Category Archives: Insolvency

COMMENTS ON THE EXPOSURE DRAFT CORPORATIONS AMENDMENT (CORPORATE INSOLVENCY REFORMS) REGULATIONS 2020 AND RULES 2020

KEY ASPECTS FOR PRACTITIONERS, PPSA ISSUES AND OTHER MATTERS WORTH NOTING

Introduction

  1. The Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill) was introduced in Parliament on Thursday 12 November 2020. I have previously commented on the exposure draft of the Bill here and made a submission to Treasury concerning that Bill here.
  2. The text of the Bill as read in Parliament is available at the parliamentary website here, with a mark up against the exposure draft available here.
  3. On 17 November 2020 the Treasury released exposure drafts of the proposed regulations and rules that will be introduced with the Bill once enacted, which are available here.  The content of the regulations and rules and the revised Bill have been summarised extensively elsewhere, see for example an excellent summary by HWL Ebsworth at their website here.
  4. In this article I comment on particular aspects of the regulations that are of interest to insolvency practitioners in operating under the reforms, aspects of the reforms that impact on PPSA issues and other matters of interest.  This article is not intended to be a general review of the regulations or rules, which can be obtained by referring to the sources noted above.

Issue:  employee entitlements and tax lodgment

  1. Despite many submissions to government to exclude these thresholds, they remain.  In short, companies will have to have their employee entitlements paid up and have lodged all outstanding federal tax returns and similar documents before being eligible to take part in a restructuring process.

Issue:  debts incurred in the restructuring are provable in a subsequent winding up

  1. The Bill has amended s553(1A) of the Act so that debts incurred by the company when it is under restructuring or under a restructuring plan are provable.  See the Bill, schedule 1, Part 2 item 48.  The text of the existing sub-section is repealed and replaced to that effect.   
  1. The Bill has amended s553(1A) of the Act so that debts incurred by the company when it is under restructuring or under a restructuring plan are provable.  See the Bill, schedule 1, Part 2 item 48.  The text of the existing sub-section is repealed and replaced to that effect.   

Issue:  Temporary protection of insolvent small businesses from statutory demands to eligible companies, where declaration is made

  1. There will be an extension of the effective moratorium on statutory demands to 31 July 2021 for companies eligible for temporary restructuring relief:  see regulation 5.4.01AAA. 
  2. The government anticipates a shortage of practitioners available to take appointments from 1 January 2021.  This measure is a device to shelter companies from statutory demands whilst waiting to line up an appointee. 
  3. The meaning of the phrase “eligible for temporary restructuring relief” is given by s 458 of the Act.  To qualify, directors must make and publish a written declaration of three matters:
    • Insolvency of the company and the company would meet the eligibility criteria for restructuring;
    • The board has resolved to appoint a restructuring practitioner;
    • There is no other current insolvency appointment (Restructuring Practitioner, VA or liquidator).
  4. Once made a company has made a declaration, the company is eligible for temporary restructuring relief for three months, which can be extended a further month if directors have been unable, despite trying, to appoint a restructuring practitioner.
  5. How are creditors supposed to know whether any particular debtor is eligible for restructuring when they are not insiders of the company?  Some relief will come from the publication of the notice.  One would need to know that the company has less than $1m in liabilities excluding contingent claims.  This will add a degree of uncertainty for people proposing to use a statutory demand process.

Issue:  Restrictions on voidable transactions in simplified liquidation

  1. In regulation 5.5.04, the restrictions on unfair preference recoveries have been set out.  In essence, unfair preference recoveries will be restricted to debts that exceed $30,000 in total or in cumulative series of related transactions, and will be restricted to transactions entered into on the three month period ending on the relation back day rather than 6 months.
  2. Preference recoveries against related entities of the company will be unaffected.

Issue:  Restructuring appointment triggers PPSA Vesting

  1. The Bill as read in parliament now amends s 267 of the Personal Property Securities Act 2009 (Cth) (PPSA) so that the effect of a restructuring appointment is to trigger vesting of unperfected security interests in the company.  See items 115 to 117 of the Bill. This was left out of the exposure draft.

Issue:  Determining the amount of liabilities to be counted in the $1 million cap for restructuring – still messy

  1. Two issues that were open from the exposure draft of the Bill were the types of debts to be counted into the $1 million threshold, whether other indicia might be used (eg turnover opr employee numbers) and whether the amount of the threshold might be changed.
  2. By the regulations, contingent debts are to be excluded from calculation but future debts remain: see r 5.3B.03(1).  The threshold is confirmed to be $1m, to be calculated on the day the restructuring begins.  No other indica are to be used.
  3. The total will accordingly exclude contingent debts where the contingency has yet to crystallise but include future non-contingent debts, for example rent, which whilst not yet due are certain to arise.
  4. Query the position of contingent debts that crystallise on an insolvency appointment or associated act of default.  The wording of the regulation is ambivalent as to whether crystallised debts of that sort are to be included, since the calculation is to be taken on the day the restructuring begins, not upon the commencement of the restructuring.  It would seem to me that crystallised debts are included since by application of section 36 of the Acts Interpretation Act 1901 (Cth), the restructuring period would be taken to include the whole of the day on which it commences. 
  5. It follows that the commencement of the restructuring may well push the company over the $1 million threshold when such cystallised debts are included.  The Law Council of Australia has recommended in a submission on the regulations that the threshold be calculated fromimmediately before the appointment (see item 1 here), which seems to me to be sensible.  It avoids the need for a review of company contracts to detect contingent debts which might not be disclosed in the accounts of the company. 

Issue:  it appears payments to referrers for appointments are allowed

  1. The regulations appear to permit a restructuring practitioner to pay a “broker”, being a person referring an appointment, for the referral – see reg 5.3B.16. 
  2. This has attracted criticism – it will feed perceptions of a lack of independence of the practitioner to say the least.

Issue:  What Transactions are in the ordinary course of business in the restructuring period?

  1. By s.453L of the Act there is a general prohibition on dealings outside the ordinary course of the company’s business, unless the restructuring practitioner has consented or the transaction was entered into under an order of the Court.
  2. The regulations provide a definition of “ordinary course of business” – see 5.3B.04. 
  3. A transaction that is for the purposes of paying a debt or claim arising prior to the commencement of the restructuring, relating to the transfer or sale of the whole or part of the business, or relating to the payment of a dividend are all outside the ordinary course of business.  Payments of company employee entitlements are not considered outside the ordinary course of business. 
  4. It seems the intent of the regulation is to give the practitioner a measure of control and require their supervision during the restructuring period.  The company will not be able to pay any essential debts arising before the appointment without consent:  for example, a payment to a key supplier might be necessary to continue trading. 
  5. Reg 5.3B.05, sets out a process for restructuring practitioners to follow when consenting to transactions outside the ordinary course of business.  Written consent is to be given by the practitioner and a record of the consent to be kept by the practitioner and given to the company within two business days of the consent being given.
  6. Practitioners should be aware of that requirement as it seems to me it will be a not uncommon occurrence.

Issue: when a restructuring ends

  1. How a restructuring is to end was left out of the Bill and is now provided for in the regulations.  Regulation 5.3B.02 deals with when a restructuring is to end.  In summary, a restructuring will end if the company:
    • fails to propose a restructuring plan in the restructuring period;
    • a proposal to make a restructuring plan lapses;
    • the restructuring practitioner terminates the restructuring;
    • the Court orders the restructuring to end;
    • an administrator of the company is appointed;
    • a liquidator or provisional liquidator is appointed;
    • or the company makes a restructuring plan (a successful ending).
  2. There are a couple of interesting points:
    • It appears to me that directors can still appoint a voluntary administrator even though the company is under restructuring;
    • Directors have a power under r5.3B.02(2) to unilaterally end a restructuring on giving notice to the practitioner and ASIC.  It seems odd to me that given that a company that enters into a restructuring is presumed to be insolvent and it would seem to be poor policy to allow the directors of the company to end the restructuring process without completing it and continuing to trade.
  3. If a restructuring is terminated by the restructuring practitioner, regulation 5.3B.02(6) requires the contents of the written notice required from the restructuring practitioner of the decision to terminate (see s.453J(3)(b) of the Act) are set out.  The notice must include the reasons for terminating the restructuring.

Issue: Proposing a restructuring plan and its contents

  1. Section 455B of the Act as amended provided for regulations to be made about the process of proposing a restructuring plan.
  2. Those regulations are included in Division 3 of the proposed regulations.  Practitioners will need to be familiar with these provisions and develop precedents that conform with them for draft plans to be used in practice.
  3. The plan must conform with that approved form and must also include various matters including regulation 5.3B.13.  They include matters such as:
    • how the company property is to be dealt with;
    • what property is to be the subject of the plan;
    • the remuneration of the practitioner;
    • the date on which the plan was executed.
  4. The plan may also:
    • authorise the practitioners to deal with identified property in a specified way (eg by sale);
    • providefor any matters relating to the company’s financial affairs;
    • be conditional upon the occurrence of events within a specified period no longer than 10 business days after the proposal is made and accepted (presumably, provision of finance, third party consents etc).
  5. Plans cannot provide for the transfer of property other than money to a creditor and plans can only have a life of 5 years beginning on the day that the plan is made in respect to payment.  In other words, payments under the plan have to be made within a maximum period of 5 years.
  6. By regulation 5.3B.14 a restructuring proposal statement must be prepared to accompany the plan which will include a schedule of debts and claims that are affected by it, and that statement must be in a prescribed form.
  7. The Act and regulations use the phrase “making a restructuring plan” and distinguish “proposing a plan”.  Making a plan is where a proposed restructuring plan is accepted by creditors and is accordingly binding.  Compare a deed proposal and a DOCA.

Issue:  the “proposal period” and extending it

  1. The default period of the restructuring process is 20 business days.  That period can be extended by another 10 business days if the restructuring practitioner is satisfied that requiring the company to give their plan within the 20 day period would not be reasonable in the circumstances.  Only one such extension can be given, that the Court can give further extensions on application.  See regulation 5.3B.15.
  2. This regulation mimics the practice in relation to voluntary administration of extensions made by the Court which, on the first request, are routinely given.  It seems to me to be a sensible regulation but one could expect the Court to be less accommodating than in VA on the first request to it for more time. 

Issue:  Certification of the restructuring plan by the restructuring practitioner

  1. Regulation 5.3B.16 provides detail of a certificate that restructuring practitioners have to provide in respect of each restructuring plan.  They should be of concern to restructuring practitioners as to the burden of certification, because of their broad scope, remembering that practitioner’s  freedom from liability in performance of their duties requires an absence of negligence.  The certificate must confirm the following matters:
    • the eligibility criteria for restructuring are met by the company;
    • the company is likely to be able to discharge the obligation created by the plan when they become due and payable;
    • the practitioner believes on reasonable grounds that all information required to be set out in the company restructuring proposal has been set out in the statement;
    • if the practitioner believes that is not the case, they must set out or identify the matters in relation to which a belief on reasonable grounds could not be formed; and
    • if a person referred the company to the restructuring practitioner it requires them to set out any details of that relationship and any payments made to the broker in connection with the referral.
  2. These obligations are serious and require a restructuring practitioner to satisfy themselves of the eligibility of the company for restructuring and the likelihood that the company imposing a plan will be able to satisfy the obligations that it is taking on.
  3. A restructuring practitioner commits an offence if they prepare a certificate under this regulation and do not make reasonable inquiries into the company’s business, property, affairs and financial circumstances or take reasonable steps to verify the company’s business, property, affairs and financial circumstances.  It is a 50 penalty unit penalty and an offence of strict liability.
  4. The prospect of civil liability for breach of these provisions (if such a breach is either because of a lack of good faith or because of the presence of negligence) and the fact that failure to make reasonable inquiries and take reasonable steps as noted above is an offence, should make practitioners cognisant of the important role in investigating the affairs of the company and certifying the proposed plan under these provisions.
  5. Further by Regulation 5.3B.17, a restructuring practitioner commits an offence if they fail to notify the company of incompleteness or inaccuracies in information in the plan or the restructuring proposal statement that accompanies it, where those flaws are likely to affect the company’s ability to meet its obligations under the plan.
  6. By regulation 5.3B.18 a restructuring practitioner can cancel a restructuring proposal under certain conditions, which include the restructuring practitioner discovering before the plan is made that the information in the plan is incomplete, affected creditors have not been disclosed, the proposal statement was deficient because it omitted a material particular or there has been a material change in the company’s circumstances not previously foreshadowed which is capable of affecting creditors’ decisions as to whether to accept the plan.
  7. That regulation provides the restructuring practitioner with a safety valve having regard to the onerous obligations that they are subject to.

Issue:  Acceptance of the plan

  1. Two interesting points regarding how a plan is accepted:
    • a plan is accepted if there is a majority in the value of the company’s affected creditors in favour who reply before the end of the acceptance period.  It would seem that if creditors choose not to vote, the plan can be accepted provided the majority of those voting are in favour by value.  Conceivably if one credited voted in favour and no other creditors voted, the plan would be approved.
    • if an affected creditor is entitled to vote because they have purchased another creditor’s claim, then the value of their vote is limited to the value that they paid for the debt.  In other words it’s the purchase price of the debt, not its face value that matters.
  2. The regulations make it an offence to give or agree or offer to give an affected creditor (simply a creditor who is bound by a plan or will be if the plan is made) any valuable consideration with the intention of securing an acceptance or non-acceptance of the plan.  Vote buying is out! 

Issue:  Appointment functions and powers of a restructuring practitioner under a plan

  1. The functions and powers of a restructuring practitioner under a plan, once made, are  provided in subdivision D, regs 5.3B.32 to 40.
  2. The functions include to receive and hold money for the company, pay money to creditors in accordance with the plan, realise property and distribute its proceeds if requested to do so by the directors,  do anything incidental to the performance or exercise of their functions and powers and to do anything else necessary or convenient for the purposes of administering a plan.
  3. By regulation 5.3B.34, there is a prohibition on a practitioner disposing of encumbered property, with exceptions.  The exceptions are if the property is PPSA retention of title property, disposals in the ordinary course of business, disposals with the consent of a secured party or with leave of the Court.
  4. By regulation 5.3B.35 the restructuring practitioner is the company’s agent when carrying out the company’s restructuring plan, and has qualified privilege in that respect and a right of indemnity with priority.  The priority is dealt with in reg 5.3B.39.  The right of indemnity prevails over all of the company’s unsecured debts, debts secured by a PPSA security interest that has vested, and debts secured by circulating security interest, except where a receiver has been appointed.
  5. By regulation 5.3B.40, the restructuring practitioner has a lien to secure the indemnity on the company’s property. 

Issue:  Information to be provided to the restructuring practitioner and reporting obligations

  1. Divisions 4 and 5 of the regulations deal with the company’s obligations to provide information to an incoming restructuring practitioner, declarations required to be made by the directors in relation to the appointment, notice of the restructuring plan and notices of contravention and termination of the plan. 
  2. A declaration by directors is required of the company’s eligibility to be under restructuring and other matters by regulation 5.3B.44.  The declaration must include whether any transactions that have been entered into by the company would be voidable under s.588FE if the company were wound up, other than transactions which would be an unfair preference.  This interesting obligation (one doubts it will be thoroughly observed) seems to require the directors to seek professional advice concerning the company’s transaction history to assess whether any voidable transactions may have occurred.  It seems to me that an unadvised company director would identify such transactions and the director/s will probably seek assistance from the restructuring practitioner before making of this declaration.

Issue:  Powers of the Court

  1. Much of the powers of the Court are left to be dealt with in the regulations and those regulations are contained in Division 6 in regulations 5.3B.50 to 55.
  2. Points of interest:
    1. The Court has a jurisdiction to deal with creditor disputes over claims and debts that are not resolved by agreement.  The jurisdiction only activates where a disagreement has arisen between the affected creditor and the restructuring practitioner; has refused to make a recommendation about it or has recommended that the dispute be referred to Court. 
    2. The Court also has a jurisdiction to vary restructuring plans on application of a company, an affected creditor, the restructuring practitioner or ASIC or on its own initiative. 
    3. The Court has a wide power to make orders to terminate, void or validate a restructuring plan. 

Issue:  Simplified liquidation

  1. The regulations also provide for circumstances in which a simplified liquidation process will end. 
  2. A problematic point is a deeming provision in reg 5.5.07.  If the company or a director of the company has been engaged in fraudulent or dishonest conduct that has had a material adverse effect on the interest of creditors as a whole or class of creditors as a whole, then the simplified liquidation process is taken to have ceased.  It is an interesting provision because the activating event is the formation by the liquidator of a that the dishonest or fraudulent conduct has occurred, where held on reasonable grounds. 

Date:  26 November 2020

Mark McKillop

Castan Chambers

Melbourne Victoria

Common Issues with the PPSA and how to deal with them as a solicitor or barrister

I recently presented a video podcast with my learned friend and fellow barrister Amanda Carruthers on the topic “PPS Issues in Insolvency”: see below. The format is to highlight the frequent PPSA issues that we see as barristers and how best to tackle them as a practitioner.

You can also download the seminar and watch at https://foleys.com.au/ResourceDetails.aspx?rid=459&cid=5

Enjoy. The seminar is part of a series presented by Foleys List on a wide range of topics relevant to commercial lawyers. See the full range at https://foleys.com.au/cpdresources.aspx

Small Business Insolvency Reforms Seminar Paper and Update on the next draft of the Bill

Will the Covid Insolvency Wave look like this?

I had the pleasure of speaking to the first Zoom meeting of the CPA Insolvency & Reconstruction Group on Monday night about the Small business Insolvency Reforms, at the invitation of Hugh Milne. A copy of the paper I presented and the overheads from the night are linked below.

As yet there is no indication yet of the date when the final bill or the regulations will surface. Since the legislation is supposed to commence by 1 January 2021, and the last sitting of parliament is in the two weeks from 30 November, we could assume that we will see some drafts by the end of the month. Here is hoping anyway.

I suspect the bill will end up being delayed and the commencement date pushed back to a date in March. I have no reason to say that other than that the first draft was very undercooked, and that job keeper has been extended again. One wonders whether the moratoriums on statutory demands, bankruptcy notices and insolvent trading will be too.

My submission on the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (the Bill)

Treasury invited submissions on the Bill providing only 5 days notice, after the exposure draft and EM had been released.

I am not normally prone to making legislative drafting submissions, but the rush in this case really warranted one given that I had read and considered the merit of the exposure draft. I suspect that the short time frame, plus the lockdown in Melbourne, will have substantially limited the ability of many usual contributors to respond.

Some of the key points of my submission are as follows.

The debt threshold for the application of restructuring and simplified liquidation needs careful thought and ought be lowered.

The final draft of the law must minimise the operative provisions of substance that are left to regulations.

Debts incurred in the trade on period must be given some priority, if no personal liability is to be imposed on the directors.

Applications to Court during the restructuring and the simplified liquidation must be limited, probably most effectively by requiring leave and subjecting the discretion to grant it to a purposive test.

Transition to liquidation needs to be clearer, and there should be no transition to VA.

The reporting obligations and the investigative powers of the restructuring practitioner need to be reasonably strong, if truncated for purpose.

The employee entitlements and tax filing threshold obligations should be scrapped.

The legislation should be delayed by 2 months to allow more work to be done on it.

A copy of my submission is available at this link:

Comments on the Exposure Draft of the Insolvency Reform Legislation – Corporations Amendment (Corporate Insolvency Reforms) Bill 2020

Actual picture of the parliamentary drafting table

Laws are like sausages, it is better not to see them being made.

Otto von Bismarck

After announcing the introduction of streamlined Debtor in Possession reforms for small corporate business insolvencies just 2 weeks ago (see my thoughts at the time of release here) by 1 January 2021, the Commonwealth has now released an exposure draft of the amending legislation and an explanatory memorandum.   It really is a case of making  sausages.

In summary, the exposure draft leaves a lot of work to be done by the drafters to get the legislation finalised.  A lot of the meat (no pun intended) in terms of substantive changes to the existing law is left to regulation, probably sensibly the only way to get this process done with consultation within the industry in time.  It seems to me that the exposure draft has been rushed out by using this device and that a lot of the hard yards will be done in the process of sifting through submissions to be made,  due on Monday and in further consultation, hopefully with industry bodies and the legal profession.

My thoughts on the exposure draft:

  1. To be completed by regulations:  the draft is the ultimate “fixer upper” opportunity, being only about two thirds finished.  The unfinished parts are to be filled by regulations to be made later.  Presumably the idea is to permit more time for the Commonwealth to consult with the professions, industry and other SME stakeholders, which may be the only practical way to get the changes made so they can commence by 1 January 2021.  This approach, whilst unorthodox for insolvency reform, is welcome given that there was little or no consultation before the package was announced.
  2. A whole new insolvency office:  The term for the appointee used in the part is “restructuring practitioner”.  A new definition in s.9 of the Act is included to define that term.  The term is used for an appointee both during the restructuring period and after the restructuring plan is accepted: there is no term akin to “deed administrator”.
  3. A whole new part:  Rather than adapting the existing processes for voluntary administration, the drafters have inserted an entirely new part, Part 5.3B, dealing with restructuring of a company under the debtor and position model.   Again, this reflects the object of the reforms, which is a revolutionary, rather than an adaptive.
  4. #tag –  (Restructuring Practitioner Appointed):  Section 457B requires a company subject to the restructuring process must add the words “(restructuring practitioner appointed)” after its name.
  5. An act of insolvency:  like a part X proposal for an individual in bankruptcy, a company who proposes a restructuring plan is taken to be insolvent – s455A(2).
  6. Restructuring Practitioner’s power to end it all:   Interestingly, there is provision under subdivision C for the role of the restructuring practitioner to have the power to terminate a restructuring on certain grounds:  see s453J.  The grounds include at least if the company does not meet the eligibility criteria for restructuring,  if it would not be in the interests of creditors to make a restructuring plan, or continue with a plan, or it would be in the interests of creditors for the company to be wound up.  It will be interesting to see on what basis this power to terminate the restructuring of a company will be exercised in practice.  One would imagine the type of situations in which a VA might recommend liquidation would be a basis – where businesses are dead and buried with no potential of saving, so that the appointment is misconceived, or cases involving substantial fraud or criminality.
  7. Recycled nuts and bolts:   A lot of basic mechanics dealt with in the new Part 5.3B are copies of similar provisions from 5.3A.  An example: a person appointed as a restructuring practitioner must make a declaration of relevant relationships.  The DIRRI provision, section 60, has been amended accordingly.  Similarly, there are parallel restrictions on third party property and secured creditor action during the period of the restructuring process.  See generally subdivision D. 
  8. So much to be provided by regulation:  Some notable examples include:
    • The eligibility of a company to participate in a restructuring based on its liabilities, and the degree to which a director can have previously been involved in another restructuring – see 435C.  The whole question of what liabilities count toward the threshold debt ceiling for eligibility, and even what the ceiling is to be, are not yet in the legislation;
    • Surprisingly, nearly all of the functions, duties and powers of the restructuring practitioner.   There is a generic provision for basic functions like providing advice to the company on restructuring matters, assisting and preparing a restructuring plan, making a declaration to creditors “in accordance with the regulations” in relation to the plan and any other functions given to the practitioner under the Act.  Apart from that, the regulations are to provide…;
    • The form, content, making, implementation, varying, lapsing, voiding, contravention and termination of restructuring plans.    Regulations are also to provide for the role of the restructuring practitioner in relation to the plan.  There are all very important issues for the success of the reforms.  Whilst crossing the proverbial fingers, one would think that regulations are being used in order to allow consultation with the industry before the legislation is finalised, or perhaps allowing it to be easily tweaked after 1 January 2021.  It will be interesting to see whether substantive text is used in the final draft of Part 5.3B rather than in regulations. 
  9. The Role of The Court is a work in progress:  
    • There is a balancing act in any insolvency regime.  On one hand it is desirable to allow creditors or other stakeholders to go to court to protect themselves from abuse of process.  On the other hand, too much judicial oversight can make the process to expensive to use.  Cost is a key complaint that has led to the reform package.  The fact that the role of the Court is to be finalised in the Exposure Draft reflects, I think, a lot of thinking going on at government level and probably a desire to further consult on this issue with the profession.
    • The role of the Court is, in many respects, to be provided: there is division 6, which provides for the powers of the court in relation to restructuring plans to be subject to regulation.  Among more mechanical sections of the part copied over from part 5.3A, the role of the Court is defined, for example regarding permitting or penalising dealing with assets or shares during the restructure that would otherwise not be permitted (Part 1 Subdivision D), effects of an appointment on a winding up (which are akin to a VA appointment) and secured creditor assets and leave to proceed.
    • Section 458A does provide that the powers of the Court will include at least a power to vary or terminate a restructuring plan and to declare a restructuring plan void.
  10. Reporting Obligations to and from the Company and the Restructuring Practitioner are still to be finalised:  Division 5 deals with information, reports and documents, in relation to the company.  The draft provides for regulations to deal with these sorts of issues.  Section 457A deals with the things that the regulations can provide for, and they do include matters such as reporting to the restructuring practitioner by the company or others, reporting to ASIC, reporting to creditors, and reporting generally about a restructuring or restructuring plan to the public by publication. 
  11. Secured Creditors Decision Period:  there is an amendment to the dictionary in section 9 of the meaning of “decision period”.  The decision period for restructuring is the same as for voluntary administration – that is 13 days after the day of appointment.
  12. Relation Back Day:  There are amendments to section 91 to accommodate the restructuring process into the relation back day definition for a company that goes into a subsequent liquidation.  Basically, a restructuring appointment that is made after a winding up application starts preserves the relation back date of the application to wind up.  Likewise, for a winding up which commences as a consequence of an application made after the beginning of a restructuring period, the relation back day is the date on which the restructuring appointment is made, called the section 513CA day.
  13. Transition to VA and Liquidation:  There is provision for transition to a voluntary administration or liquidation in the event that a restructuring plan is rejected.  It is not clear to me exactly how this is to occur:  it is to be provided for in regulations (s453A(b)).  Amendments to the small business guide in Part 1.5 of the Act do provide that if creditors do not agree to the restructuring plan the company may be placed in voluntary administration or winding up.  It appears that the rejection of the restructuring plan will amount to a resolution by creditors that the company be wound up unless alternative arrangements are made to transition to a voluntary administration.  Logically it would be similar to the rejection of a DOCA proposal.
  14. Voidable Transactions – Protection for ordinary course transactions in restructuring period:  There is a significant change to voidable transactions for a liquidation which follows a restructuring.  The main change is that there is a carve out for transactions entered into by the company whilst it is in the restructuring phase, in the ordinary course of business or with the consent of the restructuring practitioner.  In voluntary administration there is a similar carve out for transactions entered into by a voluntary administrator or a deed administrator.  Since the new process is a debtor in possession model, it does make sense for transactions entered into by the company in the ordinary course of its business or with consent of the restructuring practitioner to be similarly exempt.  That is provided for in a new subsection 588FE(2C)(d) and (2D)(d).
  15. Another safe harbour:  There are amendments to the safe harbour provisions, and a new safe harbour for companies under restructuring in 588GAA(B).  There is a carve out for insolvent trading in relation to transactions entered into during the restructuring period which are in the ordinary course of the company’s business or with the consent of the restructuring practitioner.
  16. Liquidator Investigation:   In terms of subsequent supervision, there is provision for a liquidator appointed after a restructuring to examine the restructuring practitioner on a mandatory basis under amendments to 596A and further consequential amendments in the examination provisions.
  17. Insolvency Practice Rules A host of changes have been made to the insolvency practice rules, mainly to include restructuring practitioner where appropriate.  However there are carve outs which indicate the limited nature of the simplified liquidation process.  They include exempting completely from the simplified liquidation process any provision for committees of inspection.  They simply do not apply to the simplified liquidation process.
  18. Simplified Liquidation:  Once again, future regulation is to play a large part in defining how the simplified liquidation process is to be implemented.  The regulations are to provide in future for the eligibility criteria for the simplified liquidation process, simplified methods of dealing with proofs of debt and distribution of dividends, ASIC reporting, dealing with contributories, payment of dividends, and more limited basis of circumstances in which unfair preferences can be recovered.  See generally a new subdivision B to be added at the end of Division 3 of Part 5.5 of the Corporations Act.
  19. Virtually Done: As has been commented widely elsewhere, there are welcome changes that basically permit creditors meetings to be held virtually, notification and communication by electronic means and for “e signing” of documents electronically.

Exposure Draft of the Covid Insolvency Reforms released – just five more days (including this weekend) to make submissions….

I would not ordinarily post a link to something I had not read, but this is a pandemic! The Commonwealth announced its proposed insolvency law reforms just 2 weeks ago and has now released an exposure draft of the amending legislation together with an explanatory memorandum.

Submissions on the draft are due on Monday, 12 October 2020!!! So get cracking! This makes the road runner look slow.

I will make some further comments in the next day or so once i have read it.

COVID PPSA Update

On 23 June 2020, here in Melbourne, in the calm between the lockdowns (which seems like an eternity ago now) I delivered an update to lawyers on COVID implications for the operation of the PPSA to the Leo Cussens Institute via Zoom. A copy of the paper presented is attached at this link.

The key takeaways were:

  1. as a practitioner, know the basics: what is a security interest, why to register and how to register
  2. make sure that clients take steps to protect themselves from simple mistakes;
  3. in an environment where a pandemic of insolvency is a real risk, errors in dealing with the PPSA will be costlier than ever.

I suggested the minimum basics that a practitioner should know were:

  • The main impact of the PPSA is difficult times is in insolvency.  The first thing a liquidator, administrator or bankruptcy trustee will do when appointed is search the PPSR for relevant registrations.
  • In most appointments of liquidators or bankruptcy trustees, unsecured creditors will either receive nothing or very few cents in the dollar.  Therefore, if you propose to offer funds or goods to a person or entity on credit, considering security for the obligation should be the first thing at front of mind.
  • A first-ranking secured party can then generally choose whether to enforce their security and take the property or get priority of payment from the sale of the property.
  • To take security over personal property, clients will need two things:
  1. a security agreement that is well drafted:  usually within the terms of trade, or in a separate document; and
  2. to register that security on the PPSR.

Enjoy!

PPSA Update – February 2020 Paper

In February 2020 I delivered a now annual seminar providing an update on recent PPSA developments at the Leo Cussen Institute. The seminar covered three interesting recent cases:

Bluewaters Power 1 Pty Ltd v The Griffin Coal Mining Company Pty Ltd
[2019] WASC 438 (Bluewaters)

BMW Australia Finance Limited v @Civic Park Medical Centre Pty Ltd as trustee for @Civic Park Medical Centre Unit Trust [2019] FCA 999 (Civic Park)

In the matter of Beechworth Land Estates Pty Ltd (admins apptd) and Griffith Estates Pty Ltd (admins apptd); Cussen and of Beechworth Land Estates Pty Ltd v Douglas Estate Holdings Pty Ltd and Others [2019] NSWSC 1129 (Beechworth)

Topics covered in the seminar included:

  • the breadth of a “security interest”:  do step-in rights require registration on the PPSR?  The decision in Bluewaters;
  • PMSIs – traps where the debtor is the trustee of a trust:  extension of time to register in the decision in Civic Park;
  • Administrators’ Lien over interests in land and proceeds of its sale: the decision in Beechworth;
  • Inventory security:  issues of priority and vesting in relation to processing raw materials

A copy of the paper is attached at the following link:

PPSA – Recent Developments – the O’Keeffe and Psyche cases

I recently presented a paper to Leo Cussens during a half day PPSA conference on the topic recent developments in the PPSA.  A full copy of the paper can be found at this link: Leo Cussens – PPSA – 23.5.19

The PPSA is relatively new (for a law at least) and so the Courts are still working through the legislation as cases come before them.  Many recent cases consider relatively straight forward aspects of the legislation.

As such, they are not of great significance other than as a demonstration of principle.  In the matter of O’Keefe Heneghan Pty Ltd (in liq) & Ors (2018) NSWSC 1958 (O’Keefe) is one of those cases, considering the continuing super-priority of approved deposit taking institutions (ADI) (usually banks or non-bank financial institutions) under the Act.

One significant development has been repeated demonstration of the drastic consequences of failing to identify a grantor by its proper identification number, leading to a lot of decisions considering efforts to overcome such errors. The problem was identified to drastic effect for the secured creditor in OneSteel Manufacturing Pty Ltd (administrators appointed) (2017) NSWSC 21.

There has been a rash of subsequent cases grappling with the same issue from different angles, and the recent case of Psyche Holdings Pty Limited (2018) NSWSC 1254 (Psyche) is one of them.

In the matter of O’Keeffe Heneghan Pty Ltd (in liq) & Ors (2018) NSWSC 1958

Takeout:  An ADI has super priority over ADI Accounts under its control, even where it has failed to register its security interest, since it is able to perfect its security interest by control of the ADI account.  That follows since the account is held with it and is at all times the balance is under its direct control.  An ADI which has perfected by control is entitled to follow its security interest out of the account into the control of others without losing its priority.  Secured creditors who are not ADIs should be on notice  that their priority will virtually always be secondary when competing against an ADI which has perfected by control, even after registration of their secured interest.

In the matter of Psyche Holdings Pty Limited [2018] NSWSC 1254

Takeout:  It is very important to register a security interest in accordance with the requirements of the PPSA, particularly with regard to time limits and the form of application.  That is particularly so with regard to use of an ABN or ACN in appropriate cases.   If a security interest is not validly registered within time limits set by the PPSA, the secured party may lose priority or may lose the interest completely.  While the Court has a discretion to order an extension of time for registration, the ability of the Court to grant extensions is limited and uncertain.  Practitioners should not assume that an extension of time will be available on application to the court.

I also mentioned three other cases of some note.

G. Murch Nominees Pty Ltd v Paul David Annesley & Ors [2019] VSC 107: registration of baseless security interest by mortgagor after purchase of property from mortgagee:  steps taken to restrain further registrations and remove invalid registrations.

Rubis v Garrett as Trustee of the Andrew Garrett Family Trust Trading as Dynamic Commercial Workforce Solutions (No 2) [2018] FCA 2011 – Vexatious baseless registrations against 46 alleged grantors with whom registering party had no security relationship, including a Judge in separate proceedings. Whether Registrar had breached duty not to permit vexatious registrations to be registered, in circumstances where the Registrar knew vexatious history of lodging party.

Toll Energy and Marine Logistics Pty Ltd v Conlon Murphy Pty Ltd [2019] FCA 532: extension of time for registration of a PMSI under s588FM of the Corporations Act (not insolvent, no objections)

Stopping sham PPSR Registrations – again, and again

The PPSR is Ripe for abuse

One of the weaknesses of the Personal Property Security Register (PPSR) is that anyone can go online and lodge a registration for a few dollars in fees by claiming to hold a “security interest” in respect of the personal property of another, with very few immediate consequences.

The victim of the sham registration can suffer real prejudice:  searches of the register will show apparent security interests over the victim’s personal property.  The impression given can lead to delays in completing other transactions involving the giving of real security over the affected assets or other transactions involving them, whilst time and money is required to remove the registration.

Jurisdiction to Remove and Restrain Sham Registrations

In 2014 as Counsel for the plaintiff I appeared in Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 where the plaintiff obtained an interlocutory and then final injunction to restrain the repeated registration of a sham “security interest” on the PPSR on the basis that it was an abuse of process.    I published a blog post about the case here.

The case has since attracted some attention, being reported at (2014) 285 FLR 267.

It has now also been followed in Victoria as a precedent establishing the Court’s inherent jurisdiction to grant injunctive relief of the type and on certain other points, in National Australia Bank Ltd v Garrett [2016] FCA 714.

The facts in National are a great illustration of the ease of registration on the PPSR.

Mr Garrett had been a customer of the Bank through various entities he controlled in the wine industry.   It is apparent from reading the judgment that the relationship between bank and customer had deteriorated markedly over time.  It appears again from the judgment that Mr Garrett had been subject of at least one vexatious litigant order and there was a history of applications involving him and the bank.

A financing statement was registered by the “Trustee for The Andrew Garrett Family Trust No. 4” on 24 April 2016 on the PPSR claiming a security interest in respect of the property of NAB and Treasury Wine Estates Vintners Ltd.  The collateral was said to be “All present and after-acquired property – No exceptions”.

The basis of the registration appears to have been a purported charge of which NAB gained notice in these circumstances (at para 12 of the judgment):

The registration of the financing statement followed NAB’s receipt of an email from Mr Garrett on 24 April 2016 in which Mr Garrett stated that he intended to register a charge on the PPSR over NAB’s property. Attached to the 24 April 2016 email was a copy of a Security Deed (titled “Distributor License Purchase Vendor Finance Performance Security Deed”) which purported to be a charge granted by NAB in favour of OenoViva and Mr Garrett as trustee for the Andrew Garrett Family Trust ABN 78 761 760 976. The Security Deed relevantly stated that: “This Charge is registered pursuant to the undertaking as to loss costs and damage given by the Chargee in SCI-2004-127; Andrew Garrett Wines Resorts Pty Ltd & Anor v National Australia Bank Limited”. The Security Deed has not been signed or otherwise executed by NAB. It is a creation of Mr Garrett’s and built upon the misconceived foundation that an undertaking as to damages given in a prior proceeding could somehow give rise to a security interest; I will return to the undertaking later.

[emphasis added]

The Bank made application to remove the registration after Mr Garrett refused to remove it in response to an amendment demand, being the administrative process provided by section 178 of the PPSA.

Beach J followed and confirmed the broad finding of Robson J’s decision in Sandhurst to the effect that a security interest under the PPSA does not include an interest in property that is said to arise by operation of equity, including an equitable remedial  constructive trust or charge.  Accordingly it cannot be registered.  Specifically, Beach J found [see National at paragraphs 27 to 33]:

  1. A “security interest” under the PPSA is one that is provided for by a transaction where one is dealing with consensual arrangements.  A transaction therefore does not include a claim based on obtaining equitable relief from a court of equity, such as a remedial constructive trust or charge.
  2. In identifying the transaction one must look to the substance and not the form.
  3. Further, certain interests in personal property arising at law are specifically carved out of the definition of security interest by section 8(1)(c) of the PPSA.

Beach J also followed Robson J’s finding in relation to the Court’s inherent jurisdiction under s37 of the Supreme Court Act 1986 to restrain registration as an abuse of process. Robson J accepted that the circumstances were similar to those that existed in abuses of the caveat system, where the Court already had exercised its inherent jurisdiction to remove caveats legally placed but in an abusive manner [see Sandhurst paragraphs 108 to 118, National at  paragraph 50].

Procedural Points on Judicial Process under s182 of the PPSA

In Sandhurst it was unnecessary for the Court to consider the procedure under the PPSA for removing contested registrations.  In National Beach J gave some indications of procedural points that ought to be followed.

In order to remove the an erroneous registration an applicant gives an amendment demand to the secured party under s178(1) of the PPSA.  The demand can only be given where authorized under the section.  Making an amendment demand is authorized by the section where either all of the collateral referred to in the registration, or part of it, does not secure the claimed obligation.

Assuming the amendment demand  is refused, a judicial process established under s182 of the PPSA can be invoked  within 5 business days of giving the demand.  The process provides for a hearing to determine if the amendment demand is authorized.

Beach J made the following comments about that process:

  1. The Court should treat an application made to sustain a contested registration in a similar manner to the defence of a Caveat application;
  2. The onus is on the putative secured party (in this case Garrett) to satisfy the Court that its registration ought remain;
  3. Some caution needs to be exercised in comparing the procedures, since s182(4) of the Act requires the applicant (in this case the National) to discharge a legal onus to establish that the amendment demand that initiates the process is itself authorized under s178(1) by prima facie evidence.  So the applicant would need to satisfy the Court by prima facie evidence that part or some of the collateral did not secure the obligation claimed.  That requirement was met in this case.

Conclusions

Looking forward, I expect these sorts of applications to become quite common, owing to the ease of abuse.  it is probably unlikely that the process for lodging a registration on the PPSR will be changed much as it is intended to be an easy system to use.  It is a question of competing policy imperatives which will not be resolved without some thought by regulators and stakeholders.

 

 

A QUESTIONABLE PRACTICE: PPS vesting provisions on appointment do not extinguish a financier’s perfected interest in leased equipment on the PPSR.

I recently had a piece published in the ARITA Journal with the above, rather lengthy, title.

The topic is the extent to which a financier’s security interest is really affected by the vesting provision, section 267, in the PPSA.  There is a current practice of letters being dispatched to the holders of any unperfected security interests in leased equipment, claiming vesting of all interest in the collateral in issue, without regard to upstream financier’s interests. The fact is that there are good arguments that the financier’s interest is not affected, even if the owner of the equipment who has provided the lease may lose its interest because of vesting.

This article deals with such an example where the argument of the VA in that case was defeated by the citation of a Canadian case on point. The issue hasn’t been dealt with by the Courts in Australia yet so is topical, and is relevant to major banks and equipment fleet financiers who can be affected.

A link to a PDF copy appears below.

ARITA Journal March 2016 Mark McKillop

 

PPS Leases explained, what is Regularly Engaged in the Leasing of Goods and what is a PPSA Fixture?

The courts continue to hammer out the meaning of various basic provisions of the PPSA.

The decision in Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 looked at two issues dealing with the reach of the PPSA to leases:

  •  What constitutes “regularly engaged in the business of leasing goods”
  • What is a fixture for these purposes?

Background

 The Personal Property and Securities Act 2009 (Cth) (PPSA) introduced a new national code for determining the priorities of security interests in personal property., where primacy is given to registered interests.

Prior to the introduction of the PPSA, a owner of personal property, as a lessor, had all the common law rights of an ownership against the world, including to recover that property.  Those rights were largely subject only to the terms of any transactions the owner entered with third parties affecting those rights: for example, by leasing, charging, pledging, bailing or selling the goods.

However, under the PPSA, the rights of ownership under a goods lease are affected when they are registrable security interests.  A security interest arises where, in substance, an interest in personal property provided for by a transaction secures payment or performance of an obligation: section 12(1) of the PPSA.

Ownership interests under a Lease – the PPS Lease

Difficulties arise in relation to leases under registration schemes, because it is necessary for legislators to distinguish between leases that are in substance a financing arrangement which secure a payment or obligation (finance leases), and leases that are pure leases exacting payment only for use of the property before it is returned (operating leases). Examples of the former might include a long-term car lease, over a period of 3 years, with no residual or an agreed balloon payment. An example of the latter might include a 7 day car-hire for a daily fee, with the vehicle returned at the end of the hire.

There is a grey area between the two concepts, and room to argue whether a security interest arises or not, depending upon the term and financial structure of a lease.

Under the PPSA, the interest of a lessor under a lease will be registrable in several circumstances:

  •  First, where in substance, the lease is a finance lease that creates an interest in the property that secures payment or performance of an obligation, and so falls within the general definition of a security interest. For example, a finance lease: see section 12(2)(i) of the PPSA;
  • Second, where the lease is a “PPS Lease”, irrespective of whether the lease is a finance or operating lease, but falls within the definition of PPS Lease: see section 13 of the PPSA.

The principal effects of failing to register are:

  •  Where the lessee is bankrupted or enters into insolvent administration, an unregistered registrable security interest vests in the liquidator or trustee; and
  • priority is lost to holders of security interests in the property who are registered, for example a financing bank.

Generally speaking, a PPS Lease is a lease of goods that endures for a period of more than 12 months or is in respect of goods registrable by serial number:

  • It does not matter whether the lease is a finance or operating lease. Both are caught;
  • It includes leases where, by renewal or extension, the lease may or does continue for more than 12 months;
  • It includes a lease of goods that may or must be described by serial number (eg cars, aircraft and aircraft engines, watercraft, boats, certain intellectual property: section 13(1)).
  • If the lessor is not “regularly engaged in the business of leasing goods”, the lease is not a PPS Lease.
  • Further, if the property is a fixture, rather than personalty, the PPSA does not apply – see PPSA section 8(1)(j).

So why is it necessary to have PPS leases in the legislation? Why not just rely on the substance of the lease to determine whether it falls within section 12? There appear to be several reasons:

  • First, to eliminate the grey area between operating and finance leases, but to preserve from registration short term leases that are likely to be operating leases;
  • Second, to bring property identifiable by serial number completely within the registration scheme;
  • Third, the interest of a lessor under a PPS Lease is purchase money security interest for the purposes of the priority rules, and so takes priority over other secured creditors who are registered – see section 14(1)(c). It is notable that the interest of a lessor under a short term finance lease of less than 12 months is not a PMSI.

The Limits of Regularly Leasing and Fixtures

In Forge, General Electric International Inc (GE) had by an operating lease dated 5 March 2013 provided four gas turbine electrical generators to the plaintiff (Forge). On 11 February 2014, Forge went into liquidation. Prior to 22 October 2013, GE had operated a business in Australia of renting gas turbine power generation units. From that date, it sold the rental business and had assigned the benefit of the lease and the turbines. It also continued to supply replacement turbines on a temporary basis and free of charge, to its customers who required maintenance on turbines that GE had supplied.

GE argued that at the time of the liquidation it was no longer regularly in the business of leasing turbines. The submission was rejected, since:

  • the relevant date to assess that issue was at the date of lease, not the date of liquidation (at[136]) and a the date of the lease it had not sold its business;
  • in any event, after the sale, GE continued to provide turbines on a replacement basis in the market, albeit where maintenance required it (at[134]).

GE also argued the turbines were fixtures. Under section 10 of the PPSA a “fixture” means goods, other than crops, that are affixed to land. GE argued that the definition was a “bespoke” definition that differed from the common law.   That submission was also rejected and the court found that the concept of fixture in the PPSA was the same as at common law (at [77]).

The turbines were found not to be fixtures on the facts. The key points included that (at [134]):

  • The turbines were truly portable, in that they were designed to be quickly demobilized and moved to another site, and were on wheeled trailer beds for that purpose;
  • They could be removed without damage to the land;
  • The cost of removal was modest compared to the cost of the turbines;
  • The turbines were rented for a short period, being two years, with limited renewals and were clearly intended to be removed in the future;
  • GE retained ownership and the lease specified that the turbines were personal property;
  • Forge was obliged to return them at the end of the term;
  • Forge did not own the site where they were installed.