Tag: Bankruptcy

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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Unit Trusts can expose personal assets in bankruptcy

Most business people know that they should shelter their assets by keeping them out of their own name, so that if they go bankrupt, those assets are not available to the trustee in bankruptcy.

But it’s also important to make sure that the entities that control those assets are still under the individual’s direct or indirect control in the event of personal bankruptcy.

Recently a client* learned a hard lesson that was fortunately only a near miss.

He set up his interest in a business so a trustee company held it.  The company was trustee of a unit trust.  The only unit holders of the trustee company were he and his wife.  The only shareholders of the trustee company were he and his wife.  They were also the only directors.

The trustee company owned one third of a development site.

In the course of the business he and his wife had given personal guarantees over a business loan.  Eventually the lender made a call on the guarantee for an amount of over $10 million.  The guarantee had a very nasty clause in it (which he and his wife had not read) by which they agreed to give a mortgage over all of their real property to secure the loan.

When it became apparent that the loan may go bad, the lender placed caveats over all of the real property in the name of he and his wife which included 2 investment properties and a family home.

The client could not service the first mortgages on the family home and the investment properties, or service the business loan of which he was guarantor.

After a period the client and his wife each declared bankruptcy.

After they had declared bankruptcy, an opportunity arose to restructure the business and settle with the lender on favorable terms.   The restructure required the transfer of the trustee company’s interest in the development site to a Newco.

Problem?  The units in the unit trust vested in the trustee in bankruptcy of the client and his wife.  They had ceased to be directors of the trustee company because they were bankrupt.  And the shares in the trustee company vested in the trustee in bankruptcy.  Further, the trust deed reserved the power to change trustee to the unit holders alone. (Frequently, the appointor of the trust, usually a family member, has that power, but that was not so in this case)

So the client and his wife could not cause the trustee to execute a transfer or change trustee to a new entity who could. And the trustee (ITSA) would not assist.

In the end, the client had a near miss, more through luck than anything else.  It turned out that the units in the unit trust were held by he and his wife as trustees for another trust, their family trust, which fortunately was a discretionary trust.  The trustee of that trust was a different company with different directors.  The trustee of that trust was able to direct the trustee in bankruptcy to transfer the units to it.  Then it was able to change the trustee under the provisions of the trust deed, and the new trustee could execute the transfer.  Phew that was close!

So what are the lessons of this near miss?

  1. Unit trusts are not very good at sheltering personal assets because the units will vest in the trustee in bankruptcy.  It is possible to use a hybrid unit trust/discretionary trust structure in their place.
  2. If for tax reasons unit trusts structures are necessary, the unit themselves should not be held by the individual seeking to shelter assets beneficially.  They should be held by another entity that is sheltered.  The same goes for the shares in the trustee company.
  3. Be careful to have directors of the trustee who are not likely to go bankrupt if the sheltered individual also goes bankrupt.  Preferably appoint another family member not involved in the business, or an accountant or lawyer (if one is willing).
  4. Reserve a power to change the trustee to the appointor or to a family member in the trust deed.

Regards

Mark

*The facts have been changed slightly to protect the client

Warning to lawyers and creditors serving Bankruptcy Notices: No direct evidence of posting? No effective service.

This is a warning to creditors (and lawyers acting for them) who don’t have direct evidence that their bankruptcy notice was taken to the post office or post box and mailed. You will probably not have effectively served your bankruptcy notice.

Where direct evidence is lacking, the Court will not infer a bankruptcy notice was actually posted just because you had a system where mail placed in an out tray was usually or even always taken to the post office or post box.  There has to be direct evidence of posting.

That is the effect of a decision of Justice Collier of the Federal Court delivered last week in Mbuzi v Favell (No 2) [2012] FCA 311 (link).

Readers will be familiar with reg 16.01(e) of the Bankruptcy Regulations (link) from my earlier post on service by email (link).  That regulation allows a creditor to serve a bankruptcy notice by post.

Justice Collier’s decision is based on three simple points:

  1. Although personal service is no longer required, strict proof of compliance with reg 16.01(e) is necessary;
  2. The onus is on the creditor;
  3. The Court will not infer that a mail item was posted just because it reached an in-tray:  given the penal nature of the bankruptcy system, there must be direct evidence of posting.

In Mbuzi the only evidence that the bankruptcy notice had been posted was oral evidence of the creditor as to his recollection of leaving the envelope containing the bankruptcy notice to be put in the mail by an unnamed secretary/receptionist in the ordinary course of business of his practice.

So what is sufficient direct evidence?

Notably, her Honour remarked that:

  • there was no evidence of a record of the notice being sent by post, as might be expected if there was a system of postage pursuant to which the bankruptcy notice was posted;
  • no evidence was tendered supporting the existence of any register of outgoing mail;
  • no evidence, either oral or in affidavit form, was given by any third party who might have physically posted the bankruptcy notice that the notice had been posted.

These remarks suggest that a system for registering outgoing mail, evidence that the notice was on the register and affidavit evidence from the person who posted the mail on the day in question, may be sufficient.

Regards

Mark

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