Tag: Insolvency

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