Bankruptcy Notices can be served by email

One of the first posts on this blog dealt with establishing service of documents by email, tweet or facebook message (link).

Now, service of a bankruptcy notice by email has been held to be effective.  The relevant case is The Council of the New South Wales Bar Association v Archer (Federal Magistrates Court, Lloyd-Jones FM, 13 February 2012)(link).

It is surprising that an individual can be served with a bankruptcy notice by email, given that the recipient who fails to comply with the notice commits an act of bankruptcy.

The decision arises out of regulation 16.01(e) of the Bankruptcy Regulations 1996 (link) which permits a document to be “sent by facsimile transmission or another mode of electronic transmission”.  The Court surveyed the authorities and found none that permitted service by email.  Instead the Court relied on earlier authorities dealing with facsimile transmission.

The Court dealt with a number of issues raised by email service:

  1. The requirement that the document be left “at the last known address of the debtor” imposed by r16.01(c) could be met when the address being used was an email address, and it did not matter that use of the email address was not tied to any fixed physical location as a street address or fax machine location might be;
  2. If the email “bounced back” then service would not be effective;
  3. Evidence on behalf of the debtor to the effect that he or she did not receive the document does not negate service, in the absence of the document being returned undelivered or other evidence of non-delivery:  being the same rule that applies to service by post.  Evidence of “non receipt” is not relevant;
  4. The email account need not belong to the debtor provided there is evidence that the debtor checks the account.  In the Archer decision, the account belonged to the debtor’s spouse and was checked about once a week by the debtor.

The decision is consistent with Austin J’s judgment in Austar Finance Group Pty Ltd v Campbell which is referred to in my earlier post, and it will be interesting to see if superior courts follow the Archer decision.

Regards

Mark

Proposed Law on Phoenix Activity Falls Flat

Proposed legislation to attack directors of companies involved in so called “Phoenix” activity appears to have fallen flat owing to two major bungles in the drafting of the amendments in one of the bills.

The Federal Government has released drafts of two Bills.  The Bills follow pre-election commitments in the Protecting Workers’ Entitlements package announced in July 2010.

Identifying Phoenix Activity

Distinguishing “Phoenix activity” from the legitimate cycle of business failure is sometimes complicated and involves issues of intention.  In the 2009 paper entitled “Phoenix Proposal Paper” (link), the Treasury noted the following:

Defining precisely what constitutes fraudulent phoenix activity is inherently difficult….underlying the distinction between illegitimate, or fraudulent, phoenix activity and a legitimate use of the corporate form, is the intention for which the activity is undertaken. Relevantly, ASIC draws a distinction between businesses that get into a position of doubtful solvency or actual insolvency as a result of poor business practices (for instance, poor record keeping or poor cash management practices) and those operators who deliberately structure their operations in order to engage in phoenix activity to avoid meeting obligations. (emphasis added).

The government’s proposed legislation really does not deal with the difficulty of identifying what is and what isn’t Phoenix activity at all.

Penalising the Directors

The Corporations Amendment (Similar Names) Bill 2012 will expose directors to personal liability for their company’s debts, if:

  • the company’s name is the same as or similar to a company or business name of another company that has been wound up; and
  • the director was also a director of that other company; and
  • the company incurs the debts within five years after the start of the winding up of the other company.

This bill suffers from two major problems.  The first and most obvious problem is that personal liability only applies if the subsequent company has the same or a similar name as the old company.  So a director can escape personal liability simply by choosing a new name that is not similar to the old company or business name.

In my view, the director ought be made liable if the new company is carrying on substantially part or all of the same business as the old company, and the Courts should be given some flexibility in applying that test.  The name alone is a poor indicator.  A list of indicators to be taken into account by the Court could be devised in a similar way as exists in applying other evaluative tests, such as section 425(8).  They might include the assets employed, the customer base, the nature of the business conducted, the name of the business, the premises used and the staff employed among other things.  A defence should be available if the director can show that the old company was given fair value for the business.   Further, the Court should have a discretion to excuse directors who have acted honestly and who in the circumstances ought be excused (as exists in the draft bill) to deal with the issue of intention identified in the 2009 paper I noted above.

The second problem is that the director is liable for the debts of the new company, not the old.  The drafters appear to have copied similar legislation in the UK and in New Zealand.  The idea is to hinder phoenix operators from transferring the name of the business and therefore its goodwill, by restricting the limited liability of the new company.

But in most phoenix cases, the creditors of the new company are not at risk since they are usually trade creditors whom the directors need to keep happy.  It is the old company’s creditors like the ATO and other non essential suppliers who need help.

There are a plethora of articles available on the exposure drafts, including very useful posts by AAR (link), Minters (link) and Carrie Rome-Sievers of the Victorian Bar (link) which goes into some detail about the politics of the bills.

The two problems I have identified have both been drawn to the Federal government’s attention in submissions by various bodies and we can only hope that Canberra will fix them.

Providing Access to the GEERS Scheme

The second bill is the Corporations Amendment (Phoenixing and Other Measures) Bill 2012.  It provides ASIC with administrative power to order that a company be wound up, generally in circumstances where ASIC considers that the company has been ‘abandoned’. This will trigger employees’ entitlements under the Government’s General Employee Entitlements and Redundancy Scheme (GEERS).

The second bill is a welcome development as in the past, employees or other creditors left abandoned in the old company shell had to go to the expense of winding up the shell at their own expense.

Regards

Mark

Insolvencies in Australia Updated: No mines? No growth!

Update:

The December quarter national accounts were released today, reinforcing the trends noted in the second part of my original post.  Overall the year to December 2011 GDP growth figure was a fairly weak 2.3%.  Here is a good summary taken from an article by economics correspondent, Peter Martin (link):

Economic growth has failed to live up to expectations. Gross domestic product climbed just 0.4 per cent in the December quarter to give Australia annual growth of 2.3 per cent, much weaker than the 2.75 per cent expected by the Reserve Bank.

GDP per person scarcely moved, climbing 0.1 per cent in the quarter to be up 0.9 per cent over the year. Prices were flat, suggesting zero inflation in the quarter.  Almost all the economic growth was concentrated in Australia’s three mining states. Over the past year demand has climbed 11 per cent in Western Australia, 10 per cent in Queensland, and 6 per cent in the Northern Territory.

In NSW it has climbed just 2 per cent, in Victoria 1.6 per cent and in the ACT 2.6 per cent.  In South Australia and Tasmania demand is shrinking, going backwards 0.6 per cent and 0.7 per cent.

……

Today’s figures show the economy growing extremely fast in some states and painfully slow in others, failing to make trend overall.

Original Post:

There was a widely reported publication by Dun and Bradstreet last week of some pretty terrible year on year figures for corporate and personal insolvency.  A link to the report can be found here.

The key findings reported by Dun and Bradstreet were:

  • Nationwide, insolvencies rose 42 per cent year-on-year while the number of new businesses fell 11 per cent over the same period;
  • Small business failures grew 57 per cent over the year among firms with less than five employees and 40 per cent over the year among firms with six to 19 employees;
  • Small business start-ups among firms with less than five employees fell 95 per cent in the year;
  • Failures were most pronounced within the service (up 58%), finance (up 58%) and construction (up 66%) sectors; and
  • There was virtually no start up activity in the manufacturing, service and finance sectors during the December quarter.

I think the increases in insolvencies need to be viewed with a grain of salt – anecdotally, there is evidence that the ATO has been much more active in the last 12 months after a recoveries pause imposed after GFC I.

The other interesting statistics were the almost anemic levels of growth in the non mining states in the same period.  According to statistics quoted in an article by Tim Colebatch last week (link):

  1. In the year to September 2011, domestic demand (that is, spending) grew by 4.2 per cent (faster than GDP, which was at 2.5%, because so much of the new spending was on imports);
  2. Demand grew by 13 per cent in Western Australia and 8.2 per cent in Queensland;
  3. In NSW, Victoria, Tasmania and South Australia,  demand grew by between 0.1 and 1.7 per cent;
  4. On a per capita basis, outside the mining states, spending per head was virtually flat for the year to September 2011.
  5. 77 per cent of the growth in spending over the year was in WA and Queensland, which has 30 per cent of the population. Only 23 per cent was in the rest of Australia, which has 70 per cent of the population.
  6. Since the start of the GFC, Australia has added 92,000 jobs in mining and 62,500 in construction. But by November it had lost 127,000 jobs in manufacturing, almost as many as in the entire 1990-91 recession.

Regards

Mark

What can creditors do if the “Official Receiver” is the trustee in bankruptcy?

I’ve recently had a number of clients ask me questions about the Official Receiver as a bankruptcy trustee in relation to debtors they are chasing.

The Official Receiver is a statutory appointee who acts as trustee in bankruptcy for debtors where there is no private appointment of an insolvency practitioner.

In effect, the Official Receiver is the default option in those bankruptcies where nobody (be it creditor or debtor) appoints a private trustee.  The Official Receiver has many thousands of current bankruptcies.  The staff of ITSA, the Insolvency and Trustee Service of Australia, manage them from day to day.

This default option most frequently gets used in consumer level matters where the bankrupt has little or no assets.  For example, debtors made bankrupt over small credit card debts, personal loans and the like.

You will hear anecdotally, and it has been my experience as well, that ITSA has more work than it can cope with and it does not provide the level of service that a privately appointed trustee would.  You can expect as a creditor that ITSA will attempt to identify any easily identifiable assets (land or vehicles)  but not much else.  This can be frustrating to you as a creditor if you believe that transfers of assets that are recoverable by a trustee are not being investigated.

If as a creditor you are not happy with the handling of a bankruptcy by ITSA, you are not helpless.  If a particular estate requires recovery of property the file is usually referred out to a private practitioner  appointed in the place of the Official Receiver.

Further, as I understand it, ITSA are usually quite willing to refer a matter to a private trustee if asked to do so by a creditor.  You may well be able to find a private trustee who will take the referral even without a fee arrangement, if you make sufficient enquiries.

Thanks to Stephen Michell of HLB Mann Judd (contact) and Kylie Wright (contact) of VInce and Associates  for assistance with this post.

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

What effect are online sales having on retail property?

Another question that I pondered over fish and chips at the beach these holidays was the impact of online sales on demand for bricks and mortar retail space.  I am a confessed online shopping addict.  With developments like Myer stores projected downsizing and mass closure of Dick Smith Electronics outlets, the outlook for the property sector doesn’t look great.

I received an excellent update (link) on the impact of online retail on the demand for property in the retail sector from James Stewart of Ferrier Hodgson a few weeks ago.  James writes a monthly series of updates (link) which are well worth reading for those of you interested in the retail sector and insolvency issues in that sector.

The update made three interesting points:

  1. the space requirements of retailers will fall, through a combination of greater online sales reducing in store sales, and a deliberate strategy by retailers to downsize stores and offer a greater convenience experience (think Apple stores).
  2. Australia is behind the curve – whilst traditional bricks and mortar American retailers are generating up to 18% of their sales online and growing, in Australia the figures are more like 1%;
  3. as the trend toward multichannel sales takes hold in Australia, landlords will face less demand for retail space and downward pressure on rents.  Almost all landlords will be at risk from this development, although “destination” and best in class properties (Chadstone, Bondi, Chermside) will be insulated.

On a similar note, see a recent post by my colleague Sam Hopper (link) on the impact such developments might be expected to have on rent negotiations and valuations.

Regards

Mark

China and the Australian Insolvency Market (Updated)

UPDATE:

Some evidence of what a (slight) slowdown in urbanising China might have on the Australian mining sector shows up in BHP’s last half year ended 31 December 2011.  It seems that growth on the already urbanised fringe is slowing, and moving inland (with some exceptions).  The following summary from First Samuel (link) tells the tale:

BHP Billiton’s result for the half year ending 31-Dec-11 was strong in the commodities of thermal coal, petroleum and iron ore – with each showing high revenue and earnings growth. Iron ore production hit a record annualised production rate of  178m tonnes per annum, and now provides BHP with over off of its earnings.

However BHP didn’t quite reach the expected overall profit target (US$10bill+). Cost and pricing pressures impacted  Aluminium’s performance, lower copper grades and industrial activity impacted Base Metals’ (copper) performance, and metallurgical coal was impacted by the Queensland flood legacy and industrial activity.

BHP expressed short term caution, given the uncertainty created by the situation in Europe. However, it highlighted  that the structural drivers of industrialisation and urbanisation in the developing world underpin commodity demand in the medium to longer term.

Source - BHP

BHP’s chart shows that the urbanisation of  manufacturing capabilities that exist in coastal provinces are moving inland, extending high GDP growth across more of the country.

At some point there will be no territory left  to sustain the pace of  urbanisation and we will have to hope India or Africa (where many low wage manufacturing jobs are now going) takes up the slack.

ORIGINAL ARTICLE:

Over summer at the beach I had the opportunity to read some interesting material on the Chinese economy.

The Australian economy driven in large part by demand for our raw materials by China.  China is now our largest trading partner and it is the first time that the position has been held by a non western, let alone a non democratic, nation.  The fact that China remains a dictatorship presents a greater degree of risk to us that our reliance on fellow minded nations in the past, in Britain and the USA.

I have sometimes wondered (as a insolvency practitioner) how likely it is for the China boom to continue, at least at a pace sufficient to keep resource prices sky-high, and the Australian economy afloat.

One of the more extreme predictions I read was in “The Coming Collapse of China”.   The author, Gordon Chang, sets out a long lists of reasons why the economy in China is in trouble:

  1. The current leadership has backed away from economically progressive policies;
  2. The GFC has killed growth in China’s export markets;
  3. The one child policy will from 2014 result in a falling absolute working age population, undermining China’s chief advantage of low priced  labour;
  4. Internal inflation reflected in asset bubbles, high price inflation following the GFC stimulus package in China.

Chang predicts a slowdown (Japan style) or crash will follow.  But when and how?  This is what I found interesting:

Today, social change in China is accelerating. The problem for the country’s ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party’s leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing’s overreaction to the so-called “Jasmine” protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership’s sluggish response in recent months — in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad — indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month’s “open revolt” in the village of Wukan in Guangdong province, people can organize themselves quickly — as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.

Paul Wolfowitz, former head of the World Bank, architect of US policy in the second Iraq war and expert on Asia, gave an interesting speech on the same topic (link to the video of his speech) last September in Australia.  He compares the situation in 2011 to the world economy in 1900 and identifies a challenge – that is ensuring China can be integrated into the world economy as an emerging great power without sparking upheaval or war, as Germany and Japan did.

Regards

Mark

The Relation Back Day can be manipulated by a prior VA appointment – Reform still required

Liquidators, creditors and directors are very conscious of  the “Relation Back Day” in liquidation.   It is the day on which the six month “preference period” for the recovery of preferences from creditors ends.  It is also the day on which certain longer periods for undoing certain related party transactions involving directors and their associates ends.

The relation back day for any Court ordered winding up is governed by section 513A of the Corporations Act 2001 (Act).   In a case where the Court orders that a company be wound up, and immediately before the making of the order the company was in voluntary administration, the relation back day is taken to be the section 513C day that applies to that administration.  See section 513A(b) of the Act.

Section 513A(a) does not apply, as until a court makes an order to wind up the company, there is no “winding up in progress”:  this  subsection applies to administrations commenced by a liquidator appointing a VA under s436B.

The section allows a director or chargeholder of a company to move the relation back day forward in time by the simple expedient of appointing a voluntary administrator AFTER a winding up application has been filed by a creditor, but before a winding up order is made.  That may allow a preference payment or other vulnerable transaction to avoid attack by the liquidator if it occurred at the very early end of the relevant time period.

This effect has been judicially noted.  For example, in Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd  (2008) 66 ACSR 199  at [33], [39]-[40] (Austlii link), Austin J considered that he had no power under s447A or otherwise to order that the s 513C day be the date of the commencement of a creditor’s winding up application (which was filed before the commencement of the Part 5.3A administration), notwithstanding the possibility that directors might manipulate the provisions by putting an insolvent company into administration after the commencement of a winding up proceeding.

Austin J said he was reluctant to reach this conclusion given it prevented a number of recoveries that were otherwise available to the liquidators (including against related entities) and because the evidence supported an inference that the directors had deliberately appointed a VA to defer the relation back period.   His Honour’s view was that there was a clear need for law reform especially given the varying and inconsistent consequences regarding unfair preferences and void dispositions of property (under s468 of the Act) depending on which subsection of s513A applies.

There have been calls for reform over the issue – a notable article at the time was published by Middletons (Stephen Hume) (link).  None has yet been forthcoming.

Some judges have attempted to circumvent this result by making an order to terminate an administration, and then delaying the making of the winding up order by some interval.  This approach was employed in St Leonards Property Pty Limited v Ambridge Investments Pty Limited [2004] NSWSC 851.  The winding up order was made one day after terminating the VA, which the Court in that case appeared to think was sufficient.

Regards

Mark

Bankruptcy pitfall – joint judgment creditors must enforce together

The recent decision in Rookharp Pty Ltd v Webb & Anor [2011] FMCA 801 (at paragraphs [27] to [83]) is a reminder that a joint judgment debt must be enforced by all of the judgment creditors, not just one of them.  The issue commonly comes up in relation to orders for costs, which are joint, not joint and several, debts.  Costs orders are final orders which can be the subject of a bankruptcy notice.

In Rookharp, only one of the joint judgment creditors was named as a creditor on the bankruptcy notice and was, in turn,  a petitioning creditor.  The other judgment creditor was not named as a joint petitioner or as a respondent.

The petition was set aside on the basis that one of a number of joint creditors has no title to issue a bankruptcy notice or otherwise deal with the judgment debt alone:  since it is a joint debt, all such actions must be taken jointly.

The petitioning creditor unsuccessfully argued that the other joint creditors had authorised them to act for all petitioning creditors.  The court found that all of them had to be named.

Regards

Mark

Tweet this – emails and electronic messaging can be effective service

There are some easy ways to serve a company under the Corporations Act 2001*,  but those methods sometimes fail for a variety of reasons.   Maybe the principal place of business or registered office of the company is no longer occupied, but ASIC has not been advised of the change of address.  The person serving the document might not leave it at the old address since there is no-one there to take it**.

In some cases it is not possible to serve the document again.  It might be too late to do so.  Alternatively, some subsequent step, like terminating a contract, might already have occurred.

However, if the documents were also emailed, it is possible in the right circumstances to rely on that fact to prove effective service.

In the case of a liquidator or administrator, if there is evidence that the liquidator or administrator received the email attaching the document and read it, that will be effective service on the company.  The reason for this is not that there is a provision in the legislation allowing service by email.  Rather, it is a consequence of the fact that the liquidator or administrator is the guiding mind of the company and once they know of the document, so does the company:  the ordinary meaning of service is that the document comes to the attention of the intended person.   The company has therefore been actually served and there is no need to rely on any deemed service provisions:  see for example Austar Finance Group Pty Ltd v Campbell (2007) 25 ACLC 1834, [2007] NSWSC 1493  per Austin J at 1841 (paras [48] to [60]).

What sort of evidence is required?  According to Austin J, there must be evidence that the document came to the notice of the person to be served, and that the document was in readable form.  For an email, that means that the email message was downloaded from the intended recipient’s server so that it could be read and actually came to the recipient’s attention.  So the evidence could be as simple as an emailed response acknowledging receipt.  Or that a printed copy of the email and attachment appears in the recipient’s file.  Or it might be that a subsequent email was sent or other action taken, not in direct response, but which makes clear that the first email and document was read.

The principal has wider application than insolvency – it applies to any situation where the intended recipient (company or not) can be shown to have received and read the email.  It also conceivably applies to any other forms of electronic messaging like Tweets or facebook messaging, given Austin J’s decision followed earlier cases dealing with faxes.

I note that for the purposes of personal service, Austin J was of the opinion that there had to be evidence the documents were printed, so that a hard copy was received.

Regards

Mark

*See for example s109X of the Corporations Act 2001 (Cth) and s28A of the Acts Interpretation Act 2001 (Cth).  For a thorough survey of the law on serving a company, I highly recommend chapter 3 of Farid Assaf’s excellent book, Statutory Demands: Law and Practice, 1st ed, Lexis Nexis 2008.  Usually a contract will also include deemed service provisions, or notice clauses, of similar effect.

**Of course if the person serving the document just left it anyway that would still be good service under s109X(1).  This post is based on a real case where the document was brought back and not left at the registered office.

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!)