Category: Personal Liability of Insolvency Practioners

What a difference a day makes – When does the relation back period start?

Re Weston Application; Employers Mutual Indemnity (Workers Compensation) Ltd v Omni Corporation Pty Ltd [2009] NSWSC 264

In insolvency law the calculation of precise periods of time is important.  Insolvency practitioners need to know exactly when limitation periods end in order to preserve potential claims.  The “relation back period” is one of the more important time periods relevant to calculating limitations, and yet there is surprisingly little authority on exactly when the relation back period starts.

The Relation Back period

Most practitioners are familiar with what is the last day of a relation back period. It is the “relation-back day” in corporate law, and in bankruptcy it is the date of the presentation of the petition against the bankrupt.

But what is the first day of the relation-back period?  If the relation back day is 12 December, is a 6 month relation-back period taken to begin on the 12 June?  Or 13 June?  The answer has obvious practical significance because it is not uncommon for a significant payment to fall on the 12th day.

The issue is whether one includes the relation back day or not in the 6 month period. Surprisingly, there is no appellate decision which makes the answer clear, however single judge authorities indicate one does count the relation-back day. So in the example, 12 June would not be included.

In Scott v The Commissioner of Taxation [2003] VSC 50 (link),  Justice Dodds-Streeton reached the same conclusion (at paragraphs 32 and 33).  However the decision does include reasoning on that point.

In Re Weston Application; Employers Mutual Indemnity (Workers Compensation) Ltd v Omni Corporation Pty Ltd[2009] NSWSC 264 (link), calculation of time going forward from the relation-back day was discussed in an application to strike out a voidable transaction claim on the basis it was out of time.  The time for making the application expires 3 years after the relation back day, or 12 months after the appointment of the liquidator, whichever is the later: s588FF(3)(a).

In Re Weston the liquidator commenced the application for relief under s588FF(1) exactly 3 years to the date after the relation back day:  the respective dates were 16 January 2009 and 16 January 2006.

Justice Barrett considered the issue relying on two statutory provisions (at paragraphs 6 to 16):

1.Section 105 of the Corporations Act. It provides:

Calculation of time

Without limiting subsection 36(1) of the Acts Interpretation Act 1901 , in calculating how many days a particular day, act or event is before or after another day, act or event, the first-mentioned day, or the day of the first-mentioned act or event, is to be counted but not the other day, or the day of the other act or event.

2.Section 36(1) of the Acts Interpretation Act 1901 (link).  It contains a useful table for calculating when a day should and should not be included in a time calculation.  The section states that:

A period of time referred to in an Act that is of a kind mentioned in [the table] is to be calculated according to the rule mentioned in [the table].

Based on those provisions, His Honour concluded:

  1. when a time period is expressed to end at, on or within a specified day, the period of time includes that day (item 4 of the table);
  2. when a time period is expressed to begin from a specified day, the period of time does not include that day (item 5 of the table).

The Start Date and the End Date

In Re Weston the result was that the liquidator had made his application in time, since the 16th of January 2006 was not included in calculating the 3 year limitation period after the relation-back day (applying item 5 from the table).

In calculating the start of the relation-back period, using the example above, 12 June would not be included, because 12 December would be included in the 6 month relation-back period (applying item 4 from the table).

Significance for Practitioners

The application of these principles is important:

  • for practitioners in diarising limitation periods;
  • identifying transactions at the extremes of the relation back periods under the voidable transaction provisions;
  • for third parties considering limitation defences;

for calculating the application of time periods generally where limits are strict. For an example, applied to determining whether an application was within time to set aside a statutory demand, see Autumn Solar Installations Pty Ltd v Solar Magic Australia Pty Ltd [2010] NSWSC 463.

Regards

Mark

Acknowledgement:  this post originally appeared on the Commercial Bar Association of Victoria blog, Commbar matters, at http://commbarmatters.com/2014/04/08/what-a-difference-a-day-makes-when-does-the-relation-back-period-start/

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Liquidator’s or Receiver’s lien may be at risk under PPSA in some circumstances

Most commentators, relying on s73 (link) of the Personal Property Securities Act 2009, state that liens are not affected under the PPSA.  Section 73 provides priority to liens and other security interests arising under general law or under statute (called “priority interests”) in some circumstances.

But there are some serious traps for creditors relying on liens under the new regime.

First, if a creditor is relying on a contractual lien to get paid,  that creditor is going to lose out in a priority battle with a secured party holding a security agreement in respect of all assets.  Section 73(1)(a) only provides for protection to an interest arising under general law or under statute, but not a lien arising by agreement.  A lien created by a contract is a security agreement that under the PPSA will require perfection (by registration or otherwise).

So where a logistical services company claimed a lien under its terms of trade over goods in its possession belonging to a customer, they lost out to a receiver appointed over the customer by a bank with a prior registered all assets security agreement:  see McKay v Toll Logistics (NZ) Limited (HC) [2010] 3 NZLR 700 (link); Toll Logistics (NZ) Limited v McKay (CA) [2011] NZCA 188 (link).  There is a good summary of McKay by Leigh Adams at (link).

Second, even if a creditor has a lien under statute or general law, it should be careful before taking a concurrent contractual lien.  It might be argued by a secured party holding a prior registered security agreement that section 73(1) doesn’t apply, because the contractual lien supplants the general law or statutory lien that would otherwise have arisen.  A solution for the lienee would be to ensure that the contractual lien on its terms specifically preserves any general law or statutory liens that may arise, and be created in addition to those liens.

Third, a liquidator or receiver who relies on a “salvage lien” arising under the principles in Re Universal Distributing Co Limited (in Liquidation) (1933) 48 CLR 171 should be careful to check that their lien is protected under s73(1).  It is possible that the terms of a prior registered security agreement could purport to prohibit the grantor “creating” a salvage lien.

A salvage lien does arise under general law, however it could be expected that a receiver or liquidator may well have actual knowledge of the terms of a prior registered security agreement held by a financier.

By s73(1)(e) a lien holder who has actual knowledge that creation of a subsequent priority interest will breach the terms of a secuity agreement does not receive protection of the section.   Further, the section only governs liens arising “in the ordinary course of business” – see s73(1)(b).

Now for many possessory liens arising in the ordinary course of business, the lien holder will be unaffected.  Think classically of a repairer.  A motor vehicle repairer engaged to fix a company vehicle might expect it to be under finance, but would not be likely to check the PPSR and obtain a copy of any prior security interests.

But for a salvage lien, the situation is more difficult.  A liquidator or receiver may well know the terms of a prior ranking secuirty agreement.  There could also be a tricky argument about whether a salvage lien arises “in relation to providing goods and services in the ordinary course of business”.  In my view it probably does not, given that it will arise only once the grantor is insolvent and continuing to trade under the control of an insolvency practitioner.  Until we know the answer by a decided case, the risk remains.

I note the same risk may confront solicitors and accountants holding a lien over a file for unpaid fees, for the same reasons.

These are potentially troubling results.   If one is in a position of having actual knowledge of prior security interests, then before relying on a lien of any complexion, care must be taken to avoid loss of priority to a registered security agreement.

Thanks to Nick Anson of Minter Ellison for comments on this post (link to Nick’s profile).

Regards

Mark

ATO beaten by trust liquidator in priority battle – twice!

The Commissioner of Taxation is the most common unsecured creditor in insolvent estates and often the biggest.   That is not surprising since Federal tax revenues are currently about 21% of GDP.

In 1993 the Commissioner lost his priority over other unsecured creditors in bankruptcy or liquidation for outstanding group tax and PPS debts.

Since then,  the Commissioner has looked for other ways to gain de facto priority over unsecured creditors.  One method has been to recover tax from directors personally – the “directors penalty notice” provisions of the tax law was also introduced in 1993 partly to compensate the Commissioner for the loss of priority (an excellent paper explaining these provisions in clear terms can be found here, published by Worrells).

Another device given a try by the Commissioner was to garnishee debts owed by third parties to the insolvent company, by notice under section 260-5 of the Taxation Administration Act 1953 (TAA), after a company had gone into liquidation.   A notice under s 260-5 gives the Commissioner the right to recover from a third party an amount that the third party owes or may later owe to a taxpayer who is indebted to the Commonwealth for tax. The remedy given to the Commissioner by s 260-5 is available in respect of revenue obligations, which are given the character of “debts” by force of the TAA itself and without the need for a judicial determination.  The third party must pay the amount demanded in the notice; failure to comply with the notice is a criminal offence.  Upon payment the Commissioner has the right to give to the third party a valid receipt and discharge for money paid in compliance with the notice.   In these respects, a notice under s 260-5 operates in the same manner in which a garnishee order issued by a Court operating to attach a debt.

In effect the Commissioner was issuing notices to round-up debts owed to the insolvent company that would otherwise be collected by the liquidator, putting the proceeds of the debts exclusively to payment of the Commissioner’s debt.   If the debtor responded to the notice and its validity were upheld, then the Commissioner would then restore an effective position of priority, at least as far as proceeds of third party debtors recoveries are concerned.

The Commissioner’s efforts ended badly.

First, the use of garnishee notices in this way was held to be invalid by the High Court (Bruton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation (2009) 239 CLR 346).   In a fairly extraordinary display of litigation muscle by the Commissioner (no doubt because of the potential precedent value of a favourable outcome), no less than six related proceedings were fought in the Federal Court and High Court, over about $470,000 held in a solicitor’s trust account, the debt in question.

Second, the outcome of the final Full Federal Court appeal – Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation (austlii link) (2011) 193 FCR 442 (FCFCA) (Bruton (no 2)) was that Bruton, the insolvent corporate trustee, was allowed its full indemnity costs of the entire sequence of litigation from the trust’s funds even though it was a bare trustee of the assets.   The Commissioner had argued, unsuccessfully, that a bare trustee is restricted to a “passive role” and that Bruton had no authority to conduct the litigation over the validity of the garnishee notice because, in effect, the ATO was the only unsecured creditor and would get the proceeds of the debt one way or other (no evidence to support this latter assertion was led).  The Full Court rejected that argument – first on the basis that there was some evidence suggesting the existence of other creditors, and secondly by reference to the general duties of any trustee to preserve and protect trust assets when threatened, by litigation.  See in particular paragraphs 19 to 27.

There has been no special leave application:  just an even half-dozen cases on this occasion then!

The introduction to the  joint judgment of Stone, Jacobson & Edmonds JJ in Bruton (no 2) sets out the extraordinary sequence of the litigation:

……….In 1997, by deed of trust, the appellant (Bruton) was appointed as trustee of the Bruton Educational Trust (educational trust). On 10 October 2005, Bruton applied to the respondent (Commissioner) for endorsement as a tax exempt entity as from 1 July 2006. The application was refused, as was Bruton’s objection to the Commissioner’s decision. An appeal from the Commissioner’s decision (objection appeal) was also dismissed.

Piper Alderman was the solicitor for Bruton in the objection appeal. Between October 2005 and February 2007 it was paid $470,000 by Bruton to be held in its trust account in respect of costs and disbursements of the proceedings including the endorsement application to the Commissioner. On 28 February 2007 administrators were appointed to Bruton and on 30 April 2007 the company’s creditors resolved that it should be wound up. By virtue of ss 513B(b) and 513C(b) of the Corporations Act 2001 (Cth) the winding up was taken to have commenced on 28 February 2007.

Clause 10.2(b) of the educational trust deed provided that the office of the trustee was “immediately terminated and vacated” if the trustee went into liquidation. Accordingly, from 28 February 2007 Bruton ceased to be the trustee of the educational trust and became the bare trustee of the assets comprising the trust fund (Fund). As a consequence Bruton was no longer entitled to exercise any power including the investment, management or payment of trust monies arising from the educational trust deed. Its powers were limited to those that under the general law or statute are the powers of a bare trustee.

On 26 March 2007, the Commissioner issued a notice of assessment directed to the trustee calling for payment in the amount of $7,715,873.73 in respect of tax and the Medicare levy for the 2004 income year. Furthermore, after Bruton was wound up, the Commissioner lodged a Proof of Debt with the liquidators of Bruton for the amount stated in the notice of assessment. On 8 May 2007, the Commissioner issued a notice to Piper Alderman pursuant to s 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) requiring the firm to pay $447,420.20 which it held in its trust account on account of the educational trust to the Commissioner.

On 30 May 2007 Bruton instituted proceedings in this Court (primary proceeding) seeking a declaration that the s 260-5 notice was void by virtue of s 500(1) of the Corporations Act. On 2 November 2007 Allsop J declared the notice was void (see Bruton Holdings Pty Ltd v Commissioner of Taxation (2007) 244 ALR 177). On 23 November 2007, his Honour made further orders including an order that Piper Alderman pay the $477,420.20 held in its trust account to the liquidators. The liquidators were to pay that money into an interest-bearing bank account and were restrained from spending that money except, inter alia, to pay expenses incurred by Bruton in respect of the primary proceeding and the appeal proceeding. His Honour ordered the Commissioner to pay Bruton’s costs as well as those of Piper Alderman.

An appeal from Allsop J’s judgment to the Full Court was allowed and Allsop J’s judgment was set aside (see Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184; (2008) 173 FCR 472. Bruton was granted special leave to appeal to the High Court. The High Court allowed the appeal with costs (see Bruton v Commissioner of Taxation [2009] HCA 32. It set aside the orders of the Full Court and in their place ordered that the appeal to the Full Court be dismissed with costs.

A dispute followed between the Commissioner and the liquidators concerning whether the shortfall between the amount of Bruton’s solicitor and client costs and the amount of its party and party costs referable to the primary proceeding, the Full Court appeal, the application for special leave and the appeal in the High Court should be paid out of the Fund. This dispute over the payment of costs was the subject of the proceeding before Graham J (costs proceeding) and is the issue in the present appeal (emphasis added)

Regards

Mark

How to Cure an Invalid Voluntary Administrator Appointment

I recently appeared in urgent proceedings for the voluntary administrators of  a company who may have been invalidly appointed.  The business run by the company had been the victim of obvious phoenix activity.   The administrators wanted to take action to confirm whether they were validly appointed, and were concerned that the company might revert to the control of the director with a real risk of the company’s business  being transferred to another entity.

What were the administrators to do?

The administrators had been appointed by a sole director (lets call her Ms Smith) of the company pursuant to s436A of the Corporations Act.  Ms Smith was essentially a nominal director who was appointed because the operator of the business was disqualified himself from acting as a director.  Ms Smith and the sole shareholder (lets call him Mr Jones) had fallen out with each other at about the time of the appointment.  It was allegedly the Jones camp who were seeking to “Phoenix” the company (for a third time as it turned out).

On the same day that they were appointed, the administrators made contact with Mr Jones and his lawyers.  Jones claimed the appointment was invalid.  The administrators immediately made an application to the Court for a declaration as to whether their appointment was valid, under s 447C.  They were concerned to act quickly in view of an impending first creditors meeting.

The administrators’ investigation in the days after their appointment made it clear that the appointment was invalid because Mr Jones had successfully removed Ms Smith as a director on the night before the purported appointment of the administrators.  This meant that the s447C application was no longer a solution, since that section does not allow the Court to validate an appointment which the Court determines is invalid.

Rather than withdraw,  the administrators did two things.

First, they expanded their application to seek an order validating their appointment relying on the very powerful Corporations Act provision, s447A (link).  Readers may recall that s447A allows the Court in its discretion to vary the operation of the Corporations Act as it applies to a particular company in Voluntary Administration.  In effect, the law as set out in Part 5.3A of the Corporations Act can be rewritten by the Court on application of a voluntary administrator and a range of other parties, including an “interested party”.

A line of cases has emerged over the past decade or more which makes clear that s447A can be used by a Court to validate an appointment of an administrator, even where the purported appointment was invalid and lacked power.  One of the most recent cases is National Australia Bank Ltd v Horne [2011] VSCA 380 (link).  In that case the Victorian Court of Appeal upheld a decision of Justice Sifris at first instance where his Honour used s447A to make an order validating the appointment of administrators who had been purportedly appointed by a chargeholder under s435C, which was found to be invalid because the chargeholder did not have security over substantially the whole of the company’s assets:  see Re Australian Property Custodian Holdings Limited (Administrators Appointed) (Receivers and Managers appointed) [2010] VSC 492 (link). The decision at paragraphs 31 to 35 reviews the authorities.

A question arose in our case as to whether the Court’s power under s447A should be used to validate an appointment which was in the interests of creditors (as in our case) but for which the purported appointor never had any authority to make the appointment at the time when it was made.   The basis for resisting the use of s447A in this way was a floodgates argument –  that any person could purport to be a person qualified to make an appointment, do so, and then have the appointees validate the appointment under s447A.  It is an interesting point and I will prepare a separate post about the issue.

Second, the administrators made a further application to wind the company up on the just and equitable ground, in view of the evidence of impending phoenix activity and the insolvency of the company.  The administrators had also been (validly) appointed as administrators of the second of the three companies that had been “Phoenixed” and that company had the necessary standing to seek an order under s461(1)(e).

Ultimately the proceeding settled before judgment, with Mr Smith agreeing to an order under s447A by consent, given the likely success of the winding up application.

Regards

Mark

(Thanks to Joanne Hardwick of Mills Oakley who was the instructor in the matter and provided input for this post)

Liquidators and Receivers – are you sure of your personal liability for CGT on asset sales??

Readers

Recently a controversy has developed concerning whether insolvency practitioners selling CGT assets subject to mortgage security were required to remit CGT in priority to the secured creditor.  The controversy developed out of a reading of s254 of the Income Tax Assessment Act 1936 as it relates to trustees of incapacitated entities, including liquidators, VAs and receivers.

Late last year I co-authored a paper with Helen Symon SC concerning the liability of insolvency practitioners whilst in office to a range of taxes.  The paper concentrated on CGT, Income Tax and GST.   The main issues dealt with in the paper were whether sale of post CGT assets by an insolvency practitioner gave rise to an obligation to pay CGT on the sale in priority to a secured creditor (we formed the view this was probable), and the now recognised device of appointing an agent in possession to effect a post CGT asset sale, and the circumstances and period for which practitioners are required to file tax returns for the entities to which they are appointed.

A copy of the paper is available at this link – Taxation – Common Issues.

A decision handed down since the paper contains a similar analysis of s254 in obiter (non binding) comments of the Supreme Court of New South Wales.  The decision is Goldana Investments Pty Ltd (recs & mgrs apptd) v National Mutual Life Nominees Ltd & ors [2011] NSWSC 1134.  In that decision, an application was made by the debtor company to have receivers removed on the grounds that the secured debt had been paid after the sale of a shopping centre.  The receivers of Goldana successfully resisted the application to have them removed because their potential personal CGT liability arising because of s254 had not yet been resolved.   It was therefore appropriate to allow the receivers to stay in office and in control of surplus proceeds from the sale.   According to the judgment, the receivers are in the process of seeking a private ruling from the ATO on their personal liability.

Regards

Mark McKillop

Liability limited by a scheme approved under Professional Standards Legislation

(PS Welcome to this blog!)