Tag Archives: Insolvency

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!

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/

Warning: a statutory demand for part of a debt will be set aside

Imagine this very common scenario.  Before attempting to recover a debt, a creditor learns of circumstances which give rise to a genuine dispute about part of it, but there is still some undisputed part left over.

The creditor quite logically makes a demand for the undisputed part, knowing it cannot swear in a supporting affidavit that the whole of the debt is due and payable and that there is no genuine dispute as to the existence of all of the debt.

Two recent cases have ruled that a statutory demand made in these circumstances does not comply with s459E of the Corporations Act 2001 and is liable to be set aside.

The decisions cause practical difficulties for creditors attempting to recover the undisputed balance of a debt.

The cases are Garuda Aviation Pty Ltd v Commonwealth Bank Of Australia [2012] WASC 115 (link) and Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd  [2011] SASC 165 (link).

In Candetti, a creditor was owed $1,457,935 for crane services nett of amounts already paid.  In correspondence, the debtor had disputed liability for the nett amount but had admitted that only $308,151 was payable.

Section 459E (link) governs the content of a statutory demand and among other things requires that the demand relate to a single or one or more debts that are due and payable.  The existence of the debt, that it is due and undisputed must be verified by affidavit.

Justice Blue of the South Australian Supreme Court construed s459E (see paras 47 to 53 of the judgment) to require that the whole of the debt demanded must be undisputed, since the wording of s459E(1) was silent as to whether a part of a debt could be demanded.  The purposive basis of the decision was that a debtor seeking to set aside the demand would not know which “part” of the debt to dispute, and would in effect have to raise a dispute as to the whole of the debt.

In the Garuda case, the Commonwealth Bank was owed USD16,650,000 by Garuda under a facility agreement, secured by a chattel mortgage over a Gulf stream aircraft and a director’s guarantee.  The facility was in default.

At the time the demand was to be issued, CBA believed it had a debt claim against Garuda for USD6,896,535.05.

In related proceedings that had gone to trial between CBA and the guarantor in which judgment was pending, issues had been raised which clearly gave rise to a genuine dispute as to all but USD2,099,047.13 of that amount.

Accordingly, CBA served a demand only for USD2,099,047.13 in anticipation of a genuine dispute being raised as to the balance.

Master Sanderson of the WA Supreme Court took the view that a demand for part of a debt was valid as a matter of statutory construction.  His analysis was:

[21] It is worth bearing in mind the nature of the statutory demand procedure. The party who claims a company is indebted to it and who says there is no genuine dispute about the debt can issue the demand. A company served with a demand has three options. It can pay the amount demanded. It can seek to have the demand set aside on the basis there is a genuine dispute between the parties, or the company has an offsetting claim greater than the amount demanded, or the company can do nothing. If the application to set aside the demand is unsuccessful or if the company does nothing a presumption of insolvency arises. The party making the demand then has a choice — it can apply to wind up the company or it can do nothing. If an application to wind up is made and the presumption of insolvency is not rebutted by the company then it would be wound up. All this is nothing more than the practical manifestation of the principle that a company which cannot pay its debts as and when they fall due is insolvent. Insolvent companies should be wound up. That is a basic principle of the law of corporate insolvency.

[22] Looked at in this way it does not really matter whether the demand has been made for the whole of an outstanding debt or part of it. If a company cannot pay part of a debt, that part not being disputed, it is presumed to be insolvent. So long as the amount demanded is more than $2,000 (the statutory minimum) a presumption arises. In my view, it is to unnecessarily complicate what is a simple procedure not to allow a party to claim anything other than the full amount of the debt.

[23] There are also practical difficulties about that approach. In this case for instance, it is difficult to see how the supporting affidavit could possibly have attested to there being no dispute as to the entire debt. Perhaps it could have been done — after all the respondent has argued [in the related proceeding] before Le Miere J it is entitled to judgment for the full amount. But any affidavit would have to in some way acknowledge the existence of a dispute. So a party in the position of the respondent would never be able to serve a statutory demand despite the fact a portion of the debt was not in dispute and despite the fact the inability of the applicant to pay that debt may mean it was insolvent and liable to be wound up.

….

[25] In my view, it is open to construe s 459E(1)(a) as allowing a party to serve a statutory demand for part of a single debt. This section refers to “a demand relating to a single debt”. That would be sufficiently wide to allow a demand for part of a single debt. It would do no violence to the wording of the section and would allow for a practical outcome in a case such as the present.

However, Sanderson M accepted a submission that given the national scheme of the Corporations Act, despite his own analysis, he ought to follow the earlier decision of Blue J in Candetti until overturned by a higher court.

The effect of these decisions are very troubling because a creditor who is aware of a dispute as to part of a debt seems to be unable to issue a demand for any of the debt or the undisputed part of it.

One would expect an appeal court or single judge to favour the analysis of Sanderson M in future decisions.

Regards

Mark

Jumping the gun – application to wind up before demand expires invalid

This might sound obvious, but an interesting recent case confirms, for Victoria at least, that a creditor cannot apply to wind up a company relying on a presumption of insolvency before the creditor’s statutory demand expires.  The case is Surdex Steel Pty Ltd v GB Manufacturing Pty Ltd [2012] VSC 90, a decision of Associate Justice Gardiner.

The case considered whether an applicant for an order that a company be wound up in insolvency can rely upon the statutory presumption of insolvency provided by s 459C(2)(a) of the Corporations Act 2001, if time for compliance with a statutory demand has not expired before the winding up application is filed, but has expired by the time the application comes on for hearing.

There are divergent authorities in other jurisdictions.  The surprising view that a winding up application could be commenced before the statutory demand expires arises from an argument regarding the construction of s459C(2)(a) of the Corporations Act 2001.   The sub-section says:

The court must presume that the company is insolvent if, during or after the three months ending on the day when the application was made:

(a) the company failed (as defined by s 459F) to comply with a statutory demand; …

The words “or after” in the section were relied on in a series of cases beginning with a decision of Santow J in Pinn v Barroleg Pty Ltd (1997) 23 ACSR 541, as demonstrating a legislative intention that the expiry of the demand could occur “after” the application to wind up was filed.

Associate Justice Gardiner preferred the other line of authority which focussed on other provisions of the Act that implied that the expiry of the demand must have occurred prior to the application being made.  For example, s459Q(a) requires an applicant for a winding up in insolvency to specify details of non-compliance with the demand. So Palmer J in Woodgate (as trustee for the bankrupt estate of Fenton) v Garard (2010) 78 ACSR 468 read down s459C(2)(a) so that it would not cut across s459Q(a).  Further, sub sections 459C(2)(b) – (f) were noted as alternative triggers giving rise to a presumption of insolvency (eg execution levied against the company on a judgment) which could clearly occur after an application was filed, thereby giving the words “or after” some work to do.

There being no presumption of insolvency in the circumstances, the application was dismissed because no other evidence was available to prove insolvency.

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 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

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