......... [19.30] effect on, ............................................ [19.100] meeting of — see Meeting of creditors – administration voluntary winding up — see Creditors’ voluntary winding up Creditor’s meetings — see Meetings of creditors Creditor’s petition act of bankruptcy, ....... [3.170], [3.175], [3.340], [3.385] adjournment, ................................. [3.365], [8.60] against whom may be presented associations, ........................................ [3.145] individuals, ......................................... [3.140] joint debtors, ....................................... [3.150] partnerships, ....................................... [3.145] Australia connection, ................. [3.160], [3.340] bankruptcy notice — see Bankruptcy notice checklist, .................................................... [3.133]

commencing bankruptcy proceedings, .......................................................... [3.130] compulsory bankruptcy — see Compulsory bankruptcy concurrent, ................................................ [3.370] corporate creditors, .................................. [3.135] costs, ........................................................... [3.425] court process, ............................................ [3.133] date of presentation, .................. [3.133], [3.340] requirements, ...................................... [3.170] debt requirements, ................................... [3.165] debt threshold, ............. [3.155], [3.340], [3.360] deceased estates, ................................ [3.460] substituted creditor, ............. [3.360], [3.370] debtor opposing, ...................................... [3.355] debtor’s petition and, ...... [3.20], [3.35], [3.125] deceased estates, against, ....................... [3.460] defects in, ...................... [3.350], [3.360], [3.385] adjournment for, ................................ [3.365] dismissal of petition, ................. [3.360], [3.380] consent, ................................................ [3.360] defect, for, .............................. [3.360], [3.385] impecunious debtors, ........................ [3.420] interim trustees, effect on, ................ [3.445] “other sufficient cause”, ....... [3.400]-[3.420] payment offered by debtor, .............. [3.415] service, ................................................. [3.405] set-off or cross-demand, ................... [3.410] errors and omissions, .. [3.350], [3.360], [3.385] adjournment for, ................................ [3.365] firm or business name, presenting under, .......................................................... [3.340] form, ............................................. [3.340], [3.385] hearing of petition, .................................. [3.355] adjournment, ....................................... [3.365] dismissal and withdrawal, ............... [3.360] proving act of bankruptcy, .............. [3.345], [3.375], [3.390] individual creditors, ................................ [3.135] joint creditors, ........................................... [3.135] judgment debt and, ................... [3.165], [3.175] appeal against, .................................... [3.390] real debt, .............................................. [3.390] lapse of petition, ...................................... [3.350] expiration after 12 months, .............. [3.350] extension to 24 months, .................... [3.350] “slip rule”, ........................................... [3.350] notice of opposition, ................................ [3.355] opposing, ................................................... [3.355] overview, ................................................... [3.340] partnerships presented against, .............................. [3.145] presenting petition, ............................ [3.340] pending, debtor’s petition presentation while, .............................................. [3.20], [3.125] personal insolvency agreements (Pt X), and, ............................................................ [8.60]

Index Creditor’s petition — cont presentation of, ............. [3.130], [3.133], [3.340] date of, ................................... [3.133], [3.340] requirements, ................................... [3.170] time for, ................................................ [3.340] relation back and, .................................... [4.200] secured creditors, ..................................... [3.135] sequestration orders — see Sequestration orders service, ......................................... [3.345], [3.375] dismissal of petition and, ................. [3.405] solvency as a defence, ............... [3.360], [3.395] stay of petition, ........................................ [3.423] substituted creditor, ................... [3.360], [3.370] territorial requirements, ............ [3.160], [3.340] time for presenting, ................................. [3.340] who may petition, .................................... [3.135] withdrawal of petition, ........................... [3.360] Creditors’ voluntary winding up application for, ............................ [10.45], [10.60] committee of creditors, ........................... [10.55] court ordered distinguished, ................. [10.45] date of commencement, .......... [10.90], [10.100] declaration of solvency, ........................... [11.30] grounds for, ................................. [10.45], [11.25] initiating, .................................................... [11.25] leave of court, ........................................... [10.60] length of, ................................................... [10.50] liquidator — see Liquidator meetings, ..................................... [10.20], [10.55] defects in process, .............................. [11.35] member’s meeting, .............. [10.20], [10.55] notice, .............................................. [10.55] removal of liquidator, ..... [10.55], [10.445] no declaration of solvency, ............... [11.30] special resolution, .............................. [11.25] deemed, ........................................... [11.50] member initiated, ..................................... [10.55] members’ voluntary winding up insolvent, liquidator believes company is, .......................................................... [11.40] overview, ........................ [10.45], [10.50], [11.25] provable debts, ......................................... [10.45] relation-back day, ..... [10.90], [10.100], [13.100] voluntary administration moving to, .. [11.45], [20.55] Criminal conduct of bankrupt conduct during bankruptcy, ................... [4.230] after-acquired property, .................... [4.230] failure to disclose information to trustee, .......................................................... [4.230] non-compliance with court order, . [4.230], [4.235] conduct prior to bankruptcy, .. [4.225], [4.235], [4.245]

929

concealing or removing property, ... [4.235] debts incurred without ability to repay, .......................................................... [4.235] criminal liability for, ................................ [4.225] gambling, ..................................... [4.225]. [4.245] history and development of law, ............ [2.05] offence reporting, ..................................... [4.245] prosecution process, ................................ [4.240] protection from consequences of, ......... [4.220] protective orders, ..................................... [4.220] time limit for prosecution, ..................... [4.240] trustee investigating, ............................... [4.245] Cross-border bankruptcies Australian trustee assisting, ..... [6.180], [6.182] centre of main interests (COMI), ......... [6.180], [6.182] foreign court, ............................................ [6.182] foreign main proceeding, ....................... [6.180] foreign trustee, ............. [5.245], [6.180], [6.182] Model Law on Cross-Border Insolvency, .................................. [4.35], [4.40], [5.245] “establishment” under, ..................... [6.180] jurisdictions that haven’t adopted, . [6.182] offshore information notices (s 81A), ... [6.275] overseas bankruptcies, .............................. [4.40] overseas property, ........................ [4.35], [6.175] creditor levying execution on, ......... [6.182] Model Law on Cross-Border Insolvency, .................................. [4.35], [4.40], [5.245] recovery, ................................... [4.35], [6.175] recoveries, .................................................. [5.245] Cross-border insolvency applying for recognition of Australian proceedings, ................................ [14.239] appointment of liquidator, ................... [10.200] Australian courts assisting overseas courts, ........................................ [14.237], [15.430] centre of main interests (COMI), .......... [13.60] court jurisdiction, ................... [10.190], [14.237] Cross-Border Insolvency Act 2008 (Cth) banks, ................................................... [10.25] court jurisdiction, ............................. [10.190] life insurance companies, ................. [10.25] establishment’ of debtor, ........................ [13.60] external administration meaning, ....... [15.425] foreign court, assistance to, .................. [15.435] foreign main proceeding, ....... [13.60], [14.237] foreign non-main proceeding, ............. [14.237] foreign representative, ............................ [13.60] letter of request to foreign court, ........ [14.239] Model Law, ............................................... [13.60] appointment of liquidator, ............. [10.200] court jurisdiction under, ................. [10.190] inconsistencies with Act, ................ [14.239] overseas assets, ....................................... [15.425]

930

Keay’s Insolvency: Personal and Corporate Law and Practice

Cross-border insolvency — cont recovery of assets, .................................. [14.235] Australian liquidators with overseas assets, ........................... [14.239], [15.430] overseas liquidators with Australian assets, ........................................ [14.237], [15.435] unregistered foreign company, ............ [14.239] Cross-claim — see Cross-demand Cross-demand bankruptcy notice, following receipt of, .............................. [3.310]–[3.320], [3.335] counter-claim and set-off distinguished, .......................................................... [3.315] judgment debt and, ................................. [3.320] notice (s 139ZQ), ...................................... [5.275] sequestration orders, dismissal of petition for, .......................................................... [3.410]

D

Debentures appointment of receiver under, ............ [18.40], [18.45], [18.70], [18.155] joint appointments, ............................ [18.75] manner, ................................................ [18.80] circumstances where moneys payable, .......................................................... [18.22] demand deeds, ......................................... [18.85] foreign laws governing, .......................... [21.55] holders liability for receiver remuneration, ........................................................ [18.240] issue of, ........................................ [18.45], [21.55] overview, ..................................... [18.45], [21.55] perfected security, .................................... [18.22] powers of receiver, ................................. [18.210] receivers duty to holder, ...... [18.250], [18.355], [18.365] removal of receiver, ............................... [18.595] secured, ...................................................... [18.45] transitional security agreements, .......... [18.50] Debt attachment of debt, .................... [4.175], [4.185] bankruptcy, at time of, ............................ [4.145] bankruptcy notice and, ........................... [3.155] debt threshold, ..................... [3.215], [3.390] provable debt, ....................... [3.215], [3.390] bankrupt’s debt, meaning, ....................... [7.30] claims compared, ..................................... [1.120] contingent liabilities, ............................... [1.120] bankruptcy, ............................ [6.470], [6.475] winding up, ...................................... [15.285]

creditor declining payment, ................... [3.415] creditor proving, ........................ [3.175], [3.390] creditor’s petition, threshold, ... [3.155], [3.340] debt recovery and bankruptcy proceedings, ................................ [3.360], [3.365], [4.10] debts due and payable, ........................... [1.125] debts provable in bankruptcy — see Proof of debts – bankruptcy definition, .................................................. [1.120] discharge from bankruptcy, effect on, . [4.145], [7.160] fraud, obtained by, ..................... [7.110], [7.160] frozen debts, ............................................... [3.35] future payment, ........................................ [3.165] guaranteed debt, deed effect on, ......... [20.130] immediate payment, ................................ [3.165] imprisonment for non-payment, ........... [4.220] inability to pay, ........................................ [3.395] refusal to pay distinguished, ........... [1.145] incurred without ability to repay, ......... [4.235] instalment order, ........................ [3.165], [3.385] judgment debt, ........................... [3.165], [3.175] appeal against, .................................... [3.390] real debt, based on, ........................... [3.390] liquidated sums, ......................... [1.120], [3.165] non-provable claims, ................. [6.465], [6.470] discharge of bankruptcy effect on, .. [7.110] fines and penalties, ............................ [6.465] loss a result of misleading and deceptive conduct, ......................................... [6.465] unliquidated damages, ..................... [6.465] order of payments bankruptcy — see Priority payments – bankruptcy deeds of company arrangement, ......................................... [20.185]-[20.195] winding up — see Priority payments – winding up priority debt costs, ....................................... [3.425], [4.185] provable in bankruptcy — see Proof of debts – bankruptcy quantum meruit, claim for payment under, .......................................................... [1.120] right of action for, .................................... [4.145] unliquidated claims, .................. [1.120], [3.165] discharge of bankruptcy effect on, .. [7.110] unwillingness to pay, .............................. [3.395] warrant for arrest, ...................... [3.440], [6.195] Debt agreement administrators advertising and promotion, ................... [9.155] annual estate return, ............................... [9.148] certification, ..................................... [9.15], [9.20] guidelines, ............................................. [9.20] proposed reform, ................................. [9.10]

Index Debt agreement administrators — cont designated six-month arrears default, .. [9.95], [9.145], [9.148] duties, ......................................................... [9.145] breach of, ............................................. [9.148] ineligibility to act, .................................... [9.140] insurances required, ................................ [9.130] intentional or reckless default, .............. [9.130] notification requirements designated six month arrears default, ............................................ [9.145], [9.148] end of agreement, ................................ [9.85] three month arrears default, ........... [9.145], [9.148] outgoing administrators, ........................ [9.148] overview, ..................................................... [9.10] Personal Insolvency Professionals Association, .......................................................... [9.160] record keeping, ......................................... [9.145] registration, ................................. [9.120], [9.130] application for, .................................... [9.125] cancellation, ............ [9.135], [9.140], [9.148] company, .................. [9.125], [9.130], [9.135] conditions on, ....................... [9.125], [9.130] eligibility test, ..................................... [9.135] fee, ........................................................ [9.125] remuneration, ............................................. [9.20] three month arrears default, .... [9.145], [9.148] trustee in bankruptcy, ............... [9.120], [9.130] Debt agreements (Pt IX) acceptance by creditor, .............................. [9.43] acceptance of proposal for processing, . [9.15], [9.35], [9.40] act of bankruptcy, as, .......................... [9.55] assigned and secured debts, .............. [9.42] consequences, ....................................... [9.55] creditors, restrictions, .......................... [9.45] National Personal Insolvency Index (NPII), entry, ................................................. [9.45] notification of creditors, ...................... [9.40] quantum of creditors’ claims, ............ [9.40] release from debts, ................... [9.15], [9.60] act of bankruptcy, .......................... [9.30], [9.55] administrators — see Debt agreement administrators AFSA’s role, ................................................ [9.20] explanatory statement, ........................ [9.20] practice statements, ............................ [9.118] applicable deadline, ................................... [9.15] asset threshold, ......................................... [9.165] assigned debts, ........................................... [9.42] conditional proposals, ............................... [9.20] court directions, ........................................ [9.116] creditors, acceptance, ................................ [9.43] death of debtor, effect, .............................. [9.50] debt threshold, proposed reform, ........... [9.10]

931

debtor’s petition and, ................................ [3.70] debts, release from, ........................ [9.15], [9.60] dispute resolution, ................................... [9.165] disqualified debtors, .................................. [9.25] distribution of property, ........................... [9.70] dividends to creditors, ............................ [9.165] ending, ................................. [9.15], [9.80], [9.85] frozen debts, ............................................... [9.45] income threshold, ...................................... [9.25] Insolvency Law Reform Act 2016 changes, ............................................................ [9.10] insolvent under administration, .............. [9.10] joint, .............................................................. [9.20] mandatory terms, ....................................... [9.20] moratorium on proceedings, ................... [9.65] nominated person, ..................................... [9.20] non-monetary property, ............................ [9.20] notice of completion, ................................. [9.85] Official Receiver assessment, ................... [9.35] overview, ..................................................... [9.10] Part X agreements distinguished, .......... [8.05], [9.10] parties to, ..................................................... [9.43] payment to income ratio test, .................. [9.40] practice statements, .................................. [9.118] preference claims and, ............................ [5.200] processing, ................................................... [9.15] property of debtor, distribution, ............. [9.70] proposal of debt agreement, .................... [9.15] act of bankruptcy, ................................ [9.30] certification, ............................... [9.15], [9.20] conditional proposals, ......................... [9.20] consent, .................................................. [9.15] disqualified debtors, ............................ [9.25] explanatory statement in approved form, ............................................................ [9.20] lapsing of proposal, ............................. [9.50] process, and, ......................................... [9.15] rejection of, ................................ [9.30], [9.50] appeal to AAT, .................................. [9.35] provable debts, ........................................... [9.20] distribution of property and, ............. [9.70] remuneration of administrator, ............... [9.20] secured debts, ............................................. [9.42] sequestration order effect on, ................. [9.115] termination consequences of, ................................. [9.103] court involvement, without, .. [9.80], [9.85] accepting proposal, by, ......... [9.80], [9.90] bankruptcy of debtor, by, ............... [9.100] designated six month arrears default, .......................... [9.95], [9.145], [9.148] court order, by, ...................... [9.105], [9.115] declaration debt agreement void, .... [9.60], [9.80], [9.110] notice of, .............................................. [9.103] proposed reform, ................................. [9.10]

932

Keay’s Insolvency: Personal and Corporate Law and Practice

Debt agreements (Pt IX) — cont time for payments, proposed reform, ... [9.10], [9.20] timing and eligibility, ................................ [9.35] types of expenses that can be recovered, ............................................................ [9.20] unconditional agreement, ......................... [9.43] undervalued transactions exemptions, .. [5.40] undue hardship, ............................. [9.40], [9.75] variation of, ..................................... [9.15], [9.75] proposed reform, ................................. [9.10] void, declared, .................. [9.60], [9.80], [9.110] Debtor ability to borrow unsecured, ................. [1.135] assets of bankrupt — see Property of bankrupt realising, .............................................. [1.130] debtor’s petition — see Debtor’s petition declaration of intention to present a debtor’s petition, ............................................ [3.15] act of bankruptcy, ................................ [3.45] debtors who pay not present, ............ [3.20] demonstration of solvency, .................... [1.130] extensions of time, ................................... [1.125] information on alternatives, ..................... [3.15] interviewing, ............................................... [6.35] legal aid, .................................................... [3.420] National Personal Insolvency Index (NPII), search, ............................................ [3.220] Part X agreement advantages to, ............ [8.45] recalcitrant or unwilling, ........................ [1.145] self incrimination, privilege against, ..... [6.20], [6.225], [6.260] statement of affairs, ........... [3.15], [3.20], [3.55] failure to file, ...................................... [4.230] third party, effect of claim against, ....... [3.410] warrant for arrest, ...................... [3.440], [6.195] Debtor’s petition abuse of process, as, .................... [3.115], [7.85] improper purpose, ............................. [3.120] presentation while creditor’s petition pending, ......................................... [3.125] “serial bankrupts”, ............................... [3.65] accepted under court direction, .............. [2.90] alternatives, information to be given to debtor, ............................................................ [3.15] annulment of bankruptcy and petition ought not to have been accepted, ................................................ [7.65], [7.90] petition ought not to have been presented, ................................................ [7.65], [7.85] presentation while creditor’s petition pending, ......................................... [3.125] solvency and, .............. [3.120], [7.30], [7.80]

Australia, connection to, ........................... [3.50] capacity to present, .................................... [3.50] date of commencement, .. [2.90]. [3.85], [7.115] debtors who may not present, ................ [3.20] declaration of intention to present, ........ [3.15] act of bankruptcy, ................................ [3.45] signed by Official Receiver, ................ [3.35] discretion to reject petition, ..................... [3.65] endorsement of, effect, .............................. [3.85] farmers and rural producers, ................... [3.75] frozen debts, ............................................... [3.35] individual debtors, of, ............................... [3.50] identity, confirming, ............................ [3.55] prescribed information, ....................... [3.80] statement of affairs, ............................. [3.55] when a person becomes bankrupt, .. [2.90], [3.85] information on alternatives to be given to debtor, .............................................. [3.15] joint debtors, ............................................. [3.105] referral of petition to court, ............. [3.110] statement of affairs, ........................... [3.105] statement of joint affairs, .................. [3.105] leave of court required, ............................ [3.75] moratorium provisions, ................. [3.10]–[3.45] declaration of intention to present a debtor’s petition, ............................ [3.15] farmers and rural producers, ............. [3.75] frozen debts, ......................................... [3.35] proclaimed law, and, ........................... [3.75] secured creditors, protection, ............. [3.40] stay period, ........................................... [3.35] notification of creditors, ............................ [3.20] overview, ..................................................... [3.05] partnership debtors, .................................. [3.95] referral of petition to court, ............. [3.100] statement of affairs of each partner, . [3.95] power of attorney, under, ......................... [3.50] presentation when creditor’s petition pending, .......................................................... [3.125] proclaimed laws and, ................................ [3.75] rejection of petition, ................................... [3.70] appeal to AAT, ...................................... [3.65] debt agreements and, .......................... [3.70] capacity to pay debts, ......................... [3.65] discretion, .............................................. [3.65] joint debtors, ................................... [3.105] partnership debtors, .......................... [3.95] farmers and rural producers, ............. [3.75] personal insolvency agreements and, ............................................................ [3.70] “serial bankrupts”, ............................... [3.65] stay under a proclaimed law applies, ............................................................ [3.75] territorial requirements, not meeting ............................................................ [3.70] rural producers, .......................................... [3.75]

Index Debtor’s petition — cont secured creditors, protection, ................... [3.40] solvency effect on, ............ [3.120], [7.30], [7.80] statement of debtor’s affairs, ...... [3.15], [3.20], [3.55] partnerships, ......................................... [3.95] trustee, copy to, .................................... [3.90] stay period, ................................................. [3.35] territorial requirements, ............................ [3.50] rejection for not meeting, ................... [3.70] trustee appointment consent, .................................................. [3.90] Official Trustee, ..................................... [3.90] who may present, ...................................... [3.50] Deceased estates administration, ........................... [3.465], [6.590] annulment of bankruptcy of, ........... [7.175] end of, .................................................. [6.590] bankruptcy of, .......................................... [3.450] creditor’s petition against, ...................... [3.460] debt threshold, ................................... [3.460] date of commencement of bankruptcy, .......................................................... [6.590] insolvent debtor, ......................... [3.450], [6.590] legal personal representative, ................ [6.590] non-divisible assets, ................................. [6.590] NPII, entry, ................................................ [3.465] Part XI of Bankruptcy Act, ..................... [3.450] petitions by, ............................................... [3.455] solvent debtor, .......................................... [6.590] tax requirements, ..................................... [6.590] trustee of the regulated debtor’s estate, .......................................................... [3.465] Deed administrator — see also Administrators administration of deed — see Deeds of company arrangement appointment, ............................................. [20.45] deed of company arrangement, ............ [20.45] duties, ....................................................... [20.135] examinations of company officers, ..... [20.150] eligible applicant, ............................. [20.150] independence, ......................................... [20.135] joint, ............................................................ [20.45] officer of the company, .......................... [20.135] removal by court, ..................................... [20.45] remuneration, ......................................... [20.145] revoking appointment, ............................ [20.45] supervision by the court, ...................... [20.290] tax, liability, ............................................. [20.140] vacancies, filling, ...................................... [20.45] Deeds of company arrangement administration of deed, ........................ [20.155] abuse of process, .............................. [20.270]

933

admissibility of claims, ................... [20.175] annual administration returns, ...... [20.210] contingent claims, ............................ [20.175] distributions, ..................................... [20.180] differentiation between creditors, . [20.260] payment of dividends, .................. [20.200] priorities, ....................................... [20.185] double proof of debts, ..................... [20.195] end of administration returns, ...... [20.210] future breaches, ................................ [20.175] future claims, ................................ [20.170] netting, ............................................... [20.180] payment of dividends, .................... [20.200] priority creditors, ............................. [20.185] employees, .................................... [20.190] superannuation guarantee charge, .................................................. [20.195] procedural requirements, ............... [20.205] lodgement of accounts with ASIC, .................................................. [20.210] provable claims, ............................... [20.165] recovery of funds, ............................ [20.160] set-offs, ............................................... [20.180] administrator — see Administrators — see Deed administrator advantages, ............................................... [20.25] company and directors, for, ............. [20.30] creditors, for, ....................................... [20.35] amending, ................................................ [20.220] appointment of administrator when trading under, ............................................. [19.42] approval, ...................................... [20.20], [20.40] period between approval and execution, ........................................................ [20.135] commercial morality, ............................. [21.150] committee of inspection, ...................... [20.205] company’s continued trading under deed, ................ [8.15], [20.20], [20.30], [20.300] insolvent trading and, ..................... [20.300] compromise of creditor’s claims, .......... [20.10] contents of, ................................................ [20.50] contingent claims, . [20.120], [20.130], [20.165], [20.175] contracts, .................................................. [21.150] varying operation of, ......................... [20.70] court’s power to vary, ........................... [19.390] creditor support for investigations, .... [20.375] creditor’s decision to accept Part 5.3A deed, .......................................................... [20.40] creditor’s trust, ......................................... [20.80] debt for equity swap, ............ [21.150], [21.155] debts incurred after execution of, ........ [20.20], [20.300] deed administrator — see Deed administrator distributions, ........................................... [20.180] payment of dividends, .................... [20.200] priorities, ........................................... [20.185]

934

Keay’s Insolvency: Personal and Corporate Law and Practice

Deeds of company arrangement — cont draft, ........................................................... [20.40] effects of deed, .......................................... [20.95] company, on, ....................................... [20.70] creditor’s trust, ................................ [20.80] former name of company and change of name, ......................................... [20.85] “subject to deed of company arrangement”, .................................................... [20.75] creditors, ............................................ [20.165] claims, ............. [20.95], [20.115], [20.165] directors, on, ....................................... [20.90] extent of protection from creditor’s claims, ........................................................ [20.115] guarantees, on, ................................. [20.130] initiation of proceedings by creditor, on, .......................................................... [20.95] enforcement and execution of judgment, .................................................. [20.105] winding up, ................................... [20.100] owners and lessors, on, .. [20.105], [20.125] prior leases, ....................................... [20.125] secured creditors, on, ...................... [20.120] execution of, .................. [19.55], [20.10], [20.55] administrator, by, ............................... [20.55] company, by, ....................................... [20.55] debts incurred after, .......................... [20.20] notice of, .............................................. [20.60] period between approval and execution, ........................................................ [20.135] requirements for, ................................ [20.55] non-compliance with, ................... [20.250] time limit for, ...................................... [20.55] failure to execute, ....................... [11.45], [20.55] form of, ...................................................... [20.50] future claims, .......................................... [20.170] guaranteed debt, .................... [20.130], [20.165] holding DOCA, ........................................ [20.10] ipso facto clauses, .................................... [20.70] lodgement, ................................................. [20.60] majority creditor approval, .................... [20.10] material contravention of, ...................... [20.60] meeting of creditors decision on, ....................................... [19.305] details of proposed deed, ............... [19.325] termination of deed, .......... [11.45], [20.240] variation of deed, ............................. [20.215] moratorium period, ................................. [20.50] netting arrangements, ........................... [20.180] notice of execution, .................................. [20.60] overview, ................. [20.305], [21.120], [21.150] period between approval and execution of deed, ............................................. [20.135] pooling arrangements, ............................ [20.15] groups of insolvent companies, ...... [20.15] post-deed debts, ....................... [20.20], [20.300]

pre-existing liabilities discharged, .......... [8.15] proof of debt double proof of debts, ..................... [20.195] failure to lodge, .................................. [20.65] progress from liquidation to administration, ........................................................ [19.415] proposal, .................................................... [20.40] publication of, ........................................... [20.75] rescheduling of debts, ............................. [20.10] resolution approving, .............................. [8.160] restructuring and, ........ [20.05], [20.10], [21.10] rights in personam, ................................. [20.95] schemes of arrangement distinguished, ............................ [20.05], [20.90], [21.120] secured creditor, ....................................... [20.10] debt extinguished by, ........................ [19.30] effect on, ............................................ [20.120] proceedings, bringing, .... [20.105], [20.120] realising security, ............... [20.55], [20.120] set-offs, ..................................................... [20.180] setting aside, ............................... [8.15], [20.265] creditor support for investigations, ........................................................ [20.375] share transfers, ....................................... [21.150] simple moratorium, ................................. [20.10] standard provisions, ................................ [20.50] stay provisions, ........................................ [20.10] stay of termination, ......................... [20.280] termination of administration execution of deed, .............................. [19.50] failure to execute deed, ..................... [19.50] termination of deed, ................ [20.50], [20.225] application for, .................... [11.45], [20.245] company pursuing claims after, .... [20.200] court, by, .............................. [11.45], [20.245] creditors’ voluntary winding up following, .......................................................... [11.45] in accordance with deed, ................ [20.230] meeting of creditors, ......... [11.45], [20.240], [20.255] notice, by, ........................................... [20.235] notice of, ............................................ [20.240] previous operation of deed not affected, ........................................................ [20.285] principles of application, ................ [20.255] stay of termination, ......................... [20.280] variation instead of, ......................... [20.215] voiding a deed, ... [20.40], [20.250]-[20.270] terms of, ....................................... [20.40], [20.50] creditors’ claims, ................ [20.95], [20.115] standard, .............................................. [20.50] termination circumstances, ............. [20.230] types, .......................................................... [20.10] uncommercial transactions during, .... [14.160] valuation of company, ........................... [21.150] variation of deed, ................................... [20.215] administrator, discretion, ................ [20.215]

Index Deeds of company arrangement — cont courts, by, .......................................... [20.220] creditors, by, ...................................... [20.215] voidable transactions during, .............. [14.160] voiding or validating a deed, ............... [20.40], [20.250] principles of application, ................ [20.255] abuse of process, .......................... [20.270] differentiation between creditors, . [20.260] public interest, .............................. [20.265] s 447A Corporations Act, and, ..... [20.270] “some other reason”, .................... [20.265] variation instead of, ......................... [20.215] voluntary administration, ....................... [19.55] appointment of administrator when trading under, ............................... [19.42] court’s power to vary, ..................... [19.390] creditor’s decision to accept, ............ [20.70] purpose of administration, .............. [19.05], [19.55], [20.05] second meeting of creditors decision on, ................................... [19.305] details of proposed deed, .............. [19.325] termination of administration, ....... [19.50], [20.05], [20.65] termination of deed, ........................ [20.295] warrants, .................................................. [21.150] winding up, followed by, ..................... [20.295] Deregistration of company ASIC, by, .................................................. [10.120] compulsory winding up, .. [17.45], [17.120] ASIC register entry, ................................. [17.55] company not carrying on business, ... [17.115], [17.120] compulsory winding up ASIC initiated deregistration, ......... [17.45], [17.120] court ordered deregistration, ........... [17.40] debts and obligations following, ........... [17.55] destruction of records, ............................ [17.65] effects and consequences, .......... [17.55]-[17.65] litigation following, ................................. [17.55] member agreement, by, ......................... [17.115] notice of, .................... [17.45], [17.115], [17.120] overview, ......... [10.05], [10.45], [17.05], [17.35] property vesting in ASIC, ...................... [17.60] reasons for, .............................................. [17.115] reinstatement following — see Reinstatement requirements for, .................................... [17.115] trust property, effect on, ......................... [17.60] voluntary, ................................................. [17.115] voluntary winding up, ............................ [17.50] winding up, in cases other than, ........ [17.115]

935

Directors — see Directors of companies Directors’ duties best interests of corporation, .. [16.30], [16.42], [16.43], [21.90] civil penalties, ..................................... [16.50] criminal liability, ................................ [16.65] breach of duty, ............................ [16.10], [16.78] advisors as accessories to, ................ [21.65] civil penalties, ..................................... [16.50] consequences, ..................................... [16.45] criminal liability, . [16.65], [16.170]-[16.185] prosecutions, ................................. [16.175] types of offences, .......................... [16.180] disqualification for, ............................ [16.50] liquidator investigating, ................... [16.20] misfeasance, ........................................ [16.55] phoenix conduct, . [10.50], [16.70], [16.165], [21.65] third party participation in, ............. [16.45] transaction voidable for, ................... [16.45] business judgment rule, .......................... [16.42] care, skill and diligence, .......... [16.20], [16.35], [16.40] breach of duty, .................................... [16.45] restructuring and, ............................ [21.155] standard of care, ................................ [16.40] tax liabilities and insolvency, ......... [16.155] common law duties, ................................ [16.25] creditors, to, .............................................. [16.70] trigger, .................................................. [16.75] exercise of powers, .................... [16.30], [16.40] criminal liability, ................................ [16.65] rights of creditors, .............................. [16.70] extension of, .............................................. [16.78] fiduciary duties, ......................... [16.20], [16.30] good faith, ................................................. [16.30] breach of duty, .................................... [16.45] business judgment rule, .................... [16.42] relief from liability, ............................ [16.60] restructuring and, ............................ [21.155] group companies, .................................. [16.125] improper use of position, ....................... [16.43] insolvent trading — see Insolvent trading liability, relief from, ................................. [16.60] material personal interests, .................... [16.42] misfeasance, .............................................. [16.55] misuse of information, ............................ [16.43] breach of duty, .................................... [16.45] restructuring and, .................... [21.45], [21.155] rights of creditors, taking into account, .......................................................... [16.70] trigger, .................................................. [16.75] safe harbour provisions, ........ [1.155], [14.115], [16.60], [21.90] statutory duties, .......................... [16.40]–[16.43] tax liabilities, ........................................... [16.160] insolvency and, ................................ [16.155]

936

Keay’s Insolvency: Personal and Corporate Law and Practice

Directors of companies breach of duty — see Directors’ duties civil actions against, ................................ [16.05] relief from liability, ............................ [16.60] compensation, recovery from, ............... [16.80] criminal liability, ...................... [16.65], [16.170] ASIC, prosecutions, ......................... [16.175] failure to assist external administrator, ........................................................ [16.175] types of offences, .............................. [16.180] regulatory offences, ...................... [16.175] winding up, offences, ................... [16.185] de facto directors, .................................... [16.15] declaration of solvency, ............. [11.15], [11.25] deed of company arrangement, effect on, .......................................................... [20.90] Director Identification Numbers, .......... [16.70] director penalty notice, ........... [10.55], [16.160] non-response to, ............................... [16.160] service, ............................................... [16.160] disqualification for breach of duty, ...... [16.50] duties — see Directors’ duties employees, liability to, ............................ [16.80] fraud, .......................................................... [16.55] insolvent trading — see Insolvent trading liabilities employees, to, ..................................... [16.80] insolvent trading — see Insolvent trading tax, ........................................ [1.200], [16.145] defences, ........................................ [16.155] indemnifying Commissioner, ....... [16.150] voidable transactions and, ............ [16.150] misfeasance, .............................................. [16.55] negligence, ................................................. [16.55] officers, definition, ...................... [13.40], [16.10] passive directors, ...................................... [16.20] penalties for non-payment tax liabilities, ........................................................ [16.160] defences, ............................................ [16.165] phoenix conduct, ......... [1.155], [10.50], [16.70], [21.65] employee entitlements and, ............. [16.80] tax liabilities and, ............................. [16.165] prosecutions, ........................................... [16.175] receiver as “shadow director”, ............ [18.450] removal and replacement by administrator, .......................................................... [18.20] restructuring and, .................................... [21.45] safe harbour provisions, ........ [1.155], [14.115], [16.60] shadow directors, ..................................... [16.15] advisors, ............................................... [21.65] holding company directors, .......... [16.130], [21.90] receiver as, ........................................ [18.450] safe harbour provisions and, ........... [21.90] secured creditor as, ............................ [21.50]

sleeping directors, .................................... [16.20] statutory duties — see Directors duties superannuation, unpaid director liability for, ......................... [16.160] defences, ........................................ [16.165] tax liabilities, ............................. [1.200], [16.145] director penalty notice, ..... [10.55], [16.160] directors duties, ................................ [16.160] non-response to, ............................ [16.160] penalties, ............................................ [16.160] voidable transactions and, ............. [16.150] defences, ........................................ [16.155] indemnifying Commissioner, ....... [16.150] withholding tax instalments, unremitted, ........................................................ [16.160] voluntary administration administrator’s power to remove or appoint, ........................................ [19.190] effect on, .............................................. [19.80] initiating, ............................................. [19.40] collateral purpose, ........................... [19.42] validity, .............................. [19.40], [19.42] personal guarantees, .......................... [19.85] leave to enforce, ............................. [19.85] winding up of company, ........................ [1.200] appealing against order, ................... [13.25] director penalty notice, ..................... [10.55] non-response to, ............................ [16.160] effect on director, ................. [13.25], [13.40] offences, ............................................. [16.185] personal liability, .................. [1.200], [10.55] powers during, ..................... [13.25], [13.40] report as to affairs of company (RATA), ............................ [10.280], [13.30], [15.20] Discharge of bankruptcy after discharge, ......................................... [7.155] annulment distinguished, ......................... [7.20] assets acquired after discharge, ............... [4.55] automatic discharge, .................... [2.70], [7.115] time of, ......................... [2.70], [6.30], [7.135] consequence, ............................................. [7.110] debts effect on, ................................ [4.145], [7.160] former bankrupt still liable for, ...... [7.110], [7.160] fraud, obtained by, ............... [7.110], [7.160] secured creditors, ............................... [7.160] effect, ............................................................ [2.70] debts, on, ............................... [4.145], [7.160] property, on, ........................................ [7.160] secured creditors, on, ........................ [7.160] end of administration, ............................... [7.10] “fresh start”, ...................... [4.55], [7.105], [8.15] objection to, ............................................... [7.120] extension of bankruptcy, ...... [7.20], [7.135] grounds for objection, ....................... [7.130]

Index Discharge of bankruptcy — cont general grounds, .............................. [7.120] special grounds, ................. [7.120]-[7.130] review by AAT, .................................. [7.145], [7.150] court, ............................................... [7.150] Inspector-General, ........................... [7.145] withdrawal of, ...................... [7.140], [7.155] overview, ................................................... [7.105] personal insolvency agreements, ........... [8.65], [8.205] process and consequence, ....................... [7.110] property of bankrupt, effect on, ............. [7.20], [7.160] purpose, ............................. [4.55], [7.105], [8.15] rehabilitation of bankrupt, ..................... [7.105] secured creditors, effect on, .................... [7.160] subsequent bankruptcies, ....................... [7.180] time to, ................................. [2.70], [6.30], [7.20] unliquidated damages claim, liability, ............................................ [3.165], [7.110] Disclaimer of assets – bankruptcy contracts, .................................................... [6.290] effect, .......................................................... [6.285] leased property, ........................................ [6.285] mitigation of loss, .................................... [6.280] notice of disclaimer, ................................. [6.280] overview, ................................................... [6.280] Disclaimer of assets - liquidation challenges proposed disclaimer (s 568B), to, .. [15.215] subsequent challenge (s 568E), ...... [15.225] contracts, .................................................. [15.205] effect, ........................................................ [15.220] guarantor’s right to indemnity, ........... [15.230] leases, ....................................................... [15.205] liabilities pursuant to, ..................... [15.230] liabilities, effect on, ................................ [15.230] lodgement of disclaimer with ASIC, .. [15.210] loss of right to, ....................................... [15.205] loss suffered as a result, ....................... [15.220] notice of disclaimer, publication, ........ [15.210] onerous property, ................................... [15.205] overview, ................................................. [15.205] procedure, ............................................... [15.210] prospective operation, ........................... [15.220] purpose, ................................................... [15.205] setting aside, ........................................... [15.220] subsequent challenge to disclaimer (s 568E), ........................................................ [15.225] time limit, ................................................ [15.205] types of property, ................................... [15.205] vesting of disclaimed property, ........... [15.225]

937

Distribution of company assets – winding up assets overseas and cross-border issues, ........................................................ [15.425] Australian court, assistance, .......... [15.430] foreign court, assistance, ................ [15.435] dividend returns, ................................... [15.335] indemnifying creditors, ......................... [15.420] liquidator’s powers, ................. [10.310], [14.05] overview, ................................... [10.45], [15.330] pari passu, ..................................... [2.25], [16.78] priorities, ........................... [15.340], [15.345] payment of dividends, .......................... [15.335] priority of creditors — see Priority payments – winding up proof of debts — see Proof of debts – winding up property, meaning, ................................. [15.420] secured creditors — see Secured creditors surplus assets, ......................................... [15.440] trustee, company acting as, .................. [15.350] Distribution of estate – bankruptcy amount, ...................................................... [6.525] annulment and, ........................................ [7.100] debt agreements and, .............................. [9.165] dividend returns, ....................... [6.525], [6.530] end of administration, ............................. [6.595] final dividend, .......................................... [6.525] final order of payment, ........................... [6.580] insufficient funds to cover, ..................... [6.580] interim, ....................................................... [6.525] legal proceedings for payment of, ........ [6.530] likely amount, ................................. [6.50], [6.60] overview, ....................................... [2.65], [6.525] pari passu, ................................................... [2.25] partnership dividends, ............................ [6.325] payment of, ............................................... [6.530] priority of creditors — see Priority payments – bankruptcy proof of debts — see Proof of debts – bankruptcy report on, ..................................................... [6.60] right to share of bankrupt’s estate, ....... [2.65], [4.145], [6.460], [6.530] distribution of estate, ........................ [6.525] payment of dividends, .................... [6.530] unlawful proceedings, ....................... [4.150] secured creditors — see Secured creditors statement of affairs not filed, ................. [6.530] trustee obligation to maximise, ............... [6.50] unclaimed, ................................................. [6.530] with all convenient speed, ....... [6.525], [6.530] Dividend returns bankruptcy — see Distribution of estate – bankruptcy deeds of company arrangement, ........ [20.200]

938

Keay’s Insolvency: Personal and Corporate Law and Practice

Dividend returns — cont winding up — see Distribution of company assets – winding up Documents books and records of bankrupt access to premises to search for, ..... [6.210] associated entities, ................. [6.25], [6.205] financial records, .................................. [6.15] examination, ................ [6.15], [6.20], [6.185] failure to deliver, ...... [6.20], [6.205], [6.215] statutory notices challenging, ....................... [6.220]–[6.225] s 77A notice, ................................... [6.205] s 77AA notice, ................................ [6.210] summons to attend and produce, ... [6.245] supervised account regime, ............. [6.405] books, winding up and, ...... [10.275], [10.340], [15.15], [15.110], [15.185] application to court for delivery, ... [13.35], [15.185] destruction following deregistration of company, ........................................ [17.65] directors obligations, ........... [13.35], [13.40] examination, ........ [15.15], [15.110], [15.185] destruction of, ............................. [4.235], [6.210] de-registration of company, following, .......................................................... [17.65] electronic, ......................................... [6.15], [6.20] examinable affairs, meaning, ................. [6.195] financial records, ........................................ [6.15] legal privilege and, .................................... [6.40] production of, ............................... [2.125], [6.20] order for, corporate insolvency, ..... [15.185] search warrant, liquidator applying for, .......................................................... [15.15] self-incrimination and, ................ [6.20], [6.225] statement of affairs — see Statement of affairs statutory notices challenging, ........................... [6.220]–[6.225] s 77A notice, ........................................ [6.205] s 77AA notice, ..................................... [6.210] time limit for compliance with, ....... [6.225] supervised account regime records, ..... [6.405] warrant to seize, ............... [4.25], [6.20], [6.195] liquidator applying for, ..................... [15.15]

E Effects of bankruptcy annulment and, .......................................... [7.95] bankrupt, on, .............................................. [4.10] assist trustee in bankruptcy, ............. [4.15], [4.230], [6.35] attend meeting of creditors, requirement, ............................................................ [4.15]

contributions from income, ................ [4.15] managing a corporation, prohibition, ............................................................ [4.15] partnerships, ......................................... [4.15] surrender of passport, ......................... [4.15] credit, obtaining, ...................................... [4.230] creditors, on, — see Creditors family and associates, on, — see Family and associates of bankrupt family law claims — see Family law claims legal proceedings initiated by bankrupt — see legal proceedings initiated by bankrupt property of bankrupt — see Property of bankrupt protected money — see Protected money protected property — see Protected property Employees assisting liquidator, ...... [13.40], [13.80], [15.20] deeds of company arrangement, and, ........................................................ [20.190] directors of companies, liabilities, ........ [16.80] employment contracts, receivership effect on, ........................ [18.385], [18.555], [18.565] entitlements deeds of company arrangement, and, ........................................................ [20.190] phoenix companies and, ................... [16.80] receivership and, .............. [18.385]-[18.415], [18.465] recovery of, ......................................... [16.80] safe harbour provisions and, ......... [21.105] excluded employees, ............. [15.390], [18.395] Fair Entitlements Guarantee (FEG), .... [1.200], [13.80], [15.270], [15.415] receivership and, .............................. [18.555] leave entitlements receivership, ...................................... [18.400] winding up, ...................................... [15.395] officers definition, ..................................... [13.80] receivership and entitlements, ......................... [18.385]-[18.415], [18.465] advances to entitlements, ............... [18.410] effect on, ............................................ [18.555] employment contracts, ... [18.385], [18.555], [18.565] excluded employees, ....................... [18.395] leave entitlements, ........................... [18.400] termination of employment, ......... [18.390], [18.555], [18.565] wages including superannuation, . [18.390] restructuring and workouts and, .......... [21.85] retrenchment payments, ....................... [15.400] schemes of arrangement and, .............. [21.130] superannuation guarantee charge (SGC), ........ [15.270], [15.390], [20.190], [20.195]

Index Employees — cont voluntary administration, effect on, ..... [19.80] wages deeds of company arrangement, .. [20.190] employees of bankrupt, ........ [6.90], [6.560] proof of debt, .................................... [15.270] receivership, ...................................... [18.390] winding up, ...................................... [15.390] winding up and entitlements advances to entitlements, ............... [15.410] assisting liquidator, ............. [13.40], [13.80], [15.20] effect on, .............................................. [13.80] employment contracts, .................... [15.400] excluded employees, ....................... [15.390] Fair Entitlements Guarantee (FEG), .......................... [13.80], [15.270], [15.415] leave entitlements, ........................... [15.395] priority payments, ........................... [15.390] retrenchment payments to employees, ........................................................ [15.400] superannuation guarantee charge (SGC), ........................................ [15.270], [15.390] wages, ................................................ [15.390] End of bankruptcy annulment — see Annulment of bankruptcy compositions or schemes by bankrupts — see Compositions or schemes of arrangement court order, by, ........................................... [7.10] discharge — see Discharge of bankruptcy end of administration, meaning, ........... [8.205] meaning, ...................................................... [7.10] overview, ............................ [6.595], [7.05]–[7.20] period of bankruptcy, ... [4.230], [7.05], [7.105], [7.115] extending, ................................ [7.20], [7.120] personal insolvency agreements, .......... [8.205] Entities associated/related entities books and records of, ............ [6.25], [6.205] s 77A notice, ................................... [6.205] corporate insolvency, examination in, ........................................................ [15.175] definition, ................................ [6.25], [14.45] investigation of, .................................. [6.205] personal insolvency agreements, .... [8.100] pooling and, ...................................... [15.310] controlled by bankrupt, .......................... [5.250] definition, .................................................... [6.25] examination corporate insolvency, ....................... [15.175] examinable period, ............................ [5.250] group companies

939

deed of company arrangements, .... [20.15] director duties, ................................. [16.125] insolvent trading, ............................. [16.125] liquidator to, ..................................... [10.220] pooling, ............................... [15.310]-[15.325] net worth, .................................................. [5.250] personal services, ..................................... [5.250] related entities, ............................. [6.25], [14.45] pooling and, ...................................... [15.310] recovery of benefits, ........................ [14.145] voidable transactions and, ..................... [14.45] close associate, .................................. [14.155] court orders, ....................... [14.170]-[14.175] recovery of related-entity benefits, ........................................................ [14.145] time period extension, .................... [14.100] unreasonable director-related transactions, .......................................... [14.35], [14.155] Examination corporate insolvency — see Examination – corporate insolvency discharge, following, ............................... [7.155] family and associates of bankrupt access to premises, ............................. [6.205] Official Receiver or creditor, by, ...... [4.130] private examinations, .............................. [6.215] s 77C notices, ...................................... [6.215] public examinations bankruptcy, in — see Public examinations – bankruptcy (s 81) liquidator conducting, ...... [10.340], [13.40], [15.120] Examination – corporate insolvency abuse of process, .................... [15.165], [15.185] affidavit evidence, .................................. [15.200] benefits, .................................................... [15.150] books of company, .. [10.340], [15.15], [15.110], [15.185] confidentiality and, ................................ [15.155] connected/related entity, ...................... [15.175] deed administrator, by, ......................... [20.150] documents, order for production of, .. [15.185] eligible applicant, ... [15.130], [15.140], [20.150] challenging, ....................................... [15.140] examinable affairs, ................. [15.130], [15.170] connected entity, .............................. [15.175] false information, giving, ..... [15.185], [15.190] function, ................................................... [15.160] legal professional privilege, . [15.110], [15.195] legal representative present, ................ [15.185] legislative provisions, ............................ [15.110] liquidator conducting, ............ [10.340], [13.40], [15.120] misconduct, in relation to, ... [15.120], [15.135] obtaining information by affidavit, ..... [15.200]

940

Keay’s Insolvency: Personal and Corporate Law and Practice

Examination – corporate insolvency — cont officers and employees, of, .... [10.280], [15.20], [20.150] power to conduct, .... [10.340], [13.40], [15.155] procedure for examination, .................. [15.185] incrimination, .................................... [15.190] legal professional privilege, .......... [15.110], [15.195] public examinations, ............. [10.340], [15.150] liquidator conducting, ...... [10.340], [13.40], [15.120] purpose, ................................... [15.160], [15.165] rationale, .................................................. [15.145] self incrimination, .................................. [15.190] summons for examination, .. [15.130], [15.160] affidavit supporting application, ... [15.180] application, ........................................ [15.180] court order, by, ................................. [15.135] deletion of categories sought, ........ [15.180] examinable affairs and, ................... [15.170] setting aside, ..................................... [15.165] vexatious, ................................................. [15.165] External administration receivership — see Receivership voluntary administration — see Voluntary administration External administrator — see Administrator

F

Fair Entitlements Guarantee (FEG) corporate misuse of, ................................ [16.80] employees and, .......... [1.200], [13.80], [15.270], [15.415], [18.555] order of payments, .................... [6.540], [13.80] priority payments - bankruptcy, ........... [6.540] proof of debts - winding up, ............... [15.270] receivership and, .................................... [18.555] trustee providing information to government, ............................................................ [6.75] Family and associates of bankrupt access to premises of, .............................. [6.205] examination access to premises, ............................. [6.205] Official Receiver or creditor, by, ...... [4.130] express trusts, ........................................... [4.142] family home, ............................................. [4.132] joint ownership of, ............... [4.132], [4.142] partition and sale, .............................. [4.132] family law claims — see Family law claims public examinations by trustee, ............ [4.130]

related third parties, ................................ [4.132] resulting and constructive trusts, ......... [4.142] transfer of property family law financial agreement, under, .......................................................... [3.192] recovery by trustee, ........................... [4.132] related third party, to, ....................... [4.132] void, ..................................................... [4.132] Family Court of Australia jurisdiction in bankruptcy, ......... [2.20], [2.370] Family law claims bankruptcy effect on proceedings, ........ [4.155] division of matrimonial assets, ............. [4.135] financial agreements, ............................... [4.135] transfers to defeat creditors exemption, ............................................................ [5.80] frozen debts and, ....................................... [3.35] interests of creditors, ............................... [4.135] maintenance payments, ............. [3.205], [4.70], [4.175], [4.185] maintenance agreements, ................. [4.155] preference claims and, .................... [5.200] transfers to defeat creditors exemption, ...................................................... [5.80] undervalued transactions exemption, ...................................................... [5.40] maintenance orders, .......................... [4.155] preference claims and, .................... [5.200] transfers to defeat creditors exemption, ...................................................... [5.80] matrimonial causes, ................................. [4.135] personal insolvency agreements and, .. [8.210] Pt VIII of Family Law Act, ..................... [4.135] protected property, ............................ [4.105] property orders in favour of spouse, ... [4.135] protected property, ...................... [4.70], [4.175] rights of action of bankrupt, assignment of, .......................................................... [4.120] spousal maintenance, .............................. [4.135] transfer of property under, .................... [3.192] property orders in favour of spouse, .......................................................... [4.135] transfers to defeat creditors, .............. [5.80] trustee as party affected by a property order, ............................................ [4.105], [4.135] vested property of bankrupt estate, and, .............................................. [4.25], [4.135] Federal Circuit Court compulsory bankruptcy application process, .......................................................... [3.133] jurisdiction, ................................. [2.370], [3.133] criminal process, ................................ [4.240] summary and indictable offences, .. [4.240] winding up, ...................................... [10.190]

Index Federal Circuit Court — cont registrar hearing application, ................ [3.133] sequestration orders — see Sequestration orders Federal Court of Australia compulsory bankruptcy application process, .......................................................... [3.133] corporate insolvency, jurisdiction, ...... [10.190] jurisdiction, ................................. [2.370], [3.133] corporate insolvency, ....................... [10.190] criminal process, ................................ [4.240] summary and indictable offences, .. [4.240] winding up, ...................................... [10.190] registrar hearing application, ................ [3.133] sequestration orders — see Sequestration orders Financial agreements — see Family law claims Financial support for proceedings administration of bankruptcy, . [6.420], [6.455] best interests of creditors, obligation, .......................................................... [6.450] creditor’s indemnity, .......................... [6.425] government funding (s 305), ........... [6.440] litigation funding, .............................. [6.430] trustee funding, .................................. [6.435]

G Garnishee orders declaration of intention to present a debtor’s petition effect on, ........................... [3.35] Group companies consolidated creditor meeting, .............. [20.15] deed of company arrangements, .......... [20.15] director duties, ....................................... [16.125] holding company liability for subsidiary, ........................................................ [16.130] insolvent trading, ................................... [16.125] liquidator to, ........................................... [10.220] pooling, ....................... [15.310]-[15.325], [20.15]

H Household and personal property protected property, .................................... [4.80]

I Imprisonment attempting to leave country without consent, .......................................................... [4.235]

941

bankrupt’s conduct resulting in, .......... [4.230], [4.235] court order, failure to comply with, .... [4.230], [4.235] non-payment of debt, for, ...................... [4.220] prosecution process, ................................ [4.240] warrant for arrest of debtor, .... [3.440], [6.195] Income of the bankrupt actual income threshold, ........................ [6.350] assessed income, ...................................... [6.350] assessment of income contributions, ..... [4.60], [6.360] collection from others, ............................ [6.380] consent to leave Australia and, ............. [6.375] contribution assessment period, ........... [6.345] process of assessment, .......... [4.60], [6.360] review of assessment, ........................ [6.365] subsequent bankruptcies effect on, . [7.180] derived income, .......................... [6.350], [6.365] entity income, ........................................... [5.250] gifts, ............................................................ [6.350] hardship, .................................................... [6.370] income channelling, ................................. [5.250] income, definition, ................................... [6.355] overview, ................................................... [6.340] payment, .................................................... [6.375] income contributions, ........................ [7.105] personal services, ..................................... [5.250] property distinguished, ............................ [4.45] property used in earning income, ......... [4.80], [4.85] reasonable remuneration, ....................... [6.360] savings during bankruptcy period, ........ [4.60] assets acquired, and, ........................... [4.60] supervised account regime, ..... [6.340], [6.385] bankrupt’s income deposited to supervised account, .......................................... [6.395] cash income, ........................................ [6.400] constructive income receipt arrangements, .......................................................... [6.400] injunctions, .......................................... [6.410] keeping records, ................................. [6.405] non-monetary income receipt arrangements, ............................... [6.400] objective of, ......................................... [6.385] review of trustee decisions, ............. [6.415] supervised account notice, ............... [6.390] withdrawal from, ............................... [6.395] trust distributions, ................................... [6.350] Indicators of bankruptcy bank requests to reduce overdraft, ....... [1.115] continuing losses, ..................................... [1.115] dishonoured, post-dated or rounded sum cheques, ......................................... [1.115] enforcement action taken by creditors, .......................................................... [1.115]

942

Keay’s Insolvency: Personal and Corporate Law and Practice

Indicators of bankruptcy — cont failure to pay within trading terms, ..... [1.115] inability to borrow further funds or to raise capital, ............................................ [1.115] inability to produce timely and accurate financial information, .................. [1.115] liquidity ratio below 1, ........................... [1.115] overdue taxes, ........................................... [1.115] special arrangements with selected creditors, .......................................................... [1.115] suppliers changing supply terms to cash on delivery (COD), ............................ [1.115] Insolvency absolute insolvency test, ......................... [1.100] act of bankruptcy — see Acts of bankruptcy aims and purposes of law, ........ [1.15], [1.150], [1.170] creditors involvement in process, .... [1.65], [1.210] equal, fair and orderly procedure, providing, ........................................ [1.30] equal sharing, ........................... [1.30], [1.45] investigations and accountability, ..... [1.50] pari passu rule, ......................... [1.35], [1.45] personal and corporate, common terms, ................................................ [1.20], [1.25] pre-existing rights, protecting, ......... [1.35], [1.165] protection of debtor, ............................ [1.20] recycling of capital, ............................. [1.55] release of debtor, .................................. [1.25] restructuring, ............ [1.60], [1.150]-[1.160], [21.05] rule of law, supporting, ...................... [1.30] secured creditors, protecting, ............. [1.40] alternatives, ....................... [1.60], [1.75], [1.150] evasion of creditors, .......................... [2.105] Part IX debt agreement, .................... [2.105] Part X agreement, .............................. [2.105] pre-emptive action, ............................ [1.195] private informal arrangements, ....... [2.105] assessment, ...................................... [1.85], [1.95] creditor concessions, .......................... [1.125] prospective, ........................................... [1.95] retrospective, ......................................... [1.95] terms of trade, extension, ................. [1.125] time, extensions of, ............................ [1.125] time for assessment, ............................ [1.95] Australia’s regime, ......... [1.75], [1.170], [1.180] bankruptcy, .............................. [1.75], [1.190] context of, ............................................ [1.200] corporate insolvency, ............. [1.75], [1.185] costs of, .................... [1.150], [1.185], [1.210] court hierarchy, ................................... [1.185] need for, ............................................... [1.175]

personal insolvency, .............. [1.75], [1.185] professional regime, ............................ [1.75] reform, .................................... [1.185], [1.220] balance sheet test, ...................... [1.100], [1.110] cash flow test, .............................. [1.100]-[1.110] commercial insolvency test, ................... [1.100] corporate, ........................... [1.70], [1.75], [1.195] administration — see Voluntary administration liquidation — see Winding up receivership — see Receivership winding up — see Winding up costs of regime, ............ [1.150], [1.185], [1.210] creditors involvement in process, .......... [1.65], [1.210] definition, .......................... [1.70], [1.85], [1.135] effect of, ....................................................... [1.35] Harmer Report, .......................................... [1.80] indicators bank requests to reduce overdraft, . [1.115] continuing losses, ............................... [1.115] dishonoured, post-dated or rounded sum cheques, ......................................... [1.115] enforcement action taken by creditors, .......................................................... [1.115] failure to pay within trading terms, .......................................................... [1.115] inability to borrow further funds or to raise capital, .................................. [1.115] inability to pay a particular debt, ..... [1.85] inability to produce timely and accurate financial information, .................. [1.115] liquidity ratio below 1, ..................... [1.115] overdue taxes, ..................... [1.115], [16.160] special arrangements with selected creditors, ........................................ [1.115] suppliers changing supply terms to cash on delivery (COD), ...................... [1.115] individuals — see Bankruptcy Insolvency Practice Rules, ...................... [1.155] Insolvency Practice Schedules, .............. [1.155] insolvent, definition, .................................. [1.85] insolvent trading and, ............................. [16.90] rebuttal, .............................................. [14.115] safe harbour provisions, .. [1.155], [14.115], [16.60] unsatisfied execution, ...................... [11.200] invoking, .................................................... [1.150] judicial regime, ......................................... [1.185] legislative regime, ...................................... [1.75] changes, ................................................. [1.80] liquidation — see Winding up numbers and trends, ................... [1.225], [2.08] overview, ....................................... [1.05], [21.05] pari passu rule aims, ........................................... [1.35], [1.45] personal — see Bankruptcy

Index Insolvency — cont Personal insolvency agreements (Pt X) — see Personal insolvency agreements (Pt X) PPSA security regime — see Security interest pre-emptive action, .................................. [1.195] presumption of insolvency, ..... [1.140], [11.65], [11.70], [11.265], [11.270], [14.115] debtor challenging, ............................ [1.140] failure to keep adequate records, .. [14.115] recovery proceedings, in relation to, .......................................................... [1.140] professional regime, .................................. [1.75] proof of, ........................... [1.90], [1.115], [1.200] compulsory winding up, .................. [10.75] prospective, ................................................. [1.95] public interest and, ..... [1.150], [1.165], [8.220], [8.270] rehabilitation, .............................................. [1.15] realisable assets, ......................... [1.130], [6.190] reform, ................. [1.80], [1.150]-[1.160], [1.220] inquiry, need for, ................................ [1.230] regulatory and professional regime, ..... [1.75], [1.220] retrospective, ............................................... [1.95] safe harbour provisions, ........ [1.155], [14.115], [16.60] sequestration order, relevance to, ......... [1.140] solvent, definition, ..................................... [1.85] technology, effect on, ................. [1.195], [1.220] terminology, ................................................ [1.70] tests of, ....................................................... [1.100] balance sheet test, ................ [1.100], [1.110] cash flow test, ........................ [1.100]-[1.110] time for assessment, .................................. [1.95] winding up — see Winding up Insolvency Law Reform Act 2016 overview, ............. [1.80], [1.155], [1.160], [2.22] Insolvency practitioner Association of Independent Insolvency Practitioners (AIIP), ......... [1.75], [2.380] Australian Restructuring Insolvency and Turnaround Association (ARITA), .............................................. [1.75], [2.380] Personal Insolvency Professionals Association (PIPA), ................................ [1.75], [9.160] professional regime, .................................. [1.75] Turnaround Management Association (TMA), ............................................................ [1.75] Insolvent trading administrator, company’s decision to appoint and, ................................................. [19.40] advice from appropriately qualified entity, .......................................... [16.105], [21.65]

943

affidavit proof, .......................................... [16.90] assignment of claim, .............................. [16.115] checklist of insolvency indicators, ........ [16.95] civil penalties, ........... [16.50], [16.110], [16.120] compensation for creditors loss, ......... [16.135] deterring breach, .............................. [16.135] unsecured creditors, ......... [16.85], [16.110], [16.135] corporate veil, lifting, .............................. [16.85] creditors, duty to, .................................... [16.75] deeds of company arrangement, under, ........................................................ [20.300] defences, .................... [16.105], [16.130], [21.90] director behaviour prior to insolvency, ........ [4.235], [16.105] deterring breach by, ......................... [16.135] group companies, duty to, ............. [16.125] individual creditor suing, ............... [16.120] liability, ................................ [16.90], [16.140] criminal, ........................................ [16.110] not taking part in management, ... [16.105] group companies, .................................. [16.125] holding company liability for subsidiary, ........................................................ [16.130] incurring a debt, ...................... [16.90], [16.100] debt, meaning, .................................. [16.100] individual creditor’s claim, .................. [16.120] information, provided by reliable subordinate, ........................................................ [16.105] tax liabilities, ..................................... [16.155] insolvency report, .................................... [16.90] liability conditions for, ..................................... [16.90] incurring a debt, ............... [16.90], 16.100] reasonable grounds to suspect insolvency, ...................................... [16.90], [16.95] consequences, .................................... [16.110] director, ................................................ [16.90] non-executive director, ...................... [16.90] s 558G of Corporations Act, ............ [16.85] tax liabilities, ..................................... [16.155] liquidator assigning claim, ................... [16.115] order of application of compensation moneys, ........................................................ [16.135] overview, ................................... [16.85], [16.140] pari passu distribution, ........................... [16.85] presumptions of insolvency, .................. [16.90] reasonable grounds to expect solvency, ........................................................ [16.105] reasonable grounds to suspect insolvency, ............................................ [16.90], [16.95] reason to suspect, meaning, ............. [16.95] reasonable steps to stop incurring debt, ........................................................ [16.105] tax liabilities, ..................................... [16.155] receiver liability for, ............................... [18.450]

944

Keay’s Insolvency: Personal and Corporate Law and Practice

Insolvent trading — cont recovery of loss, ..................................... [16.110] safe harbour provisions, ........ [1.155], [14.115], [16.60], [16.85], [21.65], [21.90] advice from appropriately qualified entity, .......................................... [16.105], [21.65] holding company directors, ........... [16.130] Salomon v Salomon & Co Ltd . [1897], [16.85] standard of proof, .................................... [16.90] subsidiary, holding company liability for, ........................................................ [16.130] suspicion of insolvency, .......................... [21.95] unsecured creditors, compensating, .... [16.85], [16.110], [16.135] Inspector-General in Bankruptcy, ............. [2.110] administration of bankruptcy, ............... [2.110] administrative review of decisions Official Trustee, ................................... [2.110] registered trustees, ............................. [2.110] annulment of bankruptcy, oversight of, ............................................................ [7.40] Attorney-General, supervision by, ........ [2.110] committee of inspection, attending, ..... [6.165] confidential information, ........................ [2.112] meeting of creditors, ................................. [6.95] Pt X agreements, ................................ [8.140] personal insolvency agreements, challenges to, .......................................................... [6.445] power to bring court proceedings, ....... [6.445] private trustees, supervision, . [2.125] see also Registered trustees proposed reform, ....................................... [9.10] review of objection to discharge of bankruptcy by, .............................. [7.145] show-cause notices, ................................. [2.300] trustee reporting requirements, ............ [2.265], [6.585] Instalment order act of bankruptcy, after, ............ [3.165], [3.385] Investigation of bankrupt associated entity, ...................................... [6.205] bankrupt request for information, .......... [6.85] books and records of bankrupt, . [6.15], [6.20], [6.185] access to premises to inspect, .......... [6.205] associated entities, ............................... [6.25] failure to deliver, ...... [6.20], [6.205], [6.215] financial records, .................................. [6.15] s 77A notice, ........................................ [6.205] s 77AA notice, ..................................... [6.205] s 77C notices, ...................................... [6.215] creditors information provided to, .................... [6.55]

views regarding, ................................. [6.190] demand notice, ......................................... [6.200] examinable affairs, meaning, ................. [6.195] interviewing the bankrupt, ...................... [6.35] notices issued by Official Receiver, ....... [6.200] offshore information notices (s 81A), ... [6.275] preliminary inquiries and actions, ........ [6.190] private examinations, .............................. [6.215] s 77C notices, ...................................... [6.215] public examinations — see Public examinations – bankruptcy (s 81) s 77A notice, .............................................. [6.205] s 77AA notice, ........................................... [6.210] search warrant, ................. [4.25], [6.20], [6.195] trustees role in, ............................. [6.20], [6.185] warrant to search and seize property, ... [4.25], [6.20], [6.195] Involuntary bankruptcy overview, ..................................................... [2.50]

J Joint creditors bankruptcy notice, ................................... [3.210] creditor’s petition, .................................... [3.135] judgment or order, names on, ............... [3.210] partnership dividends, ............................ [6.325] provable debts, ......................................... [6.485] sequestration orders effect on, ............... [3.135] Joint debtors bankruptcy notice, ................................... [3.210] consolidation of estates, .......................... [6.320] creditor action against non-bankrupt joint debtor, ............................................ [4.150] creditor’s petition, presentation against, .......................................................... [3.150] debt agreements (Pt IX), ........................... [9.20] debtor’s petition, ...................................... [3.105] referral of petition to court, ............. [3.110] statement of affairs, ........................... [3.105] statement of joint affairs, .................. [3.105] meetings of creditors, .............................. [6.140] Pt X agreements, ................................ [8.155] personal insolvency agreements, ............ [8.35] sequestration order against, ................... [3.150]

L

Legal practitioners Bankruptcy Act, role under, ................... [2.375] controlling trustees, as, ........................... [2.375] ethical responsibilities, ............................ [2.375]

Index Legal practitioners — cont fees payable by trustees, ......................... [2.370] legal professional privilege as property, ............................................................ [4.50] liquidators, .............................................. [10.470] Legal proceedings initiated by bankrupt abandonment by trustee, ........................ [4.115] assignment of rights of action, ............. [4.120], [6.305] before bankruptcy, ................................... [4.115] family law rights of action, .................... [4.120] personal rights of action, ........................ [4.125] stayed from date of bankruptcy, ........... [4.115] vest in trustee, .......................................... [4.120] Legal professional privilege corporate insolvency and, .... [15.110], [15.195] documents of bankrupt and, ................... [6.40] s 77A notice and, .................. [6.205], [6.225] s 77AA notice and, .............. [6.210], [6.225] s 77C notice and, ................................ [6.225] overview, ..................................................... [6.40] property, as, ................................................ [4.50] waiver of, .................................................... [6.40] Liens invalidation of security interest, ......... [14.270] secured creditors, ..................................... [6.505] security interest, ....................................... [18.50] voluntary administration administrator’s lien, ......................... [19.230] court leave to dispose of property subject to, .................................................. [19.380] Life insurance companies foreign liquidators and, .......................... [10.25] winding up, .............................................. [10.25] Liquidation — see Winding up Liquidator administrator, appointment of, ............. [19.35], [19.415] agents, ...................................................... [10.330] carrying on business as, ................. [15.235] annual administration return, ............. [10.275] annual liquidator return, ...................... [10.160] application to become, .......................... [10.145] appointment, ............... [10.45], [10.55], [10.195] ASIC, by, .............................. [10.390], [11.50] court, by, . [10.45], [10.60], [10.75], [10.390], [11.315] creditors’ voluntary winding up, ... [11.30], [11.45]

945

disqualifying relationships, ........... [10.200], [10.210] disclosure of relevant relationship, .................................................. [10.230] guiding principles, ........................... [11.315] independence, requirement, ........... [10.200] lodging notice of, ............................. [10.270] notice of, .............................................. [15.30] statutory restrictions, ....................... [10.200] voluntary liquidator, ....................... [10.350] apprehended bias, .................................. [10.210] ASIC regulatory guides (RGs), ............ [10.130] assets available to — see Winding up dealing with company assets assignment of insolvent trading claim, ........................................................ [16.115] assistance from officers and employees, .............................. [13.40], [13.80], [15.20] failure to assist, ................................ [16.175] books of company, examination, ........ [10.340], [15.15], [15.110], [15.185] books of liquidator, creditors examining, .......................................................... [15.65] carrying on a business, ......... [10.310], [15.235] challenging decision of, ........................ [10.440] classification, ........................................... [10.205] commencement date, assessing, ............ [15.10] company groups, to, .............................. [10.220] compromising debts, ............................... [15.65] conflicts of interest company groups, ............................. [10.220] disqualifying relationships, ........... [10.200], [10.210] fiduciary duties and, ....................... [10.240] independence, ..................... [1.150], [10.445] lawyers, with, ................................... [10.215] removal of liquidators, ................... [10.285] contested proceedings, pursuing, ......... [13.35] continuing professional education (CPE), ........................................ [10.150], [10.165] costs, orders as to, .................. [10.425], [11.315] court appointed, ........... [10.45], [10.60], [10.75] court orders, ............................ [10.405], [10.425] ASIC applying for, ........................... [10.405] consent to apply for, ........................ [11.235] creditor applying for, ...................... [10.430] court oversight — see supervision of liquidator below creditor, relations, .................................... [15.35] informing creditors, ............ [10.55], [15.30], [15.45]-[15.60] meetings of creditors — see Meetings of creditors – winding up rights of creditors, .............................. [15.65] statutory reports to creditors, ......... [15.30], [15.45] creditors’ voluntary winding up, .......... [11.30]

946

Keay’s Insolvency: Personal and Corporate Law and Practice

Liquidator — cont voluntary administrator, becoming liquidator of, ................... [11.45], [20.55] criminal offences, ................... [16.180], [16.185] declaration of independence, relevant relationships and indemnities (DIRRI), ........................................................ [10.230] delegation by, .......................................... [10.250] directions, applying for, .......... [10.345], [15.40] disciplinary action against, .................. [10.175] ASIC, by, ............................ [10.405], [10.435] cancellation of registration, ........... [10.165], [10.365], [10.375], [10.390] conditions on registration, ............. [10.375] court directions, ............................... [10.400] court orders, ...................... [10.405], [10.425] discipline committee, ...................... [10.375] industry notices, ............................... [10.380] recording of, ...................................... [10.385] removal of liquidator, ....... [10.55], [10.445] show cause notice, ........... [10.370], [10.385] suspension of registration, ............ [10.165], [10.365], [10.390] termination of registration, ............ [10.360] disclaimer of assets — see Disclaimer of assets – liquidation discretion, exercising, ............................ [10.250] distribution of company assets — see Distribution of company assets – winding up duties, ....................................................... [10.235] ascertain and take possession of assets, ........................................................ [10.260] ascertain liabilities, .......................... [10.290] assetless company, ........................... [10.295] care and skill, .................................... [10.245] sale of property, regarding ........... [15.240] discretion, exercising, ...................... [10.250] Ex parte James, rule in, ................... [10.300] failure to perform, ........... [10.405], [10.425] fiduciary duties, .............. [10.205], [10.210], [10.240], [16.30] conflicts of interest and, ............... [10.240] honesty, ......................................... [10.240] impartiality, ................................... [10.240] investigate, ........................................ [10.280] keep records and accounts, ............ [10.275] lodge notice of appointment, ......... [10.270] preserve assets, ................................. [10.265] realise assets, ..................... [10.265], [15.240] recover assets, ................................... [10.260] register for GST, ............................... [10.270] report and investigate, .................... [10.280] settle list of contributories, ............. [10.285] statutory, ............................................ [10.255] third parties, to, ................................ [10.245]

examination by — see Examination – corporate insolvency expending own funds, .......................... [10.295] fiduciary duties, .... [10.205], [10.210], [10.240], [16.30] conflicts of interest and, ................. [10.240] honesty, .............................................. [10.240] impartiality, ....................................... [10.240] funding, ................................................... [10.195] funding agreements, .............................. [10.320] group of companies, to, ........................ [10.220] GST, registering for, ............................... [10.270] impartial, ................. [10.205], [10.210], [10.445] indemnity, ................................................ [10.195] independence, .......... [1.150], [10.200], [10.205], [10.210], [10.445], [11.315] declaration of independence, relevant relationships and indemnities (DIRRI), ........................................................ [10.230] relationships, and, ........... [10.200], [10.210], [10.445] disclosure of relevant relationship, .................................................. [10.230] information, provision to creditors, ..... [10.55], [15.30], [15.45]-[15.60] meetings of creditors — see Meetings of creditors – winding up requests by creditors, ........................ [15.45] breach of duty, ................................ [15.50] good faith and, ................................ [15.55] reasonable/unreasonable, . [15.45], [15.55], [15.60] relevance, ........................................ [15.50] vexatious, ........................................ [15.55] statutory reports to creditors, ......... [15.30], [15.45] inside information, use of, ................... [10.255] insurance requirements, ........ [10.170], [10.180] investigations, ......................... [10.280], [15.110] books, accounts and financial records, ........................................................ [10.280] circumstances that lead to liquidation, ........................ [15.110], [15.115], [15.195] examination of officers and employees, .......................................... [10.280], [15.20] external funding for, ........................ [10.280] further report to ASIC (s 533), ...... [15.120] offences, identifying, ....... [15.120], [15.135] breach of duty by director, ............ [16.20], [16.175] statutory report to ASIC, ................ [15.115] legal practitioners, and, ........................ [10.470] liability ascertaining, ...................................... [10.290] liquidator, of, .................................... [10.240] nomination, ............................................. [10.195] notice requirements, ................................ [15.30]

Index Liquidator — cont annual administration return lodgement, .......................................................... [15.45] appointment, of, ................................. [15.30] creditors, to, ........................................ [15.30] initial remuneration notice, ........... [11.320], [15.30] overview, ...... [10.45], [10.50], [10.135], [15.05], [15.445] possession of property, taking, ........... [10.260], [13.35], [15.25] directors and officers assisting, ...... [13.40], [13.80], [15.20] following winding up, .................... [10.265] powers, ........ [10.45], [10.60], [10.135], [10.205] delegation of courts power, ........... [10.340] powers, compulsory winding up, ...... [10.310] all such things as are necessary, .... [10.335] control of court, ................................ [10.340] costs and litigation, ......................... [10.325] directions, .......................................... [10.345] engagement of agents, .................... [10.330] long term funding agreements, restriction, ........................................................ [10.320] public examinations, ........ [10.340], [13.40], [15.155] right to compromise debt, restrictions, ........................................................ [10.315] take possession of company books, ........................................................ [10.340] powers, voluntary liquidator, ................ [10.55] provisional — see Provisional liquidator public examinations, conducting, ...... [10.340], [13.40], [15.120] qualifications, ......... [10.135], [10.145], [10.150], [10.185] legal, ................................................... [10.470] receiver, effect of appointment on, ........................................ [18.165]–[18.185] recovery of assets — see Winding up – dealing with company assets register of, ............................................... [10.170] registration, ............... [10.55], [10.115], [10.140] application for, .................................. [10.145] disqualification from, .................... [10.150] cancellation, ..... [10.165], [10.365], [10.375], [10.390] committee interviews, ..... [10.145], [10.155] conditions on, ................................... [10.375] discipline committee, ...................... [10.375] exams, ................................................ [10.145] experience, ......................... [10.150], [10.185] insurance, .......................... [10.170], [10.180] object of provisions, ........................ [10.185] obligations, ........................................ [10.160] annual liquidator return, ............... [10.160]

947

continuing professional education (CPE), .................................. [10.150], [10.165] qualifications, .... [10.135], [10.145], [10.150] register, ............................................... [10.170] renewal, ............................................. [10.170] suspension of, ... [10.165], [10.365], [10.390] termination of, .................................. [10.360] regulation, ................................................ [10.115] ASIC regulatory guides (RGs), ...... [10.130] relation back day, assessing, .................. [15.10] relevant relationship, ............................. [10.230] declaration of, ................................... [10.230] disclosure of, ..................................... [10.230] disqualifying relationships, ........... [10.200], [10.210] independence and, .......... [10.200], [10.210], [10.445] lawyers, with, ................................... [10.215] removal of liquidators, .......... [10.55], [10.445], [15.35], [15.65], [15.70] court application for, ....................... [10.445] remuneration, ............................ [1.210], [10.55], [10.450]–[10.465] ASIC setting, ....................................... [11.50] assetless company, ........................... [10.295] court review of, ................................ [10.450] creditors approving, ......... [10.450], [15.65], [15.70] disbursements, .................................. [10.450] initial remuneration notice, ........... [11.320], [15.30] legal fees, ........................................... [10.470] lien over assets under their control, ........................................................ [10.460] priority, .............. [10.450], [10.460], [15.380] proportionality, ................................. [10.455] reasonable, ......................................... [10.455] remuneration determinations, ....... [10.465] time-billing, ....................... [10.460], [10.465] replacement, ............................ [10.390], [10.425] creditors’ rights, ............................... [10.395] report as to affairs of company (RATA), ............................ [10.280], [13.30], [15.20] resignation, .............................. [10.225], [10.390] search warrant, applying for, ................. [15.15] special purpose, ...................................... [10.225] statutory duties, ..................................... [10.255] statutory reports to creditors, ......... [15.30], [15.45] supervision of liquidator, ..................... [10.355] challenge to liquidator’s decision, ........................................................ [10.440] costs, orders as to, ........................... [10.425] court inquiries, ................. [10.415], [10.435] court orders, applying for, ............ [10.405], [10.425] court oversight, ................ [10.400], [10.405]

948

Keay’s Insolvency: Personal and Corporate Law and Practice

Liquidator — cont directions, applying for, .................. [10.345] liquidator applying for inquiry, .... [10.420] review of external administration, ........................................................ [10.410] termination of registration, ............ [10.360] tax returns, .............................................. [10.270] termination of registration, .................. [10.360] trustee compared, .... [10.45], [10.135], [10.205] voluntary liquidator, ............................. [10.350] resignation, ........................................ [10.390] voluntary winding up, ............................ [10.55] who may become, .................................. [10.150] Litigation funding financial support for proceedings, ........ [6.430]

M Maintenance agreements — see Family law claims Managed investment schemes (MIS) registration and operation, ..................... [10.25] responsible entity, .................................... [10.25] winding up, .............................................. [10.25] Meetings of creditors administration — see Meetings of creditors – administration bankruptcy — see Meetings of creditors – bankruptcy consolidated creditor meeting, .............. [20.15] group companies, .................................... [20.15] liquidation — see Meetings of creditors – winding up Part X agreements — see Meetings of creditors – Pt X agreements personal insolvency agreements — see Meetings of creditors – Pt X agreements schemes of arrangement, ...................... [21.125] voluntary administration — see Meetings of creditors -administration Meetings of creditors – administration consolidated creditor meeting, .............. [20.15] deed of company arrangement, ............ [20.40] approval, ................................ [20.20], [20.40] proposal, .............................................. [20.40] entitlement to vote, . [19.100], [19.350]-[19.365] admitted creditors, ........................... [19.355] contingent debts, .............................. [19.365] secured creditors, ............................. [19.355]

status as creditor, dependent on, .. [19.350] unliquidated claims, ........................ [19.365] first meeting, ............................ [19.290]-[19.300] committee of inspection, appointment, ........................................................ [19.290] declaration by administrator, ......... [19.295] removal of administrator, ............... [19.290] requirements, .................................... [19.300] time for holding, ................ [19.300], [20.40] group companies, .................................... [20.15] overview, ................................................. [19.285] second meeting, ....................... [19.305]-[19.335] adjournment, ..................................... [19.335] administrator presiding at, ........... [19.300], [19.330] alternatives to be decided on, ....... [19.305] court determining whether properly held, ........................................................ [19.385] creditors’ details, notice of, ............ [19.305] details of proposed deed, ............... [19.325] extension of time for, ...... [19.310], [19.312] court power, .................................. [19.380] 45 business day limit, ..................... [19.335] report to creditors, ........................... [19.315] time for holding, .............................. [19.310] voting at, ............................ [19.340]-[19.370] voting, ....................................... [19.340]-[19.370] casting vote, ...................................... [19.345] court’s power to review, ................. [19.345] entitlement to vote, ......................... [19.100], [19.350]-[19.365] admitted creditors, ........................ [19.355] contingent debts, ........................... [19.365] secured creditors, .......................... [19.355] unliquidated claims, ...................... [19.365] recording votes, ................................ [19.370] related creditor, ................................ [19.345] unanimous vote, ............................... [19.370] vote on the voices, ........................... [19.370] winding up of company, on, ............ [11.45] Meetings of creditors – bankruptcy adjournment, ............................... [6.115], [6.130] advertisement of on AFSA website, ..... [2.115] agenda, ....................................................... [6.110] annulment of bankruptcy, ............ [7.25], [7.45] scheme of arrangement or composition, ............................................................ [7.35] attorney, ....................................... [6.110], [6.135] chair/chairperson, ........................ [6.110], [7.45] duties, ................................................... [6.155] committee of inspection, ............. [6.95], [6.165] convening creditors directions, ........................... [6.145] unreasonable, ...................... [6.150], [8.30] proposal lodged by debtor, on, ....... [6.140] trustee calling, .......... [3.190], [6.95], [6.140]

Index Meetings of creditors – bankruptcy — cont notice of meetings, ......................... [6.105] vexatious, ............................................. [6.150] creditor statements, .................................. [6.110] joint bankruptcies, ................................... [6.140] minutes, ..................................................... [6.130] notice of meetings, ......... [6.100], [6.105], [7.45] AFSA scrutiny, .................................... [6.105] overview, ..................................................... [6.95] Part X agreements — see Meetings of creditors – Pt X agreements personal insolvency agreements — see Meetings of creditors – Pt X agreements president (chairperson), .............. [6.110], [7.45] duties, ................................................... [6.155] priority payments, creating, ................... [6.560] procedure, .................................................. [6.110] proposals lodged by debtor, .................. [6.140] proxies, ......................................... [6.110], [6.135] quorum, ..................................................... [6.115] resolutions, ................................................ [6.110] accepting scheme of arrangement or composition, ........................ [7.35], [7.55] annulment of bankruptcy, ...... [7.25], [7.45] scheme of arrangement or composition, .......................................... [7.35], [7.55] ordinary, ............................................... [6.120] passing without meeting, ................ [6.130] special passing without meeting, ................ [6.130] priority payments, creating, ............ [6.560] termination, for, .................................. [8.310] voting on, ............................................ [6.115] without meeting, ................................ [6.130] trustee calling meeting, ...................... [3.190], [6.95] notice of meetings, ......................... [6.105] removal of at meeting, ........ [6.125], [6.160] reporting to meeting, .......................... [6.50] voting, ........................................................ [6.110] deciding vote, ..................................... [6.125] ordinary resolution, ........................... [6.120] polls, ..................................................... [6.115] proxies, ................................................. [6.135] Meetings of creditors – Pt X agreements adjourning, .................................. [8.150], [8.170] calling, ............................................ [3.190], [8.85] conduct, ....................................... [8.150], [8.170] setting aside agreement, and, .......... [8.235] trustee liability for, ............................ [8.295] controlling trustee — see Controlling trustee creditor’s rights, ....................................... [8.180] debate at meeting, ................................... [8.170] debtor attending, ...................................... [8.150] debtor’s proposal, .................................... [8.170]

949

following failure to implement agreement, ..... [8.195] limitation on further agreements, ... [8.190] notification requirements, ................. [8.185] sequestration order issue, ................. [8.195] further agreements, ................................. [8.190] Inspector-General attendance, ............... [8.140] joint debtors, ............................................. [8.155] notice of, ...................................... [8.120], [8.135] creditors not notified still bound, ... [8.135] notification requirements following, .... [8.185] overview, .................................................... [8.115] remuneration of trustee, ......................... [8.175] expected amount, ............................... [8.130] order of payment, ................ [6.545], [6.550] resolutions and special resolutions, ....... [8.95], [8.160], [8.165] adjournment of meeting, .................. [8.150] agreement, passing, ........................... [8.160] controlling trustee releasing property, .......................................................... [8.165] debtor petition, ................................... [8.165] executing agreement, .......... [8.165], [8.170] notification requirements, ................. [8.185] statement under s 189B, .................... [8.110] trustee, nominating, ........................... [8.170] rules, ........................................................... [8.120] s 188 authority requirements, .... [3.190], [8.70] s 189A report and declaration, .............. [8.150] secured creditors, ..................................... [8.147] sequestration order following, .............. [8.195] statement of affairs, ................................. [8.150] timing of, ..................................... [8.120], [8.125] trustee nominating, ......................................... [8.170] remuneration, ..................................... [8.175] creditors reviewing, ........................ [8.180] voting, .......................................... [8.147], [8.160] closeness of vote, ............................... [8.235] joint debtors, ....................................... [8.155] related party votes, ............................ [8.235] trustee disallowing, ........................... [8.295] Meetings of creditors – winding up adjournment, ............................................. [15.95] appointment of liquidator, ..................... [15.70] notice of, .............................................. [15.30] chair/chairperson, ................................... [15.85] convening, ................... [10.340], [15.35], [15.65] creditors’ voluntary winding up, ......... [10.20], [10.55], [15.70] defects in process, .............................. [11.35] member’s meeting, .............. [10.20], [10.55] notice, .............................................. [10.55] removal of liquidator, ..... [10.55], [10.445] no declaration of solvency, ............... [11.30] special resolution, .............................. [11.25] deemed, ........................................... [11.50]

950

Keay’s Insolvency: Personal and Corporate Law and Practice

Meetings of creditors – winding up — cont members’ meetings creditors’ voluntary winding up, .... [10.55] removal of liquidator, ..... [10.55], [10.445] solvent winding up, .......................... [10.20] members’ voluntary winding up, ........ [11.10], [11.15] minutes, ..................................... [10.275], [15.90] notice of meetings, ................................... [15.75] members’ voluntary winding up, ... [11.10] overview, ................................................... [15.70] president (chairperson), .......................... [15.85] proxy form, ..................................................... [15.75] liquidator special proxy, ................. [15.100] quorum, ............................................... [15.80] Published Notices Website (PNW), .... [10.125] quorum, ..................................................... [15.80] adjournment for lack of, ................... [15.95] record of those present, .......................... [15.90] removal of liquidator, ............................. [15.70] remuneration of liquidator, ... [10.450], [15.65], [15.70] replacement of liquidator, .................... [10.395] resolutions, .............................................. [15.105] circulating resolutions, ...................... [15.70] members’ voluntary winding up, ... [11.10] passing, .................................. [11.15], [11.20] without meeting, ............................. [15.70] pooling arrangements, .................... [15.315] special, ................................................. [15.70] rules, ........................................................... [15.70] secured creditors, ................... [15.100], [15.305] solvent winding up, ................................ [10.20] statement of assets and liabilities, ........ [11.15] voting, ........................................ [15.70], [15.100] poll, ..................................................... [15.105] proxies, ................................................. [15.75] show of hands, ................................. [15.105] Members’ voluntary winding up declaration of solvency, ............. [11.15], [11.25] insolvent, liquidator believes company is, .......................................................... [11.40] liquidator, .................................................. [11.23] meeting of creditors, ................................ [11.15] overview, ................................................... [10.20] solvent winding up, ................................ [10.20] special resolution, .................................... [11.10] passed, .................................................. [11.20] statement of assets and liabilities, ........ [11.15] Mortgages agent for mortgagee in possession, ...... charge under s 139ZR priority over, .... mortgagee in possession, .......... [18.20], secured creditors, ....................... [4.190],

[18.20] [5.265] [18.30] [6.505]

taking possession of collateral, ....... [18.20], [18.30] security interest definition, ............................................ [13.70] invalidation of, ................................. [14.270] preference, as, ..................................... [5.160] trustee requiring discharge of, .............. [4.190]

N National Personal Insolvency Index (NPII) bankruptcy records, ................................. [2.115] creditor’s meetings, advertisement of, . [2.115] creditor’s petitions, .................................. [2.115] debt agreements, ...................................... [2.115] details of registered trustees, ................. [2.115] formal arrangements entered under Act, .......................................................... [2.115] Pt IX debt agreements, ............................ [2.115] Pt X personal insolvency agreements, ... [8.70] Pt 13 regulations, ..................................... [2.115] public search, ............................................ [2.115]

O Official Receiver in Bankruptcy bankruptcy notice, issuing, .................... [3.200] conduct of administration, ..................... [2.125] debt agreements (Pt IX) assessment, ...... [9.35] declaration of intention to present a debtor’s petition, ............................................ [3.15] act of bankruptcy, ................................ [3.45] administrative nature of, .................... [3.55] debtors who may not present, .......... [3.20] signature on, effect, .............................. [3.35] issue and serve notices, powers, ........... [2.125] production of documents, ................ [2.125] practice statements, ................................. [2.130] statutory notices, issue of, ...................... [6.210] supervisory and oversight role, ............ [2.125] Official Trustee in Bankruptcy — see also Trustee appointment, ............................................... [3.90] following removal of trustee, .......... [6.160] assessment and collection of income contributions (OTPS 1), .............. [2.130] body corporate, ........................................ [2.125] consumer bankruptcies, .......................... [2.125] indemnity, right of, ...................... [2.275], [6.90] practice statements, ................................. [2.130] recovery of property, ............................... [2.125] remuneration, ........................................... [2.125] Order of payments costs and expenses administration, of, .............................. [6.545]

Index Order of payments — cont trustee, of, .............................. [6.545], [6.550] deeds of company arrangement, ........ [20.185] equality among creditors, ....................... [6.535] Fair Entitlements Guarantee (FEG), .... [1.200], [6.540], [13.80] pari passu and, ........ [6.535], [15.340], [15.345], [16.78] priority payments bankruptcy — see Priority payments – bankruptcy deeds of company arrangement, ......................................... [20.185]-[20.195] winding up — see Priority payments – winding up remuneration of trustee, ........... [6.545], [6.550] secured creditors, ....................... [5.235], [6.535] unsecured creditors, .................. [6.535], [6.540] wages of employees of bankrupt, .......... [6.90], [6.560]

P

Pari passu bankruptcy, ................................................ [6.535] exceptions, ................................................. [1.165] insolvent trading claims, ........................ [16.85] overview, ....................................... [2.25], [16.78] PPSA and, .................................................. [1.165] priorities and, ........................................... [1.165] bankruptcy — see Priority payments – bankruptcy winding up — see Priority payments – winding up winding up, ............................ [15.340], [15.345] exceptions, ......................................... [15.345] subordination of debt, ..................... [15.345] Part 5.3A of Corporations Act — see Voluntary administration Part IX debt agreements — see Debt agreements (Pt IX) Part X agreement — see Personal insolvency agreements (Pt X) Partnerships creditor’s petition presented against, .............................. [3.145] presenting petition, ............................ [3.340] debtor’s petition, ........................................ [3.95] referral of petition to court, ............. [3.100] statement of affairs of each partner, . [3.95]

951

partnership dividends, ............................ [6.325] provable debts, ......................................... [6.485] receivership, .............................................. [18.05] Personal insolvency agreements (Pt X) acts of bankruptcy, ..................... [3.190], [3.192] advantages of, ............................................. [8.40] creditor, for, ........................................... [8.50] debtor, for, ............................................. [8.45] bankruptcy provisions applicable, .......... [8.55] certificate of discharge of the debtor’s obligations, ........................ [8.65], [8.205] contents, ....................................................... [8.35] controlling trustee — see Controlling trustee creditor, advantages to, ............................. [8.50] creditor’s petition, and, ............................. [8.60] creditor’s rights, ....................................... [8.180] death of debtor, effect, ................ [8.95], [8.310] debtor, advantages to, ................. [8.45], [8.205] debtor’s petition and, ................................ [3.70] debtor’s property, effect on, ....... [8.75], [8.205] disclosure requirements, ........................... [8.05] ending of, .................................... [8.205], [8.220] exclusions, ................................................... [8.30] failure to implement agreement, ........... [8.195] family law, effect on, ............................... [8.210] identification and specification of debtor’s property, .......................................... [8.35] Insolvency Law Reform Act 2016 changes, ............................................................ [8.25] insolvent debtor, ......................................... [8.20] Inspector-General in Bankruptcy challenging, .......................................................... [6.445] joint agreements, ........................................ [8.35] meeting of creditors — see Meetings of creditors – Pt X agreements National Personal Insolvency Index (NPII), entry, ................................................. [8.70] overview, ............. [8.05], [8.10], [8.205], [8.330] Part 5.3A administrations distinguished, ............................................................ [8.15] Part IX agreements distinguished, ......... [8.05], [9.10] period of control, ........................... [8.65], [8.95] stay of creditors’ claims, ..................... [8.75] prescribed information, debtor receiving, ............................................................ [8.70] priority payments, ..................... [6.550], [6.555] proof of debts, .......................................... [8.205] provable debts, effect on, .............. [8.55], [8.65] public hearings, ........................................ [8.270] public interest and, .................... [8.220], [8.270] records relating to, ................................... [8.205] regulated debtor, meaning, ...................... [8.25] s 188 authority, ......................................... [3.190] agreement process and, .......... [8.65], [8.70] creditor’s petition, effect on, .............. [8.60]

952

Keay’s Insolvency: Personal and Corporate Law and Practice

Personal insolvency agreements (Pt X) — cont debtor’s property, effect on, ............... [8.75] effect of signing, ....................... [8.50], [8.75] “effective”, ............................................. [8.75] period of control, ............................... [8.190] restrictions on, ...................................... [8.80] subsequent charges, ............................. [8.75] setting aside by court, ............... [8.225], [8.230] agreement is unreasonable or not to creditor’s benefit, ......................... ancillary orders, ................................. application for, ...................... [8.285], delay, ............................................... compensation, ..................................... conduct of meeting, ........................... effect, ....................................................

[8.230] [8.280] [8.295] [8.285] [8.280] [8.235] [8.325]

false and misleading information provided to creditors, ................................... [8.245] interests of creditors, .......... [8.240], [8.265], [8.270] limitation period, ............................... [8.285] non-compliance with requirements, .......................................................... [8.240] notice requirements, .......................... [8.320] part of agreement, ............................. [8.290] sequestration order following, ........ [8.270] application for, ................................ [8.275] standing to bring applications, ....... [8.260] termination, distinguished, .............. [8.285] time limits, .......................................... [8.250] trustee, role, ........................................ [8.295] voting, closeness of, ........................... [8.235] statement of affairs, ....... [8.70], [8.100], [8.120] termination, ............................................... [8.220] application for, .................................... [8.285] certificate, ............................................ [8.305] court, by, ................................ [8.225], [8.255] ancillary orders, .............................. [8.280] compensation, ................................. [8.280] interests of creditors, ........ [8.265], [8.270] sequestration order following, ....... [8.270], [8.275] setting aside, distinguished, ............ [8.285] standing to bring applications, ....... [8.260] time limits, ...................................... [8.285] creditors, by, .......................... [8.285], [8.310] resolution, by, ................................. [8.310] default of debtor, ............................... [8.305] effect, .................................................... [8.325] final payment, on, .............................. [8.315] limitation period, ............................... [8.285] notice requirements, ............ [8.305], [8.320] part of agreement, ............................. [8.290] terminating event, by, ....................... [8.315] trustee, by, ............................. [8.285], [8.305] notice requirements, ........................ [8.320]

threshold criteria, ....................................... [8.20] timeline to making of agreement, ........... [8.65] trustee appointing, .......................................... [8.275] nominating, ......................................... [8.170] “professional” opinion, ..................... [8.105] remuneration, ..................................... [8.175] creditors reviewing, ........................ [8.180] unpaid, ............................................. [8.325] terminating agreement, ..................... [8.305] variation, .................................................... [8.215] notice requirements, .......................... [8.320] void, .............................................. [8.285], [8.290] Personal Insolvency Professionals Association (PIPA) Code of Professional Practice, ............... [9.160] debt agreement administrators, ............ [9.160] overview, ..................................................... [1.75] Personal Property Securities Act (PPSA) regime secured creditors — see Secured creditors security interest — see Security interest Pledge security interest, ....................................... [18.50] Pooling court-ordered pooling, .......... [15.320], [15.325] ancillary orders, ............................... [15.320] deed of company arrangements, .......... [20.15] groups of insolvent companies, ...... [20.15] determination, ........................................ [15.315] effect, ........................................ [15.315], [15.320] eligible unsecured creditor, .................. [15.315] intermingled assets, ............................... [15.325] liquidators powers, ................................ [15.315] overview, ................................................. [15.310] voluntary pooling, ................................. [15.315] Preferences avoidance provisions and, ........ [5.05], [14.35], [14.170] burden of proof, ....................................... [14.75] business purpose of payments, ............. [5.185] contingent creditor, .................................. [14.75] court orders transaction was a preference, ........................................................ [14.170] time limit for application, .............. [14.175] creditor meaning, .............................................. [14.75] protective provisions, ........................ [5.140] debtor-creditor relationship requirement, .......................................................... [5.160] third party payments, ....................... [5.165] defeating or delaying or obstructing creditors, ........................................................ [14.140]

Index Preferences — cont defences to preference claim, ................ [5.140], [5.190]-[5.230], [14.125] consideration, ..................................... [5.225] good faith, ........................... [5.220], [14.190] in the ordinary course of business, .......................................... [5.230], [14.230] maintenance and debt agreements, .......................................................... [5.200] persons acquiring property from creditor, .......................................................... [5.195] secured creditor payment isn’t a preference, ..................................... [5.235] delivery of goods, payment for, ............ [5.185] effect of finding preference was given, ........................................................ [14.130] effect of transaction, ................ [5.175], [14.105] elements of voidable preferences, ............................... [5.145]-[5.180], [5.190] insolvency at time of transaction, ........ [5.155], [14.65], [14.90] meaning, .................................................... [5.135] overview, ..................................... [5.125], [14.65] payment in advance by debtor, ............ [5.155], [5.185], [14.75] payment of secured creditor, ................. [5.235] peak indebtedness rule, .......... [5.185], [14.120] pre-bankruptcy transactions, ................... [5.05] pre-existing debt, ................................... [14.165] prepayment, .................. [5.155], [5.185], [14.75] proof requirements burden of proof, ................................. [14.75] creditor, ................................................ [5.140] trustee, ................................... [5.135], [5.175] protective provisions — see Protective provisions purpose, ................................................... [14.140] reasons for paying, .................... [5.130], [14.70] receiver’s liability to repay, .................... [14.85] recovery of, ............................................... [5.125] creditor protections, ........................... [5.140] repayment of benefit, ............................ [14.130] running accounts, .................... [5.185], [14.120] security interest, ....................................... [14.85] existing debt, over, ............................. [5.235] property, over, ..................................... [5.155] set off against liquidator, ...................... [14.130] setting aside by trustee, .......................... [5.135] third party payments, ............................. [5.165] time of transaction, .................................. [5.180] extended period for related-entities, ........................................................ [14.100] within six month period, .................. [14.95] transaction, ................................................ [14.80] trust, money or property held by debtor on, .......................................................... [5.150]

953

unfair preferences, .................... [14.35], [14.45], [14.65]-[14.130] court orders, ....................... [14.170]-[14.175] pre-existing debt, ............................. [14.165] purpose, ............................................. [14.140] upfront payment as a fee, ...................... [14.75] void transaction as, ................................. [5.170] voidable preferences, .................. [5.145]-[5.180] debtor was insolvent, ........................ [5.155] effect of transaction, .......................... [5.175] payment in favour of creditor, ........ [5.160] other creditors, ................................ [5.170] third party payments, ...................... [5.165] time of transaction, ............................ [5.180] transfer of property, ........................... [5.150] unfair preferences, .............. [14.35], [14.45], [14.65]-[14.130], [14.165] winding up, in creditor was preferred, ..... [13.75], [14.105] defences, ............................................ [14.125] four-year extended time period for related-entities, ........................... [14.100] insolvent transaction, .......... [14.65], [14.90] legal proceedings against, ................ [13.75] reasons for preference, ...................... [14.70] receiver’s liability to repay, .............. [14.85] running accounts, ............................ [14.120] third party transfers, ......................... [13.75] time of transaction, ............................ [14.95] extended period for related-entities, .................................................. [14.100] transaction, proof of, ......................... [14.80] transaction within six month period, .......................................................... [14.95] extended period for related-entities, .................................................. [14.100] unfair preferences, .............. [14.35], [14.45], [14.65]-[14.130] Priority payments – bankruptcy audit costs, ................................................ [6.545] balance of funds, ...................................... [6.580] costs and expenses administration, of, .............................. [6.545] trustee, of, .............................. [6.545], [6.550] court ordered, ........................................... [6.570] discretion, ............................................ [6.575] special resolution, reversing, ........... [6.565] Fair Entitlements Guarantee (FEG), .... [1.200], [6.540] final order of payment, ........................... [6.580] insufficient funds to cover, ..................... [6.580] overview, ................................................... [6.540] Part VI scheme or composition, ............ [6.555] Part X agreement, liabilities under, ..... [6.550], [6.555] provisions of Act overriding, ................. [6.575]

954

Keay’s Insolvency: Personal and Corporate Law and Practice

Priority payments – bankruptcy — cont remuneration of trustee, ........... [6.545], [6.550] secured creditors, between, .................. [15.305] special resolution granting, .................... [6.560] taxed costs of petitioning creditor, ....... [6.545] unsecured creditors, .................. [6.535], [6.540] wages of employees of bankrupt, .......... [6.90], [6.560] Priority payments – winding up administrator debts, .............................. [15.365] advances to pay employee entitlements, ........................................................ [15.410] anti-deprivation principle, ..................... [13.72] clearing house arrangements, ................ [13.72] committee of inspection, expenses, .... [15.385] costs and expenses relating to company property, ...................................... [15.355] legal costs, ......................................... [15.360] court conferring priority, ...................... [15.420] deferred expenses, . [15.355], [15.370], [15.380] employees, ............................................... [15.390] advances to entitlements, ............... [15.410] assisting liquidator, ............. [13.40], [13.80], [15.20] effect on, .............................................. [13.80] employment contracts, .................... [15.400] excluded employees, ....................... [15.390] Fair Entitlements Guarantee (FEG), ............ [1.200], [13.80], [15.270], [15.415] leave entitlements, ........................... [15.395] priority payments, ........................... [15.390] retrenchment payments to employees, ........................................................ [15.400] superannuation guarantee charge (SGC), ........................................ [15.270], [15.390] wages, ................................................ [15.390] Fair Entitlements Guarantee (FEG), .... [1.200], [13.80], [15.270], [15.415] insufficient funds, where, ..................... [15.350] leave entitlements of employees, ........ [15.395] liquidator expenses, ............................................ [15.355] legal costs, ......................................... [15.360] remuneration, ... [10.450], [10.460], [15.380] other winding up expenses, ................. [15.375] overview, ................... [13.50], [15.340], [15.350] pari passu, ................... [2.25], [15.340], [15.350] purchase money security interest (PMSI), .......................................................... [14.20] report as to costs, ................................... [15.370] retrenchment payments to employees, ........................................................ [15.400] schemes of arrangement and, .............. [15.345] secured creditors, between, .................. [15.305] subordination of debts, ......................... [15.345]

superannuation contributions, ............. [15.390] superannuation guarantee charge (SGC), ........................................................ [15.390] tax obligations, ....................... [15.350], [15.405] taxed costs of applicant for winding up order, ........................................................ [15.360] trustee, company acting as, .................. [15.350] voluntarily winding up, ....................... [15.370] wages, ...................................................... [15.375] Private examinations overview, ................................................... [6.215] s 77C notices, ............................................ [6.215] Privately appointed receivers — see Receivers, privately appointed Privilege examination, restrictions on, .................. [6.260] legal professional, ........................ [6.40], [6.260] corporate insolvency, ....... [15.110], [15.195] property, as, .......................................... [4.50] s 77A notice and, .................. [6.205], [6.225] s 77AA notice and, .............. [6.210], [6.225] s 77C notice and, ................................ [6.225] qualified privilege, ................................. [19.195] s 189A report and declaration, ........ [8.100] self incrimination, against bankruptcy, ................ [6.20], [6.225], [6.260] corporate insolvency, ....................... [15.190] waiver of, .................................................... [6.40] Proof of debts – bankruptcy appeal against trustee decision, ........... [4.165], [6.520] bankruptcy notice and, ............. [3.215], [3.390] contingent liabilities, ................. [6.470], [6.475] criteria for, ................................... [6.460], [6.470] dealings, meaning, ................................... [6.490] debts provable in bankruptcy, ... [2.65], [6.460] discharge of bankruptcy effect on, .. [7.110] personal insolvency agreements effect on, ............................................................ [8.55] doctrine of election, ................................. [6.485] double proofs, rule against, ................... [6.485] fair entitlements guarantee (FEG), ........ [6.540] foreign currency debts, ........................... [6.470] future liabilities, ......................... [6.470], [6.490] guarantors, ................................................ [6.485] income tax, ................................................ [6.480] joint creditors, ........................................... [6.485] monetary terms, claim in, ...................... [6.470] non-provable claims, ................. [6.465], [6.470] discharge of bankruptcy effect on, .. [7.110] fines and penalties, ............................ [6.465] loss a result of misleading and deceptive conduct, ......................................... [6.465]

Index Proof of debts – bankruptcy — cont unliquidated damages, ..................... [6.465] partnership creditors, .............................. [6.485] periodical payments, ............................... [6.470] personal insolvency agreements, .......... [8.205] purchased debts, ...................................... [6.510] purpose bankruptcy, ............................ [4.150], [4.165] winding up, ...................................... [15.250] rejection of, .................................... [6.520], [7.30] right to share of bankrupt’s estate, ....... [2.65], [4.145], [6.460], [6.530] distribution of estate to creditors — see Distribution of estate – bankruptcy unlawful proceedings, ....................... [4.150] rounding down, ....................................... [6.520] secured creditors and, ............................. [6.505] set-off, ......................................................... [6.490] limits on, .............................................. [6.495] mutuality, meaning, ........................... [6.495] security interest, grant of, ................ [6.490] superannuation guarantee charge (SGC), .......................................................... [6.540] tax liabilities, ............................................. [6.480] trustee admitting debt to proof, ............ [6.460] trustee determining, .................. [4.150], [4.165] appeal against, ...................... [4.165], [6.520] court varying, ..................................... [6.520] unlawful conduct, arising from, ........... [6.575] Proof of debts - winding up appeal against liquidator decision, ..... [15.300] claims of uncertain value, estimate of, ........................................................ [15.280] contributories’ claims, ........................... [15.290] deeds of company arrangement, ........ [20.165] double proofs, rule against, ................. [15.260] superannuation guarantee charge (SGC), ........................................................ [15.265] employee wages, .................................... [15.270] fair entitlements guarantee (FEG), ...... [15.270] form, ......................................................... [15.295] future debts, ............................................ [15.255] statutory discount for payment, ... [15.255] liquidators determining, ....................... [15.295] appeal against decision, .................. [15.300] overview, ..................... [13.50], [13.55], [15.250] penalties and fines, .................. [13.65], [15.275] purpose, ................................................... [15.250] relevant date, .......................................... [15.250] set-off, ....................................................... [15.285] subordinate claim, ................................. [15.290] superannuation guarantee charge (SGC), ........................................................ [15.270] double proofs, rule against, ........... [15.265] understated, ............................................ [15.295]

955

Property of bankrupt after-acquired property, ............. [4.25], [4.230], [7.180] annulment of bankruptcy effect on, ...... [4.45], [7.15], [7.100] ascertainment by trustee administering estate, ............................................................ [4.20] bankrupt refusing to give up possession, .......................................................... [6.170] beneficiary of a trust, ................................ [4.50] bequests, .......................................... [4.25], [4.55] “Books” or records of a bankrupt, ......... [4.50] capital gains tax (CGT) on sale of asset, ............................................................ [4.45] certificate of title to real estate, ............... [4.20] charge over, creation under s 139ZR, .. [5.265], [5.275] claims subject to legal proceedings initiated by bankrupt, .................................. [4.115] companies, ................................................... [4.25] concealing or removing, .......... [3.440], [4.235], [6.195] delay in trustee taking possession, . [6.170] consolidation of estates, .......................... [6.320] contributions to superannuation funds, ................................................ [4.25], [4.95] controlling trustee taking control of, ...... [8.85] cost effective return on, .......................... [6.190] court directions, ......................... [6.315], [6.455] criminal forfeiture orders, ........................ [4.25] dealing with assets, ................................. [6.300] debt agreements (Pt IX), distribution under, ............................................................ [9.70] definition, .................................................. [5.250] directions from the court, ......... [6.315], [6.455] discharge of bankruptcy, effect on, ........ [7.20], [7.160] disclaimer of assets, ................................. [6.280] contracts, .............................................. [6.290] effect, .................................................... [6.285] leased property, .................................. [6.285] mitigation of loss, .............................. [6.280] notice of disclaimer, ........................... [6.280] discretionary trusts, ................................... [4.50] disposal, improper or unfair, ..... [4.20], [4.235] distribution to creditors — see Distribution of estate - bankruptcy divisible property, ........... [4.25], [4.45], [4.150], [6.195] after-acquired, ..................................... [7.180] determining ownership, ................... [6.190] doctrine of relation, ................................... [4.65] entity controlled by bankrupt, .............. [5.250] exempt property — see Protected property family home, ............................................. [4.132] family law claims, and, — see Family law claims

956

Keay’s Insolvency: Personal and Corporate Law and Practice

Property of bankrupt — cont family property — see Family and associates of bankrupt forfeiture orders, ........................................ [4.25] freezing orders, ......................................... [6.190] funds transferred to superannuation fund, ............................................................ [4.25] improper or unfair disposal, ...... [4.20], [4.235] income — see Income of the bankrupt income distinguished, ............................... [4.45] insurance policies, ........................ [4.95], [6.500] interest and tax, ........................................ [6.335] legal professional privilege as, ................ [4.50] liquidator, assets available to — see Winding up – dealing with company assets market value, ................................ [5.35], [5.260] matrimonial assets, division of, ............ [4.135] non-divisible property, .............................. [4.25] bankruptcy effect on proceedings to claim, .......................................................... [4.155] deceased estates, ................................ [6.590] non-monetary property and debt agreements, ............................................................ [9.20] overseas bankruptcies, .............................. [4.40] overseas property, ........................ [4.35], [6.175] Model Law on Cross-Border Insolvency, .................................. [4.35], [4.40], [5.245] recovery under, ...................... [4.35], [6.175] overview, ..................................................... [4.20] payments received by execution or garnishment, ................................. [4.175] payments recovered and held by sheriffs and courts, ............................................. [4.185] personal property, ...................................... [4.45] policies in demutualisation of insurance company, .......................................... [4.50] proceeds of crime, .................................... [4.195] property acquired after “commencement” of bankruptcy, .............. [4.25], [4.55], [4.60] bequests, .................................... [4.25], [4.55] disclosure to trustee, obligation, ....... [4.25] lottery win, ............................................ [4.55] vesting of, .............................................. [4.60] property acquired from debtor after date of bankruptcy, .................. [4.215] before date of bankruptcy, ............... [4.215] purchased in good faith, ... [4.175], [4.210], [4.215] transfers to defeat creditors exemption, ...................................................... [5.85] undervalued transactions exemption, ...................................................... [5.50] “property”, definition, .............................. [4.25] protected dealings — see Protected dealings protected money — see Protected money protected property — see Protected property

protective provisions — see Protective provisions real property, ............................................... [4.45] realisable assets, ......................... [1.130], [6.190] realising the assets, .................................. [6.330] recovery of — see Recovery of property relation back, doctrine — see Relation back rights of action assignment of, ....................... [4.120], [6.305] trustees, ............................. [6.310], [6.430] family law, ........................................... [4.120] personal, .............................................. [4.125] trustee, of, .............................. [6.310], [6.430] s 188 authority, effect on, .......................... [8.75] period of control, ............................... [8.190] savings during bankruptcy period, ........ [4.60] assets acquired, and, ........................... [4.60] search warrant, ................. [4.25], [6.20], [6.195] secured creditors — see Secured creditors seize property, order allowing trustee to, .............................................. [4.25], [6.195] selling, ........................................................ [6.330] share issues, ................................................ [4.50] statement of affairs, ................................... [6.30] superannuation funds, .................. [4.25], [4.95] surplus, ........................................................ [7.30] tax refunds, ................................... [4.45], [6.480] time limits for claiming, ......................... [6.330] “tools of trade”, .............................. [4.80], [4.85] transfer of defeat creditors, to — see Transfers to defeat creditors prior to bankruptcy, ........................... [4.230] related third parties, to, .................... [4.132] transfer of property, meaning, .......... [5.20], [5.30], [5.65] trustee challenging, .............................. [5.05] transportation, ............................................ [4.90] trustee taking possession of, ... [6.170], [6.300], [8.50] period of control, ............................... [8.190] trusts, .............................................. [4.50], [5.250] examinable period, ............................ [5.250] express trusts, ..................................... [4.142] net worth, ............................................ [5.250] resulting and constructive trusts, ... [4.142] trustee right of indemnity, ................. [4.50] types, ............................................................ [4.45] used in earning income, ............... [4.80], [4.85] valuation of, ................................................ [5.35] vesting of property in trustee, .... [2.55], [4.25], [4.50] after acquired property, ...................... [4.60] family law property order, subject to, ............................................................ [4.25] registered on title, ................................ [4.50]

Index Property of bankrupt — cont warrant to search and seize property, ... [4.25], [6.20], [6.195] Protected dealings burden of proof, ......................... [4.210], [4.215] contracts for valuable consideration, ... [4.210] creditors acting in good faith, .. [4.205]-[4.215] in the ordinary course of business, ..... [4.210], [4.215] property acquired from debtor after date of bankruptcy, .................. [4.215] before date of bankruptcy, ............... [4.215] purchased in good faith, ... [4.175], [4.210], [4.215] transfers to defeat creditors exemption, ...................................................... [5.85] undervalued transactions exemption, ...................................................... [5.50] Protected money award of damages breach of contract, ............................. [4.125] defamation, ........................... [4.100], [4.125] personal injury, ..................... [4.100], [4.125] personal rights of action, .................. [4.125] professional negligence, .................... [4.125] definition, .................................................. [4.100] “exempt loan money”, ............................ [4.100] exempt money, ......................................... [4.100] NDIS amount, ........................................... [4.100] partly protected money, .......................... [4.100] personal rights of action, ........................ [4.125] superannuation contributions, ............... [5.105] superannuation fund cashed in before bankruptcy, ...................................... [4.95] Protected property criminal or penalty orders, property subject to, .................................................... [4.195] equitable charge, property held in, ....... [4.110] exempt property, .......................... [4.75], [4.150] resolution, by, ....................................... [4.85] forfeiture order, property subject to, .... [4.195] household and personal property, .......... [4.80] insurance policies and superannuation funds, ............................................................ [4.95] lapse of time–20 years, .............................. [4.65] maintenance payments, ............................ [4.70] pecuniary penalty order, property subject to, .......................................................... [4.195] proceeds of crime order, property subject to, .......................................................... [4.195] property transferred under Pt VIII Family Law Act, ........................................ [4.105] property used in earning income, .......... [4.80]

957

protected dealings — see Protected dealings restraining order, property subject to, . [4.195] rural support schemes, ............................. [4.85] secured creditors bankruptcy and — see Secured creditors self-managed superannuation funds (SMSFs), ............................................................ [4.95] transportation, ............................................ [4.90] trust property, ........................................... [4.110] Protective provisions change of position, ................ [14.195], [14.225] consideration, ............................... [5.35], [5.225] good faith and, ................................. [14.200] valuable, ............................ [14.195], [14.220] good faith, .... [4.210], [4.215], [5.220], [14.190], [14.200] party to transaction in, ................... [14.195] in the ordinary course of business, ..... [5.230], [14.230] liquidator, resisting claim of, ............... [14.185] non-party, .......................................... [14.190] no reasonable grounds for suspecting company insolvent, .................. [14.195], [14.205]–[14.215] “reasonable business person” test, ........................................................ [14.210] suspicion, ........................................... [14.215] non-party, ................................................ [14.190] overview, ................................................. [14.180] preference claims, defences to, ............. [5.140], [5.190]-[5.230], [14.125] consideration, ..................................... [5.225] good faith, ........................... [5.220], [14.190] in the ordinary course of business, .......................................... [5.230], [14.230] maintenance and debt agreements, .......................................................... [5.200] persons acquiring property from creditor, .......................................................... [5.195] secured creditor payment isn’t a preference, ..................................... [5.235] s 588FF, order pursuant to, .................. [14.185] valuable consideration, .............. [5.35], [5.225], [14.195], [14.220] voidable transaction claims, defences to, ............ [5.190], [5.210], [14.125], [14.205] change of position, .......... [14.195], [14.225] consideration, .......... [5.35], [5.225], [14.200] good faith, ........................... [5.220], [14.200] party to transaction in, .................. [14.195] in the ordinary course of business, .......................................... [5.230], [14.230] maintenance and debt agreements, .......................................................... [5.200] no reasonable grounds for suspecting company insolvent, .................. [14.195], [14.205]–[14.215]

958

Keay’s Insolvency: Personal and Corporate Law and Practice

Protective provisions — cont non-party, .......................................... [14.190] persons acquiring property from creditor, .......................................................... [5.195] preference claims, . [5.190]-[5.230], [14.125] secured creditor payment isn’t a preference, ..................................... [5.235] valuable consideration, .. [14.195], [14.200], [14.220] Provisional liquidator appointee requirements, ......................... [12.55] appointment by court, ........... [10.190], [12.05], [12.60] carrying on a business, ........................... [12.60] discretion in exercising powers, ............ [12.65] duties and responsibilities, ........ [12.50]-[12.70] effect of appointment, .. [12.05], [12.40]–[12.50] end of administration report, ................ [12.70] end of appointment, .............................. [12.100] external administrator, ............................ [12.55] fiduciary duty, .......................................... [12.70] grounds for appointment, ........ [12.30]–[12.35] identifying assets of company, .............. [12.60] independence, ............................. [12.55], [12.70] notice requesting report as to affairs, ... [12.45] powers under Corporations Act, .......... [12.60] discretion in exercising, .................... [12.65] remuneration, ........................................... [12.75] returns, lodging with ASIC, ................... [12.70] Provisional winding up application for, .......................................... [12.05] company, by, ....................................... [12.20] creditor, by, .......................................... [12.10] member, by, ......................................... [12.15] undertakings as to damages, ........... [12.25] who can apply, ...................... [12.10]-[12.20] application for order, following, ........... [12.05] appointment of liquidator — see Provisional liquidator ASIC investigation, during, ................... [12.05] commencement, ........................................ [10.95] company, applicant, ................................. [12.20] company, effect on, .................................. [12.45] creditor, applicant, ................................... [12.10] director’s powers during, ....................... [12.45] end of, ...................................................... [12.100] interaction with other arrangements, ... [12.80] Pt 5.3A administration and, ............. [12.85] receivership and, ................................ [12.90] ipso facto termination clauses, .............. [12.40] member, applicant, .................................. [12.15] order, granting of effect on, ................. [12.100] overview, ................................... [12.05], [12.105] preceding a scheme, .............................. [12.100]

proceedings against company, stay of, ............................................ [12.50], [12.95] Pt 5.3A administration and, ................... [12.85] receivership and, ...................................... [12.90] report as to affairs, ................................... [12.45] undertakings as to damages, ................. [12.25] Public examinations – bankruptcy (s 81) abuse of process, ...................................... [6.265] administration of bankruptcy, . [6.230], [6.245] affidavit in support of summons, ......... [6.240] application for summons, ......... [6.235], [6.240] contemplated proceedings, .................... [6.265] corporate insolvency — see Examination – corporate insolvency creditor’s rights regarding, ....................... [6.90] discharge or adjournment of summons, ............................................ [6.265], [6.270] existing proceedings, ............................... [6.265] family and associates, ............................. [4.130] order for, .................................................... [6.235] overview, ................................................... [4.130] persons who may be examined, ........... [6.235] power to examine, ..................... [6.245], [6.250] privilege and, ............................................ [6.260] production of books, ............................... [6.245] relevant person, ........................................ [6.235] restrictions on, .......................................... [6.255] privilege, .............................................. [6.260] summons to attend, ................... [6.200], [6.240] affidavit in support, ........................... [6.240] application for, ...................... [6.235], [6.240] discharge or adjournment of, ......... [6.265], [6.270] produce books, and, .......................... [6.245] Public examinations – corporate insolvency — see Examination – corporate insolvency Purchase money security interest (PMSI) overview, ................................................... [6.505] priority, ........................................ [6.505], [14.20] receivership, ............................................ [18.335] retention of title arrangement as, .......... [14.20]

R Realisable assets solvency assessment, ............................... [1.130] trustee preliminary inquiries, ................ [6.190] Receivers abuse of power, ...................................... [18.430] administrator appointment after receiver appointed, .......................................................... [19.42]

Index Receivers — cont becoming, .......................................... [19.150] distinguished, ..................................... [18.05] advantages of appointing, ...................... [18.30] breach of contract, ................................. [18.430] controllers, ................................................. [18.30] definition, ............................................ [18.10] court-appointed — see Receivers, court-appointed death of, effect, ....................................... [18.610] enforcement rules, ................................... [18.22] formalities of appointment, ................... [18.95] indemnities, ............................. [18.110], [18.470] inspection, right of, ................................ [18.225] invalid appointment, ............................. [18.430] remedying, ........................................ [18.105] liability appointer, of, ..................................... [18.475] breach of duty, losses due to, ....... [18.455], [18.480] contracts made before receivership commenced, ................................ [18.460] contracts made within the scope of agency, ........................................................ [18.440] Corporations Act, under, . [18.435]-[18.465] court-appointed receiver — see Receivers, court-appointed court relief from, ............. [18.460], [18.475], [18.480] debts incurred, .................................. [18.440] employee entitlements, ... [18.440], [18.465] fraud, negligence, breach of trust or duty, losses due to, .............. [18.455], [18.480] general law, under, .......................... [18.430] indemnities, ....................... [18.110], [18.470] insolvent trading, ............................. [18.450] misfeasance, neglect or omission, . [18.445] negligence, ......................... [18.430], [18.455] personal, .............. [1.150], [18.430], [18.440] relief from, ......................... [18.470]–[18.480] “shadow director”, as, .................... [18.450] liquidator appointment, effect on, ...... [18.100] managing controller, ................ [18.30], [18.310] negligence, ............... [18.430], [18.455], [18.480] notice of appointment, ............ [18.95], [18.145] overview, ................................................... [18.15] payment priorities, ................................ [18.180] persons disqualified from acting as, .... [18.90] powers, .................................................... [18.150] privately appointed receivers — see Receivers, privately appointed provisional liquidator and, .................... [12.90] qualifications for appointment, ............ [18.90], [18.145] receiver and manager, as, ....................... [18.25] refusing appointment, ............................. [18.80]

959

registered liquidator, .............. [18.90], [18.145], [18.580] remuneration, ......................................... [18.185] court fixing, ....................................... [18.240] power to claim, ................................ [18.240] priority of payment, ........................ [18.240] secured creditor, right to appoint, ........ [13.70] two or more, ............................................. [18.10] validity of appointment, ....... [18.100], [18.115] verifying appointment, ......................... [18.115] voidable transaction claims against, ... [18.175] wilful default, ......................................... [18.430] Receivers, court-appointed — see also Receivers administration of receivership, ............ [18.425] aggrieved person, .................................. [18.130] appointee, ................................................ [18.145] appointment, ............................ [18.120]-[18.130] effect of, ............................................. [18.565] examples of, ...................................... [18.140] improper or defective, .................... [18.625] just or convenient, ........................... [18.135] time for, .............................................. [18.135] types, .................................................. [18.150] ASIC, ........................................................ [18.130] control of assets, ..................... [18.425], [18.565] directions from court, ............ [18.425], [18.505] discharge of, ............................................ [18.630] discretion of court, ................................. [18.150] duties, ....................................................... [18.500] account for receipts, ........................ [18.500] exercise of reasonable care and skill, ........................................................ [18.500] fiduciary obligations, ....................... [18.500] officer, as, ........................................... [18.500] orders of court, compliance, .......... [18.500] fiduciary duties, ..................................... [18.500] indemnity, ................................................ [18.495] jurisdiction of courts, ............ [18.120], [18.125] liabilities, .................... [18.05], [18.510]–[18.520] contractual, ........................................ [18.515] indemnity from, ............................... [18.495] relief from, ......................................... [18.525] statutory, ............................................ [18.520] tortious, .............................................. [18.510] liquidator appointment effect on, ....... [18.425] management powers, ............ [18.205], [18.425] notice of appointment, .......................... [18.145] officer of court, ....................... [18.205], [18.500] overview, ................................... [18.22], [18.120] powers, ... [18.125], [18.150], [18.425], [18.485], [18.490] appointment limiting, ..... [18.150], [18.490] directions, .......................................... [18.505] directors, effect on, .......................... [18.565] fiduciary, ............................................ [18.500] remuneration, ................................... [18.495] sale, ..................................................... [18.425]

960

Keay’s Insolvency: Personal and Corporate Law and Practice

Receivers, court-appointed — cont privately appointed receiver, replacing, ........................................................ [18.565] qualifications, .......................................... [18.145] relevant person, ...................................... [18.130] remuneration, ......................................... [18.495] review of decisions, ............................... [18.205] role and position, ................................... [18.205] statutory provisions, under, ................... [18.22] termination of receivership administration completed, ............. [18.620] effect, .................................................. [18.640] improper or defective appointment, ........................................................ [18.625] misconduct, ....................................... [18.630] procedure on, .................................... [18.635] reasons, .............................................. [18.615] Receivers, privately appointed — see also Receivers administrators and, ................................. [18.20] advantages of appointing, ...................... [18.30] agent of the company, as, ..................... [18.160] effect of winding up, ........................ [13.95], [18.165]–[18.185] appeal against decisions of, . [18.420], [18.580] categories of decision, ..................... [18.422] conduct of receiver, ......... [18.422], [18.423] error of fact or law, .......................... [18.422] s 423, under, ...................................... [18.423] s 599, under, ...................................... [18.422] appointment, effects, ............................. [18.530] company officers, on, ...................... [18.535] company, on, ..................................... [18.560] company property, on, .................... [18.540] creditors, on, ..................................... [18.545] employees, on, .................................. [18.555] legal proceedings, on, ..................... [18.545] pre-existing contracts, on, .............. [18.550] appointment, manner of, ........................ [18.80] assets circulating security interests, ......... [18.370] collection, possession and control, ........................................................ [18.315] disputed property, ........................... [18.315] effect of receiver appointment on, ........................................................ [18.540] officers and employees, obligations, ........................................................ [18.320] preserving for creditors, ................... [18.20] prior security, .................................... [18.340] retention of title, ............... [18.325], [18.330] all moneys clause, ........................ [18.335] sale of — see sale of company property below vesting of property, ......................... [18.195]

auditor’s fees, ......................................... [18.380] bank accounts, control of, .................... [18.315] carry on business, .................................. [18.345] challenging appointment, ....................... [18.40] creditors, payment, ................................ [18.350] debenture holder, duty to, .. [18.250], [18.355], [18.365] debentures, under, ...... [18.40], [18.45], [18.70], [18.155] demand deeds, ......................................... [18.85] directions from court, ............................ [18.235] directors authority and, ........................ [18.535] distribution auditor’s fees, ................................... [18.380] circulating security interests, ......... [18.370] Commissioner of Taxation, of, ....... [18.360] employee entitlements, .... [18.385]-[18.415] advances to, .................................. [18.410] employment contracts, .................. [18.385] excluded employees, ..... [18.395], [18.405] leave, ............................................. [18.400] retrenchment pay, .......................... [18.405] wages and superannuation, ........... [18.390] insurance, liability to third parties, ........................................................ [18.375] non-circulating security interests, . [18.365] priorities and prior securities, ...... [18.355], [18.415] tax liabilities, ...................... [18.355]-[18.365] duties, ....................................... [18.160], [18.245] bona fide exercise of powers, ....... [18.250], [18.255] civil penalty order for breach, ....... [18.285] costs and expenses of discharging, ........................................................ [18.365] debenture holder, to, ....... [18.250], [18.355] debtor company, to, ........ [18.250], [18.255], [18.345] exercising power of sale, . [18.250]-[18.260] extent of, ............................................ [18.255] fiduciary obligations, ....................... [18.245] general duties, .................. [18.260], [18.285] general law, under, .......................... [18.250] good faith, ......................... [18.255], [18.285] market value, .................................... [18.265] reasonable care, . [18.255]-[18.270], [18.285] reporting, ............................ [18.290]-[18.310] s 420A Corporations Act, under, ......................................... [18.260]-[18.280] onus of proof of breach, ............... [18.260] security, realising, ............................ [18.250] statutory, ............................ [18.290], [18.535] effect of winding up on receiver’s agency, ........................................................ [18.165] claims against receivers by liquidators, ........................................................ [18.175] power to carry on business, ........... [18.170]

Index Receivers, privately appointed — cont powers of liquidator over receiver, ........................................................ [18.185] surplus funds paid to liquidator, .. [18.180] employees obligations to assist, .......... [18.320] examination of, ....................................... [18.185] examinations by, ..................................... [18.230] fiduciary obligations, ............................. [18.245] fixed charges, ............................................ [18.50] floating charges, ....................................... [18.50] formalities of appointment, ................... [18.95] independence, ........................... [1.150], [18.155] joint appointments, .................................. [18.75] liquidator supervising, .......................... [18.185] management powers, ............................ [18.200] challenges to decisions, ... [18.420]-[18.423], [18.580] managing controller, ................ [18.30], [18.310] manner of appointment, ......................... [18.80] notice of appointment, ............................ [18.95] notification requirements, ..... [18.290], [18.560] officer of the company, .......................... [18.160] effect of appointment on, ............... [18.535] officers and employees obligations to assist, ........................................................ [18.320] overview, ..................................... [18.20], [18.35] personal liability, ...................... [1.150], [18.170] powers, .................................................... [18.210] assets with no market value, ......... [18.275] directions from the court, ............... [18.235] examinations, .................................... [18.230] express powers, ................................ [18.220] extension of powers, ....................... [18.215] management, .................... [18.200], [18.535] remuneration, claiming, .................. [18.240] sale, of, ................................ [18.250]-[18.260] market value, ................ [18.265], [18.275] secured creditors’ interests, protection, ......................................... [18.250]-[18.260] statutory powers of inquiry, .......... [18.225] third parties, rights, ......................... [18.280] preserving assets for creditors, .............. [18.20] priority claims, ....................................... [18.415] auditor’s fees, ................................... [18.380] circulating security interests, ......... [18.370] employee entitlements, .... [18.385]-[18.410] non-circulating security interests, . [18.365] prior security interest, ..................... [18.355] remuneration, ................... [18.240], [18.365] tax liabilities, ...................... [18.355]-[18.365] property does not vest in, .................... [18.195] qualifications for appointment, ............. [18.90] receiver and manager, ............................. [18.25] control of bank accounts, ............... [18.315] joint appointments, ............................ [18.75] removal of, .............. [18.580], [18.595], [18.610]

961

remuneration, ......................................... [18.185] court fixing, ....................................... [18.240] power to claim, ................................ [18.240] priority of payment, ........ [18.240], [18.365] replacement, ............................................ [18.610] report as to affairs, ................. [18.185], [18.295] reporting duties, ..................................... [18.290] ASIC reports, .................................... [18.305] corporations financial affairs (s 421A report), ......................................... [18.310] notification requirements, ............... [18.290] receiving reports from officers, ..... [18.295], [18.300] report as to affairs, ........... [18.185], [18.295] s 430 reports, ..................................... [18.300] resignation, .............................................. [18.590] revoking authority of, ........................... [18.160] role and position, ................................... [18.155] agent of company, ............................ [18.160] sale of company property determinable value, ......................... [18.275] duties under 420A, ........... [18.260]-[18.280] exercising power of, ......... [18.250]-[18.260] extent of power, ............................... [18.255] market value, .................... [18.265], [18.275] reasonable care, ................. [18.260]-[18.270] valuations of assets, ......... [18.265], [18.270] secured creditor, appointment by, ....... [13.70], [18.20] security interest, ....................................... [18.50] prior, ................................................... [18.340] priority of payment, ...................... [18.355] statutory powers appointment, of, ................................. [18.20] inquiry, of, ......................................... [18.225] termination of receivership, ................. [18.160] administration completed, ............. [18.575] debenture holder, removal by, ....... [18.595] effect of, ............................................. [18.610] misconduct, ....................................... [18.580] procedure, ......................................... [18.605] reasons, .............................................. [18.570] redundant receiver, removal, ......... [18.600] removal, ............. [18.580], [18.595], [18.610] resignation, ........................................ [18.590] third parties duty to, .............................................. [18.280] insurance liability to, ....................... [18.375] validity of appointment, ....... [18.100], [18.115] termination of receivership, ........... [18.570] verifying appointment, ......................... [18.115] vesting of property, ............................... [18.195] Receivership carrying on business, .............................. [13.95] cross-border insolvencies, ....................... [18.05] ending, ....................................................... [18.22]

962

Keay’s Insolvency: Personal and Corporate Law and Practice

Receivership — cont external administration, .......................... [18.05] historical background, ............................. [18.05] liability of receiver — see Receivers overview, ................................................... [18.05] Part 5.2 Corporations Act, ...................... [18.10] controllers, definition, ....................... [18.10] partnership disputes, .............................. [18.05] provisional winding up and, ................. [12.90] receivers — see Receivers termination of, court appointed receivers, ........................................................ [18.615] administration completed, ............. [18.620] effect, .................................................. [18.640] improper or defective appointment, ........................................................ [18.625] misconduct, ....................................... [18.630] procedure on, .................................... [18.635] reasons, .............................................. [18.615] termination of, privately appointed receivers, ........................................................ [18.160] administration completed, ............. [18.575] debenture holder, removal by, ....... [18.595] effect of, ............................................. [18.610] misconduct, ....................................... [18.580] procedure, ......................................... [18.605] reasons, .............................................. [18.570] redundant receiver, removal, ......... [18.600] removal, ............................. [18.580], [18.595] voluntary administration, and, ........... [18.190] voluntary administration distinguished, .......................................................... [19.05] winding up effect on, .............................. [13.95] Recovery of property administrative means, by, ....................... [5.255] charge under s 139ZR, .............. [5.265], [5.275] notice (s 139ZQ), ...................................... [5.260] charge, .................................................. [5.265] cross-claim by trustee, ....................... [5.275] effect of, ............................................... [5.265] non-compliance with, ........................ [5.260] onus of proof, ..................................... [5.270] setting aside, ....................................... [5.270] overseas property, ...................................... [4.35] statutory notice of demand, ................... [5.255] non-compliance with, ........................ [11.75] Register of Trustees details of trustees on, ................ [2.140], [2.165] disciplinary proceeding outcomes, ....... [2.315] Registered trustees — see also Trustee annual trustee return, .............................. [2.150] application to become, ............................ [2.138] interview committee, ........... [2.138], [2.145]

authority to act, ........................................ [2.135] cancellation of registration, ...... [2.155], [2.295] conditions, registration subject to, ........ [2.140] consent to act, ........................................... [2.190] continuing professional education, ....... [2.140] creditors, oversight by, ............................ [2.360] disciplinary committee, .......................... [2.305] industry body notices, ............................ [2.310] joint trustees, ............................................. [2.162] objects of provisions as to, ..................... [2.170] on-going obligations, ............................... [2.150] other registrations, ................................... [2.175] performance standards, .......................... [2.180] period of registration, ............................. [2.160] personal insolvency agreements (Pt X), trustee of, — see Controlling trustee private individual as, .............................. [2.120] qualifications, ............................................ [2.140] Register of Trustees, ................................ [2.165] disciplinary outcomes, ...................... [2.315] registration, ............................................... [2.140] remuneration, ............................. [1.210], [2.190] costs and disbursements, .... [2.205], [6.550] determination of, factors, ................. [2.190] order of payment, ................ [6.545], [6.550] particular issues, ................................ [2.205] Remuneration Claim Notice, ........... [2.200] Review by Inspector-General, ......... [2.210] renewal of registration, ........................... [2.160] replacement of trustee, ............................ [2.325] creditors, dissatisfaction, .................. [2.325] streamlined method, .......................... [2.330] resignation, ................................................ [2.320] show-cause notice, ................................... [2.300] supervision by Inspector-General, ........ [2.125] authority over, .................................... [2.220] review of remuneration, ................... [2.210] suspension of registration, ....... [2.155], [2.295] termination of registration, ...... [2.180], [2.290] vacation from office, ................................ [2.320] Reinstatement application to court for, .......................... [17.80] criminal prosecution, to allow, ........ [17.85] directors, by, ........................................ [17.85] just to reinstate, .................................. [17.90] person aggrieved, .............................. [17.85] solvency as an issue, ......................... [17.95] ASIC, by, .................................................... [17.75] court, by, .................................................... [17.80] directors, .................................................. [17.110] effect of, .................................................... [17.110] insolvency, ................................. [17.95], [17.100] liquidation, effect on, ............................. [17.110] overview, ................................................... [17.70] reinstating in order to wind up, ......... [17.100] third party rights and, .......................... [17.110] validation of prior acts, ........................ [17.105]

Index Related entities — see Entities Relation back act of bankruptcy, ...................................... [2.95] avoidance regime, under, ....................... [14.40] creditor’s petitions, and, ......................... [4.200] date of “commencement” of bankruptcy, ................................ [3.170], [4.200], [6.12] claim by trustee, ................................. [4.200] defences, ...................................................... [2.97] definition, .................................................. [14.40] doctrine, ....................................................... [2.95] property of bankrupt, identification, ...... [2.95] protected dealings, and, burden of proof, ................... [4.210], [4.215] contracts for valuable consideration, .......................................................... [4.210] creditors acting in good faith, ............................................. [4.205]-[4.215] in the ordinary course of business, ............................................ [4.210], [4.215] property acquired from debtor after date of bankruptcy, ................. [4.215] before date of bankruptcy, .............. [4.215] subsequent dealings, ................................. [2.95] vesting of property, ................................... [2.95] winding up, . [10.90], [10.95], [13.100], [14.40], [15.10] Restructuring and workouts advisors, ..................................... [21.65], [21.165] aim, ............................................................. [21.15] capital raising, ........................................ [21.155] capital structure, ....................................... [21.55] Chief Restructuring Officer, .................... [21.40] Commissioner of Taxation, .................... [21.80] company’s constitution, altering, ........ [21.155] comparable valuation methods, .......... [21.115] consent, .................................................... [21.120] continuing trading during, .................... [21.35] continuous disclosure rules and, ........ [21.160] contracts, effect on, .................................. [21.35] corporate law issues, ............................. [21.155] cost, ............................................................. [1.210] debt restructuring, ................................... [21.10] debt stack, ................................................. [21.55] deeds of company arrangement — see Deeds of company arrangement directors duties, .......... [21.40], [21.45], [21.155] discounted cash flow method, ............. [21.115] employees, ................................................. [21.85] enterprise valuation, ................ [21.55], [21.115] equity investors, ....................................... [21.70] executive management statutory duties, ................................. [21.40] formal process, ........... [21.15], [21.20], [21.120] hedge and swap providers, ................... [21.60]

963

informal process, ........................ [21.15], [21.20] initial period, ............................................ [21.20] insider trading and, ............................... [21.155] insolvency alternative, ................. [1.60], [1.75], [1.150]-[1.160], [1.195], [1.225], [20.05] insolvent trading and, ............................. [21.45] insurance, ................................................ [21.165] investigating accountant appointment, .......................................................... [21.15] ipso facto clauses and, .............. [21.15], [21.80] lessors, ........................................................ [21.75] liquidation analysis, ............................... [21.115] listed companies, ...... [21.30], [21.155], [21.160] non-executive directors, .......................... [21.45] officer’s statutory duties, ........ [21.40], [21.155] overview, ....................................... [1.60], [21.05] parties to, ..................................... [21.15], [21.30] advisors, ............................................... [21.65] Commissioner of Taxation, .............. [21.80] debtor, .................................................. [21.35] directors, .............................................. [21.45] employees, ........................................... [21.85] equity investors, ................................. [21.70] executive management, .................... [21.40] hedge and swap providers, ............. [21.60] lessors, .................................................. [21.75] secured creditors, ................. [21.50], [21.55] unsecured creditors, .......................... [21.80] phases of, ................................................... [21.20] pre-pack sale process distinguished, .... [21.25] process, ........................................ [21.15], [21.20] publicly listed companies, ..... [21.30], [21.155], [21.160] related party financial benefits, .......... [21.155], [21.160] restructuring definition, .......................... [21.10] safe harbours and, ..................... [21.05], [21.90] advice requirements, ......................... [21.65] sale or disposal of assets, ....................... [21.35] schemes of arrangement — see Schemes of arrangement secured creditors, ....................... [21.50], [21.55] junior, ................................................... [21.55] liability, .............................................. [21.165] “out of the money”, .......................... [21.55] senior, ................................................... [21.50] shareholders, ............................................. [21.70] standstill agreement, ............................... [21.20] staple securities and, ............................... [21.70] swap providers, ........................................ [21.60] syndicated facility agreement, ............... [21.20] turnaround, ............................................... [21.10] valuation of assets, ................................ [21.115] voluntary administration and, .............. [20.05] workout definition, .................................. [21.10] Retention of title all moneys clause, .................................. [18.335]

964

Keay’s Insolvency: Personal and Corporate Law and Practice

Retention of title — cont perfection requirements, ......................... [14.20] preferences and, ....................................... [14.85] purchase money security interest (PMSI), as, .......................................... [14.20], [18.335] receiver dealing with assets under, ... [18.325], [18.330] rights, ........................................... [13.70], [14.20] Rights of action assignment of, ............................. [4.120], [6.305] bankrupt, of, ....................................... [4.120] family law rights, ............................... [4.120] trustee, of, .............................. [6.310], [6.430] personal, .................................................... [4.125] trustee, of, .................................... [6.310], [6.430]

S

S 188 authority act of bankruptcy, .................................... [3.190] agreement process and, ................ [8.65], [8.70] creditor’s petition, effect on, .................... [8.60] debtor’s property, effect on, ..................... [8.75] effect of signing, ............................. [8.50], [8.75] “effective”, ................................................... [8.75] Part X agreements — see Personal insolvency agreements (Pt X) period of control, ..................................... [8.190] restrictions on, ............................................ [8.80] subsequent charges, ................................... [8.75] Safe harbour provisions “a better outcome for the company”, . [21.95], [21.100] advice from appropriately qualified entity, .......................... [16.105], [21.65], [21.165] aim, ............................................................. [21.90] appointment of an administrator or liquidator, ........................................................ [21.100] courses of action, ...................... [21.95]-[21.105] debt is incurred directly or indirectly in connection with, ........................... [21.95] directors of companies, .......... [1.155], [14.115], [16.60] act a particular time after director starts to suspect’, ......................................... [21.95] evidential burden, ............ [21.105], [21.110] information, providing, .................. [21.105] losing protection of, ......................... [21.105] shadow directors, ............................... [21.90] duration, .................................................. [21.100] effect, ........................................................ [21.105] elements of, ............................................... [21.95]

employee entitlements and, ................. [21.105] establishing, ............................................ [21.105] evidential burden, .................. [21.105], [21.110] holding company directors, ... [16.130], [21.90] insolvent trading and, ............ [1.155], [14.115], [16.60], [16.85], [21.65], [21.90] legislative reform, ........................ [1.80], [1.155] losing protection of, ............................... [21.105] restructuring and workouts and, ......... [21.05], [21.90] shadow directors, ..................................... [21.90] suspicion of insolvency, .......................... [21.95] voluntary administration and, .............. [19.05] Schemes of arrangement administration of restructuring under, ........................................................ [21.140] administrator duties, ............. [21.135], [21.145] annulment following acceptance of, ...... [7.35] bankrupt initiating, .................................... [7.40] challenging, ................................................. [7.60] commercial morality of, ........................ [21.125] court approval, ....................... [21.120], [21.125] creditor classes, ...................................... [21.130] deeds of company arrangement distinguished, ............................ [20.05], [20.90], [21.120] distribution of funds, ............................ [21.140] effect, ............................................................ [7.50] employees, ............................................... [21.130] enforcement, ................................................ [7.50] equity investors, ....................................... [21.70] expected dividend, ................................ [21.125] explanatory statement, .......................... [21.125] final account, ........................................... [21.145] initiating, ..................................................... [7.40] ipso facto clauses, .................................. [21.120] meetings of creditors, ............................ [21.125] multiple creditors, .................................... [21.20] notice of cessation, ................................. [21.145] operation, ................................................ [21.120] overview, ................................................. [21.120] pre-scheme creditors, ............................ [21.140] priority of payment and, ...................... [15.345] proof of debts, ........................................ [21.140] provisional winding up and, ................. [12.95] report as to affairs, ................................. [21.120] reporting, ................................................. [21.135] restructuring and, .................................... [21.10] equity investors exclusion from, ..... [21.70] scheme administrator duties, ............... [21.135] termination of a scheme, .......... [7.60], [21.145] court powers, .................................... [21.145] trustee report on, ....................................... [7.45] variation, ...................................... [7.55], [21.145] winding up compared, ........................... [10.50]

Index Secured creditors attachment of debt to petition, ............. [4.175], [4.185] bankruptcy effect on, ............................... [6.505] bonds, ......................................................... [21.55] charges — see Charges creditor’s petitions and, .......................... [3.135] debenture deed, .......................... [18.22], [21.55] appointment of receiver under, ...... [18.40], [18.45], [18.70], [18.155] manner, ................................................ [18.80] removal of receiver, ......................... [18.595] debt agreements (Pt IX) and, ................... [9.42] debt trading, ............................................. [21.50] deeds of company arrangement, .......... [20.10] debt extinguished by, ........................ [19.30] effect on, ............................................ [20.120] proceedings, bringing, .... [20.105], [20.120] realising security, ............... [20.55], [20.120] definition, .... [4.190], [15.305], [18.05], [20.120] discharge of bankruptcy effect on, ....... [7.160] execution process, as a result of, .......... [4.175] group loans, .............................................. [21.50] independent business review, ................ [18.20] invalidation of security interests security interests in favour of relevant persons, ........................................ [14.275] unperfected security interests, ....... [14.270] investigating accountant, appointing, .. [18.20] lessor, .......................................................... [13.70] liens, ........................................................... [6.505] meetings of creditors, ............ [15.100], [15.305] moratorium against civil recovery processes, protection from, .............................. [3.40] mortgages, ................................... [4.190], [6.505] order of payment, ...................... [5.235], [6.535] overview, ................................................. [15.305] par lenders, ............................................... [21.50] payment isn’t a preference, .................... [5.235] perfected security interests bankruptcy, .......................................... [14.20] debenture deed, .................................. [18.22] winding up, .......................... [13.70], [14.20] personal property, .................................... [4.190] possession of collateral, taking, ............ [18.20], [18.30] agent for mortgagee in possession, .......................................................... [18.20] mortgagee in possession, .... [18.20], [18.30] PPSA security interest, .............. [4.190], [6.505] priority, .......... [6.535], [15.305], [21.50], [21.55] proof of debt and, .................................... [6.505] purchase money security interest (PMSI) bankruptcy, .......................................... [6.505] receivership, ...................................... [18.335] winding up, ........................................ [14.20] real property, ............................................. [4.190]

965

realising the assets, .................................. [6.330] receiver duties to, ............................................ [18.250] right to appoint, ................... [13.70], [18.20] register, ....................................................... [13.70] retention of title rights, ............. [13.70], [14.20] rights in personam, ................................. [21.50] rights in rem, ............................................ [21.50] rights of action bankruptcy, .......................................... [4.150] debtor personally, against, ............... [6.505] property, over, ..................................... [6.505] winding up, ...................................... [15.305] security interest circulating security interests, avoidance, ........................................................ [14.165] definition, ............................................ [13.70] perfected, ............................................. [13.70] PPSA, bankruptcy, ............... [4.190], [6.505] PPSA, winding up, ............................ [13.70] preference, as, ..................................... [5.160] shadow directors, acting as, ................... [21.50] surrender of security, ............................ [15.305] vesting rules, ............................................. [14.20] voluntary administration appointing administrator, ................. [19.30] effect on secured parties, ........................................ [19.105]–[19.126] continuation of pre-administration action, .................................................. [19.125] current position, ............................ [19.110] deed of consent for enforcement, .................................................. [19.125] enforcement action, ...... [19.120], [19.125] finance leases, ............................... [19.105] limitations on enforcement, .......... [19.120] moratorium exception, .................. [19.270] position prior to PPSA, ................ [19.105] PPSA retention of title property, .. [19.125] PPSA security interest holder, ...... [19.110] retention of title (ROT) claims, ... [19.105] rights of, ........................................ [19.125] winding up application for, .................................. [11.215] effect on, .............................. [13.70], [15.305] Security interest automatic, ................................................ [18.360] circulating security interests, . [18.50], [18.370] avoidance, ......................................... [14.165] debenture deed, ........................................ [18.22] appointment of receiver under, ...... [18.40], [18.45], [18.70] manner, ................................................ [18.80] removal of receiver, ......................... [18.595] definition, .................... [13.70], [18.05], [20.120] non-circulating security interests, ....... [18.365]

966

Keay’s Insolvency: Personal and Corporate Law and Practice

Security interest — cont overview, ................................................... [18.50] perfected, ................................... [13.70], [18.325] PPSA, ............................................ [13.70], [18.50] owners and lessors, ......................... [20.125] pari passu and, ................................... [1.165] proceeds, ............................................ [18.360] vesting rules, ....................................... [1.165] prior, ......................................... [18.340], [18.355] receiver dealing with assets under, .... [18.325] security agreement over “all present and after-acquired property” (ALLPAP), .......................................................... [18.50] deeds of company arrangement and, ........................................................ [20.120] priority of secured creditors, ........... [21.50] transitional security agreements, .......... [18.50] vesting rules, ............................................. [1.165] voluntary administration administrator’s powers, .. [19.190], [19.200] court directions, ............................... [19.170] creditors, effect on, .......................... [19.100] long-term leasing arrangements, effect on, ........................................................ [19.100] property, effect on, ............................. [19.70] secured creditor appointing administrator, .......................................................... [19.30] secured parties, effect on ........................................ [19.105]–[19.126] security interests, meaning, ........... [19.100], [19.110] unperfected security interests, ....... [19.100] Sequestration — see also Bankruptcy creditor’s petition — see Creditor’s petition effects of bankruptcy — see Effects of bankruptcy insolvency, relevance, ................................ [1.90] powers, ...................................................... [3.133] proceedings for non-compliance with bankruptcy notice, ....................... [3.355] Sequestration orders affidavit evidence, ...................... [3.133], [3.375] annulment of bankruptcy, order ought not to have been made, .... [7.10], [7.65], [7.80] appeal against making of, ...................... [7.170] costs, ........................................................... [3.425] court jurisdiction and process, .............. [3.133] court powers, ............................................ [3.335] discretion of court, ............... [3.380], [3.395] reversal of order, .................................. [7.10] creditor’s petition — see Creditor’s petition debt agreements (Pt IX), effect on, ........ [9.115] debt requirements, ................................... [3.165] debtors onus of proof, ............................ [3.380]

dismissal of petition discretion of court, ............... [3.380], [3.395] going behind the judgment, ............ [3.390] illness of debtor, ................................. [3.420] impecunious debtors, ........................ [3.420] “other sufficient cause”, ....... [3.400]-[3.420] payment offered by debtor, .............. [3.415] service of originating process, ......... [3.405] set-off or cross-demand, ................... [3.410] technical defects in petition, ........... [3.380], [3.385] effect, ............................................................ [4.05] error, reversal for, ........................... [7.10], [7.80] evidence, .................................................... [3.375] Federal Circuit Court, ............................. [3.133] Federal Court, ............................. [3.130], [3.133] filing application and affidavits, .......... [3.133], [3.375] joint creditors and, ................................... [3.135] joint debtors, against, .............................. [3.150] judgment debt and, ................... [3.165], [3.390] meeting of creditors Pt X agreements, following, ...................................... [8.195] overview, ................................................... [3.375] procedural irregularity in, ........................ [7.80] public interest considerations, ............... [3.400] requirements for making, ....................... [3.375] reversal of, ................................................... [7.10] annulment of bankruptcy, ...... [7.65], [7.80] setting aside, ............................................. [3.430] court, powers, ..................................... [7.165] rescission or suspension, .................. [7.165] solvency and, .............................. [3.325], [3.395] stay of proceedings, ................................. [3.430] timeline, ..................................................... [3.130] Service bankruptcy notice, ....... [3.220], [3.225], [3.335] substituted service, ............................ [3.230] time limit on, ...................................... [3.235] Corporations Act under, ....................... [11.100] creditor’s petition, ...................... [3.345], [3.375] substituted service, ............................ [3.345] statutory demand, .................................. [11.100] substituted bankruptcy notice, ............................. [3.230] creditor’s petition, .............................. [3.345] Set-off bankruptcy notice, following receipt of, .............................. [3.310]–[3.320], [3.335] counter-claim and cross-demand distinguished, ............................... [3.315] mutuality, ................................................ [15.285] notice of the fact, ................................... [15.285] relevant debt, .......................................... [15.285] sequestration orders, dismissal of petition for, .......................................................... [3.410]

Index Set-off — cont

967

time to automatic discharge and, ........... [6.30] trustee, copy to, .......................................... [3.90]

winding up, in, ....................................... [15.285] Setting aside bankruptcy notice, ..................... [3.255], [3.265] defective, .............................................. [3.280] final judgment, ........................... [3.255], [3.265] Sheriff creditor’s petition effect on, ................... [4.185] declaration of intention to present a debtor’s petition effect on, ............... [3.20], [3.35] execution returned unsatisfied by, ........ [3.185] payments recovered and held by, ......... [4.185] recovery from, winding up, ................. [14.245] sale by, ....................................................... [3.185] Slip rule creditor’s petition invoking, ................... [3.350] overview, ................................................... [3.350] winding up, application for court order, ........................................................ [11.230] Solvency ability to borrow unsecured, ................. [1.135] annulment of bankruptcy and, . [3.120], [7.30], [7.80] assessment, .................................. [1.130], [3.395] bankruptcy notice and, ............. [3.325], [3.395] deceased estates, solvent, ....................... [6.590] onus of proof, ........................................... [3.395] realisable assets, ....................................... [1.130] sequestration orders and, ......... [3.325], [3.395] solvent, definition, ..................................... [1.85] Special administrator Aboriginal and Torres Strait Islander corporations, ................... [1.225], [10.25] winding up order effect on, ................... [10.25] Statement of affairs administration of bankruptcy and, ......... [6.30] date of filing, ............................................. [7.115] debtor’s, ............................... [3.15], [3.20], [3.55] failure to file, ...................................... [4.230] joint debtors, ....................................... [3.105] partnership debtors, ............................ [3.95] joint debtors, ............................................. [3.105] materially incomplete, .............................. [6.30] offences relating to, ...................... [4.245], [6.30] partnership debtors, .................................. [3.95] personal insolvency agreements (Pt X), .............................................. [8.70], [8.100] realising the assets, .................................. [6.330] sequestration order, following, ................ [6.30]

Statutory demands affidavit accompanying, .......... [11.95], [11.190] bankruptcy notices, comparison, .......... [11.80] challenges to, ........................................... [11.115] 21 days’ time limit, .......... [11.130], [11.135] extension, ...................................... [11.140] validity, .............................................. [11.130] compliance, .............................................. [11.105] extension of time for, ....... [11.110], [11.140] content, ....................................................... [11.95] creditor’s debt requirements, ................. [11.90] date of failure to comply, ...................... [11.110] debt recovery, for, ................................... [11.170] defect in, ... [11.115], [11.145], [11.180], [11.185] defect, definition, .............................. [11.185] setting aside for, ............... [11.180], [11.185] substantial injustice, ........................ [11.180] form of demand, ...................................... [11.85] judgment debt, need not be based on, . [11.95] multiple, ................................................... [11.120] non-compliance with, .............. [11.75], [11.305] offsetting claims, ..................................... [11.175] quantum meruit supporting, ................. [11.90] service, ..................................................... [11.100] time limit, .......................... [11.130], [11.135] setting aside, ............................................ [11.115] abuse of process, ................ [11.85], [11.165] appeal against decision, .................. [11.120] application, ........................................ [11.120] affidavit accompanying, ................ [11.125] time limit, ...................... [11.130], [11.135] conditions on, ................................... [11.195] consequences of, ............................... [11.195] costs, claiming, ................................. [11.165] discretion for, .................................... [11.190] Graywinter principle, ...................... [11.125] grounds for, ....................... [11.145], [11.190] defect in demand, ......... [11.115], [11.145], [11.180], [11.185] genuine disputes about debt, ................................... [11.150]-[11.160] offsetting claims, ........................... [11.175] substantial injustice, ...................... [11.180] Stay of winding up court ordered, ........................................... [17.10] deed of company arrangement executed, .......................................................... [17.25] indefinite stay termination distinguished, ............... [17.10] limited period, for, ..................... [17.10], [17.25] pending appeal from winding up order, .......................................................... [17.20] pending scheme of arrangement, ......... [17.25]

968

Keay’s Insolvency: Personal and Corporate Law and Practice

Stay of winding up — cont termination of winding up — see Termination of winding up voluntary winding up, ............................ [17.30] Superannuation contributions cashed in before bankruptcy, ................... [4.95] consideration and, ..................................... [5.35] defeat creditors, made to, ........... [5.05], [5.105] account-freezing notices, .................. [5.120] “eligible superannuation plan”, ...... [5.110] “out of character”, ............................. [5.110] recovery of void contributions, ....... [5.120] third party, by, ...................... [5.105], [5.115] transferees main purpose, ................ [5.110] void transfers, ..................................... [5.115] director liability for unpaid, ................ [16.160] defences, ............................................ [16.165] exempt money, ......................................... [4.100] priority payments - winding up, ........ [15.390] superannuation guarantee charge (SGC), ........................................................ [15.390] property of bankrupt, ................... [4.25], [4.95] protected money, ...................................... [5.105] superannuation cashed in before bankruptcy, ...................................... [4.95] protected property, .................................... [4.95] self-managed superannuation funds (SMSFs), .............................................. [1.195], [4.95] unpaid employee superannuation director liability for, ......................... [16.160] defences, ........................................ [16.165] Supervised account regime bankrupt’s income deposited to supervised account, .......................................... [6.395] cash income, .............................................. [6.400] constructive income receipt arrangements, .......................................................... [6.400] income of the bankrupt and, ... [6.340], [6.385] injunctions, ................................................ [6.410] keeping records, ....................................... [6.405] non-monetary income receipt arrangements, .......................................................... [6.400] notice, ......................................................... [6.390] objective of, ............................................... [6.385] review of trustee decisions, ................... [6.415] supervised account notice, ..................... [6.390] withdrawal from, ..................................... [6.395] Supreme Courts jurisdiction, winding up, ...................... [10.190]

T Tax capital gains tax (CGT) on sale of asset, ............................................................ [4.45] Commissioner receiving benefit of voidable transaction, .................................. [16.150] deceased estates, requirements for, ...... [6.590] deed administrator liability, ................. [20.140] GST, liquidator registering for, ........... [10.270], [15.405] insolvent companies Commissioner unaware of insolvency, ........................................................ [16.150] defences, ............................................ [16.155] priority of payments, ...................... [16.145] voidable transactions, ...................... [16.150] interest and, .............................................. [6.335] liabilities, ... [6.480], [15.405], [18.355]-[18.365], [20.140] director penalty notice, ..... [10.55], [16.160] non-response to, ............................ [16.160] directors liability for, ........ [1.200], [16.145], [16.150] defences, ........................................ [16.155] penalties for non-payment of, ....... [16.160] defences, ........................................ [16.165] provable debts, ................................... [6.480] liquidator completing tax returns, ...... [10.270] notice of bankruptcy to ATO, .................. [6.45] penalties for non-payment tax liabilities, ........................................................ [16.160] defences, ............................................ [16.165] phoenix conduct and, ............................ [16.165] priority payments insolvent companies, ....................... [16.145] winding up, ...................... [15.350], [15.405] refunds, .......................................... [4.45], [6.480] restructuring and, .................................... [21.80] “single touch payroll”, .......................... [16.165] unpaid income tax, ................................ [15.405] voidable transactions and, ................... [16.150] Termination of liquidation — see Termination of winding up Termination of winding up application for, .......................................... [17.10] service of notice of, ............................ [17.15] compulsory winding up, termination by court, .............................................. [17.10] deed of company arrangement executed, .......................................................... [17.25] existing debt, ............................................ [17.10] indefinite stay distinguished, ................ [17.10] notice, service of, ..................................... [17.15]

Index Termination of winding up — cont order for termination, ............... [17.10], [17.25] who may apply, .................................. [17.10] overview, ................................................... [17.05] refusal where scheme of arrangement approved, ...................................... [17.25] stay of winding up — see Stay of winding up Transfers to defeat creditors avoidance provisions, ...... [1.160], [5.05], [5.60] defence, .................................................. [5.75] exemption, ............................................. [5.80] consideration, .................... [5.35], [5.75], [5.100] recovery of shortfall, ........................... [5.90] third party, to, ..................................... [5.100] defences, ...................................................... [5.75] defraud, meaning, ...................................... [5.95] effective until set aside, ............................ [5.90] exemptions, ................................................. [5.80] improper or unfair disposal, ...... [4.20], [4.235] main purpose, ............................................. [5.60] deemed purpose, ................................. [5.70] defraud creditors, to, ........................... [5.95] prevent or hinder or delay, ................ [5.70] transferee knowledge of, .................... [5.75] maintenance agreements, ......................... [5.80] money-back for transferee, ....................... [5.90] onus of establishing, .................................. [5.60] purchaser, protection, ................................ [5.85] recovery by trustee, ................................. [4.132] related third party, transfer to, .............. [4.132] state legislation, .......................................... [5.95] time limit, .................................................... [5.70] time of transfer, .......................................... [5.65] transfer of property, meaning, .... [5.20], [5.30], [5.65] transfers with intent to defraud creditors under state legislation, .................. [5.95] trustee challenging, .................................... [5.05] undervalued transactions — see Undervalued transactions Trustee administration of bankruptcy — see Administration of bankruptcy annual administration return (AER), .. [2.265], [6.585] annulment, report on application for, .... [7.75] assets available to — see Property of bankrupt bankrupt, dealings with, ........................ [2.240] assisting trustee, ......... [4.15], [4.230], [6.35] cancellation of registration, ...... [2.155], [2.295] carrying on business, ................. [6.290]-[6.300] powers regarding, .............................. [2.270] challenging property transfer, ................. [5.05]

969

confidential information, ........................ [2.112] cost in conducting administration, ....... [6.190] court oversight of, ...................... [2.335]-[2.350] conduct, review of, .............. [2.340], [2.350] creditors, information provided to — see information provided to creditors below creditors interests, obligation to act in, . [6.50], [6.450] creditor’s meeting, calling, ......... [3.190], [6.95] debt agreements, ........................ [9.120], [9.130] debtor, information provided to, ........... [6.10], [6.190] debts properly incurred, ......................... [14.15] declaration of relevant relationships, ..... [6.55] definition, .................................................... [2.55] demand notice, issuing, .......................... [6.200] directions, ........................ [6.90], [6.455], [7.170] disciplinary committee, .......................... [2.305] distribution of estate to creditors — see Distribution of estate - bankruptcy dividend return, maximising, .................. [6.50] duties, ......................................................... [2.225] Ex parte James, rule in, ..... [2.250], [10.300] fair dealing, ......................................... [2.250] fiduciary duties, ................... [2.225], [2.245] general under section 19, ................. [2.230] impartiality and independence, ...... [2.235] profiting from, prohibition on, ........ [2.245] estate of bankrupt, administration, ...... [2.120] examination of bankrupt and their family members, ................ [4.130], [6.15]-[6.25] failure of bankrupt to disclose information to, .............................................. [4.230], [6.20] foreign trustee, ........................... [5.245], [6.180] funds handling, ........................................ [2.260] income of the bankrupt — see Income of the bankrupt indemnity against assets, ........... [4.50], [14.15] company acting as trustee, ............. [15.350] industry body notices, ............................ [2.310] information provided to creditors, ................................................. [6.50]-[6.60] breach of duty to provide, ................. [6.70] confidential information, .................... [6.75] dividend, likely amount, ........ [6.50], [6.60] exemptions from requirements, ........ [6.65] breach of duty to provide, ................ [6.70] relevance, .......................................... [6.70] unreasonable, ........................ [6.75], [6.80] Fair Entitlements Guarantee (FEG) scheme, ............................................................ [6.75] investigations, details concerning, ... [6.10], [6.50], [6.55] relevance, ............................................... [6.70] reports at meetings of creditors, ....... [6.50] request by creditor, .................. [6.65], [6.75]

970

Keay’s Insolvency: Personal and Corporate Law and Practice

Trustee — cont relevance or breach of duty to provide, ...................................................... [6.70] unreasonable, ........................ [6.75], [6.80] rights of creditors, ................................ [6.55] statement of affairs summary, .......... [6.10], [6.30] time for providing, .................. [6.10], [6.60] trustee declaration, .............................. [6.55] trustee’s decision, ..................... [6.70], [6.80] unreasonable, ............................ [6.75], [6.80] information requested by bankrupt, ...... [6.85] information to bankrupt about obligations, ............................................................ [6.30] initial actions, ............................................. [6.10] insolvency, in event of, ........................... [14.15] Official Trustee becomes trustee, ..... [6.160] Inspector-General, regulation by, .......... [2.285] interest of, .................................................... [2.55] interim trustees, ....................................... [3.445] interviewing the bankrupt, ...................... [6.35] statement of affairs, about, ................. [6.30] investigation by, ........................... [6.20], [6.185] associated entity, ................................ [6.205] bankrupt request for information, .... [6.85] bankrupts conduct, ............................ [4.245] creditors information provided to, ................... [6.55] views regarding, .............................. [6.190] demand notice, ................................... [6.200] examinable affairs, meaning, ........... [6.195] interviewing the bankrupt, ................ [6.35] notices issued by Official Receiver, . [6.200] offences by bankrupt, ........................ [4.245] preliminary inquiries and actions, .. [6.190] public examinations — see Public examinations – bankruptcy (s 81) s 77A notice, ........................................ [6.205] s 77AA notice, ..................................... [6.210] s 77C notices, ...................................... [6.215] joint trustees, ............................................. [2.162] liability of trustees, .................................. [2.275] indemnity, ................................ [2.275], [6.90] creditor’s, ........................................ [6.425] personal liability for costs, ............... [2.275] liquidator compared, .............. [10.45], [10.135], [10.205] notice of bankruptcy, giving, ................... [6.45] obligations, maximising dividend return, .............................................. [6.50], [6.450] officers of the court, ................................. [2.230] official — see Official Trustee in Bankruptcy oversight of trustees, ............................... [2.335] creditors, by, ........................................ [2.360] discretion of court, ............................. [2.340] Inspector-General, regulation by, .... [2.285]

judicial inquiry into conduct, .......... [2.350] standards of professional conduct, . [2.180] penalties, .................................................... [2.365] penalty privilege, ..................................... [2.355] performance standards, ............ [2.180], [2.230] personal insolvency agreements (Pt X), of, — see Controlling trustee powers, ...................................................... [2.270] carrying on bankrupt’s business, .... [2.270] compromising any debt due to bankrupt, .......................................................... [2.270] investigative, ........................... [6.20], [6.185] leasing bankrupt’s property, ............ [2.270] recovery, ................................................. [6.20] sale of property, .................................. [2.270] taking or defending any legal proceedings, .......................................................... [2.270] voidable transactions, challenging, ... [8.50] preliminary inquiries and actions, ........ [6.190] proceedings, financial support for — see Financial support for proceedings property of bankrupt, taking possession of, ................................ [6.170], [6.300], [8.50] public examinations — see Public examinations – bankruptcy (s 81) realisation of property, .............................. [2.60] registered — see Registered trustees removal, ....................................... [6.125], [6.160] incoming trustee, ............................... [6.160] remuneration, ............................. [1.165], [1.210] annulment of bankruptcy, effect on, .......................................................... [7.170] creditors approving, .. [6.50], [6.90], [6.125] debtor proposal, ................................... [7.45] litigation in pursuit of, ...................... [6.450] order of payment, ................ [6.545], [6.550] reporting requirements, ............ [2.265], [6.585] request by bankrupt for information, .... [6.85] request by creditor for information, ...... [6.65], [6.75] breach of duty to provide, ................. [6.70] confidential information, .................... [6.75] Fair Entitlements Guarantee (FEG) scheme, ............................................................ [6.75] reasonable, ................................. [6.75], [6.80] relevance, ............................................... [6.70] trustee’s decision, ..................... [6.70], [6.80] unreasonable, ............................ [6.75], [6.80] returns, requirements as to lodgement of, .......................................................... [2.265] right of indemnity, ................................... [14.15] scheme of arrangement, report on, ........ [7.45] show-cause notice, ................................... [2.300] statement of affairs — see Statement of affairs statutory responsibilities, ........................ [2.255] suspension of registration, ..................... [2.295] termination of registration, ...... [2.180], [2.290]

Index

971

restructuring and, .................................... [21.80]

Trustee — cont vesting of property in, ...... [2.55], [4.25], [4.50] family law property order, subject to, ............................................................ [4.25] registered on title, ................................ [4.50] warrant to search and seize property, ... [4.25], [6.20], [6.195] Trusts bankruptcy and, ....................................... [1.195] creditor’s trust, ......................................... [20.80] distributions and income of bankrupt, .......................................................... [6.350] examinable period, .................................. [5.250] express trusts, ........................................... [4.142] insolvency, ................................................. [14.15] liquidator managing property of, ......... [14.15] net worth, .................................................. [5.250] property held by bankrupt in, ... [4.50], [5.250] preferences and, ................................. [5.150] resulting and constructive trusts, ......... [4.142] winding up and assets held in, .......... [10.320], [14.15], [15.350] Turnaround Management Association (TMA) Code of Conduct, ..................................... [1.195] overview, ..................................................... [1.75]

U

Undervalued transactions avoidance provisions, .................... [5.05], [5.20] consideration, ............................................. [5.35] what is not consideration, .................. [5.37] debt agreements, ........................................ [5.40] defence, ........................................................ [5.45] exemptions, ................................................. [5.40] exoneration principle defence, ................ [5.45] intent, ........................................................... [5.20] interest in property, ................................... [5.45] market value, .............................................. [5.35] purchaser, protection, ................................ [5.50] restitution for transferee, .......................... [5.55] time period, ..................................... [5.25], [5.30] defence, .................................................. [5.45] transfer of property, ................................... [5.30] voidable, ...................................... [5.20], [14.135] time period, ............................... [5.25], [5.30] Unsecured creditors Commissioner of Taxation, .................... [21.80] insolvent trading, compensation for, ... [16.85], [16.110], [16.135] order of payment — see Order of payments

V Voidable transactions avoidance provisions and, ...... [1.160], [4.132], [5.15], [14.35] related entity, definition, ....... [6.25], [14.45] transaction, definition, ...................... [14.50] benefit, meaning, .................................... [14.155] categories of, ............................................. [14.35] challenging, ................... [8.50], [14.60], [14.180] circulating security interests, ............... [14.165] close associate, meaning, ...................... [14.155] commencement of proceedings, ............ [5.240] defences to claims, .... [5.190], [5.210], [14.125], [14.205] change of position, .......... [14.195], [14.225] consideration, ......................... [5.35], [5.225] good faith, ........................................... [5.220] in the ordinary course of business, .......................................... [5.230], [14.230] maintenance and debt agreements, .......................................................... [5.200] no reasonable grounds for suspecting company insolvent, .... [14.205]–[14.215] non-party, .......................................... [14.190] persons acquiring property from creditor, .......................................................... [5.195] preference claims, . [5.190]-[5.230], [14.125] secured creditor payment isn’t a preference, ..................................... [5.235] valuable consideration, ... [14.195], [14.220] director breach of duty, for, ................... [16.45] enforcement of orders, ............................ [5.240] gifts, .......................................................... [14.135] insolvent transactions, ............... [14.35], [14.55] non-party, ................................................ [14.190] obstructing creditors’ rights, . [14.35], [14.140], [14.142] orders relating to, .................................... [14.60] s 588FF, pursuant to, ....................... [14.185] preferences — see Preferences presumption of insolvency, .................. [14.115] pre-winding up transactions, ... [14.25], [14.30] protective provisions — see Protective provisions reasonableness, ....................................... [14.135] receivers, claims against, ...................... [18.175] related entities, ......................... [14.45], [14.135] recovery of benefits, ........................ [14.145] relation back day — see Relation back relative, meaning, ................................... [14.155] subsequent bankruptcies, ....................... [7.180] superannuation contributions, . [5.110], [5.115] tax liabilities and, ................................... [16.150]

972

Keay’s Insolvency: Personal and Corporate Law and Practice

Voidable transactions — cont time period, ................................... [5.25], [5.240] transaction, definition, ............................ [14.50] transfers to defeat creditors, .................... [5.90] uncommercial transactions, ... [10.260], [14.35], [14.135], [14.155] court orders, ....................... [14.170]-[14.175] deed of company arrangement, during, ........................................................ [14.160] purpose, ............................. [14.140], [14.200] voluntary administration, during, ........................................................ [14.160] undervalued transactions, ........ [5.20], [14.135] unfair loans, .............................. [14.35], [14.150] court orders, ....................... [14.170]-[14.175] unfair preferences — see Preferences unreasonable director-related transactions, .......................................... [14.35], [14.155] close associate, .................................. [14.155] court orders, ....................... [14.170]-[14.175] voluntary administration, ....................... [19.70] winding up, recovery of assets, ........... [14.35], [14.50] Voluntary administration abuse of process, termination for, ......... [19.50] court’s power, ................................... [19.390] administrator — see Administrator advantages, ............................................... [19.15] application to terminate, ........................ [19.50] appointment of administrator, ............... [19.25] collateral purpose, ............................. [19.42] company’s decision, .......................... [19.40] court’s power to validate, ............. [19.390], [19.400] defective, court’s power to cure, ... [19.390] immediate effect, ................................ [19.45] liquidator, by, ...................... [19.35], [19.415] receiver and manager appointed, after, .......................................................... [19.42] secured party creditor, by, ................ [19.30] teleconference, by, .............................. [19.40] validity, .................. [19.40], [19.42], [19.165] administrator’s duty to investigate, .................................................... [19.42] court’s power to determine, ........ [19.390], [19.400] commencement of, ..................... [10.95], [19.25] court’s power to alter date, ............ [19.390] committee of inspection creditors’ meeting deciding whether to appoint, ........................................ [19.290] company contracts, effect on, ................ [19.95] company officers, effect on, .................... [19.80] company property administrator’s lien over, ................ [19.230]

dealings, effect on, ............................. [19.70] effect on, ................................ [19.60], [20.85] sale by administrator, ...................... [19.185] court role and powers, .......................... [19.375] appointment of reviewing liquidator, ........................................................ [19.175] company’s affair, in relation to, ..... [19.400] directions to administrator, ........... [19.170], [19.380] inquiry into conduct of administration, ........................................................ [19.175] interests of creditors, protection, ... [19.400] orders, power to make, .... [19.385]-[19.395] scope, ............................................ [19.390] particular powers under Pt 5.3A, . [19.380] removal of administrator, .............. [19.140], [19.155] termination of administration, ...... [19.390] creditors administrator reporting to, ............. [19.215] second meeting of creditors, ........ [19.305] court cannot deem parties to be, .. [19.395] effect on, ............................................ [19.100] meeting of — see Meeting of creditors — administration proof of debts, .................................. [19.250] deed of company arrangement, ............ [19.55] appointment of administrator when trading under, ............................... [19.42] court’s power to vary, ..................... [19.390] creditor’s decision to accept, ............ [20.70] purpose of administration, .............. [19.05], [19.55], [20.05] second meeting of creditors decision on, ................................... [19.305] details of proposed deed, .............. [19.325] termination of administration, ....... [19.50], [20.05], [20.65] termination of deed, ........................ [20.295] directors of company administrator’s power to remove or appoint, ........................................ [19.190] effect on, .............................................. [19.80] initiation by, ........................................ [19.40] collateral purpose, ........................... [19.42] validity, .............................. [19.40], [19.42] personal guarantees, .......................... [19.85] leave to enforce, ............................. [19.85] disadvantages, .......................................... [19.15] effect of company and members, on, ........... [19.60], [20.85] company contracts, on, ..................... [19.95] company employees, on, .................. [19.90] company officers, on, ........................ [19.80] company property, on dealings with, .......................................................... [19.70]

Index Voluntary administration — cont company shares, on, .......................... [19.65] company transactions, on, ................ [19.75] creditors of company, ...................... [19.100] director’s personal guarantees, ........ [19.85] non-secured owners and lessors, .. [19.130] secured parties, on ........... [19.105]–[19.126] employees, effect on, ............................... [19.90] legislative background, ........................... [19.05] meeting of creditors, ............................. [19.285] first meeting, ...................... [19.290]-[19.300] committee of inspection, appointment, .................................................. [19.290] declaration by administrator, ........ [19.295] removal of administrator, ............. [19.290] requirements, ................................. [19.300] second meeting, ............................... [19.305] adjournment, ................................. [19.335] administrator presiding at, ........... [19.300], [19.330] court determining whether properly held, .................................................. [19.385] details of proposed deed, .............. [19.325] extension of time for, .. [19.310], [19.312], [19.380] 45 business day limit, ................... [19.335] report to creditors, ........................ [19.315] time for holding, ........................... [19.310] voting, ................................. [19.340]-[19.370] court’s power to review, ............... [19.345] entitlement to vote, ...................... [19.100], [19.350]-[19.365] recording votes, ............................ [19.370] moratorium on proceedings during, .. [19.245] civil proceedings, ............................. [19.250] criminal proceedings excluded, .... [19.260] enforcement action, suspension of, ........................................................ [19.265] exceptions owner or lessor acting before administration commences, .... [19.280] perishable property, ...................... [19.275] secured parties, ............................. [19.270] execution action, suspension of, ... [19.265] leave to commence or continue proceedings, ................................ [19.250] payment of preferences to creditors, ........................................................ [19.250] prescribed proceedings excluded, . [19.260] stay of proceedings, ......................... [19.250] winding up proceedings, adjournment of, ........................................................ [19.255] non-secured owners and lessors effect on, ............................................ [19.130] moratorium exception, .................... [19.280]

973

overview, ........ [1.05], [1.195], [19.05], [19.430], [19.450] personal insolvency agreements, based on, .......................................................... [19.05] personal property securities (PPSA) regime administrator’s powers, .................. [19.190] court directions, ............................... [19.170] creditors, effect on, .......................... [19.100] effect of administration, .................. [19.105] limitations on enforcement, ........... [19.120] long-term leasing arrangements, effect on, ........................................................ [19.100] position prior to, .............................. [19.105] property, effect on, ............................. [19.70] rights of secured parties, ................ [19.125] secured creditor appointing administrator, .......................................................... [19.30] secured parties — see secured parties below security interests, ............. [19.100], [19.110], [19.190] unperfected security interests, ....... [19.100] process, ...................................................... [19.20] Pt 5.3A of Corporations Act, .................. [19.05] court powers, .................................... [19.375] objects, .................................................. [19.10] Part X PIAs distinguished, ................. [8.15] s 513C day, .......................... [10.95], [10.100] winding up, effects of, .................... [13.100] purpose, ....................................... [19.05], [19.10] restructuring of insolvent company and, .......................................................... [20.05] reviewing liquidator, appointment of, ........................................................ [19.175] secured parties, ....................... [19.105]–[19.126] bailor, whether, ................................. [19.110] current position, ............................... [19.110] effect on, ............................. [19.105]–[19.125] enforcement action, ......... [19.120], [19.125] continuation of pre-administration action, .................................................. [19.125] deed of consent for, ...................... [19.125] limitations on, ............................... [19.120] finance leases, ................................... [19.105] moratorium exception, .................... [19.270] PPSA regime, .................................... [19.105] position prior to, ........................... [19.105] PPSA retention of title property, ... [19.125] PPSA security interest holder, ....... [19.110] retention of title (ROT) claims, ...... [19.105] rights of, ............................................ [19.125] third party rights, restrictions on exercising, .................................... [19.110] vulnerabilities of, ............................. [19.126] receivership and, .................................... [18.190] receivership distinguished, .................... [19.05] safe harbour regime and, ....................... [19.05]

974

Keay’s Insolvency: Personal and Corporate Law and Practice

Voluntary administration — cont shares, effect on, ....................................... [19.65] stay of proceedings during civil proceedings, ............................. [19.250] criminal proceedings excluded, .... [19.260] enforcement or execution action, .. [19.265] winding up proceedings, ............... [19.255], [19.415] termination, ............................................... [19.50] application for, .................................... [19.50] court’s power, ................................... [19.390] deed, execution of, ............................. [20.65] events resulting in, .............. [19.50], [20.65] uncommercial transactions during, .... [14.160] void transactions, ..................................... [19.70] winding up and, ..................... [19.410]-[19.425] adjournment of proceedings for, .. [19.255], [19.415] administrator’s liability in, ............. [19.230] compared, ............................................ [10.50] creditors’ costs, priority of, ............ [19.255] creditors’ voluntary winding up, moving to, .................................................... [11.45] effects of, ............................................ [13.100] liquidator appointing administrator, .......................................... [19.35], [19.415] pending proceedings for, ................ [19.255] progress from administration to liquidation court order, by .............................. [19.425] creditors’ vote, by ......................... [19.420] progress from liquidation to administration, ........................... [19.415] liquidator’s decision, .................... [19.415] real prospect of better outcome than, ........................................................ [19.255] second meeting of creditors deciding on, ........................................................ [19.305] termination of administration, ........ [19.50] termination of winding up, ........... [19.415] transitioning to, .... [11.45], [13.100], [20.55] Voluntary administrator — see Administrators Voluntary bankruptcy annulment, .................................................. [3.10] debtor’s petition — see Debtor’s petition overview, ..................................................... [2.50] moratorium or stay against civil recovery processes, ............................. [3.10]–[3.45] enforcement process, ........................... [3.35] farmers and rural producers, ............. [3.75] frozen debts, ......................................... [3.35] proclaimed law, and, ........................... [3.75] secured creditors, protection, ............. [3.40] stay period, ........................................... [3.35]

Voluntary winding up — see also winding up affairs “fully wound up”, ....................... [17.50] commencement, ........................ [10.100], [14.10] compulsory distinguished, ................... [10.100] creditors’ voluntary — see Creditors’ voluntary winding up declaration of solvency, ............. [11.15], [11.25] deregistration of company, ..................... [17.50] liquidator believes company is insolvent, .......................................................... [11.40] members’ voluntary, ... [10.20], [10.45], [11.10], [11.25] declaration of solvency, ....... [11.15], [11.25] insolvent, liquidator believes company is, .......................................................... [11.40] liquidator, ............................................ [11.23] meeting of creditors, .......................... [11.15] special resolution, .............................. [11.10] passed, ............................................. [11.20] statement of assets and liabilities, . [11.15], [11.300] restrictions, ................................ [10.60], [11.300] s 513B Corporations Act, ...................... [10.100] stay of proceedings, ................................. [17.30] surplus assets, ......................................... [15.440] Voluntary winding up — see Voluntary winding up Warrants arrest of debtor, .......................... [3.440], [6.195] search property, to, .......... [4.25], [6.20], [6.195] liquidator applying for, ..................... [15.15] s 77AA notice distinguished, ........... [6.210] seize property, to, ............. [4.25], [6.20], [6.195] liquidator applying for, ..................... [15.15] Winding up Aboriginal and Torres Strait Islander corporations, ................... [1.225], [10.25] administration, effect on other types of, ............................. [12.80], [13.90]-[13.100] administration of, ..................... [10.05], [10.115] ASIC, by, .............. [10.115], [10.120], [11.50] investigations, ............................... [10.120] powers, ............................ [10.30], [10.120] report to (s 533), ........................... [15.120] courts role, ........................................ [10.190] creditors, meeting — see Meetings of creditors -winding up statutory report to, ........................... [15.115] appeals, .................................................... [10.190] challenging liquidator’s decision, . [10.440] application for order — see Winding up application for court order ASIC, .......................................... [10.120], [11.50] appointing liquidator, ........................ [11.50]

Index Winding up — cont investigations, ................................... [10.120] powers, ................................ [10.30], [10.120] Published Notices Website (PNW), ........................................................ [10.125] regulatory guides (RGs), ................ [10.130] reports to, .......................................... [10.120] further report (s 533), ................... [15.120] statutory report, ............................. [15.115] auditor, ..................................................... [13.105] avoidance provisions, ................................ [5.10] bankruptcy compared, .. [4.25], [10.40], [10.45] banks, ......................................................... [10.25] books of company, ..... [10.275], [13.35], [13.40] carrying on business, ............. [10.310], [13.05], [15.235] change of company name during, ........ [13.20] claims against creditors, ......................... [13.75] commencement, ........... [1.90], [10.90], [11.315], [14.10], [15.10] compulsory winding up, .... [10.95], [14.10] varied dates of, ..................... [10.95], [14.10] voluntary winding up, ...... [10.100], [14.10] committee of inspection, ........... [10.55], [15.40] company books, ......... [10.275], [13.35], [13.40] company documents, publication of liquidation, .................................... [13.20] company litigation, .................................. [13.15] company property distribution of — see Distribution of company assets - winding up liquidator dealing with — see Winding up - dealing with company assets company secretary, .................................. [13.35] company’s business, ................................ [13.05] compulsory winding up — see Compulsory winding up contingent debts, .................................... [15.285] contracts, .................................................... [13.85] contributories, ........................................... [13.45] calls on, ................................................ [13.35] directors, .............................................. [13.25] End of Administration Return, ....... [17.40] list of, ................................................. [10.285] court jurisdiction, ................................... [10.190] court ordered — see Compulsory winding up court’s discretion, ................................... [11.265] abuse of process, .............. [11.250], [11.275] disputed debts, .. [11.250], [11.270], [11.305] no benefit, .......................................... [11.295] tender of payment, .......................... [11.280] wishes of creditors, .......................... [11.290] creditors, effect on, .................................. [13.50] claims against creditors, ................... [13.75] priority rights, .................................... [13.72] secured creditors, ............... [13.70], [15.305]

975

creditors’ voluntary winding up — see Creditors’ voluntary winding up criminal offences relating to, ................ [16.185] criminal proceedings, effect on, ............ [13.65] debts, effect on, ........................................ [13.50] deed of company arrangement effect on, ............................................ [20.100] followed by, ....................................... [20.295] deregistration of company — see De-registration of company director penalty notice, ........... [10.55], [16.160] non-response to, ............................... [16.160] service, ............................................... [16.160] directors co-operating with liquidator, .......... [13.40], [15.20] director penalty notice, ..... [10.55], [16.160] non-response to, ............................ [16.160] effect on, ................................ [13.25], [13.40] personal liability, ................................ [10.55] distribution of assets — see Distribution of company assets - winding up powers during winding up, ........... [13.25], [13.40] employees assisting liquidator, ............. [13.40], [13.80], [15.20] effect on, .............................................. [13.80] End of Administration Return, ............. [17.40] Fair Entitlements Guarantee (FEG), ..... [13.80] foreign insolvency proceedings — see Cross-border insolvency forms, ....................................................... [10.125] Harmer Report, .......................................... [1.80] hearing of application — see Winding up application for court order injunction to prevent, ............................ [11.250] insolvency, proving, ..................... [1.90], [10.45] insolvent trading — see Insolvent trading insolvent winding up, . [1.140], [10.45], [10.50] compulsory — see Compulsory winding up creditors’ voluntary — see Creditors’ voluntary winding up date of commencement and relation-back day, ................................. [10.90], [13.100] compulsory winding up, ................. [10.95] voluntary winding up, .................. [10.100] interaction with other arrangements, .. [12.80], [13.90]-[13.100] ipso facto clauses, ...................... [6.290], [13.85] provisional winding up, ................... [12.40] legal practitioners, and, ........................ [10.470] legislation, ................................................. [10.10] changes to, .......................................... [15.05] constitutional powers, ....................... [10.25] State based arrangements, ................ [10.25]

976

Keay’s Insolvency: Personal and Corporate Law and Practice

Winding up — cont life insurance companies, ....................... [10.25] liquidator — see Liquidator managed investment schemes (MIS), ... [10.25] meetings — see Meetings of creditors – winding up members, effect on, .................................. [13.45] member’s meeting — see Meetings of creditors – winding up members’ voluntary winding up, ........ [10.20], [10.45], [11.10], [11.25] declaration of solvency, ....... [11.15], [11.25] insolvent, liquidator believes company is, .......................................................... [11.40] liquidator, ............................................ [11.23] meeting of creditors, .......................... [11.15] special resolution, .............................. [11.10] passed, ............................................. [11.20] statement of assets and liabilities, .. [11.15] name of company, changing, ................. [13.20] order for, .................................. [11.315], [11.320] application for — see Winding up – application for court order companies absence, made in, ......... [11.255] court’s discretion, ............................. [11.265] employees, effect on, ......................... [13.80] granting, ............................................. [11.255] interim, ............................................... [11.255] notice of, ............................................ [11.320] refusal, ................................................ [11.265] service, ............................................... [11.320] subsequent, ........................................ [11.300] overview, ......... [10.05]-[10.15], [10.45], [10.50], [10.475], [13.02] Part 5.3A administration, effect on, .... [13.100] phoenix conduct, .......... [1.155], [10.50], [16.70] employee entitlements and, ............. [16.80] tax liabilities and, ............................. [16.165] preferences — see Preferences prescribed forms, ..................................... [10.10] proof of debts — see Proof of debts – winding up provisional winding up — see Provisional winding up publication of liquidation, ...................... [13.20] Published Notices Website (PNW), .... [10.125] purposes, ................................................... [10.35] receivership, effect on, ........................... [13.95], [18.165]–[18.185] regulatory proceedings, effect on, ......... [13.65] relation back day, ....... [10.90], [13.100], [15.10] compulsory winding up, .................. [10.95] voluntary winding up, .................... [10.100] report as to affairs, ..... [10.280], [13.30], [15.20] restructuring, ............................................ [10.35] secretary of company, ............................. [13.35]

secured creditors — see Secured creditors shares, prohibition on transfer, .............. [13.45] solvent winding up, .... [10.20], [10.45], [11.25] member’s meeting, ............... [10.20], [11.15] proprietary company, of, .................. [10.20] special administrator, .............................. [10.25] statutory presumption of insolvency, .. [1.140], [11.265], [11.270] stay of — see Stay of winding up stay of legal action, .................................. [13.55] subsequent orders, ................................. [11.300] termination of — see Termination of winding up voluntary — see Voluntary winding up voluntary administration and, ......................................... [19.410]-[19.425] adjournment of proceedings for, .. [19.255], [19.415] administrator’s liability in, ............. [19.230] compared, ............................................ [10.50] creditors’ costs, priority of, ............ [19.255] creditors’ voluntary winding up, moving to, ...................................... [11.45], [20.55] effects of, ............................................ [13.100] liquidator appointing administrator, .......................................... [19.35], [19.415] pending proceedings for, ................ [19.255] progress from administration to liquidation court order, by .............................. [19.425] creditors’ vote, by ......................... [19.420] progress from liquidation to administration, ........................... [19.415] liquidator’s decision, .................... [19.415] real prospect of better outcome than, ........................................................ [19.255] second meeting of creditors deciding on, ........................................................ [19.305] termination of administration, ........ [19.50] termination of winding up, ........... [19.415] transitioning to winding up, ........... [11.45], [13.100], [20.55] Winding up – application for court order abuse of process, .................... [11.250], [11.275] adjourning, ................ [10.80], [11.255], [11.260] affidavit verifying debt, ......................... [11.220] application, ................................ [10.45], [10.125] ASIC, by, .................................................. [11.210] company, by, ........................................... [11.210] company defending, .............................. [11.245] consent of liquidator, ............................. [11.235] contributory, by, ...................... [11.210], [11.215] creditors, by, ... [10.45], [10.60], [10.70], [10.75], [11.60], [11.210], [11.215] contingent creditor, .......................... [11.215] prospective/future creditor, ........... [11.215]

Index Winding up – application for court order — cont secured creditor, ............................... [11.215] substituting creditor, ........................ [11.310] defending, ................................................ [11.245] determination, ......................................... [11.225] slip rule, ............................................. [11.230] directions, ................................................ [11.255] director, by, .............................................. [11.210] dismissal of, ............................................ [11.255] disputed debts, ........ [11.250], [11.270], [11.305] form, ......................................................... [11.220] hearing of application, .......................... [11.255] adjourning, .......... [10.80], [11.255], [11.260] court’s discretion, ............................ [11.265], [11.290]-[11.300] opposition to, .................... [11.245], [11.285] injunction to prevent, ............................ [11.250] insolvent at time of, ............................... [11.215] leave of court for, ................................... [11.210] liquidator, by, .......................... [11.210], [11.215] non-compliance with statutory demand, ........................................ [11.220], [11.255] notice of, .................................... [10.60], [11.240] notice of intention to appear, .............. [11.245], [11.255] opposition to, .......................... [11.245], [11.285] originating process, ................................ [11.220] prescribed agency, by, ........................... [11.210] procedure, ................................................ [11.205] provisional winding up following — see Provisional winding up publication of, ......................... [11.240], [11.250] Published Notices Website (PNW), ........................................................ [10.125] regulation, ................................................ [11.205] s 459A, under, ........................................... [10.75] s 459B, under, ........................................... [10.80] s 459P, under, .............................. [11.55], [11.60] s 459S, under, .......................................... [11.305] s 461, under, .............................................. [10.70] service, ..................................................... [11.220] slip rule, ................................................... [11.230] statutory demand, failure to comply with, .......................................... [11.75], [11.305] subsequent applications, ....................... [11.300] substituting creditor, .............................. [11.310] support of, ............................................... [11.245] tender of payment effect on, ................ [11.280] substituting creditor, ........................ [11.310] time for determination, ......................... [11.225] slip rule, ............................................. [11.230] time for filing, ........................................... [11.70] uncontested, ............................................ [11.255] valid debt, .................................................. [11.60] who may apply, ........... [10.70], [11.55], [11.60], [11.210]

977

creditors, ... [10.45], [10.60], [10.70], [10.75], [11.60], [11.215] Winding up – dealing with company assets ascertain and take possession of assets, ......... [10.260], [10.280], [10.295], [13.35], [14.05], [15.05] directors and officers assisting with, .............................. [13.40], [13.80], [15.20] assetless company, ................................. [10.295] attachment of debt proceedings before commencement, .......................... [14.240] avoidance regime, .................................... [14.35] charge enforcement before commencement, ........................................................ [14.240] compromise debt, right to, ................... [10.315] contingent debts, .................................... [15.285] costs and litigation, ............................... [10.325] court orders transaction was a preference, ........................................................ [14.170] time limit for application, .............. [14.175] court, recovery from, ............................. [14.245] cross-border recoveries, ........................ [14.235] Australian liquidators with overseas assets, ........................................... [14.239] overseas liquidators with Australian assets, ........................................................ [14.237] date of commencement, from, ............... [14.10] disclaimer of assets — see Disclaimer of assets – liquidation disposition of property, ........................... [13.10] distribution of assets — see Distribution of company assets – winding up enrichment, company retaining at plaintiff’s expense, ....................................... [10.300] Ex parte James, rule in, ......................... [10.300] execution against property before commencement, .......................... [14.240] gifts, .......................................................... [14.135] group of companies, pooling, ......................................... [15.310]-[15.325] insolvent transactions, ............... [14.35], [14.55] related-entity benefits, recovery, ... [14.145] invalidation of security interests security interests in favour of relevant persons, ........................................ [14.275] unperfected security interests, ....... [14.270] liquidator duties regarding, ................. [10.235] ascertain and take possession of assets, .......... [10.260], [10.280], [10.295], [15.05] preserve assets, ................................. [10.265] realise assets, ..... [10.265], [10.310], [15.240] recover assets, ..... [10.260], [10.280], [15.05] liquidator entitlement to, ........................ [14.10] long term funding agreements, ........... [10.320] order, following, ..................................... [11.320] overview, .................................................. [11.110]

978

Keay’s Insolvency: Personal and Corporate Law and Practice

Winding up – dealing with company assets — cont ownership, company retaining, ............ [13.10], [14.20] pooling of assets, .................... [15.310]-[15.325] possession, liquidator taking, ............. [10.260], [13.35], [15.25] directors and officers assisting, ...... [13.40], [13.80], [15.20] following, .......................................... [10.265] preference payments — see Preferences preserving assets, ................................... [10.265] pre-winding up transactions, .... [14.25]-[14.35] priority rights, .......................................... [13.72] proof of debts — see Proof of debts – winding up property held in trust, ............ [10.320], [14.15] property, meaning, ................................. [15.420] purchase by third party in good faith, ........................................................ [14.240] realising assets, ....... [10.265], [10.310], [15.240] sale method, ...................................... [15.240] recovery, ...... [10.260], [10.280], [14.05], [14.30], [15.110] avoiding pre-winding up transactions, by, ............................................ [14.25], [14.30] related-entity benefits, ..................... [14.145] related entity, ............................................ [14.45]

relation-back day, ..................... [13.100], [14.40] retention of title, ......................... [13.10], [14.20] perfection requirements, ................... [14.20] secured creditors — see Secured creditors sheriff, recovery from, ........................... [14.245] surplus funds, ......................................... [10.340] third party holding, ................................. [15.25] transaction, ................................................ [14.80] defeating or delaying or obstructing creditors, ........ [14.35], [14.140], [14.142] trusts, assets held in, ............... [10.320], [14.15] uncommercial transactions, ... [10.260], [14.35], [14.135], [14.155], [14.250] purpose, ............................................. [14.140] undervalued transactions, ........ [5.20], [14.135] unfair loans, .............................. [14.35], [14.150] unfair preferences, .................... [14.35], [14.45], [14.65]-[14.130], [14.250] purpose, ............................................. [14.140] unreasonable director-related transactions, .......................................... [14.35], [14.155] close associate, .................................. [14.155] void dispositions/transfers, ................. [14.250] court ordered liquidations only, .... [14.265] disposition of property, ................... [14.255] execution of company assets, ........ [14.260] voidable transactions — see Voidable transactions